2024 (12) TMI 1635 - AT - Income Tax

Revision under sec. 263 upheld where AO failed to examine intangible asset depreciation; Explanation 2(b) found applicable

Agricom Foods Private Limited Versus Pr. Commissioner of Income Tax – (Central), Mumbai-2, Mumbai

ITAT MUMBAI upheld the Pr. CIT's revision under sec. 263, finding the assessment orders erroneous and prejudicial because the AO failed to examine ... Scope of revision proceedings initiated u/s 263 - when an order can be termed as “erroneous”? - depreciation claimed on intangible assets - Case of the PCIT is that the AO, having disallowed depreciation on intangible assets in AY 2017-18, should have continued the same stand in the years under consideration also and should have disallowed the depreciation claimed on intangible assets HELD THAT:- Under the provisions of sec. 263 of the Act, the Ld. Pr. CIT can revise the order only if it is shown that the assessment order is erroneous in so far as prejudicial to the interests of the revenue. Since the AO did not examine the claim again and did not disallow the same, the Ld. PCIT has held that the assessment orders passed for both the years under consideration are erroneous and prejudicial to the interests of revenue. We also notice that the AO did not examine the issue of allowing depreciation in both the years under consideration, even though he had taken a conscious decision to disallow the claim of depreciation in AY 2017-18 with the reasoning that the break-up details and nature of intangible assets were not available. In the absence of any specific enquiry on this issue conducted in both the years under consideration, in our view, it cannot be said that there was conscious application of end by the AO in allowing depreciation claimed on intangible assets. in both the years under consideration. We may refer to clause (b) of Explanation 2 to sec.263 of the Act, wherein it is stated that an order passed allowing any relief without inquiring into the claim shall be deemed to be erroneous in so far as prejudicial to the interests of revenue. We hold the impugned revision orders passed by Ld. PCIT holding the assessment orders as erroneous and prejudicial to the interests of revenue, in the facts and circumstances of the case, cannot be found fault with. Since the assessee contends that the depreciation claimed by the assessee is in accordance with the law laid down by the Hon’ble Supreme Court in the case of Smiffs Securities Ltd. [2012 (8) TMI 713 - SUPREME COURT] we direct the AO to examine this issue of depreciation claimed on intangible assets by taking into consideration the above said decision of Hon’ble Supreme Court. As directed by Ld. PCIT, the AO should decide this issue in accordance with law without being influenced by any of the observations of Ld. PCIT and after affording adequate opportunity of being heard to the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the revisional power under section 263 can be exercised where the Assessing Officer allowed depreciation on a lump-sum amount allocated to 'intangible assets' without specific enquiry into the nature and breakup of those intangibles, particularly when an identical issue was disallowed in an earlier assessment year. 2. Whether an assessment order becomes 'erroneous in so far as prejudicial to the interests of revenue' under section 263 merely because the Assessing Officer did not elaborate discussion in the assessment order or failed to follow his earlier stand on an identical issue. 3. Whether, in the absence of specific breakup of intangible assets, the excess of purchase consideration over net asset value can be treated as goodwill/intangible right and thereby eligible for depreciation under the statute, and what standard of examination is required on remand. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of section 263 where AO allowed depreciation on lump-sum 'intangible assets' without enquiry Legal framework: Section 263 permits revision if an order is 'erroneous in so far as prejudicial to the interests of the revenue'. The power is limited and can be invoked only where the AO's order is not in accordance with law, involves incorrect assumption of fact, incorrect application of law, denial of natural justice, or absence of application of mind. Precedent treatment: The Tribunal relied on controlling principles from higher courts that restrict section 263 to orders that are legally erroneous and prejudicial to revenue; an order reached by the AO after application of mind and permissible in law cannot be reopened merely because the Commissioner would have taken a different view. Interpretation and reasoning: The Tribunal found that the AO did not re-examine the claim of depreciation on the lump-sum intangible allocation in the two relevant years, despite having disallowed a similar claim in the immediately preceding year on the ground that the sale agreement lacked breakup/nature of intangible assets. Because no specific enquiries were made by the AO in the years under consideration, the Tribunal concluded there was no conscious application of mind by the AO in allowing depreciation. Explanation 2(b) to section 263 was noted, which treats