DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 3(1)(1), AHMEDABAD vs. RECKITT BENCKISER HEALTHCARE INDIA PRIVATE LIMITED , HARYANA

3. For the purpose of convenience and to avoid repetition, we proceed to adjudicate the appeal for Assessment Year 2012–13 as the lead year, inasmuch as it involves the primary issues in dispute, namely, disallowance of depreciation on goodwill and product registration expenses, as well as deduction under section 80-IC. The issues arising in the remaining three appeals for Assessment Years 2013–14, 2020–21, and 2022–23 are either common or consequential in nature. Therefore, the findings rendered in the lead year shall, mutatis mutandis, apply to the other years, subject to variations in facts or figures, wherever applicable.

4.2 For the assessment year 2012-13, the assessee filed its original return of income on 29.11.2012 declaring a total income of Rs.67,86,62,066/- and book profit under section 115JB of Rs.138,96,15,026/-. Thereafter, a revised return was filed on 31.03.2014 declaring a loss of Rs.498,53,50,971/- under the normal provisions, with the book profit remaining unchanged. The case was selected for scrutiny and notice under section 143(2) was issued. During the course of assessment proceedings, the assessee furnished detailed explanations and submissions. Aggrieved by the said assessment, the assessee preferred an appeal before the CIT(A), who granted relief on all the above issues. The Revenue is now in appeal before us against the order of the CIT(A).

5.2 In addition, for A.Ys. 2020–21 and 2022–23, the Revenue has further challenged the action of the CIT(A) in deleting the disallowance relating to brought forward unabsorbed depreciation, which was held to be available for set off against current year income. The Assessing Officer had restricted the set off by adopting a revised figure of brought forward depreciation, whereas the CIT(A), based on the past assessments and records, directed allowance of the full amount as claimed by the assessee. The specific amounts involved in each year are tabulated below: Assessment Ground Relating to Ground Relating to Year Depreciation on Goodwill Brought Forward Depreciation 2012–13 Rs.6,61,91,21,210/- —

2013–14 Rs.4,96,43,40,908/- —

2020–21 Rs.66,26,59,520/- Rs.2,65,61,88,427/-

2022–23 — Rs.1,26,54,00,107/- 5.3 We now take up the Revenue’s ground challenging the deletion of disallowance of depreciation on goodwill.

5.4 During the course of assessment proceedings, the AO noted that the assessee had claimed depreciation of Rs.6,61,91,21,210/- on goodwill. This goodwill was stated to have arisen pursuant to the scheme of amalgamation of Reckitt Benckiser (India) Ltd. (RBIL) with the assessee company. The AO observed that the scheme was approved by the Hon’ble High Court of Gujarat with effect from 01.04.2011. The AO made detailed inquiries into and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 6 the nature of the goodwill and the manner in which depreciation was claimed. The AO questioned the allowability of depreciation on such goodwill and issued a show-cause notice to the assessee. In response, the assessee submitted that the claim was squarely covered by the decision of the Hon’ble Supreme Court in CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)] and several other judicial pronouncements holding that goodwill is an intangible asset eligible for depreciation under section 32(1)(ii).

5.5 During the course of assessment proceedings, the assessee was asked to furnish the computation and working of goodwill which was eventually furnished vide assessee’s letter dated 19.01.2016. The assessee submitted that goodwill was recognized in the books of RBHIL (merged entity) on account of amalgamation with RBIPFL. The total goodwill recognized was Rs.32,63,74,84,841/-, out of which Rs.6,16,10,00,000/- was transferred to another entity (Hattie) as part of a demerger. Thus, the net goodwill retained in RBHIL was claimed at Rs.26,47,64,84,841/-. However, the assessee did not explain the basis for arriving at these figures. On analysis of the submissions and financial records, the AO found that no tangible or identifiable goodwill was acquired by RBHIL as a result of the amalgamation with RBIPFL. RBIPFL had no business operations except holding shares in RBHIL (then PPL). It had neither manufactured nor traded in any goods nor had any customer base or business activity. Its only asset was investment in equity shares of PPL. The entire investment activity, including purchase of 90,51,516 shares of PPL, was carried out from funds raised by issuing shares to RBISPL (Singapore). These shares were later cancelled as per clause 4.2.11 of the amalgamation scheme approved by Hon’ble Punjab and Haryana High Court. The AO observed that there was no transfer of business, customer base, or identifiable intangible asset from RBIPFL to RBHIL, which could give rise to goodwill. The business of the assessee remained unchanged post-amalgamation. The gross profit ratio actually declined over the years — from 61.24% (2010–11) to 49.69% (2012–13), contradicting any argument of enhancement in business value. The AO and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 7 examined the scheme of amalgamation approved by Hon’ble High Court, which stipulated calculation of goodwill in terms of clauses 6.3.1, 6.3.4 and 6.3.7. The assessee had computed goodwill only on the basis of clause 6.3.4 and ignored the other two mandatory clauses, which if considered, led to negative goodwill. The clause-wise computation as per AO is as under: Clause 6.3.1 – Pooling of Interest Method Particulars Amount (Rs.)

Purchase Consideration (90,90,910 × 1,69,22,72,896 Rs.186.15) Less: Net Assets of RBIPFL (assets – 32,74,81,86,758 – liabilities) 11961532 = 32,73,62,25,226 Goodwill as per Clause 6.3.1 (–) 31,04,39,52,330 Clause 6.3.4 – Book Entry Method in RBHIL Particulars Amount (Rs.)

Value of investment of RBIPFL in PPL (as per 32,72,80,00,001 books of RBHIL) Less: Face value of shares of PPL held by (–) 9,05,15,160 RBIPFL Less: Goodwill transferred to Hattie (–) 6,16,10,00,000 Goodwill as per Clause 6.3.4 Rs.32,63,74,84,841

Clause 6.3.7 – Net Asset vs Share Allotment (Valuation Deficit) Particulars Amount (Rs.)

Net assets of RBIPFL (as per books) 32,72,81,86,758

Less: Market value of shares allotted (–) 1,69,22,72,896 (90,90,910 × Rs.186.15) Goodwill as per Clause 6.3.7 (–) 1,59,22,72,896

Clause Amount (Rs.) Clause 6.3.1 (–) 31,04,39,52,330 and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 8 Clause 6.3.4 32,63,74,84,841 Clause 6.3.7 (–) 1,59,22,72,896 Net Goodwill (–) 12,59,615

Thus, taking a holistic view as per the High Court approved scheme, the AO concluded that no goodwill arose on amalgamation.

