The Hyderabad bench of the Income Tax Appellate Tribunal ( ITAT ) observed that goodwill was an intangible asset, depreciation allowable under Section 32(1) of the Income Tax Act, 1961
The assesse involved in providing Information Technology Enabled Services to its Associated Enterprises ( AEs ). In the financial year 2016-17, the assessee acquired the entire shareholding of SNL Financials ( India ) Private Limited ( SNL India ) from its existing shareholders for a sum of Rs. 1,72,43,00,000/-. This acquisition included shares at a premium from the existing shareholders of SNL India. Consequently, the excess purchase consideration over the net assets of SNL, amounting to Rs. 1,04,16,27,225/-, was documented as ‘goodwill’ in the consolidated audited financials of the assessee for the same financial year, prepared under the Companies Act, 2013.
The assessee recorded the surplus purchase consideration over SNL’s net assets, totaling Rs. 1,04,16,27,225/-, as a negative capital reserve in accordance with Ind-AS accounting standards. This negative capital reserve essentially represents ‘goodwill,’ which was considered an intangible asset from a tax perspective.
The assessee asserted that the request for an additional deduction of depreciation on goodwill, totaling Rs. 26,04,06,806/-, was unintentionally omitted. The assessee rectified this omission by submitting a revised computation of income. However, in the preliminary assessment order issued on September 24, 2021, the learned Assessing Officer overlooked the additional claim made by the assessee through the revised computation of income, failing to provide any explanation for this omission.
The assessee raised objections before the Dispute Resolution Panel ( DRP ).
The counsel for the assessee K.C. Devdas argued that due to an oversight or mistake, they failed to claim additional depreciation on goodwill while filing the income tax return. The contention put forth was that irrespective of whether the assessee claimed the deduction for depreciation in computing the total income, the provisions outlined in Section 32(1) of the Income Tax Act, 1961, should still apply. The assessee drew upon the precedent set by the Supreme Court in the Smifs Securities case, wherein it was established that goodwill associated with a business or profession qualifies as a depreciable asset.
The Dispute Resolution Panel (DRP) dismissed the aforementioned claim, stating that the issuance of notice under Section 143(2) of the Income Tax Act, 1961 aimed solely to ensure that there are no inaccuracies in the reported income, no shortfall in tax payment, and no excessive loss claims or reductions. Therefore, the Assessing Officer does not possess the authority to reduce the total income declared in the income tax return.
The DRP emphasized that when sub Section (5) of Section 139 of the Income Tax Act, 1961 was introduced, the legislature was aware that there could be instances of incorrect statements or omissions in the income tax return
Hence, provisions for filing revised returns were incorporated, allowing taxpayers a one-year period from the end of the assessment year to rectify such errors or omissions. According to the DRP, since the law stipulates that any errors or omissions can only be corrected by filing a revised return within the specified timeframe under Section 139(5) of the Income Tax Act, 1961, neither the assessee is entitled to raise such claims after the prescribed period before the assessing officer nor is the assessing officer empowered to entertain such claims.
The counsel for the assessee K.C. Devdas argued that once the decision of the Supreme Court was pronounced, no dispute regarding its correctness can be entertained, and such a decision must be universally respected.
He emphasized that the decision of the Supreme Court cannot be disregarded on the pretext that certain aspects were not debated during the proceedings. It is presumed that all potential defenses pertinent to the decision were raised during the hearing. Merely because certain provisions, Section 43(6) and Section 43(1) of the Income Tax Act, 1961, were not explicitly mentioned in the Supreme Court’s order, the Dispute Resolution Panel ( DRP ) was not justified in refusing to adhere to the precedent. Allowing such deviation would create disorder, as it would be convenient to pinpoint omissions in judgments to evade compliance with binding precedents.
The counsel further argued that Section 43(6) of the Income Tax Act, 1961, was applicable in this scenario since the intangible asset in the form of goodwill arises only upon the event of amalgamation. Similarly, he contended that the 6th provision to Section 32(1) of the Income Tax Act, 1961 does not apply because the asset, namely goodwill, was not accessible to the amalgamating company until its creation during the amalgamation process. Moreover, he stated that Section 43(1) of the Income Tax Act, 1961, does not impede the assessee’s rights because no financial expenditure was incurred, and the goodwill emerged as a consequence of the excess consideration paid.
Lastly, the counsel pointed out that the Memorandum to the Financial Bill, 2021, which stipulates that depreciation cannot be claimed on goodwill, does not apply to the assessment year 2018-19.
The counsel for the revenue TH Vijaya Lakshmi heavily relied on the observations made by the Dispute Resolution Panel (DRP) and argued that, in light of the decision of the Honorable Supreme Court in the case of Goetze India Ltd. A deduction can only be claimed through the submission of a revised income tax return. Thus, the DRP correctly concluded that the Assessing Officer lacks the authority to entertain claims made in any other manner.
Consequently, the bench has no hesitation in affirming that goodwill qualifies as an intangible asset and was eligible for depreciation.
The assessee has actually claimed depreciation when computing their total income. This implies that depreciation must be allowed while calculating the total income, irrespective of whether the assessee makes the claim or not. Therefore, it becomes the duty of the Revenue to grant depreciation on goodwill even if the assessee does not explicitly request it.
The two member bench of the tribunal comprising Rama Kanta ( Vice President ) and N.K.Narasimha Chary ( Judicial member ) concluded that the denial of the deduction claim for depreciation on goodwill by the authorities below cannot be justified. Therefore, the bench observed that this disallowance should be overturned, and the claim for deduction of depreciation on goodwill should be accepted.
Consequently, the grounds of appeal are allowed.
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