Revision u/s 263 quashed; depreciation on amalgamation goodwill and Voot platform upheld as consistent, plausible claim

ITAT held that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue, and therefore revision u/s 263 was unjustified. The AO had duly inquired into and accepted depreciation on goodwill arising from amalgamations and on the Voot platform, following binding precedent, a plausible legal view, and the principle of consistency. Once depreciation on goodwill for Studio 18 had been allowed in the year of capitalization and supported by earlier ITAT orders, the Department could not reverse its stand absent any change in facts or law. Goodwill arising on amalgamation was held to be a new intangible asset eligible for depreciation u/s 32(1)(ii). Alleged errors in carry-forward of losses were held not prejudicial to Revenue. Assessee's appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the assessment order allowing depreciation on goodwill and determining carry forward of losses, having been passed after enquiry and verification, could be treated as "erroneous in so far as prejudicial to the interests of the Revenue" under section 263 read with Explanation 2.

1.2 Whether non-following of the Department's stand in earlier assessment years on depreciation of goodwill arising on amalgamation justified revision under section 263.

1.3 Whether depreciation on goodwill on acquisition of "Studio 18" was rightly allowed by the Assessing Officer, in view of earlier appellate acceptance and the principle of consistency, so as to preclude revision under section 263.

1.4 Whether depreciation on goodwill arising on amalgamation of another company was allowable under section 32(1)(ii) notwithstanding the sixth proviso to section 32(1), and whether adoption of a favourable view by the Assessing Officer could be revised under section 263.

1.5 Whether depreciation on the "Voot platform", being an intangible asset distinct from goodwill, could be disturbed in revision under section 263.

1.6 Whether any alleged error in quantification or verification of carry forward of business losses (as distinct from their set-off) rendered the assessment order prejudicial to the interests of the Revenue for the purpose of section 263.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Adequacy of enquiry by the Assessing Officer for purposes of section 263 (goodwill depreciation and carry forward losses)

Legal framework

2.1 The Court reproduced Explanation 2 to section 263, which deems an order "erroneous in so far as prejudicial to the interests of the revenue" if, inter alia, it is passed (a) without making enquiries or verification which should have been made, or (b) allowing relief without enquiring into the claim.

Interpretation and reasoning

2.2 On depreciation, the Assessing Officer issued a detailed notice under section 142(1) specifically calling for particulars of depreciation, including details of assets, opening WDV, additions, deletions, and supporting evidence. The assessee responded with a depreciation chart, explanatory notes, and cited case law, including on depreciation of goodwill.

2.3 Thereafter, by a further show-cause notice, the Assessing Officer expressly called for details and documentary evidence regarding "intangible rights goodwill" and threatened disallowance in absence of proof. The assessee furnished a break-up of goodwill depreciation into (i) acquisition of Studio 18 and (ii) amalgamation-related goodwill, with detailed notes, High Court amalgamation order, valuation report, purchase price allocation report, and the prior assessment order where such depreciation had been allowed.

2.4 On brought forward and carry forward losses, the Assessing Officer issued a detailed show-cause notice pointing out discrepancies between ITR Schedule CFL and figures in computation across several assessment years, and called for explanation and calculations. The assessee filed year-wise working of profits, set-off of earlier losses, and resulting balance losses carried forward; this working was reproduced and examined in the assessment order.

2.5 The assessment order recorded that, after examination of the assessee's replies and annexures, the Assessing Officer found the depreciation claim "examined and found correct" and likewise found the explanation on carry forward losses "considerable hence, accepted."

2.6 The Court held that these facts demonstrated that the Assessing Officer had conducted detailed enquiries and verifications on both issues. It emphasised that an Assessing Officer is not required to record elaborate reasoning while accepting a claim; what matters is that enquiry was in fact conducted.

Conclusions

2.7 Since adequate enquiries and verifications were made on depreciation and carry forward of losses, the deeming provisions of Explanation 2(a) and (b) to section 263 were not attracted, and the assessment could not be treated as erroneous and prejudicial merely on that ground.

Issue 2: Effect of Department's earlier stand on goodwill depreciation and principle of consistency for section 263

Interpretation and reasoning

2.8 The Revenue argued that depreciation on goodwill arising on amalgamation had been disallowed in assessment years 2016-17 and 2017-18, and therefore the Assessing Officer was bound, on principle of consistency and "to keep the matter alive", to disallow such depreciation in the year under consideration; any deviation was prejudicial to the Revenue.

2.9 The Court noted that in the immediately preceding assessment year 2018-19 the Assessing Officer had already accepted and allowed depreciation on the same goodwill. The Assessing Officer in the present year followed this immediately preceding assessment, and thus could not be faulted for inconsistency.