allowance of relief without inquiry as capable of rendering an order erroneous and prejudicial. Ratio vs. Obiter: Ratio - where an allowance of relief (depreciation) is made without any inquiry into the claim, such an assessment may be 'erroneous in so far as prejudicial to the interests of the revenue' and attracts section 263. Obiter - observations about expectations that AO follow earlier years' conclusions absent changed circumstances. Conclusion: The revisional authority was justified in considering the assessment orders erroneous and prejudicial because the AO did not examine the issue and thus did not apply his mind before allowing depreciation on the lump-sum intangible allocation; revision under section 263 to direct fresh examination was proper. Issue 2 - Whether non-discussion in assessment order alone renders it erroneous under section 263 Legal framework: An order is 'erroneous' only if it is not in accordance with law; mere absence of elaborate discussion does not necessarily equate to an erroneous order. The revisional power cannot substitute the Commissioner's judgment for that of an AO who has applied his mind and reached a permissible view where two views are possible. Precedent treatment: The Tribunal recognized conflicting views in higher court decisions: one line holds non-discussion may render an order erroneous, while another (binding in the jurisdiction) holds that lack of elaborate discussion, standing alone, does not make an order erroneous if the AO has otherwise applied his mind and reached a legal conclusion. Interpretation and reasoning: The Tribunal applied the binding territorial precedent that an assessment cannot be branded erroneous merely because the order lacks elaborate reasoning. However, that principle was applied together with the factual finding that here the AO had not carried out any enquiry in the years under consideration (unlike the earlier year), and thus the lack of discussion reflected absence of application of mind rather than mere brevity. Ratio vs. Obiter: Ratio - non-discussion does not per se make an order erroneous; it becomes so where the absence of discussion evidences lack of application of mind/inquiry. Obiter - weighing of conflicting high-court views where jurisdictional precedent controls. Conclusion: Non-discussion alone is insufficient to invoke section 263, but where non-discussion stems from absence of inquiry and lack of application of mind on a material claim (as found here), revision is sustainable. Issue 3 - Whether excess of purchase consideration over net asset value can be treated as goodwill/intangible asset eligible for depreciation and scope of remand Legal framework: The statutory provision permits depreciation on intangible assets as specified; where purchase consideration exceeds the net asset value of an undertaking, that excess may, in appropriate circumstances, constitute goodwill or intangible rights eligible for depreciation subject to legal criteria and proof. Precedent treatment: The Tribunal accepted that higher-court authority has recognized that consideration paid over NAV may represent goodwill/intangible rights and that depreciation may be allowable thereon if the legal tests are satisfied. Interpretation and reasoning: The Tribunal held that the assessee is entitled to advance and the AO must examine the contention that the lump-sum allocation represents goodwill/intangible rights and apply the relevant legal tests. Given the AO had not examined the issue in the years under consideration, the matter should be remitted to the AO for fresh, reasoned adjudication taking into account applicable higher-court jurisprudence on goodwill/intangible rights and depreciation. The AO is directed to decide the issue independently, not to be influenced by revisional observations, and to afford the assessee adequate opportunity of hearing. Ratio vs. Obiter: Ratio - where an assessee claims depreciation on lump-sum intangible allocation, the AO must conduct requisite inquiry (including considering whether excess consideration is goodwill/intangible rights) and apply legal tests; failing that, revision can be directed for fresh adjudication. Obiter - the Tribunal's acceptance that the assessee may rely on the higher-court principle regarding goodwill without prejudging the factual merits. Conclusion: The excess over NAV can be argued to be goodwill/intangible rights and may be eligible for depreciation, but the AO must examine the matter afresh in accordance with law and give the assessee a hearing; remand for such examination was directed and upheld. OVERALL CONCLUSION The revisional orders under section 263 upholding cancellation/recall of the assessments for the limited purpose of directing the Assessing Officer to enquire into and decide the claim of depreciation on the lump-sum 'intangible assets' were sustained. The Assessing Officer is directed to examine the nature and breakup of the intangible allocation, consider submissions that excess consideration may constitute goodwill/intangible rights (applying controlling higher-court principles), and pass a reasoned decision after hearing the assessee, uninfluenced by the revisional authority's observations.