5.6 The AO further analysed whether depreciation could be allowed on the so-called goodwill, assuming (without admitting) that goodwill had arisen. He referred to section 32(1)(ii) of the Act, which allows depreciation on intangible assets such as know-how, patents, trademarks, licences, and commercial rights of similar nature, provided they are: • acquired by the assessee,

• owned, wholly or partly,

• and used for the purposes of business.

5.7 In the present case, the AO concluded that: • No asset was acquired by RBHIL on amalgamation. • Even if goodwill existed, it was self-generated by RBHIL, as the goodwill represented difference between the market value of its own shares and face value at which RBIPFL acquired them. • The asset was not used since nothing was transferred or came into use. • Therefore, depreciation was not allowable, even on legal and functional criteria. 5.8 The AO emphasized that the assessee is essentially trying to claim depreciation on its own self-generated goodwill, which is not permissible in law. He relied on AS-26, which clearly states:

“Internally generated goodwill should not be recognized as an asset.”

5.9 He also referred to the Supreme Court decision in CIT v. B.C. Srinivasa Setty (128 ITR 294), where it was held that cost of self-generated and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 9 goodwill is not ascertainable and hence cannot be subjected to capital gains tax — the same rationale applies for depreciation.

5.10 The AO distinguished the assessee’s case from the Supreme Court’s ruling in CIT v. Smifs Securities Ltd. (348 ITR 302). He noted that in Smifs Securities, the issue before the Court was only whether goodwill was eligible for depreciation, not whether goodwill had actually arisen. There, goodwill was held to be a capital right acquired pursuant to transfer of business. In the present case, however, no business or asset was transferred, and thus the genesis of goodwill itself is absent.

5.11 The AO concluded that reliance on Smifs Securities is misplaced, as it does not apply to a situation where the existence of goodwill is itself fictitious or manufactured.

5.12 The AO also considered various case laws relied upon by the assessee, including decisions in: • Toyo Engineering India Ltd. v. DCIT – Mumbai HC [TS-811-HC-2012] read with Mumbai ITAT [TS-665-ITAT-2014) • Triune Energy Services P. Ltd. v. DCIT – Delhi HC [65 TAXMANN.COM 288] • Areva T&D India Ltd. v. DCIT - Delhi HC [20 taxmann.com 29] • Commissioner of Income-tax v. RFCI Ltd. – Himachal Pradesh HC – [57 taxmann.com 17] 5.13 The AO held that all these cases were distinguishable on facts, as the genesis of goodwill in those cases was not in dispute, unlike the present one. He observed that mere approval of amalgamation and recording of goodwill in books does not ipso facto entitle the assessee to depreciation. Summarising his findings, the AO recorded the following: a. There was no transfer of customer base or patronage on amalgamation. b. No increase in brand value or client base of amalgamated entity. c. No improvement in financial indicators post-amalgamation. and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 10 d. RBIPFL had no expertise, operations, or value addition to offer to RBHIL. e. No asset was received by RBHIL pursuant to amalgamation. f. As per AS-14, goodwill does not arise under pooling of interest method. g. Goodwill as computed per the approved scheme was negative. h. Depreciation on non-existent asset or self-generated goodwill is not allowable. i. In absence of asset put to use, depreciation cannot arise. j. Self-generated goodwill is not a depreciable asset under section-32

Accordingly, the AO disallowed the claim of depreciation of Rs.6,61,93,21,210/- and added the same to the income of the assessee.

5.14 Before the ld. CIT(A), it was submitted by the assessee that the Assessing Officer had incorrectly examined the allowability of depreciation on goodwill by confining his analysis to the commercial worth or customer base of RBIPPL (the amalgamating company), while the actual goodwill arose in the books of the amalgamated company RBHIPL on account of identifiable consideration paid by RBIPPL to unrelated shareholders for acquiring 100% shares of RBHIPL in a secondary transaction. It was explained that the consideration paid by RBIPPL represented value not merely of tangible assets but also of various intangible assets, such as brands, trademarks, distribution networks, know-how, and other business or commercial rights associated with the underlying business of RBHIPL. Upon amalgamation of RBIPPL with RBHIPL, the excess of such identifiable consideration over the book value of net assets of RBHIPL was accounted as goodwill in the books of the amalgamated company, as per the Scheme of Amalgamation duly sanctioned by the Hon’ble High Court of Punjab and Haryana. The assessee submitted that such goodwill was not self-generated but represented acquired goodwill on which depreciation was allowable under section 32(1)(ii). and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 11 5.15 The assessee further rebutted the finding of the AO that shares were issued without consideration by pointing out that the share exchange ratio was duly determined based on a valuation report of M/s. KPMG, a reputed firm, considering the net assets and liabilities of both companies, and the same was approved by the Hon’ble High Court. The assessee also clarified that the accounting of amalgamation was done as per the “Pooling of Interest Method” in accordance with Accounting Standard–14 (AS-14), but that the Scheme itself, in clause 6.3.1, specifically provided that any difference would be recognized as goodwill. In support of this, the assessee relied upon the ICAI Announcement titled “Disclosures in cases where a Court/Tribunal makes an order sanctioning an accounting treatment which is different from that prescribed by an Accounting Standard”, which permits recognition of such items in accordance with the Court-approved scheme, subject to appropriate disclosure.

5.16 The assessee also submitted that full disclosure regarding the recognition of goodwill was made under Note 36 of its audited financial statements for the year ended 31.03.2012, and the same had been duly certified by the statutory auditors, approved in the general meeting of the shareholders, and filed with the Registrar of Companies. The AO had not disputed the audited financials or the compliance with the Companies Act. Relying on the binding judgment of the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)], the ld. CIT(A) held that goodwill qualifies as an intangible asset under Explanation 3(b) to section 32(1), being in the nature of “business or commercial rights of similar nature”, and hence is eligible for depreciation.

5.17 The CIT(A) observed that once the Hon’ble High Court sanctioned the Scheme of Amalgamation under sections 391–394 of the Companies Act, 1956, it had statutory force and became binding on the companies and their stakeholders, overriding any conflicting provision in Accounting Standards. The ld. CIT(A) relied on the judgment of the Bombay High Court in and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 12 Sadanand Varde v. State of Maharashtra [(2001) 247 ITR 609 (Bom.)] to affirm that the scheme approved under sections 391–394 constitutes a complete code and prevails over other accounting treatments. The ld. CIT(A), therefore, concluded that the goodwill recognised pursuant to a valid Scheme of Amalgamation approved by the jurisdictional High Court and disclosed in accordance with ICAI guidance could not be regarded as self- generated goodwill and depreciation thereon was rightly claimed under section 32(1)(ii). The addition made by the Assessing Officer was accordingly deleted in entirety.

