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2022 (7) TMI 160 - AT - Income TaxRevision u/s 263 - depreciation claimed on goodwill arose out of amalgamation - applicability of 5th proviso to section 32(1) of the Act and restriction of depreciation in a scheme of amalgamation - As per CIT AO wrongly depreciation on goodwill, even though 5th proviso to section 32(1) of the Act, very clearly restricts claim of depreciation to successor company on amalgamation, as if such succession has not taken place - distinction between the purchase of goodwill under amalgamation as against the goodwill created - HELD THAT - There is no dispute with regard to the fact that goodwill is not existing in the books of account of the amalgamating company. Further, depreciation on goodwill claimed by the assessee was first time recognized in the books of account of amalgamated company in a scheme of amalgamation approved by the Hon'ble High Court of Madras. As per said scheme of amalgamation, accounting treatment in the books of transferee company has been specified as per which transferee company shall account for merger in its books of account as per 'purchase method' of accounting prescribed under Accounting Standard-14 issued by Institute of Chartered Accountants of India. In this case, there was no goodwill in the books of account of the amalgamating company and further, goodwill has been acquired by amalgamated company by paying consideration over and above net value of assets at amalgamating company. Therefore, in our considered view, case of the assessee squarely comes under ratio laid down by the Hon'ble Supreme Court in the case of M/s. Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT It is well settled principle of law by decisions of various Courts, including decision in the case of Malabar Industrial Co. 2000 (2) TMI 10 - SUPREME COURT where it has been clearly held that the PCIT cannot assume jurisdiction to revise assessment order, unless the PCIT satisfies that assessment order passed by the Assessing Officer is erroneous, insofar as it is prejudicial to the interests of the Revenue. In this case, on the issue of depreciation on goodwill, the Assessing Officer has taken one possible view with which the PCIT does not agree, however, it cannot be treated as erroneous prejudicial to the interests of the Revenue, unless view taken by the Assessing Officer is erroneous and unsustainable in law. This legal principle is also laid down in the case of CIT Vs. Max India Ltd. 2007 (11) TMI 12 - SUPREME COURT - In our considered view, view taken by the Assessing Officer on the issue of depreciation on goodwill is a possible view, because when 5th proviso to section 32(1) of the Act, has no application to the given facts and circumstances of the case, the Assessing Officer cannot take any view, which is contrary to provisions of section 32(1) of the Act. Since, the Assessing Officer has taken one of the possible view for which the PCIT may not agree, however, this may not be a reason for the PCIT to assume jurisdiction to revise assessment order passed by the Assessing Officer. We are of the considered view that the assessment order passed by the Assessing Officer u/s. 143(3) of the Act dated 29.12.2017, is neither erroneous nor prejudicial to the interest of the Revenue. PCIT has assumed jurisdiction u/s. 263 of the Act on the sole basis of application of 5th proviso to section 32(1) of the Act, towards depreciation on goodwill. In view of the factual matrix as stated in preceding paragraphs and non-applicability of 5th proviso to section 32(1) of the Income Tax Act, 1961, there cannot be error in relation to the view taken by the Assessing Officer while framing the original assessment. Appeal of assessee allowed.
Issues Involved:
1. Jurisdiction under section 263 of the Income Tax Act. 2. Applicability of the 5th proviso to section 32(1) of the Income Tax Act. 3. Validity of the assessment order passed by the Assessing Officer. 4. Depreciation on goodwill arising from amalgamation. 5. Principles of natural justice and opportunity to be heard. Detailed Analysis: 1. Jurisdiction under section 263 of the Income Tax Act: The Principal Commissioner of Income Tax (PCIT) assumed jurisdiction under section 263 of the Income Tax Act, 1961, to revise the assessment order passed by the Assessing Officer (AO) on 29.12.2017. The PCIT issued a show cause notice, asserting that the AO's order was erroneous and prejudicial to the interests of the Revenue, primarily because the AO allowed depreciation on goodwill without considering the 5th proviso to section 32(1) of the Act. 2. Applicability of the 5th proviso to section 32(1) of the Income Tax Act: The PCIT contended that the 5th proviso to section 32(1) restricts the claim of depreciation to the successor company on amalgamation. The PCIT argued that the AO failed to apply this provision correctly, rendering the assessment order erroneous. The assessee, however, argued that the 5th proviso was not applicable as the goodwill arose from the amalgamation and was not an existing asset in the books of the amalgamating company. The assessee also cited judicial precedents to support its claim. 3. Validity of the assessment order passed by the Assessing Officer: The assessee contended that the AO had conducted a proper inquiry and applied his mind before allowing the depreciation on goodwill. The assessee argued that the AO's decision was one of the possible views and thus could not be considered erroneous or unsustainable in law. The Tribunal agreed with the assessee, stating that the AO's view was a possible one and that the PCIT could not assume jurisdiction under section 263 merely because he disagreed with the AO's view. 4. Depreciation on goodwill arising from amalgamation: The Tribunal examined the facts and found that the goodwill was not an existing asset in the books of the amalgamating company but arose due to the amalgamation. The Tribunal cited the decision of the Hon'ble Supreme Court in the case of M/s. Smifs Securities Ltd., which held that goodwill arising on amalgamation is entitled to depreciation under section 32(1). The Tribunal also referred to other judicial precedents that supported the assessee's claim for depreciation on goodwill. 5. Principles of natural justice and opportunity to be heard: The assessee argued that the PCIT failed to provide a proper opportunity to present its case, thereby violating the principles of natural justice. The Tribunal noted that the PCIT's order was based on a wrong assumption of facts and incorrect application of law, and thus, the revision under section 263 was invalid. Conclusion: The Tribunal concluded that the assessment order passed by the AO was neither erroneous nor prejudicial to the interest of the Revenue. The PCIT's assumption of jurisdiction under section 263 was based on an incorrect application of the 5th proviso to section 32(1). The Tribunal quashed the PCIT's order and allowed the appeal filed by the assessee. The assessment order dated 29.12.2017, allowing depreciation on goodwill, was upheld.
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