2023 (4) TMI 739 - AT - Income Tax

Depreciation on goodwill u/s 32(1) - goodwill recorded in books of accounts of resulting post demerger - company addition on the ground that goodwill accounted in the books of assessee company is a self-generated which is not qualified for depreciation as an intangible - HELD THAT - Neither the AO nor the ld. CIT(A) had any dispute regarding manner in which quantum of goodwill was arrived at. In fact both the authorities have accepted the valuation of net asset acquired by the assessee company and the valuation for arriving at the consideration to be paid to the shareholders of the demerged company. It is also a fact that no goodwill was appeared in the books of Demerged company before appointing date. The fact that the depreciation on goodwill was specifically omitted by amending section 32 by the Finance Act 2021 w.e.f. 01.04.2021 also demonstrate that depreciation on goodwill was allowable before the amendment. AO and the ld. CIT(A) have stated that goodwill recorded by the assessee company is self-generated but fact remains that goodwill recorded in the books of accounts in resulting company is not self-generated goodwill but falls into the category of purchased goodwill. From the above facts it is clear that goodwill recorded in the books of assessee company is purchased goodwill and cost of the same has been rightly arrived at. Pursuance to the scheme of demerger goodwill recorded in books of accounts of resulting company was acquired but not self-generated as per the order of the Hon ble High Court of Madras in a scheme document. Therefore we are of the considered opinion that once the assessee proves that goodwill accounted in the books of accounts in a scheme of demerger is only of purchased goodwill by paying consideration then the same fall within the ambit of purchased goodwill and entitled for depreciation under section 32(1) of the Act. Assessee has rightly claimed depreciation on goodwill accounted in the scheme of demerger approved by the Hon ble High Court of Madras and thus we direct the Assessing Officer to allow depreciation on goodwill as claimed by the assessee for all the three assessment years. Decided in favour of assessee. Disallowance made under section 14A r.w. Rule 8D - argument of the assessee that the assessee has not earned any exempt income for the assessment year in question - HELD THAT - It is an admitted fact that the assessee had not earned any dividend income which was claimed as exempt under section 10(34) of the Act. It is well settled principle of law by the decision of Hon ble Supreme Court in the case of Chettinad Logistics 2018 (7) TMI 567 - SC ORDER wherein it was held that section 14A of the Act can be triggered if the assessee seeks to square off expenditure against income which does not form part of total income. Thus where no exempt income is earned section 14A could not be invoked. Hon ble Delhi High Court in the case of Cheminvestments Ltd. v. CIT 2015 (9) TMI 238 - DELHI HIGH COURT had considered identical issue and held that no disallowance can be made where no dividend income has been received. In this case there is no dispute with regard to the fact that the assessee has not earned any dividend income. Thus in the absence of exempt income no disallowance under section 14A r.w. Rule 8D could be made. Decided in favour of assessee.

Summary

Issues Involved:
1. Depreciation on Goodwill under section 32(1) of the Income Tax Act, 1961.
2. Disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962.

Summary:

Issue 1: Depreciation on Goodwill

The first issue for consideration is the depreciation on goodwill under section 32(1) of the Income Tax Act, 1961. The assessee, M/s. Sunedison Solar Power India Private Limited, claimed depreciation on goodwill arising from a scheme of demerger approved by the Hon'ble High Court of Madras. The scheme involved the demerger of the Engineering, Procurement, and Commissioning (EPC) business from Sunedison Energy India Private Limited to the assessee company. The assessee issued preference shares to the shareholders of the demerged company, resulting in goodwill recorded in its books.

The Assessing Officer (AO) initially allowed depreciation on the differential amount as the cost of plant and machinery for the assessment year 2013-14 but disallowed it entirely for the subsequent years, stating that the goodwill was self-generated. The AO and the Additional Commissioner of Income Tax (Addl. CIT) concluded that the goodwill was merely a book adjustment and not an actual asset, thus not eligible for depreciation.

The CIT(A) upheld the AO's decision for the assessment years 2013-14 and 2014-15 but allowed the depreciation for the assessment year 2015-16, recognizing the goodwill as acquired through demerger and not self-generated. The Tribunal, after considering the facts and legal precedents, including the Supreme Court's decision in CIT v. Smifs Securities Ltd., concluded that the goodwill was indeed purchased and eligible for depreciation under section 32(1) of the Act. The Tribunal directed the AO to allow the depreciation on goodwill for all three assessment years.

Issue 2: Disallowance under Section 14A read with Rule 8D

For the assessment year 2015-16, the AO disallowed expenses related to exempt income under section 14A by invoking Rule 8D, amounting to Rs. 35,74,259/-. The assessee argued that no exempt income was earned during the year, and hence, no disallowance should be made. The Tribunal, referencing the Supreme Court's decision in Chettinad Logistics and the Delhi High Court's decision in Cheminvest Ltd., held that in the absence of exempt income, no disallowance under section 14A read with Rule 8D could be made. The Tribunal directed the AO to delete the addition made towards disallowance under section 14A.

Conclusion:

The appeals filed by the assessee for the assessment years 2013-14, 2014-15, and 2015-16 were allowed, and the appeal filed by the Revenue for the assessment year 2015-16 was dismissed.