2026 (3) TMI 1117 - AT - Income Tax

Depreciation on goodwill requires the asset be capitalised into the block of assets; uncapitalised goodwill depreciation is disallowed, while remand permits verification of a unit loss claim.

Depreciation on goodwill arising from amalgamation is disallowed where the goodwill was not capitalised or brought into the relevant block of assets and ... Depreciation on goodwill arising out of amalgamation of certain companies with the assessee - block of assets concept - denial of set-off of loss of the Dahej SEZ Unit against profits of other business units. Depreciation on goodwill and block of assets concept - Allowability of depreciation in respect of alleged goodwill arising on amalgamation where the asset was not recognised or brought into the block of intangible assets in the year of amalgamation - HELD THAT: - The Tribunal held that while goodwill is in principle a depreciable intangible asset, depreciation under section 32 operates through the block of assets mechanism in section 43(6). An asset must be brought into the relevant block and its actual cost recognised to compute Written Down Value; Explanation 5 to section 32 only applies where an asset already forms part of the block and does not assist where the asset was never capitalised. Because the assessee consistently adjusted the excess consideration to General Reserve and did not capitalise the alleged goodwill or determine any actual cost or opening WDV in the year of amalgamation, the statutory computation mechanism did not operate and depreciation could not be allowed in the year under appeal. The Tribunal further observed that admitting such a claim would necessitate recomputing earlier years after those assessments had attained finality and would risk giving an unintended double tax advantage where the excess consideration was exempt in the hands of transferors under section 47(vii). On these factual and legal bases the Tribunal found no infirmity in the rejection of the claim. [Paras 11, 12, 13, 14, 15] Claim for depreciation on alleged goodwill rejected as the asset was not capitalised or brought into the block of intangible assets and statutory depreciation computation could not be applied. Denial of set-off of loss of the Dahej SEZ Unit against profits of other business units - HELD THAT: - The Tribunal held that the restriction in Goetze as to fresh claims applies to the Assessing Officer and does not curtail appellate powers. Explanation 5 to section 32 means depreciation cannot be denied merely because it was not claimed in the return if otherwise allowable. However, the allowability of the Dahej unit depreciation involves factual verification (existence of depreciable assets, use in business, determination of WDV) which the Assessing Officer had not examined on merits. Accordingly the Tribunal set aside the appellate decision on this issue and restored the matter to the Assessing Officer for limited verification and recomputation after giving the assessee opportunity of being heard; the Tribunal distinguished the revenue decision relied upon by the Department as being inapposite to intra-year set-off. [Paras 18, 20, 21] Issue remitted to the Assessing Officer for verification of the depreciation claim relating to the Dahej unit and recomputation of income, with direction to afford the assessee opportunity of being heard. Final Conclusion: The appeal is partly allowed: the claim for depreciation on alleged goodwill is dismissed for failure to capitalise the asset and bring it into the block of assets, while the claim for set-off of the Dahej unit loss is remitted to the Assessing Officer for verification and recomputation of income. Issues: (i) Whether depreciation on alleged goodwill arising on amalgamation can be allowed in the year under appeal when the assessee did not recognise or capitalise the goodwill and did not bring it into the block of intangible assets in the year of amalgamation; (ii) Whether the business loss of the Dahej unit, arising upon allowance of depreciation claimed during assessment proceedings though not claimed in the return, is eligible for set-off against profits of other units.Issue (i): Whether depreciation on alleged goodwill arising on amalgamation can be allowed in the year under appeal when the asset was not capitalised or brought into the block of intangible assets in the year of amalgamation.Analysis: Depreciation under the statutory scheme operates through the block of assets mechanism and is allowable on the written down value of a block computed under section 43(6). Explanation 5 to Section 32 ensures depreciation cannot be denied merely because it was not claimed, but presupposes that the asset already forms part of the block. The facts show the alleged goodwill was adjusted against general reserve, was not capitalised, no actual cost or opening written down value was determined in the year of amalgamation, and the earlier assessment year has attained finality. Allowing depreciation in a later year without the asset having entered the block would require recomputation of earlier years and would permit a double tax benefit where excess consideration to shareholders is exempt under section 47(vii).Conclusion: Depreciation on the alleged goodwill is not allowable in the year under appeal; this conclusion is against the assessee.Issue (ii): Whether the Dahej unit loss, claimed after filing the return by revising computation during assessment proceedings, is eligible for intra year set-off against profits of other units.Analysis: The restriction in Goetze on entertaining fresh claims applies to the Assessing Officer and does not curtail appellate powers. Explanation 5 to Section 32 means depreciation is not automatically barred solely because it was not claimed. The claim of depreciation for the Dahej unit was not examined on merits by the Assessing Officer and involves factual verification of asset existence, use, and written down value; those matters require remand for verification and opportunity of hearing.Conclusion: The matter is restored to the Assessing Officer for verification of the depreciation claim for the Dahej unit and recomputation of income; this conclusion is in favour of the assessee (allowed for statistical purposes).Final Conclusion: The appeal is partly allowed: the claim for depreciation on alleged goodwill is dismissed, and the claim concerning set-off of the Dahej unit loss is remitted to the Assessing Officer for fresh verification and recomputation.Ratio Decidendi: Depreciation under Section 32 is allowable only where the asset has been brought into the relevant block of assets and an actual cost/written down value has been determined under Section 43(6); Explanation 5 does not permit allowance of depreciation for an asset that never entered the block, and appellate authorities may remit fresh factual claims to the Assessing Officer for verification when earlier assessment proceedings did not examine the claim on merits.