2025 (1) TMI 1066 - AT - Income Tax

Revision u/s 263 - non-consideration of trade receivable has resulted in excess claim of Goodwill to that extent resulting in excess allowance of depreciation - As argued trade receivables were never transferred to the assessee as part of scheme of Amalgamation - HELD THAT - In terms with a scheme of Amalgamation sanctioned by NCLT the assessee acquired the assets and liabilities of CBTPL w.e.f 31.03.2017. The part of assets acquired under the scheme of Amalgamation included goodwill. Undisputedly in the return of income for the impugned assessment order the assessee had claimed deprecation on goodwill. In response to the query raised the assessee furnished its reply explaining in detail the scheme of Amalgamation and the assets and liabilities acquired on merger of CBTPL. From the reply furnished before the A.O. on 23.03.2021 it can be seen that the assessee had very clearly stated that as per the scheme of Amalgamation the assets and liabilities of Industrial Solid Waste business unit of CBTPL were transferred and vested with the assessee. Whereas post-merger CBTPL continued with the business of Municipal Solid Waste Management. In support of such contention the assessee had furnished the scheme of Amalgamation minutes of board meeting of CBTPL as well as the details of assets and liabilities appearing in the books of CBTPL before demerger. Thus from the aforesaid facts it is very much clear that in course of assessment proceeding the A.O. had enquired in detail regarding the claim of depreciation on goodwill. Facts on record clearly demonstrate that allegation of transfer of trade receivable of Municipal Solid Waste Division to the assessee is totally unfounded and rather contrary to the facts and materials on record. In contrast the Board Resolution of CBTPL and other facts and materials clearly establish that the trade receivable pertaining to Municipal Waste Division was never transferred to the assessee under the scheme of Amalgamation. Thus in our considered opinion ld. PCIT has completely misconceived the facts while exercising jurisdiction u/s. 263 of the Act harbouring a wrong notion that the trade receivable relating to Municipal Waste Division has been transferred to the assessee. Also by simply observing that the assessee was able to adduce partial evidence ld. PCIT has proceeded to revise the assessment order. Thus in our view exercise of power u/s. 263 of the Act in the facts of the present appeal is unsustainable. Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the assessment order passed by the Assessing Officer (A.O.) allowing the claim of depreciation on goodwill is erroneous and prejudicial to the interest of the Revenue, thereby justifying the invocation of jurisdiction under Section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income Tax (PCIT).
Whether the trade receivables of the Municipal Solid Waste Division of Concord Blue Technology Private Limited (CBTPL) were transferred to the assessee under the scheme of Amalgamation, thereby affecting the calculation of goodwill and the subsequent depreciation claim.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the PCIT's Invocation of Section 263

Relevant Legal Framework and Precedents: Section 263 of the Income Tax Act empowers the PCIT to revise an assessment order if it is erroneous and prejudicial to the interest of the Revenue. The legal standard requires both conditions to be satisfied.
Court's Interpretation and Reasoning: The Tribunal examined whether the A.O. had conducted a thorough inquiry into the claim of depreciation on goodwill during the assessment proceedings. The Tribunal found that the A.O. had specifically investigated this claim and was satisfied with the evidence provided by the assessee.
Key Evidence and Findings: The A.O. had issued a notice to the assessee seeking justification for the depreciation claim on goodwill. The assessee provided detailed submissions and documentary evidence, including the scheme of Amalgamation and board resolutions, demonstrating that the goodwill calculation was accurate.
Application of Law to Facts: The Tribunal applied the legal standard under Section 263 and concluded that the assessment order was neither erroneous nor prejudicial to the Revenue. The A.O. had conducted a detailed inquiry, and the PCIT's invocation of Section 263 was based on a misconception of facts.
Treatment of Competing Arguments: The Tribunal considered the arguments of the Departmental Representative supporting the PCIT's order but found them unconvincing in light of the evidence and the A.O.'s thorough examination.
Conclusions: The Tribunal concluded that the PCIT's order under Section 263 was unsustainable and quashed it, restoring the original assessment order.

Issue 2: Transfer of Trade Receivables

Relevant Legal Framework and Precedents: The determination of whether trade receivables were transferred under a scheme of Amalgamation involves examining the terms of the scheme and the factual circumstances.
Court's Interpretation and Reasoning: The Tribunal scrutinized the evidence, including the NCLT-approved scheme of Amalgamation and board resolutions, to ascertain whether the trade receivables of the Municipal Solid Waste Division were transferred to the assessee.
Key Evidence and Findings: The evidence showed that only the Industrial Solid Waste Division was transferred to the assessee. The trade receivables in question pertained to the Municipal Solid Waste Division, which was not part of the transfer.
Application of Law to Facts: Based on the evidence, the Tribunal found that the trade receivables were not transferred to the assessee, contrary to the PCIT's assumption.
Treatment of Competing Arguments: The Tribunal noted that the PCIT's assumption was based on a misunderstanding of the facts, which the assessee had attempted to clarify during the proceedings.
Conclusions: The Tribunal concluded that the PCIT's assumption regarding the transfer of trade receivables was incorrect and contributed to the erroneous invocation of Section 263.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "Thus, in our view, exercise of power u/s. 263 of the Act, in the facts of the present appeal, is unsustainable. In our considered opinion, the A.O. after conducting full length enquiry and due diligence has completed the assessment, accepting assessee's claim of depreciation."
Core Principles Established: The judgment reinforces the principle that for a revision under Section 263 to be valid, the assessment order must be both erroneous and prejudicial to the Revenue. A thorough inquiry by the A.O. that satisfies these conditions cannot be overturned based on misconceptions.
Final Determinations on Each Issue: The Tribunal quashed the PCIT's order under Section 263, thereby restoring the original assessment order. It determined that the trade receivables were not transferred to the assessee, and the depreciation claim on goodwill was correctly allowed by the A.O.

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