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Facts
The assessee claimed depreciation on goodwill arising from an amalgamation. The PCIT invoked Section 263, holding the assessment order allowing depreciation as erroneous and prejudicial to revenue, primarily because the goodwill was not reflected in the balance sheet and fully written off in the books. The assessee contended that the issue of goodwill depreciation is settled by the Supreme Court and that the AO had made a conscious decision after enquiry.
Held
The Tribunal held that the PCIT erred in invoking Section 263. The depreciation on goodwill acquired through amalgamation is allowable as per Supreme Court decisions. The fact that goodwill is not in the books does not deny depreciation if it is part of the block of assets. The AO's order, based on a possible view and after due enquiry, cannot be considered erroneous simply because the PCIT disagreed.
Key Issues
Whether the PCIT correctly invoked Section 263 to revise an order allowing depreciation on goodwill, when the AO had conducted an enquiry and taken a view that was permissible in law.
Sections Cited
263, 143(3), 32(1), 32(1), 32(1), 32(1), 32(1)
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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI RAJ KUMAR CHAUHAN, JM
(Assessment Year: 2018-19) Sprit Infrapower & Multiventures Principal Commissioner of Pvt. Ltd., Income Tax-8, 18th Floor, Marathon Futurex, N M Room No. 611, 6th Floor, Vs. Joshi Marg, Lower Parel, Aayakar Bhavan, Mumbai-400013. M.K. Road, Mumbai-400020. PAN: AALCS5905J Appellant) : Respondent) Appellant /Assessee by : Shri Madhur Agrawal, AR : Shri Arun Kanti Datta, CIT DR Revenue / Respondent by Date of Hearing : 21.08.2025 Date of Pronouncement : 10.09.2025 O R D E R
Per Padmavathy S, AM:
This appeal by the assessee is against the order of the Principal Commissioner of Income Tax, Mumbai-8 [In short 'PCIT'] passed under section 263 of the Income Tax Act, 1961 (the Act) dated 18.03.2024 for Assessment Year (AY) 2018-19. The assessee raised the following grounds of appeal:
1. On the facts and circumstances of the case and in law, the Principal Commissioner Income-tax 8, Mumbai ("the Pr.CIT") erred in assuming jurisdiction under section 263 and holding the assessment order, under 2 ITA 1589/Mum/2025 Sprit Infrapower & Multiventures Pvt. Ltd. section 143(3) of the Income-tax Act, 1961 ("hereinafter referred to as "the Act") dated 1 November 2021 (hereinafter referred to as "the assessment order"), as erroneous and prejudicial to the interest of the Revenue. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law; 2. The Pr. CIT failed to appreciate that where the Assessment order has been passed by the Assessing Officer after conducting a through enquiry, it cannot be considered erroneous and prejudicial to the interest of the revenue; 3. On facts and circumstance of the case and in law, the Learned Pr. CIT erred in disallowing the depreciation of Rs. 11,49,27,522/- claimed on goodwill purchased under amalgamation of company approved by the Honorable Mumbai High Court, for reasons which are wrong, contrary to facts and provisions in law; 4. The above grounds of appeal are without prejudice to each other.”
2. The assessee is a company and filed the return of income for AY 2018-19 declaring Nil income on 28.11.2018. The Assessing Officer (AO) completed the assessment after incorporating the Transfer Pricing Adjustment (TP Adjustment) of Rs. 5,30,00,590/-. The PCIT on verification of records noticed that the assessee has claimed depreciation on goodwill to the tune of Rs. 11,49,27,522/-. The PCIT further noticed that the goodwill on which the assessee has claimed depreciation under the Act is not reflected in the balance-sheet and that the assessee has not debited any depreciation in the P&L A/c. The PCIT held that depreciation on goodwill cannot be claimed and since the AO has allowed the depreciation while completing the assessment there is an error in the order of the AO which is prejudicial to the interest of the revenue. The assessee in response to the show- cause notice issued by the PCIT under section 263 submitted that the issue of depreciation on goodwill is settled by the Hon'ble Supreme Court in the case of Smifs Securities Ltd. vs. CIT [(2012) 348 ITR 302 (SC)] and that the assessee in 3 ITA 1589/Mum/2025 Sprit Infrapower & Multiventures Pvt. Ltd. the books of accounts has written off the goodwill fully. The PCIT did not accept the submissions of the assessee and set-aside the order of the AO by holding that “6. In this regard, reliance is placed on the decision of the ITAT Bangalore Bench in the case of United Breweries Ltd wherein it is held that assessee cannot claim depreciation on goodwill acquired in the scheme of Amalgamation. 