2025 (5) TMI 120 - AT - Income Tax

Revision u/s 263 - assessee has claimed depreciation on the amount of intangible assets shown under the head intangible assets under development and since the same was not put to use depreciation could not be claimed on it - HELD THAT - The claim of depreciation is fully supported by the Hon ble Supreme Court therefore by no stretch of imagination the assessment order can be considered as prejudicial to the interest of the revenue . Supreme Court in the case of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT held that the phrase prejudicial to the interest of Revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of Revenue. Thus when the AO had adopted one of the courses permissible and available to him and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the AO is unsustainable in law. CIT must give a finding that the view taken by the AO is unsustainable in law and therefore the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue. This legal principle is also laid down in the case of CIT Vs. Max India Ltd. 2007 (11) TMI 12 - SUPREME COURT Thus claim of depreciation on goodwill is an allowable expenditure and therefore even if no enquiry was made by AO on this account the assessment order cannot be held as prejudicial to the interest of revenue as there was no loss of revenue in allowing the claim of depreciation. The judgements relied upon by the Ld.CIT DR are on the issue where no enquiry was made by AO however since we have hold that assessment is not pre-judicial to the interest of revenue these are not applicable in such circumstances. Accordingly the assessment may be erroneous but it is not prejudicial to the interest of revenue and therefore the provisions of section 263 of the Act cannot be invoked. Accordingly we quashed the order of Ld. Pr.CIT passed u/s 263 disallowing the deprecation claimed on Goodwill. Thus the grounds of appeal raised by the assessee are allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the order passed under section 143(3) of the Income Tax Act, 1961 (the Act) allowing depreciation on goodwill was erroneous and prejudicial to the interest of the Revenue so as to justify revision under section 263 of the Act;

(b) Whether the Principal Commissioner of Income Tax (Pr. CIT) rightly invoked section 263 on the ground that the Assessing Officer (AO) passed the assessment order without making necessary inquiries regarding the claim of depreciation on goodwill;

(d) Whether the Pr. CIT was justified in disallowing depreciation claimed on goodwill on the basis that the asset was under development and not put to use;

(e) Whether the Pr. CIT exceeded jurisdiction or acted without affording reasonable opportunity to the assessee;

(f) The applicability and interpretation of Explanation 2 to section 263 regarding erroneous and prejudicial orders passed without making inquiries or verification;

(g) The scope and limits of revisional powers under section 263, including the distinction between lack of inquiry and inadequate inquiry;

(h) The applicability of judicial precedents on the allowability of depreciation on goodwill and the exercise of revisional powers under section 263.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Whether the assessment order allowing depreciation on goodwill was erroneous and prejudicial to the interest of Revenue and whether the Pr. CIT rightly invoked section 263 on grounds of lack of inquiry

The legal framework involves section 263 of the Income Tax Act, which empowers the Commissioner to revise an order passed by the AO if it is found to be erroneous and prejudicial to the interest of the Revenue. Explanation 2 to section 263, inserted by Finance Act 2015, clarifies that an order is deemed erroneous and prejudicial if passed without making inquiries or verification which should have been made.

In the present case, the Pr. CIT held that the AO allowed depreciation on goodwill without making any inquiries, and since the asset was shown as "intangible asset under development" and not put to use, the claim was not proper. The Pr. CIT disallowed depreciation and directed reassessment.

The assessee contended that the AO did make inquiries and allowed the claim based on detailed financial statements and working notes. The assessee submitted that the asset was goodwill arising from slump sale of a business division, valued at the difference between assets and liabilities taken over, and depreciation was rightly claimed at 25%. The assessee argued that the AO's silence in the assessment order on the issue does not mean lack of inquiry.

The Tribunal examined the assessment order, submissions, and the Paper Book evidencing the valuation and accounting treatment. It was found that the goodwill was shown as a negative figure under "capital reserve" in the books prepared under Ind-AS, and the depreciation was claimed in the return but not in the books. The Tribunal noted the inadvertent misclassification as "intangible asset under development" in the return but accepted the assessee's explanation.

The Pr. CIT's reliance on Explanation 2 was considered in light of judicial precedents emphasizing that lack of inquiry (no inquiry at all) justifies invoking section 263, whereas inadequate inquiry (some inquiry made but differing opinion) does not. However, the Tribunal found that since the claim of depreciation on goodwill is allowable and no loss of revenue arises from allowing it, the order cannot be held prejudicial to the interest of Revenue.

Thus, while the assessment order may be erroneous in some respects, it was not prejudicial to Revenue, negating the twin conditions necessary for invoking section 263.