5.18 During the course of hearing before us, the learned Departmental Representative (DR) opposed the relief granted by the learned CIT(A) and submitted that the Commissioner (Appeals) has failed to consider and address several critical contentions raised by the Assessing Officer in the assessment order. The DR specifically drew our attention to paragraph 4 of the assessment order and emphasised that the entire claim of depreciation on goodwill amounting to Rs.6,61,91,21,210/- was unfounded both in fact and in law. The learned DR pointed out that the assessee had not originally claimed depreciation on goodwill in its original return of income, and such claim was made only through a revised return, which itself casts serious doubt on the bona fides of the claim and its evidentiary basis.

5.19 The DR submitted that the mere accounting treatment given in the books of account cannot determine allowability under section 32, unless the asset in question satisfies the definition and preconditions of being a depreciable intangible asset actually acquired and put to use for the purposes of business. Referring to para 4.1 to 4.5 of the assessment order, the DR submitted that the Assessing Officer has clearly demonstrated that neither RBIIPL nor RBHIPL had any meaningful operational business relationship, nor did the amalgamation result in acquisition of any tangible or intangible business advantage. M/s RBIIPL was only a holding company, and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 13 and RBHIPL was engaged in the business of OTC and personal health care products, as per the valuation report of M/s KPMG.

5.20 The DR stressed that none of the resources of RBHIPL—physical, commercial, or intellectual—could have been of any utility to RBIIPL, and the two companies were operating independently without any business integration or synergy. The DR submitted that the share exchange under the amalgamation was not backed by actual consideration or acquisition of any commercial rights, and that the so-called “goodwill” arose only on account of book entries, without any real transfer of assets or commercial rights that could justify classification of such amount as depreciable goodwill under section 32(1). It was pointed out that even KPMG’s valuation report clearly stated that their approach was to determine only relative fair values of the shares of the merging companies and not the absolute fair value of their underlying assets. The DR also highlighted the findings of the Assessing Officer in para 7 of the order, where it was observed that the goodwill recorded was nothing but a balancing entry, not backed by any real business advantage or identifiable intangible asset. The AO had also noted that Accounting Standard-14 (AS-14), under which the pooling of interest method was followed, does not permit recognition of goodwill in cases of amalgamation where no real consideration or identifiable assets are transferred.

5.21 The DR contended that the learned CIT(A) has failed to appreciate these crucial findings and proceeded to grant relief merely relying on the legal position laid down by the Hon’ble Supreme Court in Smifs Securities Ltd. (348 ITR 302), without examining the factual distinctions pointed out in the assessment order. It was vehemently argued that the facts in the instant case are materially different from those in Smifs Securities, as here the goodwill is neither self-generated nor acquired through actual consideration for commercial rights. The DR urged that the matter should be restored back to CIT(A) for deciding afresh. and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 14 5.22 The learned Authorised Representative (AR) appearing for the assessee supported the findings of the learned CIT(A) and reiterated the factual and legal submissions as were made before the lower authority. The AR submitted that the impugned transaction of acquisition was undertaken with a third party, and the consideration was actually paid by the amalgamating company, RBIIPL, for acquiring the equity shares of RBHIPL, which represents a composite value of tangible and intangible assets. The AR submitted that the learned AO had incorrectly examined the claim of depreciation on goodwill by focusing on the absolute valuation of the company, while the valuation report prepared by M/s KPMG, a professional and independent valuer, was based on relative valuation of shares of RBIIPL and RBHIPL for the purpose of determining a fair exchange ratio under the scheme of amalgamation. It was emphasised that the valuation methodology adopted by the valuer was consistently followed and accepted by the Hon’ble High Court of Punjab and Haryana while approving the scheme of amalgamation.

5.23 The AR further invited our attention to page no. 16 of the assessment order, where the AO computed a negative goodwill by reducing the net worth of the amalgamated entity by treating even reserves including share premium as liabilities, which, according to the AR, is a fundamental error in approach. It was submitted that reserves and surplus, including share premium, form part of shareholders’ equity and not external liabilities, and hence, the method adopted by the AO to arrive at negative goodwill is not in accordance with standard accounting principles. The AR further pointed out that the scheme of arrangement approved by the Hon’ble High Court was not merely one of amalgamation but also included elements of demerger, and the entire scheme has been disclosed in detail in the financial statements of the assessee under Note No. 36, titled “Scheme of Amalgamation and Arrangement”, forming part of the audited accounts. The AR placed on record the copy of the approved scheme and particularly and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 15 referred to Para 6.3 and 6.3.4 thereof, which explicitly state that the difference between the value of investment in the equity shares of PPL (i.e., RBHIPL) in the books of RBIIPL and the aggregate value of face value of share capital of PPL held by RBIIPL shall be debited to goodwill in the balance sheet of PPL.

5.24 Thus, it was contended that the recognition of goodwill in the books of the amalgamated company was not arbitrary or self-generated, but was backed by a specific clause of the court-approved scheme and based on actual investment made by RBIIPL, which had resulted in identifiable goodwill representing excess consideration paid for acquisition of commercial/business rights, brands, customer base, and other intangibles. The AR also submitted that the AO had overstepped his jurisdiction by substituting the expert valuation made by a qualified valuer with his own computation without referring the matter to the Department Valuation Officer (DVO) or seeking any expert rebuttal. It was submitted that if the AO had any doubt on the valuation methodology or the value of goodwill, he ought to have referred the matter back to the valuer, instead of stepping into the shoes of a technical expert and drawing conclusions unsupported by any professional basis. The AR also placed reliance on various judicial precedents as submitted to the CIT(A).

5.25 The AR urged that the addition made by the AO by disallowing depreciation on goodwill was not sustainable, and the learned CIT(A) was justified in granting relief by relying on the binding precedent of the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd. (348 ITR 302), which held that goodwill is an asset within the meaning of section 32(1) of the Act and is eligible for depreciation.

5.26 We have carefully considered the rival submissions, perused the orders of the lower authorities, examined the scheme of amalgamation sanctioned by the Hon’ble High Court of Punjab and Haryana, the valuation report prepared by M/s KPMG, and the audited financial statements and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 16 including the explanatory notes thereon. The core issue arising in these connected appeals is whether depreciation claimed by the assessee under section 32(1)(ii) of the Income-tax Act, 1961, on goodwill arising pursuant to amalgamation, is legally allowable.