6.a The assessee has admitted to the fact that assessee has not shown any asset in the balance sheet as the amount of goodwill is fully impaired in AY 2014-15. Section 32(1) states that the one condition for claiming depreciation is that the block of assets should "exist" to claim depreciation. Since, goodwill is not treated as an asset in its books of accounts, the question of allowing depreciation on such non existing asset does not arise. This view gathers support from the ruling of the Hon'ble ITAT, Mumbai in the case of Aramark India P. Ltd. Vs. DCIT) in ITA No. 2546/Mum/2018. 6.b The Hon'ble ITAT, Mumbai in the case of Aramark India P. Ltd. Vs. DCIT for AY 2012-13 (in following the decision of the Hon'ble Supreme Court in the case of Smifs Securities Ltd. V/s. CIT held that goodwill is an asset under the expression used in explanation 3(b) to sec.32(1) and therefore, depreciation is allowable on such assets as intangible assets being any other business or commercial rights of similar nature. The Hon'ble ITAT further stated that there is no dispute with regard to allowability of depreciation on goodwill, but when comparing facts of the current year, the question of allowability of depreciation has to be examined, in the light of provision of section 32(1), where it mandates the block of assets should exists to claim depreciation. Since, goodwill is not treated as an asset in its books of accounts and also, the assessee is not getting any enduring benefit out of such goodwill, the question of allowing depreciation on such non-existing assets does not arise.
In view of these facts, the assessment order passed by the Assessing Officer is hereby set aside with the direction to the Assessing Officer to allow an opportunity of being heard to the assessee and thereafter pass the order in accordance with law after due verification.”
There is a delay of 279 days in filing the appeal before the Tribunal and the assessee filed a petition for condonation of delay along with the reasons for the delay. The relevant extract from the affidavit as given below:
4 ITA 1589/Mum/2025 Sprit Infrapower & Multiventures Pvt. Ltd. “1) I am the Tax Manager of M/s Sprit Infrapower & Multiventures Private Limited ('the Company') and, as such, well-conversant with the facts and circumstances leading to the filing of the captioned appeal. 2) I am responsible for looking after the taxation matters of the Company. I say that the revision order under section 263 of the Income-tax Act, 1961 ('the Act') was passed on 18 March 2024 by the Pr. Commissioner of Income Tax-8, Mumbai for AY 2018-19 which was received by the assessee in its registered email address on corp.acctax@esselgroup.io. 3) I say that though the order was sent on email, inadvertently it was overlooked by me and hence, was not accessed. 4) I say that only when I received a notice dated 27 January 2025 under section 142(1) of the Act to give effect to the order dated 18 March 2024, I realised that an order u/s 263 has been passed. 5) On receipt of the notice under section 142 (1), I checked the email of 18 March 2024 and realised that though the order under Section 263 was received in the mail, I had inadvertently overlooked it. 6) On being aware of the order under section 263, I approached the consultant to seek advice on the way forward for the said order. 7) Thereafter on advice of the consultant and after getting the grounds settled from the counsel, the appeal was filed by the Company on 6 March 2025. 8) I state that it was due to the unintentional mistake committed by me that the appeal could not be filed on time. I say that the captioned appeal is delayed not due to any mala fide or deliberate act on the part of the assessee but for the reasons explained hereinabove. 9) I repeat and reiterate the statements and averments made in the accompanying application for condonation of delay and they may be treated as reproduced verbatim in this affidavit. 10) I say that whatever stated above is true to the best of my knowledge and belief.”
The ld. AR submitted that the delay is due to the inadvertent omission on the part of the employee of the assessee and that the delay is not intentional. The ld. 5 ITA 1589/Mum/2025 Sprit Infrapower & Multiventures Pvt. Ltd. AR further submitted that the assessee is not getting any benefit by filing the appeal belatedly and that in assessee's case there is a reasonable cause that warrants condonation. The ld. DR on the other hand vehemently argued that the delay should not be condoned and submitted that the assessee should evidence the action against the employee who omitted to file the appeal on time.
Having heard both the parties and perused the material on record, we are of the view that there is a reasonable and sufficient cause for the delay in filing the appeal before the Tribunal. Therefore following the Hon’ble Supreme Court decision in the case of Collector, Land Acquisition Vs. MST.Katiji & Ors., (167 ITR 471) (SC) we condone the delay of 279 days in filing the appeal and admit the appeal for adjudication.
