OLYMPIC DECOR LLP,AHMEDABAD vs. THE PR.CIT, AHMEDABAD-3, AHMEDABAD

The Ld. PCIT has grossly erred in law and on facts in assuming jurisdiction u/s.263 of the Act on the erroneous ground that the impugned assessment order is erroneous in so far as it is prejudicial to the interest of the revenue.

The subject order u/s. 263 passed by the Ld. PCIT is illegal and bad in law in absence of any finding of Ld. PCIT how the alleged error of AO has resulted in loss of revenue particularly when unabsorbed depreciation on goodwill on amalgamation has rightly been carried forward and set off in accordance with the provisions of Section 32(2) of the Act.

The Ld. PCIT has further erred in law and on facts in not appreciating that the view taken by the AO during the assessment proceedings is a possible view and hence the revisionary proceedings are illegal and bad in law.

The learned AR, reiterating the grounds of appeal, submitted that the assumption of jurisdiction under section 263 of the Act by the Ld. PCIT is not justified and devoid of merit. It was submitted that the assessment was completed under section 143(3) r.w.s. 144B vide a reasoned order dated 30.04.2021, after issuance of multiple notices under sections 142(1) and 143(2), and after detailed verification of all material facts and supporting evidence. Therefore, it cannot be alleged that the assessment was completed without inquiry or that the AO accepted claims mechanically without application of mind.

The AR further submitted that the revisionary order does not contain any independent inquiry or conclusive finding by the Ld. PCIT as to how the assessment order is both erroneous and prejudicial. The PCIT merely reproduced certain figures and directed the AO to 8 conduct de novo assessment without any finding on incorrect allowance or loss of revenue. The revisionary jurisdiction under section 263, it was submitted, cannot be invoked merely for directing roving inquiries or for improvement of reasoning. It was stressed that where the AO has taken a plausible view after inquiry, the jurisdiction under section 263 is barred.

On the other hand, the learned Departmental Representative (DR) placed strong reliance on the impugned order passed by the Ld. PCIT. It was submitted that the Assessing Officer had failed to examine the core issue relating to the allowability of depreciation on goodwill, which was the subject matter of extensive litigation in earlier assessment years. The DR contended that despite the substantial claim of depreciation of Rs.26,86,17,589/- on goodwill the AO did not call for or examine the valuation report, computation of goodwill, or its allowability.

We have carefully considered the rival submissions, perused the assessment order, the revisionary order passed by the Ld. PCIT, submissions of both parties, and the judicial precedents relied upon by the assessee and the Revenue. The central question before us is whether the order passed by the Assessing Officer is "erroneous in so far as it is prejudicial to the interest of the revenue" so as to justify invocation of section 263 of the Act. The impugned revisionary order revolves around the following four issues:

Before we proceed to address the specific issues raised in the impugned order under section 263, it is relevant to consider the foundational background as recorded by the Ld. PCIT in paragraph 6 (page 4) of the revisionary order. In the said paragraph, the Ld. PCIT has outlined the facts relating to the conversion of Sara Suppliers Pvt. Ltd. into Olympic Décor LLP and the preceding amalgamation of Crown Laminates Pvt. Ltd. (CLPL) into the said entity. The PCIT noted that Sara Suppliers Pvt. Ltd. was converted into Olympic Decor LLP during F.Y. 2016–17 and had earlier amalgamated with CLPL pursuant to a scheme approved by the Hon’ble Gujarat High Court. It is further observed that as per the books of the amalgamated entity, goodwill of Rs.191.08 crores was recognized in A.Y. 2016–17 due to excess of consideration over the net assets acquired, and depreciation of Rs.26.86 crores was claimed thereon in A.Y. 2018–19. The Ld. PCIT observed that in A.Y. 2016–17, the AO had disallowed the depreciation on such goodwill on the ground that it was a self-generated asset and not eligible for depreciation. Based on this history, the Ld. PCIT formed a prima facie view that the goodwill on which depreciation was claimed in A.Y. 2018–19 had no actual cost in the hands of the amalgamating company and hence was not eligible for depreciation under section 32(1)(ii) read with Explanation 7 to section 43(1). It was also mentioned that the matter for A.Y. 2016–17 was pending in appeal, and therefore, the claim made by the assessee in A.Y. 2018– 19 was incorrect, and the AO erred in allowing such depreciation without inquiry. Furthermore, the PCIT linked this background to subsequent claims made by the LLP for set-off of brought forward depreciation and observed that if the base depreciation itself was inadmissible in earlier years, the consequential set-off in A.Y. 2018– 19 also stood vitiated. Accordingly, the Ld. PCIT treated the entire 10 chain of events—recognition of goodwill, claim of depreciation, and set-off—as forming an “erroneous and prejudicial” part of the assessment requiring revision under section 263.

We have carefully considered this background framing by the Ld. PCIT. However, for reasons discussed hereinafter in the issue-wise adjudication, we are of the view that the foundational presumption in the PCIT’s order that the depreciation on goodwill stood disallowed and that the issue was sub-judice does not hold good in light of the fact that the Hon’ble ITAT had already allowed the depreciation in favour of the assessee for A.Y. 2016–17 in its order dated 21.02.2024, a day prior to the passing of the PCIT’s order on 22.02.2024. Moreover, the goodwill arose from a High Court-sanctioned scheme of amalgamation and was supported by a valuation report, and depreciation was allowed by the AO in A.Ys. 2016–17 and 2017–18 and carried forward accordingly. Hence, while the background narrated by the PCIT provides the contextual basis for initiating proceedings under section 263, the assumption that the goodwill was fictitious and depreciation thereon inadmissible—without considering binding appellate orders and factual documentation—renders the foundation of revisionary jurisdiction unsustainable.

