Tribunal quashes order under Section 263, deeming it unsustainable.

The Tribunal held that the order passed under Section 263 by the Principal Commissioner of Income-Tax was not sustainable. The failure to refer transactions to the Transfer Pricing Officer and the allowance of depreciation on goodwill did not render the assessment order erroneous or prejudicial to the interest of Revenue. As a result, the appeal by the assessee, Bhavani Gems Private Limited, was allowed, and the order under Section 263 was quashed.

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Issues Involved:
1. Validity of the order passed under Section 263 of the Income-Tax Act.
2. Requirement of referring international and specified domestic transactions to the Transfer Pricing Officer (TPO).
3. Depreciation claim on goodwill.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed Under Section 263 of the Income-Tax Act:
The assessee, Bhavani Gems Private Limited, challenged the order passed under Section 263 by the Principal Commissioner of Income-Tax (PCIT) -5, Mumbai, which held that the assessment order dated 21.11.2018 under Section 143(3) was erroneous and prejudicial to the interest of Revenue. The PCIT's order directed the Assessing Officer (AO) to pass a fresh assessment order. The Tribunal examined whether the AO's failure to refer international and specified domestic transactions to the TPO and the allowance of depreciation on goodwill rendered the assessment order erroneous and prejudicial to Revenue's interest.

2. Requirement of Referring International and Specified Domestic Transactions to the TPO:
The PCIT found that the AO had not referred the international transactions amounting to Rs. 133.76 crores and specified domestic transactions of Rs. 20.89 crores to the TPO for determination of Arm's Length Price (ALP). The Tribunal noted that the case was selected for scrutiny under CASS for reasons unrelated to transfer pricing risk parameters. According to CBDT Instruction No. 3/2016, cases selected for scrutiny on non-transfer pricing risk parameters should be referred to the TPO only under specified circumstances, which were not applicable in this case. The Tribunal held that the AO was not required to refer the matter to the TPO as per the instructions, and thus, the AO's order was not erroneous.

3. Depreciation Claim on Goodwill:
The PCIT also noted that the AO allowed depreciation of Rs. 4.87 crores on self-generated goodwill, which should have been taken at Rs. Nil. The Tribunal observed that the goodwill was acquired from a partnership firm and had been part of the block of assets since 2012, with depreciation allowed in previous years. Citing precedents, the Tribunal held that the Revenue could not disallow depreciation in subsequent years if it was allowed in the initial year. Therefore, the AO's allowance of depreciation on goodwill was not erroneous.

Conclusion:
The Tribunal concluded that the order passed under Section 263 by the PCIT was not sustainable. The AO's failure to refer the transactions to the TPO and the allowance of depreciation on goodwill did not render the assessment order erroneous or prejudicial to the interest of Revenue. Consequently, the appeal filed by the assessee was allowed, and the order under Section 263 was quashed.

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