The ld. AR submitted that M/s Premier Finance & Trading Company Ltd. got amalgamated with the assessee vide order of the Hon'ble Bombay High Court dated 20.09.2013 and the assessee capitalized the goodwill acquired as part of the total consideration in the books of account during the Financial Year relevant to AY 2014-15. The ld. AR further submitted that the assessee in the books of account has written off the entire goodwill in AY 2014-15 itself but for the purpose of income tax the assessee added the goodwill to the block of assets to be depreciated over a period of time. The ld. AR submitted that for AY 2014-15 and 2015-16 the AO had allowed the claim of depreciation on goodwill and that the PCIT had invoked the revisionary powers under section 263 in the said AYs. The ld. AR brought to our attention that the Co-ordinate Bench of the Tribunal while deciding the appeal against the order under section 263 (ITA No. 3081 & 3082/Mum/2019 dated 11.12.2019 has quashed the order by holding that 6 ITA 1589/Mum/2025 Sprit Infrapower & Multiventures Pvt. Ltd. “9. We have given a thoughtful consideration to the issue before us and find substantial force in the claim of the assessee. As observed by the Hon’ble Supreme Court in the case of CIT, Kolkata Vs. Smifs Securities Limited (2012) 348 ITR 302(S.C) „goodwill‟ is an asset under „Explanation 3(b)‟ to Sec. 32(1) of the Act. It was observed by the Hon‟ble Apex Court, that a reading of the words „any other business or commercial rights of similar nature‟ in clause (b) of „Explanation 3‟ indicates that „goodwill‟ would fall under the expression „any other business or commercial right of a similar nature‟. It was observed by the Hon‟ble Court that the principle of ejusdem generis would strictly apply while interpreting the aforesaid expression which finds place in „Explanation 3(b)‟ to Sec. 32(1) of the Act. In the case before the Hon‟ble Apex Court, pursuant to the scheme of amalgamation of M/s YSN Shares and Securities (P) Ltd. with M/s Smifs Securities Ltd. which was duly sanctioned by the Hon‟ble High Courts of Bombay and Calcutta with retrospective affect from 01.04.1998, the assets and liabilities of M/s YSN Shares & Securities Pvt. Ltd. were transferred to and stood vested with M/s Smifs Securities Ltd. In the process „goodwill‟ had arisen in the books of M/s Smifs Securities Ltd. It was the claim of the assessee that the excess consideration paid over the value of net assets acquired of M/s YSN Shares & Securities (P) Ltd [amalgamating company] should be considered as „goodwill‟ arising on amalgamation. Infact, it was the claim of the assessee that the extra consideration was paid towards the reputation which the amalgamating company i.e. M/s YSN Shares & Securities Pvt. Ltd. was enjoying in order to retain its existing clientele. However, the A.O declined the assessee claim for deprecation for two fold reasons viz (i) that, the „goodwill‟ as per him was not an asset falling under „Explanation 3‟ to Sec. 32(1) of the Act; and (ii) that, no amount was actually paid by the assessee on account of „goodwill‟. As observed by us hereinabove, the Hon‟ble Apex Court had negated the first observation of the A.O and had held that „goodwill‟ is an asset under „Explanation 3(b)‟ to Sec. 32(1) of the Act. As regards the second observation of the A.O, the Hon‟ble Apex Court did not find any infirmity with the view taken by the lower authorities, which had approved the claim of the assessee that the difference between the cost of the assets and the amount paid constituted „goodwill‟ which the assessee company had acquired in the process of amalgamation. In sum and substance, the Hon‟ble Apex Court had approved the assesses claim for depreciation on „goodwill‟. Also, the Hon‟ble Apex Court had not found any infirmity with the view taken by the lower authorities that the excess consideration paid by the assessee over and above the value of net assets acquired of the amalgamating company i.e. M/s YSN Shares & Securities Pvt. Ltd. was to be considered as the value of „goodwill‟ arising on amalgamation.
