2021 (9) TMI 284 - AT - Income Tax

Depreciation on goodwill - amalgamation - acquisition of the deferred sales tax liabilities - MOU agreed to purchase the Assets consisting the Immovable properties - As per revenue deferred sales tax liability claimed by the assessee under the head of goodwill sought to be depreciated by the assessee is not proper and not in accordance with law and this is the liability which was existed on the date purchase and it was known liability ,therefore, it cannot be treated as goodwill - HELD THAT - On the one hand the assessee submits that it is a part of fixed assets included in the cost of the fixed assets and on the other hand, he submits that it is a goodwill which has been arisen towards excess consideration paid for the discharging of liabilities in future date, therefore, it is goodwill and to be named as intangible assets, which are contrary in nature. On the date of execution of MoUs, the liability was a known liability, therefore, it cannot be treated that it is a intangible asset and cannot be treated as a goodwill. Before us the assessee has not produced any details in regard to how he has arrived the value of assets and entry in the books of accounts. Therefore the contention of the assessee is rejected. Entire assets and liabilities were not taken over by the assessee as per MOUs therefore, the assets and deferred sales tax liabilities which are not in the nature of amalgamation. In the impugned case, it appears that the assessee has tried to pass entry in its books of account only giving corresponding effect in the assets side in the balance sheet of the said liability as goodwill, which is a self-creating in nature. The liability will always remain the liability and the liability cannot change in the form of assets. Therefore, the creation of goodwill in the books of account is completely wrong and charging depreciation on the goodwill is also wrong, hence, the depreciation claim of the assessee on the goodwill is not allowable as per the IT Act - assessee is not eligible for claiming depreciation on goodwill since its inception i.e. first year of claiming of depreciation and accordingly, the grounds raised by the assessee on this issue are dismissed. Alternatively, that the assessee may claim the deduction when it is actually paid to the concerned department subject to the First party had claimed it as expenditure and suo motto disallowed under section 43 B(a) of the Income Tax Act. 1961, if it satisfies the conditions stipulated in section 43B(a) of the income tax act. The AO is directed to ensure to avoid double deduction on this count.

Issues Involved:
1. Depreciation on Goodwill.
2. Treatment of Deferred Sales Tax Liability.
3. Admissibility of Additional Evidence.
4. Res Judicata in Income Tax Proceedings.
5. Directions for Reassessment.

Issue-wise Detailed Analysis:

1. Depreciation on Goodwill:
The primary issue revolves around the depreciation on goodwill claimed by the assessee. The assessee argued that the deferred sales tax liability, which was part of the consideration for acquiring a cement plant, was shown as goodwill in the books of account and should be eligible for depreciation. The assessee relied on the Supreme Court's decision in CIT vs. Smifs Securities Ltd. (348 ITR 302), which allowed depreciation on goodwill. However, the CIT(A) and the ITAT held that the facts of the assessee's case were different from those in the Smifs Securities case. The ITAT emphasized that the deferred sales tax liability was a known liability at the time of purchase and could not be treated as goodwill. Consequently, the depreciation claim on goodwill was disallowed.

2. Treatment of Deferred Sales Tax Liability:
The assessee treated the deferred sales tax liability as goodwill and sought to depreciate it. The ITAT found this treatment improper, stating that the liability was known at the time of purchase and could not be converted into an intangible asset like goodwill. The ITAT noted that the liability should remain as a liability and not be reclassified as an asset. The ITAT also observed that the assessee had not provided sufficient details on how the value of the assets and the entry in the books of accounts were arrived at.

3. Admissibility of Additional Evidence:
The assessee sought to introduce additional evidence, including correspondence with the sales tax department, which was not available during the proceedings before the lower authorities. The ITAT admitted this additional evidence, recognizing its importance in adjudicating the issue. However, the ITAT ultimately found that the additional evidence did not change the conclusion that the deferred sales tax liability could not be treated as goodwill.

4. Res Judicata in Income Tax Proceedings:
The assessee argued that the depreciation on goodwill had been allowed in previous assessment years, and thus, it should be allowed in the current year as well. The ITAT rejected this argument, stating that the principle of res judicata does not apply to income tax proceedings, as each assessment year is separate. The ITAT also noted that the previous decisions were based on legal issues regarding the reopening of cases, not on the merits of the depreciation claim.

5. Directions for Reassessment:
The ITAT directed the Assessing Officer (AO) to take necessary action to bring the income escaped assessment in the hands of the assessee for the assessment years 2010-11, 2011-12, and 2012-13. This direction was issued under section 150 of the Income Tax Act, which allows reopening of assessments beyond the period of limitation based on findings and directions from appellate authorities. The ITAT also provided an alternative direction, allowing the assessee to claim the deduction when the deferred sales tax liability is actually paid, subject to certain conditions under section 43B(a) of the Income Tax Act.

Conclusion:
The ITAT dismissed the appeals for all the assessment years under consideration, concluding that the assessee was not eligible for claiming depreciation on goodwill. The ITAT emphasized that the deferred sales tax liability could not be treated as an intangible asset and that the principle of res judicata did not apply to income tax proceedings. The ITAT also issued directions for reassessment and provided an alternative for claiming deductions under specific conditions.

← Previous Next →