Goodwill from slump sales eligible for depreciation; proviso to s.32(1)(ii) inapplicable; software depreciation allowed pending verification

ITAT held the acquisitions were slump sales, not amalgamations, so the proviso to s.32(1)(ii) did not apply; goodwill arising on those acquisitions is eligible for depreciation. The Tribunal rejected the assessing officer's reliance on an amalgamation precedent as inapplicable. Claim for depreciation relating to AY 2008-09 cannot be allowed in the present appeal for AY 2009-10; the taxpayer must pursue appropriate remedy. Depreciation on computer software is allowed in principle, subject to verification that the earlier AY 2007-08 decision remains undisturbed. AO to verify and adjust any refund/demand while giving effect to the order.

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Issues Involved:

1. General
2. Depreciation on Goodwill
3. Depreciation on Purchase of Software
4. Deletion of Erroneous Demand
5. Penalty Proceedings

Issue-wise Detailed Analysis:

1. General:

The ground No. 1 of the appeal, being general in nature, was dismissed as infructuous and did not require specific adjudication.

2. Depreciation on Goodwill:

The assessee acquired two units and recognized goodwill in those transactions. The acquisitions were made from Glaxo Smith Kline Pharmaceuticals Limited (GSK) and Chemito Technologies Private Limited (CTPL) through slump sales. The assessee claimed depreciation on goodwill based on the Supreme Court's decision in CIT v. Smifs Securities Ltd. (348 ITR 302). The AO denied the claim, stating that it was not made through a revised return and upheld by the DRP. The ITAT remanded the matter to the AO for adjudication on merits. In the second round, the AO accepted goodwill as a depreciable asset but denied depreciation based on valuation issues and accounting standards, relying on the ITAT decision in United Breweries Ltd. The DRP also rejected the claim, citing unrealistic valuation reports. The ITAT found the transactions to be slump sales, not amalgamations, and held that goodwill arising from these transactions is eligible for depreciation. The ITAT directed the AO to allow depreciation on goodwill for the current year but advised the assessee to explore other legal remedies for claims related to the previous year.

3. Depreciation on Purchase of Software:

The ground No. 3 relates to depreciation amounting to Rs. 1,04,938 on the purchase of software based on the directions of DRP for AY 2007-08. The CIT(A) had treated software expenses as capital expenditure and allowed depreciation at 60%. The assessee accepted this decision and claimed consequential depreciation for AY 2008-09 and AY 2009-10. The DRP directed the AO to verify and pass an appropriate order, but the AO did not grant relief. The ITAT directed the AO to verify the claim and allow depreciation if the CIT(A)'s decision for AY 2007-08 was not reversed by higher authorities.

4. Deletion of Erroneous Demand:

The ground No. 4 concerns the erroneous demand of Rs. 80,79,043 determined by the AO due to non-grant of interest under section 244A of the IT Act. The assessee argued that the total refund received included interest under section 244A, and the demand was erroneous. The ITAT directed the AO to verify the claim and delete the erroneous demand while giving effect to the Tribunal's order.

5. Penalty Proceedings:

The ground No. 5 relates to initiating penalty proceedings under section 274 r.w.s. 271(1)(c) of the IT Act for furnishing inaccurate particulars of income. The ITAT found the ground premature as no penalty had been levied in the impugned assessment order and dismissed it as infructuous.

Conclusion:

The appeal of the assessee was allowed for statistical purposes, with specific directions given to the AO for verification and appropriate action on the issues of depreciation on goodwill, software, and deletion of erroneous demand. The penalty proceedings ground was dismissed as premature.

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