7 ITA 1589/Mum/2025 Sprit Infrapower & Multiventures Pvt. Ltd.
10. We find that the assesees claim of depreciation on „goodwill‟ in the case before us falls within the four corners of the judgement of the Hon’ble Supreme Court in the case of CIT, Kolkata Vs. Smifs Securities Limited (2012) 348 ITR 302(S.C). As is discernible from the „Notes‟ forming part of the financial statements of the assessee company before us, the excess consideration of Rs. 145,29,10,901/- paid by the assessee company over the value of net assets acquired of M/s Premier Finance & Trading Company Private Limited (amalgamating company) had been considered as „goodwill‟ arising in the process of amalgamation. On a perusal of the order passed by the Pr.CIT under Sec. 263 of the Act, we find, that he had held the order passed by the A.O as erroneous for two fold reasons viz. (i) that, as per „Proviso 5‟ to Sec. 32(1), what the merged entity can claim as depreciation consequent to amalgamation/merger can at the most be the arithmetic sum of depreciation claimed by the two merging companies prior to amalgamation and cannot be more consequent to merger; and (ii) that, the introduction of the balancing figure of excess of liabilities over the assets as „goodwill‟ and treating it as tangible assets and claiming depreciation on the same under the Income Tax Act was in violation of „Proviso 5‟ to Sec. 32(1). In our considered view, the aforesaid observations of the Pr.CIT are absolutely misconceived and in contradiction of the judgment of the Hon‟ble Supreme Court of in the case of Smifs Securities Ltd. (supra). On a perusal of „Proviso 5‟ to Sec. 32(1), we find that the same is only in the nature of a rider which inter alia disentitles the amalgamating company and the amalgamated company in the case of amalgamation to claim depreciation on tangible assets or intangible assets, the aggregate of which would exceed the claim of such deduction as per the prescribed rates in case the amalgamation had not taken place. Apart therefrom, it is therein envisaged that the claim for such deduction for depreciation on assets shall be inter alia apportioned between the amalgamating company and the amalgamated company in the ratio of the number of days for which the assets were used by them. In our considered view, in the case before us the „goodwill‟ had arisen in the books of the assessee company in the course of the process of the scheme of amalgamation of M/s Premier Finance Trading Company Private Limited with the assessee company, that was approved by the Hon‟ble High Court of judicature at Bombay, vide its order dated 20.09.2013, pursuant whereto the assets and liabilities of the amalgamating company were transferred to and vested with the assessee company from the appointed date i.e. 01.04.2013. In our considered view, the aforesaid claim of depreciation raised by the assessee on the value of „goodwill‟ is in conformity with the judgment of the Hon‟ble Supreme Court in the case of M/s Smifs Securities Ltd. (supra). Also, we are unable to comprehend as to how the aforesaid claim of depreciation raised by the assessee is found to be in violation of „Proviso 5‟ to Sec. 32(1) of the Act. Further, we find that the claim of the assessee towards depreciation on 8 ITA 1589/Mum/2025 Sprit Infrapower & Multiventures Pvt. Ltd. „goodwill‟ which was acquired in process of amalgamation is also fortified by the order of a coordinate bench of the Tribunal viz. ITAT, Pune Bench “A”, Pune in the case of The Cosmos Co-op Bank Limited Vs. Dy.CIT, Circle 7, Pune [ITA No. 460 & 461/PN/2012, dated 23.01.2014]. Be that as it may, in our considered view, as the A.O in the course of the assessment proceedings had examined the assesees entitlement towards claim of depreciation on „goodwill‟, and had only after necessary deliberations finding the same to be in order had accepted the same, therefore, the Pr.CIT in exercise of the powers vested with him under Sec. 263 of the Act, was divested of his jurisdiction for seeking dislodging of the aforesaid possible, or infact a balanced and a reasonable view taken by the A.O. Our aforesaid observation that a possible view arrived at by the A.O after necessary deliberations cannot be dislodged by the CIT/Pr.CIT in exercise of revisional jurisdiction under Sec. 263 is fortified by the judgments of the Hon‟ble Supreme Court in the case of Malabar Industrial Company (2000) 243 ITR 83 (SC) and CIT Vs. Max India Ltd (2007) 295 ITR 282 (SC). Also, support his drawn from the judgments of the Hon‟ble High Court of Bombay in the case of Grasim Industries Ltd. Vs. CIT (2010) 321 ITR 92 (Bom) and CIT Vs. Gabriel India Ltd (1993)203 ITR 108 (Bom). Accordingly, not being able to persuade ourselves to subscribe to the view taken by the Pr.CIT that the order passed by the A.O under Sec. 143(3), dated 23.12.2016 was erroneous insofar it was prejudicial to the interest of the revenue, we „set aside‟ his order and restore the order passed by the A.O.”
7. The ld. AR further submitted that the depreciation claimed on goodwill for the year under consideration is a consequential depreciation and therefore cannot be denied. The ld. AR further submitted that the fact that the goodwill is not appearing in books of account cannot be a reason for denying depreciation since the goodwill is not fully written off from the block of assets under the Act. The ld. AR submitted that even otherwise the issue of allowability of depreciation on goodwill is a debatable issue and therefore section 263 cannot be invoked with respect to a debatable issue. The ld. AR further submitted that the AO during the course of hearing has conducted enquiry and has taken a conscious decision to allow the depreciation. Accordingly, the ld. AR argued that the order under section 263 cannot be sustained.
