2022 (8) TMI 1589 - AT - Income Tax

Assessment remitted for fresh re-examination of depreciation on capitalized software and goodwill, including new claim, after hearing

ITAT, Mumbai restored the dispute to the file of the AO, directing re-examination of depreciation claimed on capitalized software/goodwill originally in ... Depreciation on actual cost of purchased Goodwill - admissibility of new claim - assessee seeks additional amount of depreciation on software expenses, which was capitalized in AY 2007-08 - HELD THAT:- We noticed that the main issue relating to depreciation on goodwill has been restored to the file of AO by the Tribunal in its order dated 28-06-2019. The new claim raised in Ground no.12 also requires examination at the end of AO. Accordingly, we deem it proper to restore all these additional grounds also to the file of AO for examining them in accordance with law, after affording adequate opportunity of being heard to the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether depreciation is allowable on goodwill purchased pursuant to a slump sale by treating the actual purchase cost as the written down value for the purposes of section 43(6)(c)(ii) of the IT Act, when no depreciation was claimed in the earlier assessment year. 2. Whether unallowed depreciation attributable to the earlier assessment year (AY 2008-09) on purchased goodwill can be carried forward and allowed as brought forward unabsorbed depreciation in the subsequent assessment year (AY 2009-10). 3. Whether additional depreciation claimed in the assessment year on capitalized software expenses (capital expenditure in AY 2007-08) should be examined and allowed. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Depreciation on purchased goodwill: Legal framework Section 43(6)(c)(ii) prescribes treatment of written down value and depreciation for intangible assets; depreciation on goodwill purchased in the course of business acquisition is claimed under that provision subject to assessment year timing and procedural requirements for claim admission. Issue 1 - Precedent treatment The Tribunal referred to higher court authorities dealing with (a) admissibility of additional grounds and claims raised during assessment proceedings, and (b) entitlement to depreciation on purchased goodwill. The Tribunal noted a decision of the highest court that preserves the power of the Tribunal to admit additional grounds notwithstanding prior authority on revised returns, and a separate higher-court authority relied upon by the Assessing Officer to contend that a revised return was necessary to raise the claim. Issue 1 - Interpretation and reasoning The Tribunal found that the assessee had acquired a business division which included goodwill and that depreciation on that goodwill had not been claimed in the earlier year but was claimed during assessment proceedings for the subsequent year. Given that the Tribunal had earlier admitted the additional claim and restored the substantive issue to the file of the Assessing Officer for examination (because the AO had not examined the claim on merits), the Tribunal considered it appropriate to remit the matter to the AO for fresh adjudication in accordance with law after giving the assessee an opportunity of being heard. The Tribunal did not decide the substantive entitlement to depreciation on the merits; rather, it directed examination of the claim consistent with the statutory provision and the opportunity to present supporting evidence and legal submissions. Issue 1 - Ratio vs. Obiter Ratio: The operative holding is procedural - the Tribunal restored the claim for depreciation on purchased goodwill to the file of the AO for adjudication on merits and admitted the additional ground for statistical purposes. Obiter: No final pronouncement was made on whether the actual purchase cost must be treated as opening written down value or on the quantum of depreciation; discussion of precedents regarding revised returns was explanatory and not dispositive of the substantive entitlement. Issue 1 - Conclusion The Tribunal remitted the claim for depreciation on purchased goodwill to the Assessing Officer for reconsideration in accordance with law, affording the assessee an opportunity of being heard; the Tribunal did not decide the substantive claim and treated the additional ground as allowed for statistical purposes. Issue 2 - Allowance of brought forward unabsorbed depreciation relating to depreciation on purchased goodwill: Legal framework Tax rules permit carry forward and set-off of unabsorbed depreciation subject to its proper computation and allowance in the year of claim; where a depreciation deduction for an earlier year was neither claimed nor allowed, the question arises whether that amount can be claimed as brought forward unabsorbed depreciation in a subsequent year. Issue 2 - Precedent treatment The Tribunal acknowledged the assessee's alternative contention that, if depreciation for the earlier year is not held allowable as opening written down value, the amount should be allowable as brought forward unabsorbed depreciation. No binding precedent was applied to resolve the alternative contention on the merits; the matter was remitted for fact-specific assessment. Issue 2 - Interpretation and reasoning Because the substantive issue of depreciation on goodwill was restored to the AO for examination, the alternative contention that the unpaid depreciation should be allowed as brought forward unabsorbed depreciation could not be adjudicated without fact-finding. The Tribunal therefore directed that the AO examine and decide this alternative claim in accordance with law, ensuring the correct computation of brought forward unabsorbed depreciation if supported by facts and legal entitlement. Issue 2 - Ratio vs. Obiter Ratio: Procedural - the Tribunal remitted the alternative claim for brought forward unabsorbed depreciation to the AO for determination. Obiter: No determination on the legal permissibility of treating the unclaimed earlier-year depreciation as brought forward unabsorbed depreciation. Issue 2 - Conclusion The Tribunal directed reconsideration of the brought forward unabsorbed depreciation claim by the AO after affording the assessee opportunity to be heard, and treated the additional ground as allowed for statistical purposes. Issue 3 - Depreciation on software expenses capitalized in AY 2007-08: Legal framework Depreciation on capitalized software is allowable under the depreciation provisions subject to capitalisation in an earlier year and correct claim in the relevant assessment proceedings; new claims raised as additional grounds require examination by the AO if not previously adjudicated. Issue 3 - Precedent treatment The Tribunal treated this as a new factual and legal claim distinct from the main goodwill issue and comparable to additional claims generally admitted for consideration by the fact-finding authority; no appellate precedent was applied to finally determine the claim. Issue 3 - Interpretation and reasoning The Tribunal observed that the depreciation claim on software had not been adjudicated and, being a new claim, warranted examination by the AO. The Tribunal therefore remitted this claim to the AO for adjudication in accordance with law, with opportunity for the assessee to be heard and to supply supporting material or legal submissions. Issue 3 - Ratio vs. Obiter Ratio: Procedural - the Tribunal remitted the software depreciation claim to the AO for determination. Obiter: No substantive ruling on the allowability or quantum of the software depreciation. Issue 3 - Conclusion The Tribunal restored the software depreciation claim to the AO for adjudication and treated the additional ground as allowed for statistical purposes. Overall procedural disposition and consequence The Tribunal recalled its earlier order for the limited purpose of adjudicating the additional grounds and, after considering the submissions and the status of prior proceedings, remitted all three additional grounds (depreciation on purchased goodwill as opening WDV, alternative claim of brought forward unabsorbed depreciation, and depreciation on software) to the Assessing Officer for fresh examination in accordance with law after affording the assessee an opportunity of being heard. All three additional grounds were recorded as treated as allowed for statistical purposes; no final adjudication on merits was made by the Tribunal in this order.