Tribunal allows goodwill depreciation claim and disallows Rule 8D disallowance for lack of exempt income

The Tribunal allowed the assessee's appeal regarding the depreciation on goodwill for the assessment years 2013-14, 2014-15, and 2015-16, holding that the goodwill was acquired through demerger and eligible for depreciation under section 32(1) of the Income Tax Act. Additionally, the Tribunal directed the AO to delete the disallowance made under section 14A read with Rule 8D for the assessment year 2015-16 due to the absence of exempt income. The Revenue's appeal for the assessment year 2015-16 was dismissed.

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Issues Involved:
1. Depreciation on Goodwill under section 32(1) of the Income Tax Act, 1961.
2. Disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962.

Summary:

Issue 1: Depreciation on Goodwill

The first issue for consideration is the depreciation on goodwill under section 32(1) of the Income Tax Act, 1961. The assessee, M/s. Sunedison Solar Power India Private Limited, claimed depreciation on goodwill arising from a scheme of demerger approved by the Hon'ble High Court of Madras. The scheme involved the demerger of the Engineering, Procurement, and Commissioning (EPC) business from Sunedison Energy India Private Limited to the assessee company. The assessee issued preference shares to the shareholders of the demerged company, resulting in goodwill recorded in its books.

The Assessing Officer (AO) initially allowed depreciation on the differential amount as the cost of plant and machinery for the assessment year 2013-14 but disallowed it entirely for the subsequent years, stating that the goodwill was self-generated. The AO and the Additional Commissioner of Income Tax (Addl. CIT) concluded that the goodwill was merely a book adjustment and not an actual asset, thus not eligible for depreciation.

The CIT(A) upheld the AO's decision for the assessment years 2013-14 and 2014-15 but allowed the depreciation for the assessment year 2015-16, recognizing the goodwill as acquired through demerger and not self-generated. The Tribunal, after considering the facts and legal precedents, including the Supreme Court's decision in CIT v. Smifs Securities Ltd., concluded that the goodwill was indeed purchased and eligible for depreciation under section 32(1) of the Act. The Tribunal directed the AO to allow the depreciation on goodwill for all three assessment years.

Issue 2: Disallowance under Section 14A read with Rule 8D

For the assessment year 2015-16, the AO disallowed expenses related to exempt income under section 14A by invoking Rule 8D, amounting to Rs. 35,74,259/-. The assessee argued that no exempt income was earned during the year, and hence, no disallowance should be made. The Tribunal, referencing the Supreme Court's decision in Chettinad Logistics and the Delhi High Court's decision in Cheminvest Ltd., held that in the absence of exempt income, no disallowance under section 14A read with Rule 8D could be made. The Tribunal directed the AO to delete the addition made towards disallowance under section 14A.

Conclusion:

The appeals filed by the assessee for the assessment years 2013-14, 2014-15, and 2015-16 were allowed, and the appeal filed by the Revenue for the assessment year 2015-16 was dismissed.

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