2012 (9) TMI 38 - AT - Income Tax

Validity of reassessment proceedings of AY 02-03 excess depreciation on intangible assets namely trade and marketing network rights - inadmissible depreciation on goodwill AO in view of the amendment made in the relevant provisions of the Act allowed depreciation on asset namely trade and marketing network rights for AY 01-02 u/s 143(3), which had been withdrawn by assessee in its revised return in assessment u/s 143(3) for A.Y. 2002-03 depreciation allowed as claimed by the assessee without reducing the depreciation already allowed in trade and marketing network rights in the A.Y. 2001-02 same followed in assessment for AY 04-05 i.e. depreciation claimed without deducting the amount of depreciation already allowed in A.Y. 2001-02 Held that - It is seen that in both the above AYs the assessee has claimed excess depreciation on trade and marketing network rights. Also, even in response to notice issued u/s 148, the assessee has filed the returns on the same loss as determined by the A.O. in the AY 2002-03 and 2004-05 without reducing the excess claim of depreciation claimed by the assessee in the original returns filed by him. Thus, there was an omission and failure on the part of the assessee to disclose fully and truly material facts for the above assessment years with regard to excess depreciation claimed. A.O. was justified in initiating/completing the proceeding u/s 147/148. Depreciation in respect of intangible assets such as brands, formulations, patents and marketing distribution network dis-allowance Held that - Since the same has been allowed by Tribunal in earlier year, hence A.O. is directed to allow the same after reducing the depreciation already allowed in A.Y. 2001-02 from the WDV shown by the assessee for the year under consideration Decided partly in favor of assessee.

Summary

Issues Involved:
1. Reopening of assessment under section 147/148 of the Income Tax Act.
2. Disallowance of depreciation on intangible assets, specifically goodwill.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147/148:
The primary issue was whether the reopening of the assessment under section 147/148 of the Income Tax Act was justified. The assessee argued that the reopening was based on a change of opinion, which is not permissible. The assessee had disclosed all material facts in the original returns, and the Assessing Officer (A.O.) had allowed the depreciation claims in the original assessments. The A.O. later reopened the assessments on the grounds that the depreciation claimed on trade and marketing network rights included goodwill, which is not eligible for depreciation under section 32(ii) of the Act.

The Tribunal noted that the assessee had indeed claimed excess depreciation on trade and marketing network rights in the original returns for the assessment years 2002-03 and 2004-05. The A.O. had allowed these claims without reducing the depreciation already allowed in the assessment year 2001-02. The Tribunal found that there was an omission and failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessments. This justified the A.O.'s initiation of proceedings under section 147/148. The Tribunal rejected the assessee's contention that the reopening was merely a change of opinion, citing the Delhi High Court's decision in Honda Siel Power Products Limited v. Dy. CIT, which upheld the validity of reassessment proceedings in similar circumstances.

2. Disallowance of Depreciation on Intangible Assets:
The second issue was the disallowance of depreciation on intangible assets, specifically goodwill. The A.O. disallowed the depreciation claimed on the grounds that goodwill is not an intangible asset eligible for depreciation under section 32(ii) of the Act. The assessee contended that the amount paid for the acquisition of marketing and distribution network, market goodwill, etc., fell within the definition of intangible assets as governed by section 32(1)(ii) and was eligible for depreciation.

The Tribunal noted that in the assessee's own case for the assessment year 2006-07, the Tribunal had allowed the depreciation on such intangible assets of trade and marketing network rights. The Tribunal directed the A.O. to allow the depreciation as claimed by the assessee, after reducing the depreciation already allowed in the assessment year 2001-02 from the written down value (WDV) shown by the assessee for the year under consideration.

Conclusion:
The Tribunal upheld the reopening of the assessments under section 147/148, finding that the assessee had failed to disclose fully and truly all material facts necessary for the assessments. However, the Tribunal allowed the depreciation on intangible assets, including trade and marketing network rights, in line with its earlier decision for the assessment year 2006-07. The A.O. was directed to allow the depreciation after adjusting for the depreciation already allowed in the assessment year 2001-02. The assessee's appeals were partly allowed.