2019 (10) TMI 914 - AT - Income Tax

Disallowance of depreciation on the intangible assets/goodwill acquired in the scheme of amalgamation - principle of consistency - assessee claimed the depreciation 1st time on the intangible assets acquired in the scheme of amalgamation in the assessment 2006-07 - HELD THAT - Intent of the Legislature is to make amalgamation a tax neutral scheme for companies as well as for the shareholders and not to provide a tax planning mechanism to either of them. Coming to the present facts of the case we note that Indeed there was no entry in the books of the transferor company for the intangible assets/ goodwill being self generated assets. Thus in the backdrop of the above stated facts we are of the view that impugned transaction for claiming the deduction on account of the depreciation is an arrangement for claiming the higher depreciation which is unwanted under the provisions of law. Before parting, we are conscious to the fact that the assessee was allowed for depreciation in respect of such goodwill in the 1st year of amalgamation i.e. AY 2006-07. There was no action either under section 263 or 147 of the Act by the revenue. Therefore we can safely presume that the claim of the depreciation of the assessee in the 1st year has attained finality. Admittedly the 1st year is the base assessment year from where the issue of depreciation is emanating. The question arises once the depreciation has been allowed in the 1st year then the same can be disturbed in the subsequent year without having any change in the facts and circumstances. In our considered view, in such a case the principles of consistency shall be applied as held by the Hon ble Bombay High Court in the case of PCIT Vs. Quest Investment Advisors Ltd. 2018 (7) TMI 479 - BOMBAY HIGH COURT - the assessee succeeds on the principle of consistency. Accordingly we set aside the order of the learned CIT (A) and direct the AO to allow the depreciation to the assessee. Hence the ground of appeal of the assessee is allowed.

Issues Involved:
1. Disallowance of depreciation on goodwill.
2. Penalty under section 271(1)(c) of the Income Tax Act.
3. Addition towards unutilized CENVAT credit.
4. Forex Derivatives Losses.
5. Disallowance under section 14A of the Income Tax Act.
6. Procedural errors in the appellate order.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Goodwill:
The primary issue raised by the assessee was the disallowance of depreciation on goodwill amounting to ?1,90,09,241/- for the assessment year 2007-08. The assessee had acquired another company in a scheme of amalgamation approved by the Hon’ble Gujarat High Court, leading to the recognition of goodwill in its books. The assessee claimed depreciation on this goodwill under section 32 of the Income Tax Act.

The AO disallowed the depreciation claim, arguing that the intangible assets acquired were self-generated and had zero value as per explanation 7 to section 43(1). The CIT(A) upheld this disallowance, stating that the actual cost of the assets in the books of the amalgamating company should be considered, which was nil for intangible assets.

However, the Tribunal noted that the revenue had allowed the depreciation in the first year (2006-07) and did not take any action under sections 263 or 147. Applying the principle of consistency as upheld by the Hon’ble Supreme Court in CIT vs. Excel Industries Ltd., the Tribunal allowed the depreciation claim for the subsequent year, emphasizing that the revenue cannot change its stance without any change in facts or law.

2. Penalty under Section 271(1)(c):
The revenue appealed against the deletion of a penalty of ?87,91,233/- levied under section 271(1)(c) of the Act. The Tribunal dismissed the revenue’s appeal, stating that since the quantum addition (disallowance of depreciation on goodwill) was deleted, the penalty does not survive.

3. Addition towards Unutilized CENVAT Credit:
For the assessment year 2009-10, the assessee raised an issue regarding the addition of ?40,76,854/- towards unutilized CENVAT credit. The CIT(A) did not adjudicate this ground. The Tribunal restored the matter to the file of the CIT(A) for fresh adjudication, directing to record the correct section of the Act under which the assessment was framed.

4. Forex Derivatives Losses:
The revenue challenged the deletion of disallowance of ?9,85,57,184/- on account of Forex Derivatives Losses for the assessment year 2009-10. The Tribunal restored the matter to the file of the CIT(A) for fresh adjudication, considering the procedural errors in the appellate order.

5. Disallowance under Section 14A:
The revenue also appealed against the deletion of disallowance of ?2,07,518/- under section 14A of the Act. The Tribunal restored this issue to the file of the CIT(A) for fresh adjudication.

6. Procedural Errors in the Appellate Order:
The Tribunal observed procedural errors in the appellate order for the assessment year 2009-10, where the CIT(A) recorded that the appeal was filed against an order under section 143(3) instead of section 143(3) r.w.s. 153A. The Tribunal restored the matter to the CIT(A) to adjudicate afresh, recording the correct section of the Act.

Conclusion:
The Tribunal allowed the assessee's appeals partially and dismissed the revenue's appeal regarding the penalty. For other issues, including procedural errors, the Tribunal restored the matters to the CIT(A) for fresh adjudication. The principle of consistency played a crucial role in the decision regarding the depreciation on goodwill.

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