2.10 Further, irrespective of the Department's stance in other years, the Court held that non-following of such "consistent stand" could at best make the order prejudicial to the Revenue but would not make it "erroneous" where the Assessing Officer was following binding precedent. In assessment year 2008-09, the Tribunal had allowed depreciation on goodwill arising from merger of another business division, and that order had not been reversed by the jurisdictional High Court.

2.11 Since the Assessing Officer followed a binding Tribunal decision on allowability of depreciation on goodwill, his order could not be characterised as erroneous even if the Department had disallowed similar claims in other years.

Conclusions

2.12 Both conditions under section 263-order being erroneous as well as prejudicial to the interests of the Revenue-must coexist. On the goodwill depreciation issue, even assuming prejudice, the order was not erroneous because it was in line with binding precedent and with the immediately preceding year's assessment. Hence section 263 could not be validly invoked on this ground.

Issue 3: Depreciation on goodwill on acquisition of "Studio 18" and applicability of consistency

Interpretation and reasoning

3.1 The goodwill of Studio 18 arose in assessment year 2008-09 as excess of consideration over net assets acquired under a slump sale. Depreciation on this goodwill had been claimed since that year.

3.2 The Tribunal in the assessee's case for assessment year 2008-09 had allowed depreciation on this goodwill, and the Department had not challenged that decision before the High Court. These facts were not disputed by the Revenue.

3.3 The Court held that once depreciation on a particular goodwill has been allowed and accepted in the first year of claim, the Department cannot, in absence of any material change in facts or law, alter its stance in subsequent years. The Court applied the principle of consistency as laid down by the Supreme Court in Radhasoami Satsang v. CIT.

Conclusions

3.4 There was no error in the Assessing Officer accepting depreciation on Studio 18 goodwill; consequently, the revisional authority was not justified in treating the assessment as erroneous insofar as this component of goodwill depreciation was concerned.

Issue 4: Depreciation on goodwill arising on amalgamation and scope of sixth proviso to section 32(1)

Legal framework

4.1 Section 32(1) allows depreciation on, inter alia, intangible assets such as "know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." The Supreme Court in CIT v. Smifs Securities Ltd. held that goodwill falls within "any other business or commercial right of similar nature" and is thus a depreciable intangible asset.

4.2 The sixth proviso to section 32(1) restricts depreciation in cases of amalgamation, demerger, etc., by capping the total depreciation in the hands of amalgamating and amalgamated companies to the amount that would have been allowable had such reorganisation not taken place.

4.3 Finance Act, 2021 introduced amendments curtailing depreciation on goodwill prospectively with effect from 1.4.2021.

Interpretation and reasoning

4.4 The amalgamated goodwill under consideration arose from amalgamation effective 1.4.2015, pursuant to a High Court-approved scheme. The amalgamating company had no goodwill recorded in its books and had never claimed depreciation on goodwill. The goodwill arose only in the books of the amalgamated company as excess of consideration over net assets, as per recognised accounting principles (AS-14) and an independent valuation and purchase price allocation.

4.5 In assessment year 2016-17 the Assessing Officer had disallowed depreciation by applying the sixth proviso, on the ground that depreciation in the hands of the amalgamated company cannot exceed what would have been allowable to the amalgamating company.

4.6 The assessee argued that the mischief targeted by the sixth proviso was prevention of double or excessive depreciation on the same asset when it is transferred under amalgamation; the proviso was introduced before intangible assets, including goodwill, were recognised as depreciable, and was not intended to deny depreciation on "new" goodwill arising only in the amalgamated company's books where no such asset existed or was depreciable in the amalgamating company.

4.7 The Court noted two strands of Tribunal jurisprudence on this issue: a restrictive view (e.g., United Breweries Ltd., Bangalore Tribunal), holding that the sixth proviso caps even goodwill depreciation, and an expansive view (e.g., Mylan Laboratories Ltd., Hyderabad Tribunal, and Dow Chemical International (P.) Ltd., Mumbai Tribunal) holding that the sixth proviso is only an allocation mechanism for existing depreciable assets and does not apply where goodwill is recognised for the first time in the amalgamated company.

4.8 The Court accepted the reasoning of the latter line of authorities, observing that in cases where the amalgamating company had no goodwill recorded or forming part of a depreciable block, it could not have claimed depreciation; therefore, the question of applying the sixth proviso's cap does not arise. The goodwill is a new intangible asset arising on amalgamation in the hands of the amalgamated company and is squarely covered by the main provision of section 32(1)(ii) read with Smifs Securities.

4.9 The Court further observed that the subsequent amendment by Finance Act, 2021, prospectively disallowing depreciation on goodwill, itself indicates that prior to this amendment, depreciation on goodwill was allowable. The adjustment mechanism introduced for past depreciation also supports that legislative intent, as clarified in judicial precedent relied upon by the assessee.