5.27 The facts on record reveal that Reckitt Benckiser Investments India Pvt. Ltd. (“RBIIPL”), a group company, acquired the entire equity shareholding of Paras Pharmaceuticals Ltd. (“PPL”) from unrelated third- party shareholders at a substantial premium, driven by the commercial potential and brand equity associated with the business of PPL. Thereafter, a Scheme of Amalgamation was formulated, sanctioned by the Hon’ble High Court with effect from 01.04.2011, and implemented between PPL and RBIIPL (subsequently renamed Reckitt Benckiser Healthcare India Pvt. Ltd., the present assessee). Clause 6.3.4 of the sanctioned scheme specifically provides that the excess of investment value over the book value of share capital shall be debited to goodwill. Accordingly, the assessee recognized goodwill of Rs.6,61,91,21,210/- in its books and claimed depreciation thereon under section 32(1)(ii).

5.28 The Assessing Officer, however, disallowed the said claim by recording an elaborate set of objections, which may be summarised under ten heads. We shall now address each of those findings and record our conclusions accordingly:

(a) No transfer of customer base or patronage:

The Assessing Officer concluded that no goodwill could arise in the absence of a direct transfer of customers. This reasoning is misconceived. Goodwill in commercial parlance encompasses reputation, brand recognition, market penetration, distribution reach, and operational synergies. The acquisition of PPL by RBIIPL was a comprehensive takeover of its business ecosystem, and the subsequent amalgamation vested all its business attributes in the assessee. As held by the Hon’ble Supreme Court and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 17 in CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)], goodwill is a recognized intangible asset and not confined to customer contracts. Therefore, the AO’s approach is overly narrow and legally untenable.

(b) No increase in brand value or client base post-merger:

The AO’s observation that there was no measurable increase in brand value or clientele post-merger is irrelevant to the question of depreciation. Depreciation is allowable on the acquisition cost of qualifying assets—not based on post-facto performance or enhancement. In this case, the consideration paid by RBIIPL factored in the embedded brand value and business potential of PPL. The goodwill recorded was based on that acquisition cost. Future performance or earnings trajectory has no bearing on the initial recognition of goodwill for depreciation purposes.

(c) No improvement in financial indicators after amalgamation:

We do not agree with the AO’s premise that depreciation on goodwill can be denied on the basis of a decline in gross profit ratios in subsequent years. Taxability and depreciation allowance are determined by legal entitlements, not business profitability. Moreover, various external and macroeconomic factors can affect profitability, and such variations cannot override the fact of acquisition of a depreciable intangible asset.

(d) RBIIPL had no operational business to contribute goodwill:

This reasoning is factually misplaced. The goodwill did not arise from RBIIPL’s business. RBIIPL acquired 100% shares of PPL from independent parties at substantial premium. The excess of such consideration over the net book value of assets of PPL represents the goodwill attributable to PPL’s business potential and intangible attributes. Upon amalgamation, that value vested in the assessee. Thus, the goodwill originates from the acquisition of PPL, not from RBIIPL itself. The AO’s rejection on this count lacks factual foundation. and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 18 (e) No tangible or intangible asset received on amalgamation:

The conclusion of the AO that the assessee received no assets upon amalgamation is contrary to the record. Under the scheme sanctioned by the Hon’ble High Court, all assets and liabilities of PPL vested in the assessee by operation of law. The goodwill was computed as the excess of the purchase price paid for PPL’s shares over the net book value of its assets. Hence, the assessee received valuable tangible and intangible assets, including business rights, brands, and distribution systems.

(f) No goodwill arises under AS-14 when using pooling of interest method:

While Accounting Standard–14 prescribes pooling of interest method for amalgamations among entities under common control, Clause 6.3.4 of the Court-sanctioned scheme specifically provides for recognition of goodwill where investment value exceeds share capital. ICAI’s guidance note clarifies that Court-approved schemes prevail over accounting standards in such cases, subject to appropriate disclosure. In the present case, the goodwill was recorded in accordance with Clause 6.3.4 and disclosed under Note 36 of the audited accounts. Therefore, the accounting treatment adopted by the assessee is valid.

(g) Goodwill computation results in negative figure:

The AO computed negative goodwill of Rs.(1,59,22,72,896)/- by reducing share premium from net assets. This methodology is fundamentally flawed. Share premium is part of shareholders’ equity, not a liability. Treating it as a liability for computing net assets is contrary to accounting principles. The assessee’s valuation, as per the report of M/s KPMG, adopts a standard relative valuation approach to determine fair share exchange ratio and embedded goodwill. The AO has not referred the and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 19 matter to a Valuation Officer nor has he produced a contrary expert opinion. His computation is thus unreliable and contrary to accepted norms.

(h) Goodwill is self-generated and hence not eligible for depreciation:

This finding of the AO is factually incorrect. The goodwill in question arises from identifiable consideration paid by RBIIPL for acquiring PPL and is therefore not self-generated. The cost of acquisition is determinable and reflected in the books. The Supreme Court in Smifs Securities Ltd. (supra) has held that such acquired goodwill falls within Explanation 3(b) to section 32(1) and is eligible for depreciation.

(i) Asset not put to use:

The AO has asserted that the goodwill was not “put to use”. This assertion is misplaced. The goodwill, once recognised, forms part of the business apparatus of the assessee. Post-merger, the assessee continued to use the brands, distribution channels, and business framework of PPL, which substantiates usage of the asset. It is well settled that “use” in the context of intangible assets does not require physical application, and integration into business suffices.

(j) Cost of acquisition is indeterminate:

We find no merit in this assertion. The goodwill is derived as the difference between the price paid by RBIIPL to acquire PPL’s shares and the net asset value. This is a definite, quantifiable figure. The ruling in B.C. Srinivasa Setty [(1981) 128 ITR 294 (SC)] relied upon by the AO is distinguishable, as it pertained to capital gains on self-generated goodwill without cost of acquisition. It does not apply to depreciation claims where the cost is established.

5.28 Having examined the matter in detail, we find that the goodwill in question has arisen out of a genuine, arm’s length acquisition of PPL by and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 20 RBIIPL, followed by a court-sanctioned amalgamation. The consideration paid far exceeded the book value of assets, and the differential was rightly recorded as goodwill in accordance with the Scheme approved by the Hon’ble High Court. The valuation methodology adopted by M/s KPMG has neither been controverted by the AO through expert rebuttal nor referred for verification. The goodwill so recorded is thus an identifiable intangible asset acquired at cost and satisfies the conditions prescribed under section 32(1)(ii).

