2024 (12) TMI 982 - AT - Income Tax

Revision u/s 263 - assessee claimed depreciation on Goodwill upon acquisition of business on a slump sale basis under Business Transfer Agreement - as alleged that the assessee has claimed depreciation to the extent of 25% on intangible asset recognized as Goodwill in its books, which aspect was not examined by the AO while passing the assessment order u/s 143(3) r.w. section 144B of the Act and failure to examine the aforesaid aspect has resulted in under assessment of income HELD THAT - As evident that in case the assessment order is passed without making inquiries or verification which should have been made or the assessment order has been passed allowing any relief without inquiring into the claim of the assessee, then the said assessment order shall be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue. From the perusal of the material placed on record by the assessee, it is discernible that the aspect of the claim of Depreciation on Goodwill by the assessee was not examined by the AO and no query/information was sought from the assessee. Such being the facts, we are of the considered view that PCIT has rightly invoked its jurisdiction u/s 263 of the Act and initiated the revisionary proceedings. PCIT has also directed the AO to verify whether the transferor company has declared profits on the transfer and paid taxes on the same. PCIT has given its findings on the merits of the claim of Depreciation on Goodwill. Once the assessment order passed under section 143(3) r.w. section 144B of the Act has been set aside for de novo adjudication on limited issue, pursuant to the impugned order passed u/s 26 such observations are irrelevant at this stage and the AO should decide the issue of claim of Depreciation on Goodwill as per law. We order accordingly. Thus, we uphold the invocation of revisionary proceedings u/s 263 of the Act by the learned PCIT. Accordingly, the grounds raised by the assessee are dismissed.

Summary

Issues Involved:

1. Whether the assessment order was erroneous and prejudicial to the interest of the revenue under section 263 of the Income Tax Act.
2. Whether the Principal Commissioner of Income Tax was correct in assuming jurisdiction under section 263 regarding the inquiry into the seller's tax payment on profits from a slump sale.
3. Whether the assessee is eligible for depreciation on goodwill acquired under a slump sale.

Issue-wise Detailed Analysis:

1. Erroneous and Prejudicial Assessment Order:

The assessee challenged the invocation of revisionary proceedings under section 263 by the Principal Commissioner of Income Tax (PCIT), arguing that the assessment order was neither erroneous nor prejudicial to the revenue's interest. The PCIT had issued a show cause notice suggesting that the assessment order was erroneous due to the lack of inquiry into the depreciation claimed on goodwill. The PCIT found that the Assessing Officer (AO) failed to examine the depreciation claim on goodwill, which led to an under-assessment of income. The tribunal upheld the PCIT's decision, stating that the AO's failure to inquire into the depreciation claim rendered the assessment order erroneous and prejudicial to the revenue's interest.

2. Jurisdiction Under Section 263:

The PCIT assumed jurisdiction under section 263, treating the AO's order as erroneous for not inquiring whether the seller paid taxes on profits from the slump sale. The tribunal noted that the AO did not examine whether the transferor company declared profits and paid taxes on the transfer, which was a necessary inquiry. The tribunal found that the PCIT correctly invoked jurisdiction under section 263, as the AO did not make necessary inquiries or verifications regarding the slump sale and the associated tax implications.

3. Eligibility for Depreciation on Goodwill:

The assessee claimed depreciation on goodwill acquired through a slump sale, relying on a Supreme Court decision that recognized goodwill as an intangible asset eligible for depreciation. However, the PCIT disagreed, noting a lack of inquiry by the AO into the depreciation claim. The tribunal observed that while the AO examined the investment in intangible assets, it did not specifically scrutinize the depreciation claim on goodwill. The tribunal concluded that the PCIT's direction to reassess the claim of depreciation on goodwill was justified, as the AO did not adequately investigate this aspect during the assessment proceedings.

Conclusion:

The tribunal dismissed the appeal by the assessee, affirming the PCIT's invocation of section 263. It emphasized that the AO's lack of inquiry into critical aspects of the assessment, particularly the depreciation claim on goodwill, justified the revisionary proceedings. The tribunal directed the AO to conduct a de novo adjudication on the limited issue of depreciation on goodwill, ensuring compliance with legal standards.