Depreciation on goodwill, section 69A additions, and section 14A disallowance fail on the facts of corporate restructuring and tax claims.

A court-approved restructuring may support depreciation on goodwill and other intangibles where goodwill is first recognised in the resulting company's books and the scheme reflects genuine commercial objectives. Additions under section 69A cannot rest on cryptic electronic chats, retracted statements, or ad hoc percentage estimates without corroboration of unexplained money, and related depreciation disallowance falls with the main addition. Deduction under section 35AD for a specified fertiliser business is not defeated by isolated or occasional shared use of assets absent proof of use for a non-specified business. Minor stock differences may not justify addition or MAT adjustment, and section 14A disallowance does not survive where no exempt income is earned.

---

---

Issues: (i) Whether depreciation on goodwill and other intangible assets arising from the approved restructuring was allowable; (ii) whether addition under section 69A on alleged inflated capital expenditure and the consequential disallowance of depreciation thereon were sustainable; (iii) whether deduction under section 35AD for the NPK fertiliser unit was liable to be disallowed for alleged shared use of assets; (iv) whether stock difference additions under the normal provisions and under section 115JB were sustainable; and (v) whether disallowance under section 14A could survive in the absence of exempt income.

Issue (i): Whether depreciation on goodwill and other intangible assets arising from the approved restructuring was allowable.

Analysis: The restructuring was sanctioned by the NCLT and was supported by stated commercial objectives, including business realignment, operational efficiency, and attraction of investors. The accounting treatment under the scheme specifically contemplated recognition of goodwill and intangible assets where consideration exceeded net assets. The goodwill arose for the first time in the books of the resulting company pursuant to the scheme. The provisions relied upon by the Revenue, including the provisions dealing with actual cost and the proviso governing demerger depreciation, were held inapplicable on these facts. The claim was also supported by the principle that depreciation can be allowed on goodwill arising from a genuine corporate reorganisation.

Conclusion: The disallowance of depreciation on goodwill and other intangible assets was not justified and was deleted, in favour of the assessee.

Issue (ii): Whether addition under section 69A on alleged inflated capital expenditure and the consequential disallowance of depreciation thereon were sustainable.

Analysis: The addition rested on WhatsApp messages and retracted statements, but the material did not conclusively establish that the assessee was found to be the owner of unexplained money or that unrecorded cash was actually discovered. The chats were cryptic and did not clearly evidence a cash-back arrangement. No corroborative physical or documentary evidence traced any unaccounted money to the assessee. The ad hoc estimation of 10% of expenditure was held to be impermissible. Once the underlying addition failed, the corresponding depreciation disallowance also lacked foundation.

Conclusion: The addition under section 69A and the related disallowance of depreciation were deleted, in favour of the assessee.

Issue (iii): Whether deduction under section 35AD for the NPK fertiliser unit was liable to be disallowed for alleged shared use of assets.

Analysis: The fertiliser business fell within the specified business definition, and the isolated or occasional use of a bagging unit and conveyor belt for another fertiliser stream did not amount to use for a non-specified business. The material did not show a systematic diversion of the asset away from the specified business. The statutory provisions invoked by the Revenue were held to operate only where deduction had already been claimed and allowed and where the asset was used for a purpose other than the specified business in the relevant sense. The record also supported the assessee's contention of bona fide operational exigency rather than misuse.

Conclusion: The disallowance under section 35AD was unsustainable and was deleted, in favour of the assessee.

Issue (iv): Whether stock difference additions under the normal provisions and under section 115JB were sustainable.

Analysis: The stock variance was minor in relation to the total inventory and was capable of being explained as a timing or recording discrepancy. The Revenue's adoption of an ad hoc valuation basis was not accepted. Since the substantive addition on stock difference could not stand, the corresponding adjustment to book profit under section 115JB also could not survive.

Conclusion: The additions on account of stock difference, including the MAT adjustment, were deleted, in favour of the assessee.

Issue (v): Whether disallowance under section 14A could survive in the absence of exempt income.

Analysis: The assessee had not earned dividend income or other exempt income during the relevant year. In such circumstances, the disallowance under section 14A could not be sustained. The later amendment relied upon by the Revenue was treated as prospective and not applicable to the year in question.

Conclusion: The disallowance under section 14A was rightly deleted, in favour of the assessee.

Final Conclusion: The assessee succeeded on the substantive issues decided on merits, and the Revenue's challenge to the relief granted in one year also failed.

Ratio Decidendi: A genuine court-approved restructuring giving rise to goodwill and intangible assets can support depreciation where the asset is first recognised in the resulting company's books, and additions under section 69A cannot rest on cryptic electronic material and uncorroborated, retracted statements absent proof that the assessee was found with unexplained money.

---