5.29 The reliance placed by the AO on AS-26 and the decision in B.C. Srinivasa Setty is inapplicable in the present context. The accounting treatment adopted by the assessee is not only compliant with the scheme of amalgamation but also with the commercial substance of the transaction. The claim for depreciation is further fortified by the decision of the Hon’ble Supreme Court in Smifs Securities Ltd. (348 ITR 302), and the Gujarat High Court in Zydus Wellness Ltd. [(2017) 87 taxmann.com 82 (Guj.)].

5.30 We also find no merit in the plea of the learned Departmental Representative that the matter be restored to the CIT(A) for fresh adjudication. The CIT(A) has rendered a reasoned decision after due consideration of all material, and there is no procedural infirmity or denial of natural justice warranting remand.

5.31 Further, the claim having been made through a revised return filed within the prescribed time under section 139(5), it constitutes a valid claim in law. The AO has examined the claim on merits during assessment proceedings. Therefore, the objection that the claim was made in a revised return is of no consequence.

5.32 In view of the foregoing, we hold that the depreciation claimed by the assessee on goodwill is legally allowable under section 32(1)(ii). The action of the CIT(A) in allowing the claim is upheld. The grounds raised by the Revenue on this issue are dismissed. and 3. Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 21

6.2 In the appellate proceedings for Assessment Year 2020–21, the learned CIT(A) took note of the fact that depreciation on goodwill had been consistently claimed by the assessee since Assessment Year 2012–13, pursuant to a High Court-approved scheme of amalgamation. It was also observed that the claim for depreciation had already been adjudicated in favour of the assessee in earlier years by the CIT(A), and that the Assessing Officer had not brought any material on record to justify departure from that settled position. Accordingly, the CIT(A) held that the disallowance of and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 22 Rs.2,65,61,88,427/- on account of brought-forward depreciation was not sustainable and directed its deletion. For Assessment Year 2022–23, the CIT(A) reiterated the same findings and reasoning. He held that the set-off of unabsorbed depreciation of Rs.1,26,54,00,107/-, being a continuation of the depreciation already allowed in earlier years, could not be disallowed merely because the AO disagreed with the claim in those years. The CIT(A) categorically held that the disallowance was made by the AO without appreciation of the binding nature of earlier appellate orders and without proper factual verification. Consequently, the CIT(A) deleted the said disallowance in full.

6.3 With repetition, we conclude that the disallowance of brought-forward unabsorbed depreciation of Rs.2,65,61,88,427/- for A.Y. 2020–21 and Rs.1,26,54,00,107/- for A.Y. 2022–23 is both factually and legally untenable. The material on record demonstrates that the assessee has consistently claimed depreciation on goodwill since A.Y. 2012–13, arising out of a High Court-sanctioned Scheme of Amalgamation. The said depreciation claim, though initially disallowed by the Assessing Officer, was allowed by the CIT(A) in the earlier assessment years, and forms the basis of the unabsorbed depreciation now sought to be set off under section 32(2) of the Act. It is a well-settled principle that once a claim of depreciation is accepted in the initial year, the carry-forward of the unabsorbed portion becomes a vested right, and the same cannot be denied in subsequent years unless the foundational allowance itself is reversed by a competent appellate forum. In the present case, the Assessing Officer, without any fresh examination or verification of past appellate records, has proceeded to disallow the set-off of carried forward depreciation by simply reiterating his original position, ignoring the binding appellate findings already rendered in favour of the assessee. Moreover, the AO failed to appreciate that depreciation once allowed cannot be selectively disregarded in subsequent years for the purposes of section 32(2). The action of the Assessing Officer amounts to a collateral challenge to the concluded and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 23 position on the allowability of depreciation, which is impermissible in law. The learned CIT(A), having carefully evaluated the documentary record including the tax audit reports, earlier appellate orders, and the assessee’s computation and reconciliation statements, has rightly directed deletion of the disallowance. We find no infirmity in such reasoning or conclusion. Accordingly, the grounds raised by the Revenue challenging the deletion of the disallowance of brought-forward depreciation in both assessment years are dismissed.

7.1 During the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed expenditure on registration of products (primarily pharmaceutical and healthcare items) with regulatory authorities, both domestic and foreign. These expenses were claimed as revenue expenditure in the profit and loss account and deducted under section 37(1) of the Act. This issue arises in the following years:

A.Y. Amount Disallowed by AO (Rs.) 2012–13 46,75,857/- 2013–14 17,31,406/- 7.2 In response the assessee submitted that the expenses were incurred in accordance with the regulatory requirements of certain foreign jurisdictions where the assessee intended to export and market its products. It was explained that in the absence of registration in those countries, the assessee would not be legally permitted to sell its products therein. The assessee clarified that the registration expenses did not result in acquisition of any proprietary or enduring asset and were merely incurred to comply with statutory norms to facilitate sales. The assessee placed reliance on the decision of the Coordinate Bench of the Ahmedabad ITAT in the case of Cadila Healthcare Ltd. (ITA No. 3140/Ahd/2010), where it was and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 24 held that product registration expenditure is allowable as revenue expenditure. The assessee also relied on the affirmation of the said decision by the Hon’ble Gujarat High Court in CIT v. Cadila Healthcare Ltd. (Tax Appeal No. 752 of 2012). In addition, reference was made to appellate orders of the CIT(A) in the assessee’s own case for A.Ys. 2008–09 to 2010–11, wherein the product registration expenses were consistently held to be revenue in nature. The Assessing Officer, however, did not accept the assessee’s explanation. He noted that in the pharmaceutical and healthcare industry, product registration with the authorities of respective countries is a pre-condition for marketing and exporting products. The process involves detailed testing, bio-equivalence studies, and clinical evaluations to the satisfaction of the approving bodies. The AO concluded that such registration grants the assessee a right to market its products in those jurisdictions over an extended period of time, thereby conferring upon it a benefit of enduring nature. He therefore held that the registration process creates marketing intangibles akin to an intangible asset within the meaning of section 32(1)(ii), and that the expenditure incurred for obtaining such rights falls squarely within the capital field. The Assessing Officer further recorded that the fact that the registration enhances the product's market acceptability and commercial value substantiates the enduring benefit derived by the assessee. Consequently, he held that the product registration expenses were capital in nature and not allowable under section 37(1) of the Act. He also rejected the judicial precedents cited by the assessee, observing that the department had not accepted the decision in Cadila Healthcare Ltd. and had filed further appeals. Accordingly, the AO disallowed the amounts and added the same to the total income.

