2023 (9) TMI 846 - HC - Income Tax

Revision u/s 263 - goodwill created by virtue of demerger scheme - CIT observed that 6th Proviso to section 32(1) of the Act makes it clear that the depreciation in the hands of the resulting company is to be calculated at the prescribed rates on the WDV of the assets in the books of the demerged company, which in this case would be Nil as the WDV of the corresponding assets itself is Nil - AO wrongly accepted the claim of depreciation on goodwill created by virtue of demerger scheme without examining the provisions of explanation 2 to section 43(6) r.w.s. 32 due to which the assessment order passed u/s. 143(3) of the Act has become erroneous and prejudicial to the interest of the Revenue HELD THAT - Tribunal found that the assessee had furnished various factual and legal submissions dated 19.12.2017 where the assessee relied upon the case of Commissioner of Income Tax, Kolkata vs. Smifs Securities Ltd 2012 (8) TMI 713 - SUPREME COURT - As observed by the Tribunal that the Assessing Officer had considered the action of granting approval and also the Valuation Report. Since therefore the Assessing Officer had examined the aspect of the assessee s claim during the course of acceptance, in the opinion of the Tribunal, the Assessing Officer while passing order u/s 143(3) had taken a plausible view sustainable in the eye of law. Relying on the decision, it was held that the assessee company is entitled to claim depreciation on goodwill expended at the time of amalgamation of companies. AO had also relied on the case of Smifs Securities Ltd. (supra) and allowed the claim for depreciation - no substantial question of law arises for consideration.

Summary

Issues:
The issues in this case involve challenging the order passed by the Income Tax Appellate Tribunal regarding the claim of depreciation on goodwill created through demerger, and the application of relevant provisions of the Income Tax Act.

Issue 1 - Depreciation on Goodwill:
The case revolves around the claim of depreciation on goodwill amounting to Rs. 275 crores created by the assessee company following a demerger. The Principal CIT contended that the goodwill was a self-acquired asset with a cost of "Nil" in the hands of the demerged company, therefore, the depreciation claimed by the assessee company was not allowable under the Act. The Tribunal, however, opined that the Principal CIT erred in invoking Section 263 of the Act and set aside the order.

Issue 2 - Legal Plausibility of Claim:
The Tribunal observed that the Assessing Officer had examined the claim of depreciation during the assessment proceedings, considering factual and legal submissions from the assessee. The Tribunal found that the Assessing Officer had taken a plausible and sustainable view in allowing the depreciation on goodwill, as per the case of Commissioner of Income Tax, Kolkata vs. Smifs Securities Ltd [348 ITR 302 (SC)]. The Tribunal concluded that no substantial question of law arose for consideration and dismissed the appeals.

Separate Judgment by Judges:
The Honourable Mr. Justice Biren Vaishnav and Honourable Mr. Justice Bhargav D. Karia presided over this case and delivered the judgment dismissing the appeals based on the legal plausibility of the claim for depreciation on goodwill.