2024 (1) TMI 744 - AT - Income Tax

Disallowance of depreciation on goodwill - HELD THAT - Admittedly, similar issue came for consideration before this Tribunal in assessee s own case 2022 (6) TMI 1295 - ITAT BANGALORE Once the department accepted the capital gain offered by individual assessee in the respective hand, the same transaction cannot be doubted in the hands of purchaser. On this count also, we find force in the argument of Ld. A.R. that AO not established that the main purpose of transfer of such asset was reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish aforesaid fact, it has to be established that apart from claiming additional depreciation on enhanced cost, there is other main purpose for acquiring the asset i.e. goodwill in question. The AO in the instant case wrongly invoked the explanation 3 to section 43 of the Act. Our above decision is also supported by the order of the Tribunal relied by the Ld. A.R. in the case of M/s. Dorma India Pvt. Ltd., Chennai 2019 (11) TMI 1139 - ITAT CHENNAI Further, we also place reliance on the judgement of Hon ble Karnataka High Court in the case of Padmini Products (P) Ltd. 2020 (10) TMI 424 - KARNATAKA HIGH COURT wherein similar circumstances Hon ble High Court has allowed the claim of the assessee. As seen from earlier order of the Tribunal, the said decision is based on the judgement of Hon ble Karnataka High Court in the case of Padmini Product Pvt. Ltd. cited (supra), the operation of which is stayed by Hon ble Supreme Court as of now as mentioned above. In view of this, we are of the opinion that it is appropriate to remit this issue to the file of ld. AO to decide the same on consideration of final outcome of decision in the case of M/s. Padmini Products Pvt. Ltd. cited (supra). This issue is remitted to the file of ld. AO for fresh consideration as observed above. Disallowance u/s 14A of the Act read with Rule 8D(2) - AO invoked provisions of section 8D(2)(ii) of the Rules with regard to indirect expenses incurred by assessee which are common expenses and cannot be identified independently - HELD THAT - We have carefully gone through the assessment orders, wherein the assessing officer clearly established that assessee has earned exempt income in these assessment years and claimed that no expenditure has been incurred in assessment year 2017-18 and 2018-19, however, disallowed a meagre amount of Rs. 6,000/- in the assessment year 2020-21 without applying the formulas specified in Rule 8D(2)(ii) for disallowance u/s 14A of the Act. Hence, it cannot be said that ld. AO has not applied his mind or recorded satisfaction on this issue. In our opinion, he came to subjective satisfaction on disallowance u/s 14A of the Act read with Rule 8D(2)(ii) of the Rules. We do not find any infirmity in the findings of the lower authorities and the same is confirmed.

Summary

Issues Involved:
1. Disallowance of depreciation on goodwill.
2. Disallowance under Section 14A read with Rule 8D.

Summary:

Disallowance of Depreciation on Goodwill:
The appellant, a Private Limited company engaged in R&D, production, and marketing of hybrid seeds, challenged the disallowance of depreciation on goodwill for the assessment years 2017-18, 2018-19, and 2020-21. The appellant had purchased the proprietary concern of Mr. Praveen Noojibail and M/s. Sasya Gentech Private Limited by slump sale in AY 2015-16 and claimed depreciation on goodwill. The Assessing Officer (AO) denied the claim due to lack of documentary evidence and disallowed amounts of Rs. 2,82,68,464/-, Rs. 2,12,01,349/-, and Rs. 1,19,25,759/- for AYs 2017-18, 2018-19, and 2020-21 respectively. The Tribunal referred to its previous decision in the appellant's case for AY 2015-16, where it was held that goodwill is an intangible asset eligible for depreciation under Section 32 of the Act, supported by various judicial precedents including the Supreme Court's decision in Smifs Securities Ltd. However, the Tribunal noted that the Karnataka High Court's decision in Padmini Products Pvt. Ltd., which was relied upon, has been stayed by the Supreme Court. Consequently, the Tribunal remitted the issue back to the AO for fresh consideration based on the final outcome of the Padmini Products case.

Disallowance under Section 14A read with Rule 8D:
The appellant contested the disallowance under Section 14A read with Rule 8D(2)(ii) for AYs 2017-18, 2018-19, and 2020-21, amounting to Rs. 75,000/-, Rs. 1,04,372/-, and Rs. 7,99,060/- respectively. The appellant argued that no expenditure was incurred to earn tax-free income and that the investments were made from surplus funds. The AO, however, determined that administrative and common expenses must have been incurred to earn exempt income and applied Rule 8D(2)(ii) to disallow a percentage of the investments. The Tribunal upheld the AO's decision, stating that the AO had recorded proper satisfaction and applied his mind to the issue. The Tribunal found no infirmity in the AO's findings and confirmed the disallowance.

Conclusion:
The appeals were partly allowed for statistical purposes, with the issue of depreciation on goodwill remitted to the AO for fresh consideration and the disallowance under Section 14A read with Rule 8D confirmed.