7.3 The CIT(A), while allowing the assessee’s claim, noted that similar disallowances in A.Ys. 2008–09 to 2011–12 had been allowed as revenue expenditure by his predecessors. He further recorded that the Revenue’s appeals against the CIT(A)’s orders for A.Ys. 2008–09 to 2010–11 were dismissed by the ITAT, thereby affirming the assessee’s claim. Respectfully and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 25 following the decisions of the jurisdictional ITAT in assessee’s own case and maintaining consistency, the CIT(A) held that product registration expenses did not result in acquisition of any capital asset and were incurred wholly for business purposes. Accordingly, he directed the Assessing Officer to delete the disallowances for both years.

7.4 The Departmental Representative (DR) relied on the orders of AO. Whereas the Authorsied Representative (AR) of the assessee placed reliance on the decision of Co-ordinate Bench in assessee’s own case for earlier years in 126/Ahd/2014, 1272,1547,1366& 1780/Ahd/2015.

7.5 We have considered the rival submissions and perused the orders of the lower authorities as well as the material placed on record. The Authorised Representative (AR) for the assessee submitted that this issue is fully covered in favour of the assessee by a series of orders passed by the Co-ordinate Bench in assessee’s own case for earlier years. It was submitted that the CIT(A) had consistently allowed such expenditure for A.Ys. 2008– 09 to 2011–12, and the Department’s appeals against the CIT(A)’s orders for A.Ys. 2008–09 to 2010–11 were dismissed by the Coordinate Bench. The AR placed on record copies of the Tribunal’s orders in 126/Ahd/2014, and 1272, 1547, 1366 & 1780/Ahd/2015, wherein identical disallowances were deleted. In these decisions, the Co-ordinate Bench accepted the assessee’s submission that product registration is a regulatory requirement imposed by foreign governments and does not result in creation of a proprietary or enduring asset. We have also noted the decision of the Coordinate Bench in the case of Cadila Healthcare Ltd. (ITA No. 3140/Ahd/2010), wherein the issue of allowability of product registration expenses under section 37(1) came up for consideration. The Co-ordinate Bench in that case held that such expenditure, being incurred solely to comply with regulatory formalities for marketing products in foreign jurisdictions, is revenue in nature and does and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 26 not result in acquisition of any capital asset. The said decision was affirmed by the Hon’ble Gujarat High Court in CIT v. Cadila Healthcare Ltd., Tax Appeal No. 752 of 2012, by declining to admit the Revenue’s appeal, thereby upholding the Tribunal’s view.

7.6 We find merit in the submissions made on behalf of the assessee. The expenditure incurred for product registration is a prerequisite to legally market the assessee’s healthcare and pharmaceutical products in various foreign countries. Such expenditure is a statutory and regulatory compliance cost and cannot be construed to result in acquisition of any capital asset. The purpose of the expenditure is not to create or acquire any proprietary or transferable right, but merely to meet mandatory licensing requirements for export. This factual matrix has already been examined and accepted by the Co-ordinate Bench in assessee’s own case for earlier years, and we see no change in facts or law which warrants a deviation from the settled position. Further, the decision of the Coordinate Bench in Cadila Healthcare Ltd. (supra), which stands affirmed by the Hon’ble jurisdictional High Court, squarely applies to the present case and fully supports the assessee’s claim.

7.7 In view of the foregoing and respectfully following the binding precedents we uphold the order of the CIT(A) deleting the disallowance of Rs.46,75,857/- for A.Y. 2012–13 and Rs.17,31,406/- for A.Y. 2013–14. The grounds raised by the Revenue on this issue are, therefore, dismissed.

Assessment Deduction Deduction Disallowance Year Claimed under Allowed by AO by AO (Rs.) Section 80-IC (Rs.) (Rs.) 2012–13 95,51,08,173/- 44,59,56,123/- 50,91,52,050/-

2013–14 81,22,91,862/- 33,07,09,509/- 48,15,82,353/- 8.2 The facts are such that the assessee filed a revised return declaring a lower income. In the revised computation, the assessee enhanced its claim for deduction under section 80-IC in respect of the profits of its Baddi Unit (situated in the tax-exempt notified area of Himachal Pradesh). The AO noted that in the original return, the deduction claimed under section 80- IC was significantly lower. The AO observed that the assessee did not maintain independent books of accounts for each unit or division. Instead, consolidated books were maintained at the corporate level, from which the unit-wise results were extracted based on internal workings and management estimates. The unit-level profit and loss accounts, including that for the Baddi Unit, were thus prepared by allocation and apportionment, and not supported by independently verifiable financial records. In particular, the AO noted that a wide range of common expenses incurred by the Head Office, including expenditures on human resources (HR), information technology (IT), finance, legal and regulatory affairs, marketing and branding, treasury, corporate communication, and secretarial functions, had not been allocated to the Baddi Unit. These expenses had been debited to the general profit and loss account of the company, and were not proportionately distributed across operational units. The AO observed that all such functions performed at the corporate office were integral to the operations of every unit of the company, including the Baddi Unit. In the absence of a rational or scientific basis for apportioning these costs, the assessee's computation of profit for the Baddi and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 28 Unit was found to be artificially inflated, resulting in a correspondingly inflated claim for deduction under section 80-IC. Upon deeper analysis of the comparative profitability, the AO observed that the net profit margin of the Baddi Unit was more than the average group margin. This abnormal variance, according to the AO, was directly attributable to the non- allocation of common indirect costs, which had the effect of distorting the real profitability of the Baddi Unit. To address this discrepancy, the AO undertook a proportionate allocation of the Head Office and common administrative expenses based on turnover ratios. The AO further held that in light of the provisions of section 80-IC(7) read with section 80-IA(5), the profits of the eligible unit were required to be computed as if such unit were the only source of income of the assessee. Therefore, in order to determine the "profits derived from" the undertaking with precision, a full and fair allocation of all relevant business expenses, including corporate-level expenditure, was a statutory necessity. The AO rejected the assessee’s explanation that such indirect costs had no proximate nexus with the operations of the Baddi Unit. He held that without the support of the Head Office functions, the Baddi Unit could not have operated at such scale or profitability. In his view, the internal workings relied upon by the assessee lacked credibility and documentary support and appeared to be designed only to enhance the quantum of claim under section 80-IC. Ultimately, the AO concluded that the assessee had failed to furnish a true and correct computation of eligible profits and had thereby claimed an excessive deduction under section 80-IC. He accordingly allowed proportionate deduction as tabulated above.