9 ITA 1589/Mum/2025 Sprit Infrapower & Multiventures Pvt. Ltd.
The ld. DR on the other hand argued that from the perusal of the AO's order it is not coming out clearly whether the AO conducted any enquiry with regard to depreciation on goodwill. The ld. DR further argued that as per the guidelines issued by CBDT regarding FAS, the AO is required to record findings with respect to issues which he has accepted also. Therefore the ld. DR submitted that the claim of the assessee that the issue of depreciation is examined by the AO cannot be accepted. The ld. DR submitted that 5th proviso to section 32(1) is applicable in assessee's case and the depreciation claimed on goodwill by the assessee is to be disallowed. The ld. DR relied on the decision of the Co-ordinate Bench in the case of M/s Dosti Reality Ltd. (ITA No. 2043/Mum/2022 dated 13.04.2023) and has held the impugned issue in favour of the revenue. Accordingly the ld. DR submitted that there is an error that is prejudicial to the interest of the revenue in the order of the AO and the PCIT has rightly invoked the provisions of section 263 of the Act. .
The ld. AR in rebuttal submitted that the decision of the Co-ordinate Bench in the case of M/s Dosti Reality Ltd. (supra) is distinguishable for the reason that in the said case the amalgamation is done under pooling of interest method and whereas in assessee's case the amalgamation is under purchase method where the difference between the cost of acquisition and the net assets value is accounted as goodwill. The ld. AR further submitted that the decision relied on by the PCIT in Aramark India Pvt. Ltd. vs. DCIT (ITA No. 2546/Mum/2018 dated 28.08.2019) is also factually distinguishable. The ld. AR relied on the decision of the Co- ordinate Bench in the case of Dow Chemical International Pvt. Ltd. vs. DCIT [2024] 169 taxmann.com 290 (Mum. Trib.) where it has been held that the assessee is entitled to claim depreciation on the intangible assets arising out of amalgamation.
10 ITA 1589/Mum/2025 Sprit Infrapower & Multiventures Pvt. Ltd.
We heard the parties and perused the material on record. In assessee's case the PCIT has invoked the provisions of section 263 for the reason that the AO has allowed the depreciation on goodwill while completing the assessment. On perusal of the order of the PCIT we notice that the PCIT has not recorded anything to state that there has been lack of enquiry on the part of the AO as a reason for holding the order to be erroneous and prejudicial. We notice that similar issue of invoking revisionary powers under section 263 towards allowing depreciation for AY 2014-15 and 2015-16 have been considered by the Co- ordinate Bench and the order under section 263 have been quashed by the Co- ordinate Bench. The issue of allowability of depreciation on goodwill has been settled by the Hon'ble Supreme Court in the case of Smifs Securities Ltd. (supra) and therefore prior to insertion of explanation (3) to section 32(1) there cannot be any doubt with regard to allowability of depreciation on goodwill. In assessee's case the reason quoted by the PCIT for non-allowability of depreciation on goodwill is that the goodwill is not carried in the books of accounts of the assessee. In our view the depreciation debited to the P&L A/c and the depreciation as per the Act are separate claim and if the goodwill has not been removed out of the block as per the Act then the depreciation claim cannot be denied on the ground that it is fully written off in the books of accounts. Therefore, the PCIT's finding in this regard is not tenable. With regard to argument of the ld. DR that 5th proviso to section 32(1), we notice that the said proviso is applicable to cases where goodwill was already existing in the books of accounts of the transferor company and that the total depreciation claimed on the said goodwill cannot be more than what could have been allowed in the hands of the transferor company. From these discussions, it is clear that the issue of allowability of depreciation on goodwill is debatable. The condition precedent to the exercise of jurisdiction under section 263 is that the order sought to be revised 11 ITA 1589/Mum/2025 Sprit Infrapower & Multiventures Pvt. Ltd. must be erroneous insofar as it is prejudicial to the interests of the revenue. Following the judgments of the Supreme Court in Malabar Industrial Co. Ltd.'s case ((2000) 109 TAXMAN 66) and CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188, it is now a settled principle that where the AO has adopted one of the courses permissible in law or where two views are possible and the AO has taken one of the views with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the AO is unsustainable in law. In view of this discussion and considering the facts and circumstances of the case, we are of the view that the PCIT is not correct in invoking the provisions of section 263 in the present case and accordingly the order of PCIT is set-aside.
In result, the appeal of the assessee is allowed.