AO must reconsider goodwill depreciation disallowance after accepting capital gains from same transaction

ITAT Bangalore remitted the depreciation on goodwill disallowance issue to AO for fresh consideration pending final outcome of Karnataka HC decision in Padmini Products case, which is currently stayed by SC. The Tribunal noted that once department accepted capital gains in transferor's hands, same transaction cannot be doubted in purchaser's hands. AO failed to establish that main purpose of asset transfer was tax reduction through enhanced depreciation claims. Regarding section 14A disallowance, ITAT confirmed AO's subjective satisfaction in applying Rule 8D(2)(ii) for indirect expenses related to exempt income.

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Issues Involved:
1. Disallowance of depreciation on goodwill.
2. Disallowance under Section 14A read with Rule 8D.

Summary:

Disallowance of Depreciation on Goodwill:
The appellant, a Private Limited company engaged in R&D, production, and marketing of hybrid seeds, challenged the disallowance of depreciation on goodwill for the assessment years 2017-18, 2018-19, and 2020-21. The appellant had purchased the proprietary concern of Mr. Praveen Noojibail and M/s. Sasya Gentech Private Limited by slump sale in AY 2015-16 and claimed depreciation on goodwill. The Assessing Officer (AO) denied the claim due to lack of documentary evidence and disallowed amounts of Rs. 2,82,68,464/-, Rs. 2,12,01,349/-, and Rs. 1,19,25,759/- for AYs 2017-18, 2018-19, and 2020-21 respectively. The Tribunal referred to its previous decision in the appellant's case for AY 2015-16, where it was held that goodwill is an intangible asset eligible for depreciation under Section 32 of the Act, supported by various judicial precedents including the Supreme Court's decision in Smifs Securities Ltd. However, the Tribunal noted that the Karnataka High Court's decision in Padmini Products Pvt. Ltd., which was relied upon, has been stayed by the Supreme Court. Consequently, the Tribunal remitted the issue back to the AO for fresh consideration based on the final outcome of the Padmini Products case.

Disallowance under Section 14A read with Rule 8D:
The appellant contested the disallowance under Section 14A read with Rule 8D(2)(ii) for AYs 2017-18, 2018-19, and 2020-21, amounting to Rs. 75,000/-, Rs. 1,04,372/-, and Rs. 7,99,060/- respectively. The appellant argued that no expenditure was incurred to earn tax-free income and that the investments were made from surplus funds. The AO, however, determined that administrative and common expenses must have been incurred to earn exempt income and applied Rule 8D(2)(ii) to disallow a percentage of the investments. The Tribunal upheld the AO's decision, stating that the AO had recorded proper satisfaction and applied his mind to the issue. The Tribunal found no infirmity in the AO's findings and confirmed the disallowance.

Conclusion:
The appeals were partly allowed for statistical purposes, with the issue of depreciation on goodwill remitted to the AO for fresh consideration and the disallowance under Section 14A read with Rule 8D confirmed.

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