8.3 During the course of appellate proceedings, the assessee submitted detailed explanations supported by documentary evidence, arguing that the entire profits derived from the eligible industrial undertaking at Baddi were fully eligible for deduction under section 80-IC. The core contention raised by the assessee was that the disallowance made by the Assessing Officer (AO) lacked any sound basis and was not in consonance with statutory and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 29 provisions or binding judicial precedents. The CIT(A) observed that the issue regarding the allowability of deduction under section 80-IC in respect of the Baddi unit had been a matter of dispute in earlier assessment years as well. Specifically, for A.Ys. 2008–09 to 2011–12, the CIT(A) had, after detailed appreciation of facts and law, already allowed the assessee’s claim in full. These appellate orders were further challenged by the Revenue before the Hon’ble ITAT, which in turn dismissed the Revenue's appeals for A.Ys. 2008-09 to 2010–11, thereby confirming the relief granted to the assessee. Taking note of this consistent appellate history, the CIT(A) in the impugned years (2012–13 and 2013–14) concluded that there was no material change in the facts or legal position so as to warrant a deviation from the earlier view.

8.4 The Departmental Representative (DR) relied on the orders of AO. Whereas the Authorsied Representative (AR) of the assessee placed reliance on the decision of Co-ordinate Bench in assessee’s own case for earlier years in 126/Ahd/2014, 1272,1547,1366& 1780/Ahd/2015. The AR further submitted that the AO had fundamentally erred in treating the corporate office as a separate and independent “undertaking” for the purposes of computing the deduction allowable under section 80-IC. The AR contended that the AO had erroneously apportioned common corporate expenses and attempted to recharacterize a portion of the profits of the Baddi Unit as attributable to branding, marketing and other head-office activities, thereby artificially reducing the eligible profit for deduction.

8.5 We have carefully considered the rival submissions, perused the assessment order, the appellate orders passed by the learned CIT(A) for both years, and the material placed before us including judicial precedents relied upon by the parties. In the present appeals, the Revenue has challenged the action of the learned CIT(A) in deleting the disallowance of deduction under section 80-IC of the Act in respect of the profits of the assessee’s Baddi Unit. and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 30 The Assessing Officer had reworked the quantum of eligible profits by allocating corporate office and other common administrative expenses across all units, on the ground that such centralised expenses contributed to the functioning of the Baddi Unit. Consequently, he restricted the allowable deduction and disallowed the balance amount aggregating to Rs.50.91 crore for A.Y. 2012–13 and Rs.48.15 crore for A.Y. 2013–14.

8.6 The basis for the AO’s disallowance rests primarily on the assumption that the Baddi Unit was excessively reliant on support services and functions performed at the corporate office such as HR, legal, IT, marketing, treasury, branding, and regulatory affairs. The AO observed that no part of the said corporate expenses had been allocated to the Baddi Unit, and that this led to an inflated computation of its profits. The AO also pointed out that the books were maintained on a consolidated basis and that the unit- level profitability was extracted through internal workings unsupported by verifiable independent accounts.

8.7 The learned CIT(A), after examining the facts and placing reliance on consistent orders passed in the assessee’s own case for earlier assessment years, deleted the disallowance. It was noted that in A.Ys. 2008–09 to 2010– 11, the CIT(A) had accepted the assessee’s explanation and allowed full deduction under section 80-IC. The Revenue’s appeals against such relief were dismissed by the Coordinate Bench in a common order dated 06.09.2019 in 126/Ahd/2014, 1272/Ahd/2015, 1547/Ahd/2015, 1366/Ahd/2015 & 1780/Ahd/2015. Therein, the Co- ordinate Bench had observed that there was no assertion by the Revenue that the impugned expenses were incurred wholly and exclusively for the purposes of the head office, or that the Baddi Unit was devoid of independent operations. On the contrary, the assessee had furnished documentary evidence to substantiate that the Baddi Unit operated with sufficient functional and operational autonomy. In the absence of any specific material brought on record to establish a proximate nexus between and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 31 the head office expenses and the activities of the Baddi Unit, the Co-ordinate Bench had held that the disallowance made by the Assessing Officer could not be sustained in law. The relevant para of the same decision is reproduced as under –

8.8 In the impugned assessment years, the Revenue has not brought any fresh material or distinguishing facts that would warrant a deviation from the settled position adopted in the preceding years. The alleged central expenses, in absence of direct or proximate nexus with the eligible unit, and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 32 cannot be forcibly loaded upon its profit merely because such expenses were incurred at a corporate level. Respectfully following the binding coordinate bench decision in assessee’s own case and maintaining judicial consistency, we do not find any infirmity in the orders of the learned CIT(A) allowing the full deduction under section 80-IC as claimed. We accordingly uphold the orders of the CIT(A) for both the assessment years under appeal.

9.2 During the appellate proceedings before the CIT(A), the assessee reiterated its submission. The learned CIT(A), while adjudicating the disallowance of Rs.60,77,133/- made by the Assessing Officer under section 80-IC of the Act in respect of scrap income, observed that a similar issue had been considered in favour of the assessee in earlier years A.Ys. 2008– 09 to 2011–12. It was noted that the Coordinate Bench of the ITAT had already upheld the CIT(A)’s findings for A.Ys. 2008–09 to 2010–11 by dismissing the Revenue’s appeals. Relying on this consistent appellate position and finding no material change in facts or law, the CIT(A) directed deletion of the disallowance, holding that the scrap income was derived from the industrial undertaking and eligible for deduction under section 80-IC.

9.3 The Departmental Representative (DR) relied on the orders of AO. Whereas the Authorsied Representative (AR) of the assessee placed reliance on the decision of Co-ordinate Bench in assessee’s own case for earlier years in 1780/Ahd/2015.

