2022 (12) TMI 1581 - AT - Income Tax

Depreciation on Goodwill Allowed Under Section 32 Following Binding Precedent; No Remand Needed for Taxpayer

Mylan Laboratories Limited Versus Assistant Commissioner of Income Tax, Circle-16 (2), Hyderabad

ITAT HYDERABAD held that the SC precedent on depreciation of goodwill directly applied and, following that binding authority, allowed depreciation on ... Depreciation of goodwill - HELD THAT:- The decision of the Hon'ble Apex Court in the case of Smifs Securities Ltd. [2012 (8) TMI 713 - SUPREME COURT] is applicable to the facts of the case on hand on all fours. While following the binding precedent, the Tribunal held the issue in favour of the assessee and allowed the depreciation on goodwill. Since the issue is settled finally, we do not find any reason to restore the same to the file of the learned Assessing Officer because, no verification is required on the question of law forming the basis for denial of the claim. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether depreciation is allowable under section 32 on goodwill recorded by a successor company following amalgamation where the amalgamating company's balance sheet did not previously disclose goodwill, having regard to sixth proviso to section 32(1) and Explanations 3 and 7 to section 43(1). 2. Whether a Tribunal's prior decision applying a binding Supreme Court precedent in a coordinate assessment year and subsequent High Court refusal to admit a question of law precludes re-examination or remand of the same legal issue to the Assessing Officer for verification in a later assessment year. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of depreciation on goodwill arising on amalgamation Legal framework: Depreciation on intangible assets, including goodwill, is governed by section 32 of the Income Tax Act with the sixth proviso prescribing treatment in the year of amalgamation; valuation and definitions affecting such allowance are influenced by Explanations 3 and 7 to section 43(1). Precedent Treatment: The Tribunal followed a binding precedent of the Supreme Court (as applied by a coordinate Bench in the earlier assessment year) which held that where statutory conditions are satisfied, depreciation on goodwill recorded by the successor company post-amalgamation is allowable. The High Court in subsequent proceedings declined to admit a question of law, upholding the Tribunal's application of that Supreme Court precedent. Interpretation and reasoning: The Court observed that the merger occurred in the earlier relevant year and that the coordinate Tribunal decision had considered the same statutory provisions and facts, applying the controlling Supreme Court authority. The Assessing Officer's view that depreciation must be computed solely on the written down value shown in the amalgamating company's books (and thus nil where not shown) was rejected as inconsistent with the binding precedent applied by the coordinate Bench. The Tribunal emphasized that the statutory proviso and Explanations must be read in the light of the controlling decision which permits allowance where the successor has capitalised goodwill as part of the amalgamation consideration and the conditions of the proviso are met. Ratio vs. Obiter: The holding that depreciation on goodwill capitalised by the successor company on amalgamation is allowable, given compliance with the sixth proviso and relevant Explanations, constitutes the ratio of the decision as it directly resolves the contested statutory interpretation and allowance. Observations about the Assessing Officer's approach to valuation and the insufficiency of a purely book-value argument, insofar as they support the holding, are ratio; ancillary remarks regarding accounting entries are obiter. Conclusions: The Court allowed depreciation on goodwill for the assessment year in question, directing the Assessing Officer to permit the claim in accordance with the binding Supreme Court precedent and the coordinate Tribunal decision. The denial by the Assessing Officer based on non-disclosure of goodwill in the amalgamating company's balance sheet was set aside. Issue 2 - Preclusive effect of a coordinate Tribunal decision and High Court refusal to admit question of law on remand/verification Legal framework: Principles of precedent and finality in tax litigation: a coordinate Tribunal decision applying a binding Supreme Court precedent, when affirmed by a High Court's refusal to admit a further question of law on that point, generally establishes finality on the legal question for identical facts and issues in subsequent assessments. Precedent Treatment: The Tribunal relied on its own coordinate Bench decision and the High Court order declining admission, treating those outcomes as binding and controlling for the same issue in the later assessment year. Interpretation and reasoning: The Court reasoned that where the legal question has been authoritatively decided by a coordinate Tribunal following the Supreme Court precedent and the High Court has declined to admit a question of law (thereby upholding the Tribunal's application of the precedent), no fresh factual verification or remand to the Assessing Officer is warranted on the same legal point. Restoration for verification was unnecessary because the dispute was one of law already settled; permitting re-examination would circumvent finality and lead to repetitious litigation on identical legal standards. Ratio vs. Obiter: The determination that no remand or verification is required where a binding coordinate decision and consequent High Court action have finally settled the legal question is ratio in the context of applying doctrines of finality and judicial precedent to tax assessments. Comments on administrative convenience and potential factual permutations are obiter. Conclusions: The Court declined the Revenue's request to restore the matter to the Assessing Officer for verification, holding that the settled legal position must be followed and directing allowance of the depreciation claim in accordance with the controlling precedent and the coordinate Bench ruling. Cross-references and operative directive 1. The resolution of Issue 1 is directly informed by Issue 2: because the legal issue was previously decided by a coordinate Tribunal following the controlling Supreme Court authority and the High Court declined further admission, the same legal position must be applied in the present assessment year. 2. Operatively, the Tribunal directed the Assessing Officer to allow depreciation on goodwill in line with the binding precedent and the coordinate Bench decision; no further verification or remand was ordered on the question of law.