PCIT Revises order of AO on Goodwill Depreciation and Loan Transaction: ITAT Overturns Order citing Verified Transaction [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) has set aside the revisionary order passed by the Principal Commissioner of Income Tax ( PCIT ), affirming the genuineness of transactions related to depreciation on goodwill, unabsorbed depreciation set-off, Section 80IA deduction, and a loan repayment transaction.

Olympic Décor LLP (assessee), formerly Sara Suppliers LLP, filed its return of income for the Assessment Year (AY) 2018-19, which was scrutinized and assessed by the Assessing Officer (AO).

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The AO accepted the returned income after examining financials and submissions, including claims for depreciation on goodwill, set-off of unabsorbed depreciation, deduction under Section 80IA, and a transaction involving Rs. 10.80 crore with Crown Laminates Pvt. Ltd.

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The PCIT invoked Section 263, issuing a show-cause notice alleging that the AO’s order was erroneous and prejudicial to the Revenue’s interest. The PCIT cited issues such as: (i) erroneous allowance of depreciation on goodwill from amalgamation, (ii) improper set-off of unabsorbed depreciation, (iii) unverified deduction under Section 80IA, and (iv) failure to tax Rs. 10.80 crore as unexplained credit under Section 68 of the Income Tax Act.

The principal commissioner set aside the AO’s order, directing a de novo assessment. Aggrieved by the PCIT’s order, the assessee appealed to the ITAT. The assessee’s counsel contended that the depreciation on goodwill was valid, as it was upheld by the ITAT’s previous decisions, rendering the PCIT’s claim that the issue was sub judice incorrect.

The counsel further argued that the set-off of unabsorbed depreciation was lawful under Section 32(2), the Section 80IA deduction was verified with Form 10CCB and reconciliation, and the Rs. 10.80 crore transaction was a repayment of earlier advances, not a new loan, substantiated by banking records and confirmations.

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The two-member bench, comprising T.R. Senthil Kumar (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) observed that the AO had conducted detailed inquiries, issuing notices and verifying submissions.

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The ITAT observed that the ITAT’s order for AY 2016-17, allowing depreciation on goodwill, was pronounced before the PCIT’s revision, invalidating the PCIT’s assumption. The tribunal observed that the goodwill arose from a Gujarat High Court-sanctioned amalgamation, supported by a valuation report, and was eligible for depreciation under Section 32(1)(ii) of the Income Tax Act.

The tribunal further held that the set-off of unabsorbed depreciation was lawful, as it stemmed from the judicially confirmed depreciation for AY 2016-17. The Section 80IA deduction was supported by Form 10CCB and depreciation reconciliation, and the PCIT failed to demonstrate any factual error.

The bench concluded that the AO’s order was neither erroneous nor prejudicial to the Revenue’s interest. The tribunal quashed the PCIT’s order. The appeal of the assessee was allowed.

To Read the full text of the Order CLICK HERE

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