Issue (c) & (d): Allowability of depreciation on goodwill and correctness of Pr. CIT's view that asset was under development and not put to use

The legal framework includes section 32 of the Income Tax Act and Explanation 3 thereto, which defines assets eligible for depreciation, including intangible assets such as goodwill.

The assessee relied on the Supreme Court judgment in CIT vs Smifs Securities Ltd., which held that goodwill is an asset within the meaning of section 32 and depreciation thereon is allowable. The principle of ejusdem generis was applied to interpret "any other business or commercial rights of similar nature" to include goodwill.

The Tribunal observed that the goodwill arose from acquisition of a going concern by slump sale, valued as the difference between assets and liabilities. The accounting treatment under Ind-AS required such goodwill to be shown as a negative capital reserve, and no amortization was claimed in books, but depreciation was claimed in the return.

The Pr. CIT's reasoning that depreciation could not be claimed because the asset was "under development" and "not put to use" was found to be misconceived, as intangible assets like goodwill do not require physical use to claim depreciation.

The Tribunal held that depreciation on goodwill is allowable expenditure, supported by authoritative judicial pronouncements including the Supreme Court and Delhi High Court decisions. Therefore, the claim of depreciation was in accordance with law.

Issue (e): Whether the Pr. CIT acted without affording reasonable opportunity or exceeded jurisdiction

The assessee alleged that the Pr. CIT conducted the section 263 proceedings in haste and without proper opportunity. The Tribunal noted that the Pr. CIT issued a show cause notice, considered the assessee's submissions and explanations, and passed a reasoned order. There was no indication of denial of opportunity or procedural irregularity.

Regarding jurisdiction, the Tribunal reiterated that section 263 can be invoked only when the order is both erroneous and prejudicial to Revenue. The Pr. CIT's disallowance of depreciation on a legally allowable claim, resulting in no loss of revenue, did not satisfy this condition. Hence, the Pr. CIT exceeded jurisdiction in setting aside the assessment order.

Issue (f) & (g): Applicability and interpretation of Explanation 2 to section 263 and distinction between lack of inquiry and inadequate inquiry

Explanation 2 to section 263 provides that an order passed without making inquiries or verification which should have been made is deemed erroneous and prejudicial. The Tribunal extensively reviewed judicial precedents interpreting this provision.

The Hon'ble Supreme Court and High Courts have held that the Commissioner cannot interfere merely because he disagrees with the AO's decision or on the basis of inadequate inquiry. The jurisdiction is attracted only if there is no inquiry at all or the order is unsustainable in law.

Several judgments cited by both parties emphasize that lack of inquiry (no inquiry) justifies revision, whereas inadequate inquiry (some inquiry but different view) does not. The Tribunal found that the AO had considered the claim of depreciation on goodwill based on detailed financial statements and working notes, and thus there was no complete lack of inquiry.

Therefore, Explanation 2 was not applicable to hold the order erroneous and prejudicial.

Issue (h): Applicability of judicial precedents on depreciation on goodwill and revisional powers under section 263

The Tribunal examined key precedents:

- The Supreme Court in CIT vs Smifs Securities Ltd. held depreciation on goodwill is allowable.

- The Supreme Court in Malabar Industrial Co. Ltd. clarified that both conditions of erroneous order and prejudice to Revenue must be satisfied to invoke section 263.

- The Delhi High Court in Areva T & D India Ltd. affirmed goodwill as an asset eligible for depreciation.

- Various judgments upheld revision under section 263 where AO failed to make any inquiry, but also cautioned against interference where two views are possible.

The Tribunal found that the present case falls within the ambit of these precedents supporting the allowability of depreciation on goodwill and that the AO's order, though possibly erroneous, was not prejudicial to revenue.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following crucial legal determinations and observations:

"The amount paid in excess of liabilities over assets constitute 'goodwill' of the business purchased by which the market worth of the assessee company stood increased."

"Goodwill is an asset under Explanation 3(b) to Section 32(1) of the Act."

"Depreciation on goodwill is an allowable expenditure."

"The phrase 'prejudicial to the interest of Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue."

"When the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law."

"Explanation 2 to Section 263 applies where an order is passed without making inquiries or verification which should have been made. However, if the AO has made some inquiry and reached a conclusion, the revisional powers cannot be exercised merely because the Commissioner disagrees."

"The Pr. CIT's disallowance of depreciation claimed on goodwill on the ground that the asset was under development and not put to use is misconceived since intangible assets like goodwill do not require physical use to claim depreciation."

"The assessment order, though may be erroneous in some respects, is not prejudicial to the interest of Revenue as no loss of revenue arises from allowing depreciation on goodwill."

"The invocation of section 263 jurisdiction by the Pr. CIT in the present case is not justified and the order passed under section 263 disallowing depreciation on goodwill is quashed."

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