2024 (11) TMI 1301 - AT - Income Tax

Assessee wins depreciation claim on goodwill from amalgamation under section 32(1)(ii) following Accounting Standard-14 valuation

Dow Chemical International Private Ltd. Versus DCIT – 14 (1) (2), Mumbai

Dow Chemical International Private Ltd. Versus DCIT – 14 (1) (2), Mumbai - TMI Issues Involved:1. Disallowance of depreciation on goodwill.2. Disallowance of depreciation on distribution network.3. Disallowance of depreciation on customer relations.4. Validity of assessment order under specific sections.5. Denial of natural justice.6. Adjustments under section 143(1) of the Income Tax Act.7. Addition under section 36(1)(va) of the Act.8. Calculation of book profits.9. Refund of excess Dividend Distribution Tax (DDT) paid.Detailed Analysis:1. Disallowance of Depreciation on Goodwill:The primary issue was whether the assessee could claim depreciation on goodwill arising from the amalgamation. The assessee argued that goodwill should be considered a depreciable asset under section 32(1)(ii) of the Income Tax Act, as supported by the Supreme Court decision in Smifs Securities Ltd. The Tribunal found that the goodwill was recognized following Accounting Standard-14, which allowed for the allocation of excess consideration over net assets as goodwill. The Tribunal ruled in favor of the assessee, directing the allowance of depreciation on goodwill, as it fell under 'any other business or commercial rights of similar nature.'2. Disallowance of Depreciation on Distribution Network:The assessee claimed depreciation on the distribution network, arguing it was a critical intangible asset acquired during amalgamation. The Tribunal noted that the valuation report identified the distribution network as a significant asset. It was concluded that the distribution network constituted a business right similar to those specified in section 32(1)(ii), thus eligible for depreciation. The Tribunal directed the AO to allow the claim.3. Disallowance of Depreciation on Customer Relations:Similar to the distribution network, the assessee claimed depreciation on customer relations. The Tribunal found that the customer base was a valuable intangible asset, facilitating business continuity and growth. The Tribunal held that customer relations were akin to business rights under section 32(1)(ii) and allowed the depreciation claim.4. Validity of Assessment Order:The assessee challenged the validity of the assessment order, arguing it was issued under incorrect sections. The Tribunal found no merit in this argument, as procedural errors in mentioning sections do not invalidate the order under section 292B of the Act. This ground was dismissed.5. Denial of Natural Justice:The assessee claimed inadequate opportunity to respond to the show cause notice. This ground was not pressed during the hearing and was dismissed.6. Adjustments under Section 143(1):The assessee contested adjustments made under section 143(1), arguing they were beyond permissible scope. This ground was not pressed, following the Tribunal's decision in a related appeal, and was dismissed.7. Addition under Section 36(1)(va):The assessee challenged the addition under section 36(1)(va), but this ground was not pressed and was dismissed.8. Calculation of Book Profits:The assessee disputed the book profit calculation, but this ground was not pressed and was dismissed.9. Refund of Excess DDT Paid:The assessee sought a refund of excess DDT, arguing for a lower tax rate under applicable DTAA provisions. The Tribunal, following the Special Bench decision in Total Oil India Private Ltd, dismissed this ground, ruling in favor of the Revenue.Conclusion:The appeal for the assessment year 2016-17 was allowed, granting depreciation claims on goodwill, distribution network, and customer relations. The appeal for the assessment year 2018-19 was partly allowed, with similar directives for depreciation claims, but other grounds were dismissed.