2025 (3) TMI 306 - HC - Income Tax

Taxpayer wins depreciation on goodwill claim for post-demerger years as Fifth Proviso to Section 32 applies only to succession year

PMV Maltings Pvt Ltd Versus Dy. Commissioner Of Income Tax, Circle 19 (1) & Anr.

Delhi HC allowed appellant's appeal regarding depreciation claimed on goodwill under Section 32 for AYs 2015-16 and 2016-17 post-demerger. Court held that ... Depreciation claimed on goodwill u/s 32, albeit post demerger - depreciation claimed by the appellant for AYs 2015-16 and 2016-17 - HELD THAT:- We are concerned with a Scheme which came into effect in FY 2013-14 and the Proviso thus being pertinent only for AY 2014-15. The said provision could have had no bearing on the issue of depreciation claimed by the appellant in AY 2015-16 or 2016-17. As decided in Padmini Products (P) Ltd. [2020 (10) TMI 424 - KARNATAKA HIGH COURT] 5th proviso to Sec 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. Tribunal has failed to even notice or examine the issue from that angle. Its judgment is based solely on the applicability of the Fifth Proviso to Section 32 (1) and which we, in any case, have found was clearly not germane to AYs 2015-16 and 2016-17. In view of the above in our considered opinion, therefore, the ends of justice would warrant the matter being remitted to the board of the Tribunal for examining the appeal afresh and bearing in mind the issue which stands flagged hereinabove. We accordingly allow the instant appeal and set aside the Order of the Tribunal dated 03 February 2023. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered in this judgment is whether the disallowance of depreciation claimed on goodwill under Section 32 of the Income Tax Act, 1961, post-demerger, was sustainable in law. The Court examined the applicability of the Fifth Proviso to Section 32(1) concerning the aggregate deduction for depreciation in the context of a demerger.2. ISSUE-WISE DETAILED ANALYSISThe legal framework revolves around Section 32 of the Income Tax Act, 1961, which allows depreciation on tangible and intangible assets, including goodwill, and the Fifth Proviso that restricts aggregate depreciation claims in cases of succession, amalgamation, or demerger. The Court relied on precedents, including the Supreme Court's decision in Smifs Securities Ltd., which recognized goodwill as an intangible asset eligible for depreciation.The Court's interpretation focused on the Fifth Proviso to Section 32(1), which limits aggregate depreciation claims to the amount that would have been allowable had the succession, amalgamation, or demerger not occurred. The Proviso applies only in the year of such corporate restructuring and not in subsequent years.The Tribunal had accepted the position that goodwill is an intangible asset eligible for depreciation, referencing the Supreme Court's judgment in Smifs Securities. However, it based its decision on the Fifth Proviso, which the Court found inapplicable to the assessment years in question (2015-16 and 2016-17) since the demerger occurred in FY 2013-14.The Court examined evidence, including the Scheme of Arrangement and the Tribunal's findings, which showed goodwill was recorded in the appellant's books in FY 2013-14. The depreciation claim for subsequent years was based on the written down value (WDV) of goodwill.Competing arguments included the respondents' reliance on Section 43, which prescribes the computation of WDV. However, the Tribunal did not address this aspect, focusing solely on the Fifth Proviso's applicability.The Court concluded that the Fifth Proviso was not applicable to the assessment years in question, as it pertains only to the year of succession, amalgamation, or demerger. It emphasized that the Tribunal's decision was based on an incorrect interpretation of the Proviso.3. SIGNIFICANT HOLDINGSThe Court held that the Fifth Proviso to Section 32(1) restricts aggregate depreciation claims only in the year of succession, amalgamation, or demerger, not in subsequent years. This interpretation aligns with judgments from the Karnataka High Court in Padmini Products (P) Ltd. and the Bombay High Court in Dharmanandan Diamonds (P) Ltd.The Court set aside the Tribunal's order and remitted the matter for fresh examination, emphasizing that the Tribunal should consider the issue of WDV computation as per Section 43, which was not addressed in the original decision.The appeal was allowed, and the Tribunal was directed to re-evaluate the case in light of the Court's observations, particularly regarding the applicability of the Fifth Proviso and the computation of WDV.