Section 14A disallowance and MAT add-back on exempt-income investments, plus goodwill depreciation after amalgamation, both deleted

Disallowance under s.14A r.w. Rule 8D was held unsustainable because the AO invoked Rule 8D without recording the mandatory dissatisfaction under s.14A(2), wrongly relied on CBDT Circular No. 5/2014, and, in any event, where interest-free own funds exceeded investments, a presumption arose that investments were from own funds, negating interest disallowance; the related adjustment was also impermissible while computing book profit under s.115JB. Consequently, the s.14A disallowance and MAT addition were deleted. Depreciation on goodwill arising pursuant to an NCLT-approved amalgamation was allowed because the goodwill came into existence due to the amalgamation (not by transfer of a pre-existing asset), and the Finance Act, 2021 exclusion of goodwill applied prospectively from AY 2021-22, not to the years in appeal.

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Issues Involved:

1. Disallowance under Section 14A read with Rule 8D.
2. Claim of depreciation on goodwill arising from amalgamation.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The primary issue was whether disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D, could be made when no exempt income was earned during the relevant assessment year. The assessee argued that no disallowance is warranted in the absence of exempt income, citing various judicial precedents including the Hon'ble Gujarat High Court's judgment in CIT Vs. Corrtech Energy Pvt. Ltd. The assessee also contended that investments were made from its own funds, which exceeded the investments, and therefore, no disallowance should be made. Additionally, it was argued that the investments were strategic in nature for holding controlling interest in subsidiaries, which should not attract disallowance under Section 14A. The assessee further contended that Section 14A disallowance should not apply while computing book profit under Section 115JB.

The Assessing Officer (AO) held that disallowance under Section 14A is applicable even if no exempt income is earned, relying on CBDT Circular No.5/2014 and the Supreme Court's judgment in Maxopp Investment Ltd. The AO made a total disallowance of Rs. 35,11,35,800/- under Section 14A and included it in the book profit under Section 115JB.

The Tribunal, however, held that the provisions of Section 14A cannot be applied for computing book profit under Section 115JB, relying on the Special Bench decision in ACIT vs. Vireet Investments Pvt. Ltd. and various High Court judgments. It was concluded that the CBDT Circular No.5/2014 cannot override the expressed provisions of Section 14A read with Rule 8D, and the amendment to Section 14A by the Finance Act, 2022, is prospective and not applicable to the assessment years under consideration. The Tribunal also noted that the assessee had sufficient own funds to cover the investments, and the AO had not recorded dissatisfaction as required under Section 14A(2). Thus, the disallowance made by the AO was deleted.

2. Claim of Depreciation on Goodwill:

The second issue was whether the assessee was entitled to claim depreciation on goodwill arising from the amalgamation of its subsidiaries. The assessee argued that the scheme of amalgamation was approved by the National Company Law Tribunal (NCLT), and the excess consideration paid over the net assets acquired should be treated as goodwill, eligible for depreciation under Section 32. The assessee relied on the Supreme Court's judgment in CIT vs. Smifs Securities Ltd., which held that goodwill is an asset eligible for depreciation.

The AO denied the claim, arguing that the goodwill did not exist in the books of the transferor companies prior to amalgamation and relied on various statutory provisions to deny depreciation. The CIT(A) confirmed the AO's view.

The Tribunal, however, held that goodwill arising from amalgamation is eligible for depreciation, following the Supreme Court's judgment in Smifs Securities Ltd. and other precedents. The Tribunal noted that the NCLT's order approving the amalgamation was not challenged by the Revenue, and thus, the Revenue could not dispute the claim of depreciation on goodwill. It was also observed that the amendments to the provisions regarding goodwill by the Finance Act, 2021, are prospective and do not affect the assessment years in question. Therefore, the Tribunal allowed the claim of depreciation on goodwill.

Conclusion:

The appeals filed by the Revenue were dismissed, and the appeals filed by the Assessee were allowed, with the Tribunal ruling in favor of the assessee on both issues.

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