We now proceed to examine each issue raised by the PCIT on merits.

Once depreciation on goodwill has been allowed in the initial year and the WDV has been determined, depreciation in subsequent years becomes a matter of statutory computation under section 32(1). Depreciation once allowed enters into the block of assets and must be carried forward irrespective of actual use. The WDV having been established, the AO was not required to revisit the allowability of depreciation on the same asset unless the claim for the earlier year had been reversed. It is also well established that where depreciation has been allowed in an earlier year and no material change in facts or law occurs, the Revenue is bound to maintain consistency which means that once a view is taken and accepted in an earlier year, it cannot be arbitrarily re-examined in subsequent years. The PCIT’s contention that the goodwill was self-generated or lacked real consideration was already examined and rejected by the Tribunal in A.Y. 2016–17. The Co-ordinate Bench accepted that the goodwill arose from the excess of consideration over the net value of tangible assets transferred in amalgamation and was therefore a valid intangible asset eligible for depreciation under section 32(1)(ii). The Ld. PCIT could not have reopened the settled position through revision without 12 first disturbing the allowance in the earlier year. In our opinion goodwill arising on amalgamation qualifies as an intangible asset eligible for depreciation. The finding of Co-ordinate Bench in A.Y. 2016–17 clearly brings the assessee’s goodwill within the scope of this principle.

In light of the foregoing, we are of the opinion that the PCIT’s invocation of section 263 on this issue is based on an incorrect factual premise and a difference of opinion does not satisfy the jurisdictional threshold of an “erroneous” order prejudicial to the interests of the Revenue.

The second limb of the PCIT’s order pertains to the set-off of Rs. 11.18 crore of brought forward depreciation, which the PCIT claims to be erroneously allowed as it pertains to goodwill depreciation disallowed in earlier years. This conclusion, however, directly stems from the PCIT’s incorrect assumption in respect of the disallowance of depreciation on goodwill in A.Y. 2016–17. As already discussed, the Coordinate Bench of has allowed the claim of depreciation on goodwill in A.Y. 2016–17, and the said order was available on record before the PCIT. Once the base depreciation is judicially accepted and becomes part of assessed depreciation for that year, the unabsorbed portion thereof lawfully enters the pool of carry forward depreciation eligible for set-off under section 32(2). Once depreciation is allowed and brought forward as per returns and records, its set-off cannot be denied in later years unless the original allowance is proved to be incorrect or is otherwise reversed. There is no finding in the present case that the allowance in earlier year was reversed or disturbed. In fact, it stands judicially confirmed.

The PCIT alleged that the assessee claimed excess deduction under section 80IA of Rs.1,89,435/- and that AO accepted the same without inquiry. However, we find from the assessment records and assessee’s submissions that the AO had verified the 80IA claim based on Form 10CCB, profit and loss statement of the eligible Windmill unit, and depreciation schedules under both Income Tax and Companies Act. The reconciliation was duly filed and accepted. There is no finding by the PCIT that the claim was factually incorrect or that any excess was demonstrable from the computation. There are several judicial precedents where it was held that where the AO has made inquiries and taken a view after considering material placed before him, revision cannot be invoked merely because the PCIT believes that a better or more detailed inquiry should have been made. In absence of any clear finding of incorrect allowance or revenue loss, the assessment cannot be considered erroneous. The AO’s view is plausible and duly supported by documents.

The next ground for revision is that the AO made addition of Rs. 10.80 crore under section 28 whereas, according to PCIT, it ought to have been added under section 68. The AO, after calling for details and issuing notices under section 133(6), concluded that the repayment of loan by Crown Laminates was not properly explained, and made addition under section 28 treating it as business receipt. The PCIT has not established how such addition under section 28 was

In case of JMC Projects (India) Ltd. v. PCIT [67 taxmann.com 258 (Guj.)], the Hon’ble Gujarat High Court held that when an addition has already been made under one provision, the PCIT / Commissioner cannot revise the order merely because, in his view, a different provision ought to have been invoked. This is a classic case of improvement of reasoning, which is outside the scope of section 263. Further, the ITAT Ahmedabad in Radhe Developers (India) Ltd., held that where funds received were repayment of earlier advances through banking channels and supported by confirmations, they could not be taxed under section 68. The facts of the present case are on all fours. Accordingly, we find no merit in this ground of revision either.

We find that the AO made detailed inquiries on all issues during the assessment proceedings. The assessee responded to notices under section 142(1) with supporting documents. The PCIT has not demonstrated how the AO's view was legally untenable or factually incorrect. No new evidence or inquiry has been conducted by the PCIT either. The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [243 ITR 83 (SC)] has clearly laid down that both conditions of section 263 must be cumulatively satisfied. In the absence of prejudice to Revenue or demonstrable error, the order cannot be revised.

In view of the foregoing discussion, we are of the considered view that the assessment order was neither erroneous nor prejudicial to the interest of Revenue. The PCIT erred in invoking revisionary

In the result, the Appeal of the assessee is allowed.