2018 (8) TMI 647 - AT - Income Tax

Disallowance of depreciation on non-compete territory rights - Held that - The AO either should have dealt with the issue elaborately in the original assessment order, or should have followed the outcome of the assessment year 2002-03. The ld.CIT(A) in the first round in all these years has allowed the ground of appeal. It means, depreciation ought to be granted to the assessee. The department sought to disallow the deprecation to the assessee in all these years even without adjudicating the issue on merit at any stage. It is not permissible. - Decided against the revenue.

Issues Involved:
1. Disallowance of depreciation on non-compete territory rights.
2. Reopening of assessment under section 148.
3. Validity of the Gujarat High Court's quashing of the reopening notice.
4. Consistency in the Revenue's approach across different assessment years.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Non-compete Territory Rights:
The primary issue revolves around the disallowance of depreciation on non-compete territory rights claimed by the assessee. The Revenue's grievance is that the CIT(A) erred in deleting the additions made by the AO by disallowing the depreciation for the assessment years 2003-04, 2005-06, and 2007-08. The AO disallowed the depreciation without independently examining the issue, merely stating that since the department had not accepted the assessee's claim, it was being disallowed. The CIT(A) allowed the depreciation subject to the final decision of the Gujarat High Court.

2. Reopening of Assessment under Section 148:
In the assessment year 2002-03, a notice under section 148 was issued to reopen the assessment with the intent to disallow depreciation on non-compete territory rights. The assessee challenged this notice before the Gujarat High Court, which stayed the proceedings. The AO continued to disallow the depreciation in subsequent years without adjudicating the issue specifically, pending the High Court's decision.

3. Validity of the Gujarat High Court's Quashing of the Reopening Notice:
The Gujarat High Court quashed the reopening notice for the assessment year 2002-03, declaring the notice under section 148 as null and void. However, the High Court did not make any observations on the merits of the disallowance of depreciation. The AO's subsequent orders under section 154 denied the depreciation, arguing that the High Court's decision did not address the validity of the disallowance itself.

4. Consistency in the Revenue's Approach Across Different Assessment Years:
The Tribunal noted that the department did not file appeals against the CIT(A)'s orders for the assessment years 2003-04 and 2004-05, where similar disallowances were made. For the assessment year 2005-06, the Tribunal dismissed the Revenue's appeal, emphasizing the need for consistency since the department had accepted the CIT(A)'s findings in previous years. The CIT(A) for the assessment year 2006-07 allowed the depreciation after an elaborate discussion, and the Tribunal upheld this order. The Tribunal highlighted that the AO never provided independent reasons for the disallowance and that the matter had not been examined on merits.

Conclusion:
The Tribunal dismissed the Revenue's appeals, stating that the AO should have either dealt with the issue elaborately in the original assessment order or followed the outcome of the assessment year 2002-03. The CIT(A) had allowed the ground of appeal in the first round, implying that depreciation should be granted to the assessee. The Tribunal found no merit in the Revenue's appeals, as the department sought to disallow the depreciation without adjudicating the issue on merit at any stage. Thus, all three appeals of the Revenue were dismissed.

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