2023 (3) TMI 658 - AT - Income Tax

Revision u/s 263 - depreciation on goodwill - HELD THAT - Claim of depreciation in the hands of the demerged company was enquired during the course of assessment proceedings - we also observe that during the course of assessment, the assessee had furnished various factual and legal submissions in respect of its claim of depreciation on goodwill vide submission dated 19-12-2017, wherein the assessee relied on the case of Smifs Securities 2012 (8) TMI 713 - SUPREME COURT in support of its claim for depreciation of goodwill by assessee company. As observe that the extract of board resolution passed by the meeting of board of directors and order passed by the Hon ble Gujarat High Court granting approval to the aforesaid said of demerger and also the valuation report prepared by the approved valuer dated 04-10-2014 were all submitted before the AO during the course of assessment proceedings, for his consideration. Accordingly, in the light of the above, we are of the considered view that the AO had examined the aspect of assessee s claim of depreciation during the course of assessment proceedings, factually as well as legally, while allowing the assessee s claim of depreciation on goodwill. Whether the assessee took a view which is legally plausible/sustainable in law? - High Court of Gujarat in the case of Pr. CIT vs. Zydus Wellness Ltd. 2017 (10) TMI 373 - GUJARAT HIGH COURT has held that assessee company is entitled to claim depreciation on goodwill expended at the time of amalgamation of companies. In the said order, the Hon ble Gujarat High Court placed reliance on the decision in the case of CIT vs. Smifs Securities 2012 (8) TMI 713 - SUPREME COURT , while deciding the issue in favour of the assessee. We are of the considered view that the AO has placed reliance on the case of Smifs Securities supra while allowing the claim of depreciation on goodwill for the impugned assessment year and hence the view taken by ld. Assessing Officer can be held to be legally plausible view. Regarding the scope of enquiry u/s 263 of the Act, it may be useful to refer to jurisdictional Gujarat High Court decision in the case of Principal Commissioner of Income Tax-3 v. Minal Nayan Shah 2020 (9) TMI 825 - GUJARAT HIGH COURT - we are of the view that CIT has erred in facts and in law invoking the provisions of section 263 in the instant set of facts. Accordingly, we direct that the order passed by the Pr. CIT u/s. 263 of the Act may be set aside. Appeal of assessee allowed.

Summary

Issues Involved:
1. Validity of the revision order passed under Section 263 of the Income-tax Act.
2. Allowability of depreciation on goodwill claimed by the assessee.

Detailed Analysis:

1. Validity of the Revision Order Passed Under Section 263 of the Income-tax Act:

The assessee challenged the revision order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income-tax Act, arguing that the assessment order was neither erroneous nor prejudicial to the interest of the revenue. The Pr. CIT had set aside the assessment order on the grounds that the Assessing Officer (AO) had wrongly accepted the claim of depreciation on goodwill without examining the provisions of Explanation 2 to Section 43(6) read with Section 32 of the Act.

The Tribunal noted that during the assessment proceedings, the AO had made detailed inquiries regarding the claim of depreciation on goodwill. The assessee had submitted comprehensive details, including the fixed assets schedule, board resolutions, and a valuation report prepared in connection with the scheme of demerger. The AO had considered these submissions and relied upon the Supreme Court's decision in the case of Smifs Securities Pvt. Ltd. (348 ITR 302) to allow the claim of depreciation on goodwill.

The Tribunal emphasized that the AO had performed judicial functions and taken a legally plausible view based on the Supreme Court's decision. Therefore, the assessment order could not be considered erroneous merely because the Pr. CIT disagreed with the AO's view. The Tribunal referred to the jurisdictional Gujarat High Court's decision in the case of Principal Commissioner of Income Tax-3 v. Minal Nayan Shah (2020) 121 taxmann.com 30, which held that if the AO's view is legally plausible, the provisions of Section 263 cannot be invoked to correct the order.

2. Allowability of Depreciation on Goodwill Claimed by the Assessee:

The Tribunal examined the merits of the claim of depreciation on goodwill. The assessee had claimed depreciation on goodwill arising from the demerger of the Healthcare Division of M/s. Nirma Limited, which was transferred to the assessee company. The Pr. CIT had observed that the goodwill was a self-acquired asset with a "Nil" actual cost in the hands of the demerged company, and therefore, the written down value (WDV) of the goodwill should also be "Nil" in the hands of the assessee company.

The Tribunal referred to the Supreme Court's decision in the case of Smifs Securities Pvt. Ltd. (348 ITR 302), which held that goodwill is an asset under Explanation 3(b) to Section 32(1) of the Act, and depreciation on the same is allowable. The Tribunal also noted the Gujarat High Court's decision in the case of Pr. CIT vs. Zydus Wellness Ltd. (87 taxmann.com 82), which upheld the allowability of depreciation on goodwill in cases of amalgamation or demerger.

The Tribunal concluded that the AO had taken a legally plausible view by allowing the claim of depreciation on goodwill based on the Supreme Court's decision. Therefore, the assessment order could not be considered erroneous or prejudicial to the interest of the revenue.

Conclusion:

The Tribunal held that the Pr. CIT had erred in invoking the provisions of Section 263 in the instant case. The assessment order passed by the AO was based on a legally plausible view and could not be considered erroneous or prejudicial to the interest of the revenue. Consequently, the Tribunal set aside the revision order passed by the Pr. CIT under Section 263 of the Act and allowed the appeals of the assessee for both assessment years 2015-16 and 2016-17.