Ruling allows depreciation on goodwill acquired in amalgamation, directing assessing officer to permit deduction under consistency principle

ITAT AHMEDABAD allowed the assessee's claim for depreciation on intangible assets/goodwill acquired in an amalgamation, directing the AO to permit the deduction. Although the transaction was scrutinized as an impermissible device to claim excess depreciation, the tribunal held that depreciation allowed in the first assessment year of amalgamation attained finality and, under the principle of consistency (as applied by HC authority), could not be disturbed in subsequent years absent changed facts. The appeal was allowed.

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Issues Involved:
1. Disallowance of depreciation on goodwill.
2. Penalty under section 271(1)(c) of the Income Tax Act.
3. Addition towards unutilized CENVAT credit.
4. Forex Derivatives Losses.
5. Disallowance under section 14A of the Income Tax Act.
6. Procedural errors in the appellate order.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Goodwill:
The primary issue raised by the assessee was the disallowance of depreciation on goodwill amounting to Rs. 1,90,09,241/- for the assessment year 2007-08. The assessee had acquired another company in a scheme of amalgamation approved by the Hon’ble Gujarat High Court, leading to the recognition of goodwill in its books. The assessee claimed depreciation on this goodwill under section 32 of the Income Tax Act.

The AO disallowed the depreciation claim, arguing that the intangible assets acquired were self-generated and had zero value as per explanation 7 to section 43(1). The CIT(A) upheld this disallowance, stating that the actual cost of the assets in the books of the amalgamating company should be considered, which was nil for intangible assets.

However, the Tribunal noted that the revenue had allowed the depreciation in the first year (2006-07) and did not take any action under sections 263 or 147. Applying the principle of consistency as upheld by the Hon’ble Supreme Court in CIT vs. Excel Industries Ltd., the Tribunal allowed the depreciation claim for the subsequent year, emphasizing that the revenue cannot change its stance without any change in facts or law.

2. Penalty under Section 271(1)(c):
The revenue appealed against the deletion of a penalty of Rs. 87,91,233/- levied under section 271(1)(c) of the Act. The Tribunal dismissed the revenue’s appeal, stating that since the quantum addition (disallowance of depreciation on goodwill) was deleted, the penalty does not survive.

3. Addition towards Unutilized CENVAT Credit:
For the assessment year 2009-10, the assessee raised an issue regarding the addition of Rs. 40,76,854/- towards unutilized CENVAT credit. The CIT(A) did not adjudicate this ground. The Tribunal restored the matter to the file of the CIT(A) for fresh adjudication, directing to record the correct section of the Act under which the assessment was framed.

4. Forex Derivatives Losses:
The revenue challenged the deletion of disallowance of Rs. 9,85,57,184/- on account of Forex Derivatives Losses for the assessment year 2009-10. The Tribunal restored the matter to the file of the CIT(A) for fresh adjudication, considering the procedural errors in the appellate order.

5. Disallowance under Section 14A:
The revenue also appealed against the deletion of disallowance of Rs. 2,07,518/- under section 14A of the Act. The Tribunal restored this issue to the file of the CIT(A) for fresh adjudication.

6. Procedural Errors in the Appellate Order:
The Tribunal observed procedural errors in the appellate order for the assessment year 2009-10, where the CIT(A) recorded that the appeal was filed against an order under section 143(3) instead of section 143(3) r.w.s. 153A. The Tribunal restored the matter to the CIT(A) to adjudicate afresh, recording the correct section of the Act.

Conclusion:
The Tribunal allowed the assessee's appeals partially and dismissed the revenue's appeal regarding the penalty. For other issues, including procedural errors, the Tribunal restored the matters to the CIT(A) for fresh adjudication. The principle of consistency played a crucial role in the decision regarding the depreciation on goodwill.

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