Goodwill depreciation under s.32(1) held prospective; relief on s.28(iv) assets, s.40(a)(i) TDS remanded for verification

ITAT set aside DRP's denial of depreciation on goodwill arising from slump sale acquisitions, holding the amendment to s.32(1) by Finance Act 2021 to be prospective, and remanded the issue to AO for fresh adjudication after considering additional evidence, without expressing any view on merits. On addition under s.28(iv) for free-of-cost assets, ITAT directed AO to delete the addition to the extent the assessee proves that such assets were re-exported or destroyed under owner's instructions, following its own ruling for earlier AY. On disallowance under s.40(a)(i) for alleged TDS default, ITAT remanded the matter for AO to verify lower/nil deduction certificates under ss.194C and 194I.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether depreciation on goodwill was allowable under Section 32(1)(ii) for the assessment year prior to 2021-22, in view of the amendment by Finance Act, 2021, and whether the matter required remand on factual verification of acquisition and payment details.

1.2 Whether the value of free of cost assets received from group entities was taxable as business income under Section 28(iv), and to what extent relief was available in respect of re-exported or destroyed assets, subject to verification.

1.3 Whether disallowance under Section 40(a)(i) was warranted in respect of payments where tax was allegedly deducted at a lower rate under valid certificates issued under Section 197, and whether the issue required remand for verification.

1.4 Whether levy of interest under Sections 234A, 234B and 234C was sustainable.

1.5 Whether initiation of penalty proceedings under Section 274 read with Section 270A was open to challenge at this stage.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Depreciation on goodwill under Section 32(1)(ii) and effect of Finance Act, 2021

Legal framework (as discussed):

2.1 The Court examined the amendment made by Finance Act, 2021 to Section 32(1)(ii), Section 2(11) and Explanation 3 to Section 32, whereby "goodwill of a business or profession" was excluded from the definition of "asset"/"block of asset" for purposes of depreciation. The Court relied on the Memorandum to the Finance Bill, 2021 and the Notes on Clauses, both of which expressly provide that the amendments "will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years."

2.2 The Court also noticed a Tribunal decision holding that depreciation on goodwill was allowable prior to the said amendments and that the structure of the amendment (adjustment to cost for capital gains purposes) demonstrated that the denial of depreciation was intended only prospectively.

Interpretation and reasoning:

2.3 The Court held that the Memorandum and Notes on Clauses clearly restrict the temporal operation of the amendment to assessment year 2021-22 onwards, thereby indicating that for earlier years the pre-amendment law governs allowance of depreciation on goodwill.

2.4 It was observed that the Dispute Resolution Panel had rejected the assessee's claim solely on the ground that the amendment was "clarificatory" and therefore applicable to the year under consideration. The Court held that this approach was contrary to the clear legislative indication in the Memorandum and Notes on Clauses specifying prospective operation.

2.5 On the factual aspect, the Assessing Officer had disallowed depreciation on the ground that the assessee had not furnished adequate documentation (basis of consideration, proof of payment, rationale for classification as intangible asset, valuation report) to establish acquisition and nature of goodwill. The assessee produced additional evidence before the Court, including bank payment approvals, invoices and bank statements evidencing payments made under the Business Transfer Agreements.

2.6 The Court considered these additional documents to be relevant and going to the root of the matter. Since the DRP had not examined factual aspects, having rejected the claim purely on the legal ground of the amendment, and because the additional evidence required factual verification, the Court found it appropriate to remit the matter to the Assessing Officer.

Conclusions:

2.7 The amendment to Section 32(1)(ii) by Finance Act, 2021 excluding goodwill from depreciable assets is prospective and applies only from assessment year 2021-22 onwards; it cannot be invoked to deny depreciation on goodwill for the year under consideration.

2.8 The disallowance of depreciation on goodwill was set aside and the issue was restored to the file of the Assessing Officer to adjudicate afresh, after considering the additional evidence and examining all factual aspects. No opinion was expressed on the merits of the depreciation claim. The ground was allowed for statistical purposes.

