2022 (1) TMI 424 - AT - Income Tax

Allowability of depreciation on goodwill - As per AO goodwill is not covered within the meaning of intangible assets which means only know-how, patent, copyrights, trademarks, license, franchisee on any other business or commercial rights of similar nature - HELD THAT - As decided in own case 2021 (3) TMI 683 - ITAT DELHI DRP has not at all considered the aspect of depreciation on goodwill in correct context as there is a finding identical to that of earlier years, assessee entered into a world-wide multi-year outsourcing agreement with IBM India Pvt. Ltd., Network Solutions Pvt. Ltd. and IBM Daksh Business Process Services Pvt. Ltd. as well as Acquisition Agreement and this is not an initial year of claim of depreciation on goodwill. Hence, in light of the decision of the earlier years by the Tribunal the appeal of the assessee is allowed. Allowability of education cess and higher secondary education cess as an expenditure - HELD THAT - We find the Hon ble Bombay High Court in the case of Sesa Goa Limited vs., JCIT 2020 (3) TMI 347 - BOMBAY HIGH COURT has held that since the term Cess is not included in clause (ii) of section 40(a)of the I.T. Act, 1961, there is no prohibition in claiming the same as a deduction in computing income chargeable under head of profits and gains of business or profession. Similar view has been taken by the Hon ble Rajasthan High Court in the case PCIT vs., Chambal Fertilizers and Chemicals Ltd. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT wherein it has been held that education cess is not a disallowable expenditure under section 40(a)(ii) - we are of the considered opinion that education cess and secondary education cess paid on income tax is an allowable expenditure. Accordingly, the additional ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Legality of the assessment order and the disallowance of depreciation on goodwill.
2. Qualification of goodwill as a 'business or commercial right' under Section 32(1)(ii) of the Income-tax Act, 1961.
3. Levy of interest under sections 234B and 234D of the Act.
4. Allowability of education cess and higher secondary education cess as an expenditure.

Issue-wise Detailed Analysis:

1. Legality of the Assessment Order and Disallowance of Depreciation on Goodwill:
The Assessee challenged the assessment order framed by the CIT(A) under Section 250(6) of the Income-tax Act, 1961, claiming it was arbitrary and based on conjectures. The CIT(A) upheld the AO’s disallowance of depreciation on goodwill amounting to INR 1,55,34,890, asserting it does not qualify as a 'business or commercial right' under Section 32(1)(ii) of the Act. The Tribunal noted that the assessee had consistently been allowed depreciation on goodwill in previous years (AYs 2010-11, 2011-12, and 2012-13) by the Tribunal. The Tribunal referred to its own decisions in the assessee’s case from prior years, where it had allowed depreciation on goodwill, and found no distinguishing facts in the current year. Consequently, the Tribunal set aside the CIT(A)’s order and directed the AO to allow depreciation on goodwill.

2. Qualification of Goodwill as a 'Business or Commercial Right' under Section 32(1)(ii):
The AO and CIT(A) had disallowed the depreciation on the grounds that goodwill was not specifically mentioned in the definition of intangible assets under Section 32(1)(ii). The CIT(A) emphasized that the appellant failed to provide specific details and item-wise break-up of the value of rights claimed to have been acquired. However, the Tribunal, referring to the consistent decisions in the assessee’s favor for previous assessment years, held that goodwill qualifies as a 'business or commercial right' under Section 32(1)(ii), supporting the claim with precedents such as the Delhi High Court’s decision in Areva T & D India Ltd. and the Supreme Court’s dismissal of the Revenue’s SLP against this decision.

3. Levy of Interest under Sections 234B and 234D:
The Tribunal did not specifically address the issue of interest levied under sections 234B and 234D, as it was consequential and mandatory in nature. Therefore, this ground was dismissed.

4. Allowability of Education Cess and Higher Secondary Education Cess as an Expenditure:
The additional ground raised by the assessee, regarding the allowability of education cess and higher secondary education cess as an expenditure, was admitted for adjudication. The Tribunal referred to the decisions of the Bombay High Court in Sesa Goa Limited vs. JCIT and the Rajasthan High Court in PCIT vs. Chambal Fertilizers and Chemicals Ltd., which held that education cess is not a disallowable expenditure under section 40(a)(ii) of the Act. The Tribunal also cited similar decisions by other benches of the Tribunal. Consequently, the Tribunal allowed the additional ground, concluding that education cess and secondary education cess paid on income tax are allowable expenditures.

Conclusion:
The Tribunal allowed the appeal of the Assessee, directing the AO to allow depreciation on goodwill and accepting the additional ground regarding the allowability of education cess and higher secondary education cess as an expenditure. The grounds related to the levy of interest were dismissed as they were consequential. The order was pronounced in the open court on 10.01.2022.