Revenue loses on depreciation, carry-forward rights, expenses treatment, and section 80IC deductions across multiple tax issues

ITAT Ahmedabad dismissed revenue appeals across multiple issues. The assessee successfully claimed depreciation on goodwill arising from court-sanctioned amalgamation, as the goodwill represented genuine arm's length acquisition recorded per approved scheme and qualified as identifiable intangible asset under section 32(1)(ii). The tribunal allowed carry-forward of unabsorbed depreciation, ruling that once depreciation is accepted initially, carry-forward becomes vested right that cannot be denied without appellate reversal. Product registration expenses were treated as revenue expenditure under section 37(1), being mandatory compliance costs rather than capital asset acquisition. Full section 80IC deduction was upheld for the eligible unit, rejecting revenue's attempt to allocate corporate expenses without establishing proximate nexus. Scrap income from manufacturing byproducts qualified for 80IC deduction as integral business receipts. Enhanced profits from section 40(a)(ia) disallowances also qualified for 80IC deduction per CBDT circular and binding precedent.

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ISSUES:

Whether depreciation on goodwill arising pursuant to a court-sanctioned scheme of amalgamation is allowable under section 32(1)(ii) of the Income-tax Act, 1961.Whether brought-forward unabsorbed depreciation relating to goodwill is eligible for set-off under section 32(2) when the original claim of depreciation was disallowed by the Assessing Officer but allowed by the Commissioner of Income-tax (Appeals).Whether expenditure on product registration with regulatory authorities is capital expenditure or allowable as revenue expenditure under section 37(1) of the Income-tax Act.Whether deduction under section 80-IC of the Income-tax Act is allowable on profits of an eligible industrial undertaking without apportioning common or corporate expenses.Whether income from sale of scrap generated in the course of manufacturing activity is eligible for deduction under section 80-IC.Whether deduction under section 80-IC is allowable on profits enhanced by disallowance under section 40(a)(ia) relating to non-deduction of tax at source.

RULINGS / HOLDINGS:

Depreciation on goodwill arising pursuant to a Scheme of Amalgamation approved by the High Court, where goodwill is recognized as an intangible asset under Explanation 3(b) to section 32(1), is legally allowable under section 32(1)(ii). The goodwill so recorded is an identifiable intangible asset acquired at cost and used for business purposes. The action of the CIT(A) in allowing depreciation on such goodwill is upheld.Brought-forward unabsorbed depreciation relating to goodwill, once allowed by the CIT(A) in earlier years pursuant to a High Court-sanctioned scheme, constitutes a vested right and is eligible for set-off under section 32(2). The Assessing Officer's disallowance without fresh examination or reversal by a competent appellate authority is impermissible and is rightly deleted by the CIT(A).Expenditure incurred on product registration with regulatory authorities, being a statutory and regulatory compliance cost necessary to market products in foreign jurisdictions, does not result in acquisition of any capital asset and is allowable as revenue expenditure under section 37(1). The CIT(A)'s deletion of disallowance on this ground is affirmed.Deduction under section 80-IC is allowable on the profits of an eligible industrial undertaking without apportioning common or corporate expenses, where such expenses have no proximate nexus with the eligible unit. The CIT(A)'s reliance on consistent appellate orders holding that the eligible unit operates with sufficient functional autonomy and that artificial segregation of profits is impermissible is upheld.Income from sale of scrap generated directly in the manufacturing process of an eligible industrial undertaking forms part of the profits "derived from" such undertaking and is eligible for deduction under section 80-IC. The CIT(A)'s deletion of disallowance on scrap income is sustained.Deduction under section 80-IC is allowable on profits enhanced by disallowance under section 40(a)(ia), as such disallowance is a statutory adjustment and the enhanced profits remain eligible for deduction under Chapter VI-A. The CIT(A)'s order deleting disallowance on this ground is upheld.

RATIONALE:

The Court applied the statutory provisions of the Income-tax Act, 1961, primarily sections 32(1)(ii), 32(2), 37(1), 40(a)(ia), and 80-IC, alongside judicial precedents including CIT v. Smifs Securities Ltd. (2012) 348 ITR 302 (SC), and relevant decisions of coordinate benches and High Courts. The Scheme of Amalgamation sanctioned under sections 391–394 of the Companies Act, 1956 was accorded overriding effect over accounting standards, permitting recognition of goodwill as per the court-approved scheme.The Court distinguished the present case from precedents disallowing depreciation on self-generated goodwill by emphasizing that the goodwill arose from an arm's length acquisition of shares at a premium, recognized pursuant to a valid court-approved scheme, and was not self-generated.The Court rejected the Assessing Officer's methodology of computing negative goodwill by treating share premium as liability, holding it contrary to accepted accounting principles and unsupported by expert valuation or referral to a Valuation Officer.The principle that depreciation once allowed in an initial year creates a vested right for carry-forward and set-off of unabsorbed depreciation was reaffirmed, and collateral challenges to such allowance in subsequent years without appellate reversal were disallowed.Regarding product registration expenses, the Court recognized such costs as regulatory compliance expenses necessary for business operations, not creating proprietary or enduring assets, consistent with prior coordinate bench and High Court rulings.On section 80-IC deductions, the Court followed binding coordinate bench precedents holding that common or corporate expenses lacking proximate nexus with the eligible unit cannot be apportioned to reduce eligible profits artificially, and that scrap income and statutory disallowances enhancing profits qualify for deduction.The Court noted no procedural infirmity or denial of natural justice in the CIT(A)'s orders and declined the Revenue's request for remand or fresh adjudication.

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