Depreciation on amalgamation goodwill upheld; no section 14A disallowance without exempt income

Goodwill arising from a court-approved amalgamation was treated as an intangible asset eligible for depreciation, and the 5th proviso to section 32(1) and Explanation 3 to section 43(1) were held inapplicable on the facts. Where no exempt income was earned during the year, disallowance under section 14A read with rule 8D was deleted because the statutory nexus to exempt income was absent. An additional ground challenging disturbance of the opening written-down value was admitted as a pure question of law and was allowed, supporting the depreciation claim. The assessee obtained relief on the disputed depreciation and related cross-objection issues.

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Issues: (i) Whether depreciation was allowable on goodwill arising from amalgamation and whether the 5th proviso to section 32(1) and Explanation 3 to section 43(1) applied to disallow the claim; (ii) Whether disallowance under section 14A read with rule 8D was sustainable when no exempt income was earned during the year; (iii) Whether the assessee could raise an additional ground challenging disturbance of the opening written-down value and claim depreciation on that basis.

Issue (i): Whether depreciation was allowable on goodwill arising from amalgamation and whether the 5th proviso to section 32(1) and Explanation 3 to section 43(1) applied to disallow the claim?

Analysis: The goodwill arose pursuant to a court-approved amalgamation and represented the excess of consideration over net assets acquired. The claim was treated as supported by the amalgamation scheme and by binding decisions recognising depreciation on goodwill, while the decisions relied upon by the Revenue were found distinguishable or not decisive against the assessee. The proviso to section 32(1) was held inapplicable on these facts, and Explanation 3 to section 43(1) was also not attracted.

Conclusion: The depreciation claim on goodwill was held allowable and the Revenue's objection failed.

Issue (ii): Whether disallowance under section 14A read with rule 8D was sustainable when no exempt income was earned during the year?

Analysis: The record showed that the assessee had not earned any exempt income during the relevant year. In such a situation, no disallowance under section 14A could survive, since the statutory disallowance is linked to expenditure incurred in relation to exempt income.

Conclusion: The disallowance under section 14A read with rule 8D was deleted in favour of the assessee.

Issue (iii): Whether the assessee could raise an additional ground challenging disturbance of the opening written-down value and claim depreciation on that basis?

Analysis: The additional ground was purely legal, required no fresh factual enquiry, and was therefore admissible. On merits, the opening written-down value brought forward from the earlier year had not been disturbed, and the assessee's depreciation claim could not be denied on that basis.

Conclusion: The additional ground was admitted and allowed in favour of the assessee.

Final Conclusion: The assessee succeeded on the substantive depreciation issue and on the cross-objection issues, while the Revenue's challenge to depreciation on goodwill failed. The matter was thus disposed of with relief to the assessee on the contested issues.

Ratio Decidendi: Goodwill arising from a genuine amalgamation approved by the competent court is an intangible asset eligible for depreciation, and where no exempt income is earned, no disallowance under section 14A can be made.

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