9.4 We have carefully considered the rival submissions, perused the assessment order, the appellate orders passed by the learned CIT(A) for both years, and the material placed before us including judicial precedents relied upon by the parties. The issue in dispute pertains to the allowability of deduction under section 80-IC on income arising from sale of scrap generated in the eligible unit at Baddi. The Assessing Officer had disallowed the claim on the ground that such income is not “derived from” the manufacturing activity, holding that the same is incidental and does not and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 34 have a direct nexus with the core operations of the industrial undertaking. It is noted that the assessee had duly explained that the scrap was a by- product arising directly from the manufacturing process undertaken at the Baddi unit, and thus forms an integral part of its business receipts. The assessee had consistently included such scrap income as part of the eligible profits for deduction under section 80-IC in preceding years. The learned CIT(A) has rightly appreciated the factual and legal matrix of the case and referred to the decisions in the assessee’s own case for earlier assessment years. It is seen that the Co-ordinate Bench has already upheld the CIT(A)’s view in A.Ys. 2009–10 to 2011–12, thereby allowing similar deduction. The relevant para from the said decision is reproduced here –

9.5 In view of the above binding precedent in assessee’s own case and applying the principle of consistency, we find no infirmity in the order of the CIT(A) in directing deletion of the disallowance in respect of scrap income. Accordingly, the grounds raised by the Revenue on this issue is dismissed.

10.1 During the course of assessment proceedings, the Assessing Officer noted, based on verification of Form 3CD, that the assessee had incurred expenditure aggregating to Rs.19,34,672/- on which tax was not deducted and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 35 at source, thereby attracting disallowance under section 40(a)(ia) of the Act. Consequently, the Assessing Officer disallowed the said amount and added the same to the income of the assessee. During the hearing, the assessee was specifically asked to show cause as to why deduction under section 80- IC should not be disallowed on the disallowance of Rs.19,34,672/- made under section 40(a)(ia). In response, the assessee vide its letter dated 12.02.2016 submitted that the disallowance made under section 40(a)(ia) pertains to the business expenditure incurred by the Baddi unit and, therefore, forms part of the business profits of the eligible undertaking. It was submitted that deduction under section 80-IC is available on the increased profits of the eligible unit, including the disallowance made under section 40(a)(ia), which is only a statutory adjustment. However, the Assessing Officer did not accept the assessee’s contentions and restricted the deduction under section 80-IC to the amount of profits computed before making the disallowance under section 40(a)(ia), and did not allow any deduction under section 80-IC on the enhanced profits resulting from the said disallowance. Accordingly, the total income was assessed after disallowing Rs.19,34,672/- under section 40(a)(ia) and denying the corresponding deduction under section 80-IC on the said amount.

10.2 During the appellate proceedings it was brought to the notice of the CIT(A) that in the assessee’s own case for earlier assessment years, i.e., A.Ys. 2008–09 to 2011–12, the identical issue had arisen. In those years, the then CIT(A) had allowed the assessee’s claim and directed the Assessing Officer to grant deduction under section 80-IC on the disallowance made under section 40(a)(ia). The CIT(A) noted that the Co-ordinate Bench ITAT had passed consolidated orders for A.Ys. 2008–09 to 2010–11 in favour of the assessee, dismissing the Revenue’s appeals and upholding the direction to allow the deduction under section 80-IC on the enhanced profits. Relying on the binding precedent of the Co-ordinate Bench in the assessee’s own case (ITA No. 1366 & 1780/Ahd/2018 and the CIT(A) held that the disallowance under section 40(a)(ia) forms part of the and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 36 business income of the eligible undertaking and that the assessee is entitled to deduction under section 80-IC on the same.

10.3 The Departmental Representative (DR) relied on the orders of AO. Whereas the Authorsied Representative (AR) of the assessee placed reliance on the decision of Co-ordinate Bench in assessee’s own case for earlier years.

10.4 We have heard the rival contentions and perused the material available on record. It is undisputed that the said disallowance pertains to the business expenditure of the assessee’s Baddi unit, which is eligible for deduction under section 80-IC. The Assessing Officer disallowed the deduction under section 80-IC on the enhanced income, placing reliance on the decision of the Ahmedabad Bench in Rameshbhai C. Prajapati (ITA No. 226/Ahd/2010), wherein it was held that the deeming fiction of section 40(a)(ia) cannot be imported into the beneficial provisions of section 80- IB(10).

10.5 However, this very issue has been considered and decided in favour of the assessee by the Co-ordinate Bench in the assessee’s own case for earlier years [ITA Nos. 1366 & 1780/Ahd/2015, order dated 16.03.2022, para 17], wherein the Co-ordinate Bench has held as under:

17. We have heard rival contentions and perused the material on record. In view of the circular no. 37/2016 dated 2nd Nov, 2016 and the decision in the case of DCIT vs. Ascendum Solutions Pvt. Ltd. wherein the Ahmedabad ITAT Tribunal has held that where disallowance results in an enhancement of business profit, but such an enhancement is revenue neutral in as much as relates to business profits are eligible for disallowance under chapter VI. The Tribunal in the above decision made following relevant observation: -

What has been accepted by the CBDT, as learned counsel rightly points out, is the principle that when a disallowance results in an enhancement of business profits but such an enhancement is revenue neutral inasmuch as related business profits, in totality, are eligible for deduction under chapter VI, such appeals need not be pursued. The reference to Section 40(a)(ia) is no more than and 3 Others DCIT Vs. Reckitt Benckiser Healthcare India P. Ltd. 37 illustrative in nature, and what holds good for disallowance under section 40(a)(ia) applies, in principle, equally to disallowance under section 40(a)(i) as well. In this view of the matter, in terms of the CBDT circular (supra), the appeal filed by the Assessing Officer, on this point, is indeed not maintainable.

In view of the above and the language of CBDT Circular No. 37 dated 2nd Nov, 2016, we are of the view that CIT(A) has not erred in deleting the addition made on account of disallowance u/s. 40(a)(ia) of the Act. Accordingly, the ground no. 6 of the Revenue is dismissed. We are of the view that the assessee is eligible to claim deduction u/s. 80IC of the Act in respect of disallowance made u/s. 40(a)(ia) of the Act on account of non-deduction of TDS.

10.6 The Co-ordinate Bench took note of the abovementioned CBDT Circular which clarifies that if disallowance under section 40(a)(ia) enhances the profit of an eligible undertaking and such profit is otherwise eligible for deduction under Chapter VI-A, the enhanced profit will also qualify for the deduction. The circular instructs the Department not to file or pursue appeals on such issues. Following the binding precedent in assessee’s own case and in the absence of any contrary decision from a jurisdictional High Court, we uphold the finding of the learned CIT(A) and hold that the disallowance under section 40(a)(ia) would form part of the eligible profits for the purpose of deduction under section 80-IC. Accordingly, the ground raised by the Revenue is dismissed.

Order pronounced in the Court on 16th July, 2025 at Ahmedabad.