2023 (7) TMI 1462 - AT - Income Tax

Depreciation on Goodwill - valuation of intangible assets - assessee claimed that those acquisitions are for purchase of unit for lumpsum consideration, as going concerns in the nature of slump sale, which is subject to capital gain tax u/s 50B in the hand of seller - according the Assessing officer the acquisitions are in the nature of amalgamation - HELD THAT - On perusal of relevant clauses referred, we find that transaction in both the cases are of slump sale and not, amalgamation as stated by the Assessing Officer. Fifth proviso ( now sixth proviso) to section 32(1)(ii) is in relation to allocation of the depreciation on the asset between predecessor and successor entities, whereas in the instant case goodwill was not in existence as intangible asset in the case of predecessor companies from whom the assessee has acquired corresponding units under slump sale. Therefore, the said provision is also not applicable of the facts of the instant case The ratio is in the case of United Breweries 2016 (9) TMI 1527 - ITAT BANGALORE is not applicable over the facts of case as in the said case there was amalgamation of the three wholly owned subsidiaries whereas in the instant case there is a acquisition of units of third parties by way of slump sale. DR before us submitted that allocation of values to the fixed asset acquired has been on lower side for creating goodwill as intangible asset. But in our opinion, if the quantum of goodwill is reduced, the valuation of the fixed asset will increase, which are also eligible for depreciation and thus in the exercise of reallocation of values among the goodwill and other fixed asset ,will be a revenue neutral exercise We concur with the arguments of the learned counsel of the assessee that goodwill arising from transactions of acquisition of units of GSK and CTPL, is eligible for depreciation under the provisions of the Act. As far as claim of the assessee for allowing depreciation on said goodwill corresponding to assessment year 2008-09, we are of the opinion that claim with respect to depreciation for assessment years 2008-09, cannot be allowed in the appeal for assessment year 2009-10. It is for the assessee to explore necessary remedy under the provisions of the Act or any other legal remedy as advised. The ground No.2 (two) of the appeal of the assessee is accordingly allowed. Depreciation on purchase of software - only request made in this ground is for allowing depreciation in respect of expenditure on computer software, which was claimed as revenue expenditure in earlier by the assessee but rejected by the ld CIT(A) and held as capital expenditure - HELD THAT - Since the said decision has been claimed as finally accepted by the assessee, the assessee deserve depreciation in subsequent years including in year under consideration. In principle, we agree with the claim of the assessee, however, we restore the matter for verifying that decision of ld CIT(A) in earlier AY 2007-08 has not been reversed by higher appellate authorities, and then after verification, allow the claim as directed above. The ground is allowed for statistical purpose. Deletion of erroneous demand - difference between refund issued to the assessee and refund determined as payable to the assessee - HELD THAT - This issue is consequential to the computation of tax liability while giving effect of this order. We direct the Assessing Officer to verify the claim while giving effect of this order of Tribunal. The ground of the appeal is accordingly allowed for statistical purpose.

Issues Involved:

1. General
2. Depreciation on Goodwill
3. Depreciation on Purchase of Software
4. Deletion of Erroneous Demand
5. Penalty Proceedings

Issue-wise Detailed Analysis:

1. General:

The ground No. 1 of the appeal, being general in nature, was dismissed as infructuous and did not require specific adjudication.

2. Depreciation on Goodwill:

The assessee acquired two units and recognized goodwill in those transactions. The acquisitions were made from Glaxo Smith Kline Pharmaceuticals Limited (GSK) and Chemito Technologies Private Limited (CTPL) through slump sales. The assessee claimed depreciation on goodwill based on the Supreme Court's decision in CIT v. Smifs Securities Ltd. (348 ITR 302). The AO denied the claim, stating that it was not made through a revised return and upheld by the DRP. The ITAT remanded the matter to the AO for adjudication on merits. In the second round, the AO accepted goodwill as a depreciable asset but denied depreciation based on valuation issues and accounting standards, relying on the ITAT decision in United Breweries Ltd. The DRP also rejected the claim, citing unrealistic valuation reports. The ITAT found the transactions to be slump sales, not amalgamations, and held that goodwill arising from these transactions is eligible for depreciation. The ITAT directed the AO to allow depreciation on goodwill for the current year but advised the assessee to explore other legal remedies for claims related to the previous year.

3. Depreciation on Purchase of Software:

The ground No. 3 relates to depreciation amounting to Rs. 1,04,938 on the purchase of software based on the directions of DRP for AY 2007-08. The CIT(A) had treated software expenses as capital expenditure and allowed depreciation at 60%. The assessee accepted this decision and claimed consequential depreciation for AY 2008-09 and AY 2009-10. The DRP directed the AO to verify and pass an appropriate order, but the AO did not grant relief. The ITAT directed the AO to verify the claim and allow depreciation if the CIT(A)'s decision for AY 2007-08 was not reversed by higher authorities.

4. Deletion of Erroneous Demand:

The ground No. 4 concerns the erroneous demand of Rs. 80,79,043 determined by the AO due to non-grant of interest under section 244A of the IT Act. The assessee argued that the total refund received included interest under section 244A, and the demand was erroneous. The ITAT directed the AO to verify the claim and delete the erroneous demand while giving effect to the Tribunal's order.

5. Penalty Proceedings:

The ground No. 5 relates to initiating penalty proceedings under section 274 r.w.s. 271(1)(c) of the IT Act for furnishing inaccurate particulars of income. The ITAT found the ground premature as no penalty had been levied in the impugned assessment order and dismissed it as infructuous.

Conclusion:

The appeal of the assessee was allowed for statistical purposes, with specific directions given to the AO for verification and appropriate action on the issues of depreciation on goodwill, software, and deletion of erroneous demand. The penalty proceedings ground was dismissed as premature.

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