4.10 In the present assessment year, the Assessing Officer adopted the view-supported by Smifs Securities and the above Tribunal decisions-that depreciation on amalgamation goodwill was allowable, and that the sixth proviso had no application because there was no goodwill or corresponding depreciation in the amalgamating company's books. This was held to be a plausible and legally tenable view.

4.11 The Court reiterated that where two views are reasonably possible and the Assessing Officer has adopted one such view in accordance with law, the order cannot be revised under section 263 merely because the revisional authority prefers another interpretation.

Conclusions

4.12 The goodwill arising on amalgamation was a depreciable intangible asset under section 32(1)(ii) as interpreted in Smifs Securities.

4.13 The sixth proviso to section 32(1) did not apply to deny depreciation on such goodwill because no corresponding depreciable goodwill existed in the amalgamating company; the proviso is an anti-duplication mechanism and not a bar on new goodwill arising on amalgamation.

4.14 The Assessing Officer's allowance of depreciation on this goodwill, based on a recognised and supported view of law, could not be held erroneous; therefore, the Principal Commissioner had no jurisdiction to revise the order on this issue.

Issue 5: Depreciation on "Voot platform" as an intangible asset distinct from goodwill

Interpretation and reasoning

5.1 The depreciation claim also included an amount relating to the "Voot platform," capitalised as an intangible asset in assessment year 2017-18. This was consistently treated as an intangible other than goodwill, and depreciation thereon had not been disputed by the Department in earlier years.

5.2 The Principal Commissioner, while revising the assessment, proceeded on the assumption that the entire depreciation on intangible assets, including that on the Voot platform, formed part of depreciation on goodwill and should be re-examined or disallowed in line with the Department's stand on goodwill.

5.3 The Court found this approach erroneous, holding that the Voot platform was an intangible asset distinct from goodwill, and there was no material change in facts as compared to earlier years where depreciation had been allowed and not disturbed. The finding in relation to goodwill could not automatically extend to this independent asset.

5.4 Applying the principle of consistency and in absence of any specific error or enquiry gap regarding the Voot platform, the Court held that the Principal Commissioner's action in setting aside depreciation on this asset was not justified.

Conclusions

5.5 Depreciation on the Voot platform, being an intangible asset distinct from goodwill and consistently allowed in earlier years, could not be disturbed in revision under section 263 in the absence of any demonstrated error or lack of enquiry by the Assessing Officer.

Issue 6: Carry forward of business losses and "prejudicial to the interests of the Revenue" under section 263

Legal framework

6.1 The Court referred to the Supreme Court decision in CIT v. Manmohan Das (Deceased), which held that the question whether a loss may be carried forward and set off against future profits is to be determined in the assessment of the subsequent year in which set-off is claimed; any view recorded in the year of loss is not binding on the assessee in the later year.

Interpretation and reasoning

6.2 The assessee had claimed carry forward of business losses of Rs. 1,022,35,12,612, furnished detailed year-wise workings of utilisation and balance losses, and the Assessing Officer examined and accepted these workings after specific enquiry through a show-cause notice.

6.3 The Principal Commissioner alleged that there was no proper verification of correctness of the carry forward figures and directed re-verification. However, the Court reasoned that actual "revenue impact" occurs not in the year in which the carry forward figure is stated but in the later year when such loss is sought to be set off against profits and allowed by the Assessing Officer of that year.

6.4 Following Manmohan Das and a coordinate bench decision in Cargo Service Centre India (P.) Ltd., the Court held that the right to carry forward a loss is statutory, and the question whether such loss can be set off is to be decided in the year of set-off. Any observation in the year of incurrence or interim carry forward does not conclusively affect Revenue's interest because the subsequent Assessing Officer can still disallow or restrict set-off.

6.5 Accordingly, even if there were some defect in quantification or verification of the carry forward figure in the present year, it would not, by itself, be prejudicial to the interests of the Revenue for purposes of section 263, given that the Revenue's rights in the year of set-off remain unaffected.

Conclusions

6.6 As any real prejudice to the Revenue can only occur, if at all, in the year when set-off of brought forward loss is actually allowed, an alleged error in the statement or verification of carry forward losses in the present year does not satisfy the "prejudicial to the interests of the revenue" requirement of section 263.

6.7 The Principal Commissioner's direction to revise the assessment on this ground was unwarranted and beyond jurisdiction.

Overall disposition

7.1 The Court held that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue on any of the grounds invoked-depreciation on goodwill (Studio 18 and amalgamation goodwill), depreciation on Voot platform, or carry forward of losses. The revisional order under section 263 was therefore set aside and the assessee's appeal allowed.

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