Goodwill depreciation consistency and liquidated damages provision tests explained under block assets and accrued liability principles.

Depreciation on goodwill arising on demerger is explained through the block of assets regime: once goodwill is admitted into the block and depreciation is allowed in the first year, later-year depreciation on the written down value should not be denied without a change in circumstances, and any challenge to the asset's eligibility should be taken in the initial year. Deductibility of provision for liquidated damages under annual maintenance contracts is discussed by applying the tests for a recognised provision: present contractual obligation, probable outflow of resources, and a reliable estimate based on historical experience. A consistently followed methodology and reversal of excess provision support treatment as an accrued liability rather than a contingent liability.

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Issues: (i) Whether depreciation on the written down value of goodwill arising on demerger could be disallowed in the second and subsequent years when depreciation on the same goodwill had been allowed in the first year; (ii) Whether provision for liquidated damages under annual maintenance contracts was deductible as an accrued liability or disallowable as a contingent liability.

Issue (i): Whether depreciation on the written down value of goodwill arising on demerger could be disallowed in the second and subsequent years when depreciation on the same goodwill had been allowed in the first year.

Analysis: The claim related to goodwill recorded on demerger in the year relevant to the first assessment year, and depreciation on that goodwill had already been allowed in that initial year. Under the block of assets regime, the conditions relevant to admissibility of depreciation, including cost and business use, are to be examined in the first year of claim, while in subsequent years depreciation is ordinarily computed on the written down value. Once the asset enters the block and the earlier year's depreciation stands allowed, the Revenue cannot, without change in circumstances, deny depreciation in a later year on the same written down value. The Tribunal applied the principle of consistency and noted that any challenge to the nature or eligibility of the goodwill ought to have been made in the first year itself.

Conclusion: Depreciation on the written down value of goodwill was allowable; this issue was decided in favour of the assessee.

Issue (ii): Whether provision for liquidated damages under annual maintenance contracts was deductible as an accrued liability or disallowable as a contingent liability.

Analysis: The contracts imposed a liability to pay liquidated damages for delay in attending breakdown complaints, thereby creating a present obligation arising from past events. The liability was expected to result in outflow of resources, and the provision was computed on the basis of a consistently followed methodology derived from historical experience. The variation in percentages across regions was explained by differing service conditions and did not by itself make the estimate unscientific. The data showed that excess provision, if any, was reversed in the following year, and the provision represented an estimated contractual liability rather than a mere contingent claim. The tests governing recognition of a deductible provision, including present obligation, probable outflow, and reliable estimate, stood satisfied.

Conclusion: The provision for liquidated damages was deductible and the disallowance was unsustainable; this issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on the two substantive disallowances, with depreciation on goodwill directed to be allowed and the provision for liquidated damages directed to be deleted; the remaining claims for TDS credit and interest computation were restored for fresh examination.

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