2025 (9) TMI 293 - AT - Income Tax

Depreciation on goodwill allowed; s.80IA(4) permits captive power and steam as 'power', computed at board supply rates

Deputy Commissioner of Income Tax Circle-2 (1) (1), Vadodara Versus Gujarat Narmada Valley Fertilizer & Chemicals Limited

Deputy Commissioner of Income Tax Circle-2 (1) (1), Vadodara Versus Gujarat Narmada Valley Fertilizer & Chemicals Limited - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether depreciation on goodwill arising on amalgamation (difference between consideration and net book value taken over under a court-approved scheme) is allowable where the amalgamation resulted in acquisition of a going concern and the calculation was approved by the Court, and where identical claims were allowed in preceding assessment years and upheld by the Tribunal and High Court. 2. Whether profits and gains eligible for deduction under section 80IA(4) for generation of power (and steam treated as power) used for captive consumption must be computed by reference to an arm's length price determined through external comparables applied by the TPO (on the ground that sale by a captive power plant is a regulated activity and CPP can only sell to a distribution licensee), or whether the assessee's benchmarking using internal CUPs (rate at which non-eligible unit purchased from the grid / distribution company) is a permissible basis for determining ALP where identical issues were decided in favour of the assessee in preceding years and not disturbed on appeal to the High Court. ISSUE-WISE DETAILED ANALYSIS - Depreciation on Goodwill Arising on Amalgamation Legal framework: Allowability of depreciation on goodwill acquired on amalgamation where the amalgamation is effected under a court-approved scheme and the transferee takes over assets and pays consideration by issue of shares; treatment depends on recognizing goodwill as an identifiable intangible/asset for tax depreciation purposes under the income-tax provisions governing allowance for depreciation. Precedent treatment: The Tribunal and the High Court had previously considered identical claims of the assessee for multiple earlier assessment years and had allowed depreciation on the goodwill arising from the same merger; those decisions were relied on by the CIT(A) in the present year. Interpretation and reasoning: The Court (Tribunal) accepted that the amalgamation involved takeover of a going concern, tangible assets taken over at book value and consideration paid in equity shares exceeding net book value, the excess constituting goodwill as computed and approved under the scheme sanctioned by the High Court. The CIT(A) noted allowance in earlier years and the High Court's approval for an earlier assessment year. Revenue could not point to any distinguishing factual circumstances in the present year from the years already adjudicated in favour of the assessee. Ratio vs. Obiter: The Tribunal treated the precedential rulings in the assessee's own earlier proceedings (Tribunal and High Court decisions) as binding in relation to identical facts; that treatment forms the operative ratio for allowing depreciation on the goodwill in the present year. Observations as to the court-sanctioned computation and continuity of treatment are ratio; no obiter contrary findings were relied upon. Conclusion: Depreciation on goodwill arising on the merger was allowable. The Tribunal declined to interfere with the CIT(A)'s deletion of the disallowance, dismissing Revenue's ground as covered by prior identical decisions. ISSUE-WISE DETAILED ANALYSIS - ALP / Deduction under Section 80IA for Captive Power / Inter-unit Sale of Electricity Legal framework: Deduction under section 80IA(4) for profits and gains of infrastructure undertakings including generation of power; computation for captive consumption requires determination of arm's length consideration where transactions are between associated or related units. Transfer pricing analysis needs appropriate benchmarking (CUP method or other) consistent with transfer pricing provisions and applicable rules; regulatory regime for sale of electricity (sale to distribution licensee through transmission utility) is relevant to characterisation of transactions. Precedent treatment: The ITAT and High Court in the assessee's earlier assessment years had decided the identical issue in favour of the assessee - holding that profits and gains eligible for deduction under section 80IA(4) are allowable for generation of power for captive consumption and that the rate of power for computation may be the rate at which the Electricity Board supplied power to its consumer; steam produced could be treated as power for the purpose of the deduction. The department's appeal against those Tribunal orders was not admitted by the High Court. Interpretation and reasoning: The TPO rejected the assessee's internal CUP benchmarking (using the manufacturing units as tested party and the yearly average per unit rate at which the non-eligible unit purchased from the grid) on the ground that a CPP can only sell to a distribution licensee and hence the internal rate was not a valid comparable. The TPO therefore applied external CUPs and made an upward adjustment. The CIT(A) declined the TPO's approach, relying on the assessee's earlier successful benchmarking and the Tribunal/High Court rulings in preceding years which accepted computation using the rate at which the Electricity Board supplied power to its consumers and treated steam as power for section 80IA(4). Revenue's representative conceded absence of any distinguishing facts in the present year and was unable to rebut the precedents relied upon by the assessee and the CIT(A). Ratio vs. Obiter: The Tribunal treated the earlier Tribunal and High Court decisions as determinative ratio for the present year, applying settled findings on the permissibility of the assessee's benchmarking and the treatment of captive power/steam under section 80IA(4). Statements about the regulatory constraint on CPPs and the TPO's methodology are discussed but are not adopted as a new principle contrary to the prior ratio; rather the Tribunal's allowance is founded on the binding nature of earlier decisions (ratio). Conclusion: The CIT(A)'s deletion of the TPO's addition and acceptance of the assessee's ALP/deduction under section 80IA for captive power and steam was upheld. Revenue's grounds challenging the benchmarking and adoption of internal CUPs were dismissed as covered by prior Tribunal and High Court decisions in the assessee's case, and the appeal was dismissed. Cross-references and Practical Outcome Both contested issues were resolved by applying identical factual and legal treatment as in earlier assessment years where the Tribunal and High Court had ruled in favour of the assessee; Revenue did not identify any distinguishing facts or legal principle warranting departure. The Tribunal therefore declined to interfere with the appellate authority's order deleting the additions on (a) depreciation on goodwill arising on court-approved amalgamation and (b) ALP/deduction computation under section 80IA(4) for captive power/steam, and dismissed the Revenue's appeal.