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of <h1>Depreciation on Purchased Goodwill Allowed Under Limited Scrutiny; AO and CIT(A) Exceeded Jurisdiction in Share Capital Case</h1> <h3>Sagarlaxmi Agriseeds Pvt Ltd. Versus ACIT, Cir. 4 (1) (1) Ahmedabad.</h3> Sagarlaxmi Agriseeds Pvt Ltd. Versus ACIT, Cir. 4 (1) (1) Ahmedabad. - TMI ISSUES: Whether the Assessing Officer (AO) exceeded jurisdiction by disallowing depreciation on goodwill in a limited scrutiny assessment without prior approval to expand the scope.Whether depreciation on purchased goodwill is allowable under section 32 of the Income Tax Act, 1961.Whether the valuation of goodwill claimed by the assessee can be rejected without departmental valuation evidence.Whether the provisions relating to amalgamation and succession (Explanation 7 to section 43(1) and section 55) are applicable to a business purchase by a company from a proprietorship concern. RULINGS / HOLDINGS: The AO and Commissioner of Income Tax (Appeals) (CIT(A)) lacked jurisdiction to disallow depreciation on goodwill as the issue was beyond the scope of limited scrutiny and no prior approval was obtained for enlarging the scope, rendering the assessment order unsustainable.Depreciation on purchased goodwill is allowable as it is an intangible asset involving cost; however, self-generated goodwill is not depreciable since it does not constitute an intangible asset under accounting standards.The valuation of goodwill supported by a registered valuer's report cannot be dislodged by the tax authorities without bringing credible contrary evidence such as a departmental valuation report.The provisions relating to amalgamation and succession are not applicable to outright purchase of business from a proprietorship; thus, the actual cost of goodwill to the purchaser is the purchase consideration paid, and depreciation is allowable accordingly. RATIONALE: The Court applied the statutory framework of the Income Tax Act, 1961, including sections 32, 43(1), 55, and relevant CBDT instructions governing limited scrutiny assessments (CBDT Instructions dated 26.09.2014, 29.12.2015, 14.07.2016, and 30.11.2017). It emphasized that limited scrutiny scope cannot be expanded without prior administrative approval, as per CBDT's binding instructions.The Court distinguished between purchased goodwill and self-generated goodwill based on accounting standards and tax principles, recognizing that only purchased goodwill qualifies for depreciation under section 32.The Court relied on precedent from the Gujarat High Court and coordinate benches of the Tribunal which held that a registered valuer's report is prima facie evidence of valuation and cannot be rejected without credible contrary evidence.The Court clarified that Explanation 7 to section 43(1) and section 55 relate to amalgamation and succession and do not apply to a straightforward business purchase from a proprietorship, thereby invalidating the lower authorities' reliance on these provisions.The Court noted the absence of any approval from the Joint Commissioner for determining the cost of goodwill at nil, as required under Explanation 3 to section 43(1), further invalidating the disallowance.
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