2024 (6) TMI 1021 - AT - Income Tax

Pr.CIT's revision order under Section 263 quashed for depreciation on goodwill and inventory amortization disallowance

ITAT Mumbai quashed Pr.CIT's revision order u/s 263 regarding depreciation on goodwill and inventory amortization disallowance. The tribunal held that ... Revision u/s 263 - Depreciation claim on goodwill and other intangible assets - Pr.CIT was of the firm belief that the sixth proviso to section 32(1) squarely apply on the facts of the amalgamation and therefore, the depreciation claimed on the goodwill and Trade name by the assessee company cannot be allowed in its hands. Since this aspect was not examined and considered by AO during the course of the assessment proceedings the assessment order is “erroneous” and 'prejudicial to the interest of the revenue' - HELD THAT:- We have to appreciate the facts of the case in hand in the true prospective. It has to be understood that there was no goodwill in the books of the UHEPL and only after the scheme of amalgamation when the amalgamating company UHEPL amalgamated goodwill came into existence being the difference between the consideration paid by amalgamated company i.e., assessee over and above the net assets value of the amalgamating company. The valuation of the goodwill is as per the valuation report and there is no quarrel in so far as the NAV of the amalgamating company is considered. The same has the sanction of the Hon’ble National Company Law Tribunal. Whether the assessee is entitled to claim depreciation on goodwill has been decided in the case of CIT v. Smifs Securities Ltd [2012 (8) TMI 713 - SUPREME COURT] in which case also one company amalgamated with the assessee company and the excess consideration paid by it over value of net assets amounted to goodwill on which depreciation was claimed and was allowed. Since the claim of depreciation has the backing of the Hon’ble Supreme Court by no stretch of imagination the assessment order can be considered as “erroneous” and 'prejudicial to the interest of the revenue' in so far as this issue concerned. If the Ld. Pr.CIT was of the firm belief that the Assessing Officer has not conducted proper enquires, in so far as the claim of depreciation or good will is concerned. Nothing prevented the Ld. Pr.CIT to conduct enquires as held by the Hon’ble Delhi High Court in the case of DG Housing Projects [2012 (3) TMI 227 - DELHI HIGH COURT]. Disallowance on account of inventory amortization - during the course of the scrutiny assessment proceedings, the assessee has admitted the inadvertent error and requested the Assessing Officer to disallow ₹.20.88 crores instead of suomoto disallowance of ₹.14.71 crores - HELD THAT:- As seen that the assessee had substantial loss and the business loss for assessment year 2009-10 amounting to ₹. 61.30 crores would have lapsed during the year under consideration. Therefore, the contention of the Ld. Pr.CIT that this error has resulted into under assessment to the tune of ₹. 6.17 crores would do no revenue loss and therefore in our considered opinion the twin conditions i.e., order should not only be “erroneous” but also 'prejudicial to the interest of the revenue' is not fulfilled. As decided in Paville Projects (P) Ltd [2023 (4) TMI 295 - SUPREME COURT] it is observed and held that in order to exercise the jurisdiction under Section 263(1) of the Income tax Act, the Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. Thus we are of the considered view that the assessment order dated 18.03.2021 framed by the Assessing Officer under section 143(3) r.w.s. 143(3A) of the Act is neither “erroneous” nor 'prejudicial to the interest of the revenue'. Decided in favour of assessee. Issues Involved:1. Jurisdiction under Section 263 of the Income-tax Act, 1961.2. Depreciation on goodwill and other intangible assets.3. Underassessment due to inventory amortization.Issue-wise Detailed Analysis:1. Jurisdiction under Section 263 of the Income-tax Act, 1961:The primary issue raised by the assessee is that the Learned Principal Commissioner of Income-Tax (Ld. Pr.CIT) erred in assuming jurisdiction under Section 263 of the Income-tax Act, 1961. The Ld. Pr.CIT believed that the assessment order dated 18.03.2021 was 'erroneous' and 'prejudicial to the interest of the revenue.' The Tribunal examined the case records and relevant documentary evidence in light of Rule 18(6) of ITAT Rules. The Tribunal noted that for the Ld. Pr.CIT to assume jurisdiction under Section 263, two cumulative conditions must be satisfied: the order should be erroneous and prejudicial to the interest of the revenue. The Tribunal cited the Hon'ble Delhi High Court in DG Housing Projects [343 ITR 329], emphasizing that the CIT must conduct necessary inquiries and record a clear finding that the order is erroneous and unsustainable in law.2. Depreciation on Goodwill and Other Intangible Assets:The Ld. Pr.CIT contended that the depreciation claimed on goodwill and trade name by the assessee company was not allowable under the sixth proviso to Section 32(1) of the Act. The Tribunal analyzed Section 32(1) and Explanation 7 of Section 43(1), concluding that the actual cost of goodwill to the amalgamated company should be the same as it would have been for the amalgamating company. Since the actual cost of goodwill for the amalgamating company (UHEPL) was zero, the same should apply to the amalgamated company (assessee). However, the Tribunal disagreed with this interpretation, noting that the appellant paid consideration over and above the net assets value of the amalgamating company, which was taken as the cost of acquisition of goodwill. The Tribunal referenced the Hon'ble Supreme Court's decision in CIT v. Smifs Securities Ltd., where it was held that goodwill is an asset under Explanation 3(b) to Section 32(1) and depreciation on goodwill is allowable. Consequently, the Tribunal found that the assessment order was neither erroneous nor prejudicial to the interest of the revenue regarding this issue.3. Underassessment Due to Inventory Amortization:The Ld. Pr.CIT identified an error in the assessee's suomoto disallowance of inventory amortization, noting that the assessee disallowed Rs. 14.71 crores instead of Rs. 20.88 crores, resulting in underassessment of Rs. 6.17 crores. However, the Tribunal noted that the assessee had substantial losses, and the business loss for assessment year 2009-10 amounting to Rs. 61.30 crores would have lapsed during the year under consideration. Therefore, the Tribunal concluded that this error did not result in revenue loss, and the twin conditions of the order being 'erroneous' and 'prejudicial to the interest of the revenue' were not fulfilled. The Tribunal cited the Hon'ble Supreme Court's decision in CIT v. Paville Projects (P) Ltd., emphasizing the necessity of satisfying both conditions for invoking jurisdiction under Section 263.Conclusion:The Tribunal found that the assessment order dated 18.03.2021 was neither 'erroneous' nor 'prejudicial to the interest of the revenue.' Therefore, the Tribunal set aside the order of the Ld. Pr.CIT dated 27.03.2023 and restored the assessment order dated 18.03.2021. The appeal filed by the assessee was allowed.Order Pronounced:The order was pronounced in the open court on 24th April, 2024.