Issue 2: Taxability under Section 28(iv) of free of cost assets received from group entities

Legal framework (as applied):

2.9 The Assessing Officer and the DRP proceeded on the footing that the value of assets received free of cost constituted a "benefit or perquisite arising from business" within the meaning of Section 28(iv) and was chargeable as business income.

Interpretation and reasoning:

2.10 The assessee explained that the assets in question were tangible assets/computer supplies provided by group entities on a loan basis exclusively for testing, analysing and validating software, and that the assessee had no independent right to use or exploit these assets. It was contended that there was no "real income" or benefit, and reliance was placed on a prior Tribunal decision in the assessee's own case for an earlier year where relief had been granted to the extent the free of cost assets were re-exported.

2.11 The Court noted that in the earlier year the Tribunal had directed deletion of the addition to the extent the assessee could establish that the free of cost assets were re-exported in the relevant year. Following that decision, the Court held that similar relief should be extended for the year under consideration on the same principle.

2.12 During the hearing it was further claimed that part of the free of cost assets had been destroyed in accordance with instructions of the owner, such that no benefit accrued in respect of those items. The Departmental Representative contested this on the ground that there was no supporting material on record. The Court accepted that this contention, if supported by evidence, was relevant to determination of any benefit under Section 28(iv), and therefore required verification by the Assessing Officer.

Conclusions:

2.13 The addition under Section 28(iv) in respect of free of cost assets was not sustained in full. The Court directed the Assessing Officer:

(a) to delete the addition to the extent the assessee establishes, by appropriate evidence, that free of cost assets received during the year were re-exported; and

(b) to delete the addition to the extent the assessee establishes, by documents/details, that such assets were destroyed as per the instructions of the actual owner and thus conferred no benefit.

2.14 Subject to the above directions and verification by the Assessing Officer, the ground relating to addition under Section 28(iv) was partly allowed.

Issue 3: Disallowance under Section 40(a)(i) and applicability of lower deduction certificates

Legal framework (as applied):

2.15 Section 40(a)(i) disallows certain payments where tax deductible at source has not been deducted or, after deduction, not paid. The assessee contended that tax had been deducted at lower rates pursuant to valid certificates issued under Section 197 for the relevant period.

Interpretation and reasoning:

2.16 The assessee argued that in respect of payment to a particular payee, tax was deducted at a reduced rate as authorised by lower deduction certificates issued by the TDS authorities, and that reliance on Section 40(a)(i) was therefore misplaced. Certificates indicating lower rates under Sections 194C and 194I(b), valid during the relevant period, were produced as additional evidence.

2.17 The Court observed that these certificates were issued by the jurisdictional TDS authority and not by any third party, and were directly relevant to determining whether there was any failure to deduct tax in terms of Section 40(a)(i). Since these certificates were not before the lower authorities, the factual nexus between the payments disallowed and the certificates required verification.

Conclusions:

2.18 The disallowance under Section 40(a)(i) (to the extent of the impugned amount related to the payment in question and the consequential interest) was set aside and the matter was remanded to the Assessing Officer to verify the lower deduction certificates and their applicability to the specific payments. The Assessing Officer was directed to decide the matter afresh in light of this verification. The ground was partly allowed.

Issue 4: Levy of interest under Sections 234A, 234B and 234C

Interpretation and reasoning:

2.19 The Court treated the grounds challenging levy and computation of interest under Sections 234A, 234B and 234C as consequential to the determination of income and other issues in appeal.

Conclusions:

2.20 The ground relating to interest was disposed of as consequential, to be recomputed in accordance with the final assessed income as may emerge from the remand directions.

Issue 5: Challenge to initiation of penalty proceedings under Section 274 read with Section 270A

Interpretation and reasoning:

2.21 The Court held that initiation of penalty proceedings is separate and distinct from the assessment proceedings and that, at the stage of mere initiation, no substantive grievance arises for adjudication in the appeal against assessment.

Conclusions:

2.22 The ground challenging initiation of penalty proceedings was held to be premature and was dismissed.

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