Depreciation on goodwill from demerger upheld; s.32(1) proviso and Explanation 2 to s.43(6) do not bar claim

Gujarat HC dismissed the revision and upheld the Tribunal's and AO's allowance of depreciation on goodwill arising from a demerger/amalgamation. Although Revenue argued the 6th proviso to s.32(1) and Explanation 2 to s.43(6) read with s.32 barred depreciation where WDV was nil, the Tribunal found the AO had examined approvals and the valuer's report and taken a plausible legal view, relying on the Supreme Court precedent cited by the assessee. The HC held no substantial question of law arose and the assessment was not prejudicial to Revenue.

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Issues:
The issues in this case involve challenging the order passed by the Income Tax Appellate Tribunal regarding the claim of depreciation on goodwill created through demerger, and the application of relevant provisions of the Income Tax Act.

Issue 1 - Depreciation on Goodwill:
The case revolves around the claim of depreciation on goodwill amounting to Rs. 275 crores created by the assessee company following a demerger. The Principal CIT contended that the goodwill was a self-acquired asset with a cost of "Nil" in the hands of the demerged company, therefore, the depreciation claimed by the assessee company was not allowable under the Act. The Tribunal, however, opined that the Principal CIT erred in invoking Section 263 of the Act and set aside the order.

Issue 2 - Legal Plausibility of Claim:
The Tribunal observed that the Assessing Officer had examined the claim of depreciation during the assessment proceedings, considering factual and legal submissions from the assessee. The Tribunal found that the Assessing Officer had taken a plausible and sustainable view in allowing the depreciation on goodwill, as per the case of Commissioner of Income Tax, Kolkata vs. Smifs Securities Ltd [348 ITR 302 (SC)]. The Tribunal concluded that no substantial question of law arose for consideration and dismissed the appeals.

Separate Judgment by Judges:
The Honourable Mr. Justice Biren Vaishnav and Honourable Mr. Justice Bhargav D. Karia presided over this case and delivered the judgment dismissing the appeals based on the legal plausibility of the claim for depreciation on goodwill.

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