AO’s Failure to Verify Depreciation on Impaired Goodwill Justifies Revision Under Section 263

ORDER

Dr. Manish Borad, Accountant Member.- The captioned appeal at the instance of assessee pertaining to A.Y. 2020-21 is directed against the order dated 19.03.2024 of PCIT (Central), Pune passed u/s.263 of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) arising out of Assessment Order dated 31.03.2022 passed u/s.143(3) of the Act.

2. Assessee has raised following grounds of appeal :

“The following grounds of appeal are taken independently and without prejudice to one another.

1. The revision order dated 19-03-2024 passed u/s 263 of the Income Tax Act by the Pr. Commission of Income Tax, Pune is invalid, bad in law and unsustainable in law. The same may be quashed/cancelled.

2. The show cause notice dated 05-03-2024 issued by the Pr. Commissioner of the Income Tax is invalid as it does not bear the Document Identification Number (DIN). Consequently the revision over passed u/s 263 of the Income tax Act is also bad in law, invalid and unsustainable in law.

3. The Ld. Pr. Commissioner of Income Tax has erred in holding that the Assessing Officer has not applied his mind to the issue of depreciation of Rs. 1,86,95,184/- on the intangible asset in the shape of goodwill.

4. The Ld. Pr. Commissioner of Income Tax has erred in holding that no inquiry, examination or verification has been done in the assessment proceedings regarding the claim of the depreciation on goodwill, without specifying as to which inquiry/examination or verification has not been done by the Assessing Officer.

5. The Ld. Pr. Commissioner of Income Tax has erred in holding that the assessee is not entitled to the claim of depreciation on goodwill generated on amalgamation.

6. The Ld. Pr. Commissioner of Income Tax has proceeded on the incorrect assumption that the depreciation is not allowable to the assessee in respect of the impaired intangible asset (goodwill), without appreciating the submissions of the assessee made before him that though the amount of goodwill amounting to Rs.18,89,24,584/- has been impaired in the books of accounts as per the requirement of the provisions of Indian Accounting Standards, but the same has been added back while computing the income in the return of income and as such there is no effect on the total income on account of such impairment in the books of accounts.

7. The Ld. Pr. Commissioner of Income Tax has erred in holding that the assessee company has not incurred any actual cost on goodwill (intangible asset).

8. The Ld. Pr. Commissioner of Income Tax has erred in holding that depreciation on goodwill is not allowable to the assessee. The Ld. Pr. Commissioner of Income Tax has failed to appreciate that the depreciation has been already allowed to the assessee in respect of the same goodwill in earlier Assessment Years and therefore by the Principle of consistency, the claim of depreciation on the same goodwill cannot be disallowed in the latter Assessment Year 2020-21 under consideration.

9. The assessee craves leave to add, to modify to delete or to amend any or all of the above grounds of appeal.”

3. Assessee has also raised the following additional ground :

“The impugned revision order passed u/s 263 of the Income-tax Act is invalid and unsustainable in law, as it has been passed on the basis of the fact/premise that the opening WDV of the Block of intangible asset (goodwill) has been acquired/generated as a result of amalgamation of M/s Gera Realty India Pvt. Ltd. (GRIPL) with the assessee, which fact however did not form the part of assessment proceedings. The revision order may be quashed.

PRAYER

It is accordingly prayed that the above additional ground of appeal may be admitted for adjudication of the appeal in the interest of justice.

In this regard reliance is placed on the following judgements.

(i) NTPC Ltd. (SC).

(ii) Jute Corpn. of India Ltd. (SC).

(iii) Ahmedabad Electricity Co. Ltd. (Bombay).

4. Brief facts of the case are that the assessee is a Private Limited Company engaged in the business of Builders and Developers. Income of Rs.1,82,24,73,320 declared in the return of income for A.Y. 2020-21 filed on 13.02.2021 which has been subsequently revised on 30.03.2021 disclosing total income at Rs. 1,81,42,02,980. Case selected for scrutiny through CASS followed by validly serving statutory notices u/s.143(2) and 142(1) of the Act. The assessee submitted the information as called for in the questionnaire issued u/s.142(1) of the Act. Ld. AO completed the assessment after making disallowance of at Rs. 1,85,95,370 on account of Education Cess, addition for income u/s.43C(A) at Rs.23,91,847/- and disallowance u/s.14A r.w. Rule 8D at Rs. 3,82,623, and assessed the income at Rs.1,83,60,35,564.

5. Subsequently, ld. PCIT (Central) invoked provisions of section 263 of the Act regarding the claim of depreciation on intangible assets at Rs.1,86,95,184 giving reference of the generation of goodwill at the time of amalgamation in the A.Y. 2015-16 and also observed that during the year under consideration the written down value of Goodwill in the books at Rs.18,89,24,584 has been impaired during the year and written off in the profit and loss account but still the assessee has claimed depreciation u/s.32 of the Act on the said impaired intangible asset, i.e. Goodwill based on the Block of Asset concept under section 32 of the Income Tax Act. Show cause notice dated 26.02.2024 issued with DIN No. ITBA/REV/F/REV1/2023-24/ 1061484781(1)/3809. The assessee made detailed submissions stating that the depreciation as per the income-tax Act has been claimed on the basis of block of assets concept and since there was no sale of the asset forming part of the block of asset of intangible asset, depreciation has been claimed. It is also submitted that Goodwill appearing in the books of account which has been debited to the profit and loss account has again be added back while computing the total income and for this he referred to the computation of income filed before ld. PCIT. However, ld. PCIT was not satisfied with the submissions of the assessee and was of the considered view that Ld. AO in the course of assessment proceedings ought to have conducted the enquiry on this issue and in absence of enquiry the assessment order is erroneous and prejudicial to the interest of revenue. In support, Ld. PCIT has referred to plethora of decisions. Thereafter, ld. PCIT has also referred to the claim of depreciation on self-generated Goodwill and moved on to discuss the transaction which happened during F.Y. 2015-16 during which the Gera Realty India Pvt. Ltd (the amalgamating company) was transferred to the assessee, i.e. the amalgamated company and the excess of consideration paid over and above the net assets of Gera Realty India Pvt. Ltd which amounted to Rs. 20,16,30,038 has been considered as Goodwill and shown as intangible asset in view of the ratio laid down by the Hon’ble Apex Court in the case of CIT v. Smifs Securities Ltd. (SC)(2012) 348 ITR 0302.

6. Ld. PCIT referring to the explanation 3 to section 43(1) of the Act has observed that only the actual cost of the transferred capital asset from the amalgamating company to the amalgamated company should be taken at the same value as it would have been, if the amalgamating company had continued to hold the capital asset for the purpose of its own business. Ld. PCIT has observed that if the amalgamating company had continued to hold the Goodwill cost as a natural corollary the actual cost of Goodwill for the amalgamated company shall be Nil. Based on this observation, ld. PCIT came to conclusion that since the value of Goodwill is to be considered as Nil, therefore, the assessee cannot claim depreciation from A.Y. 2016-17 onwards and further observed that principle of resjudicata is not applicable to income-tax proceedings and has directed the Ld.AO to separately examine the claim of the assessee in the earlier years in accordance with the provisions of law. With these observations, ld. PCIT held that the assessment order dated 31.03.2022 is erroneous and prejudicial to the interest of revenue.

7. Now the assessee is in appeal before this Tribunal assailing the order of ld. PCIT dated 19.03.2024.

8. Ld. Counsel for the assessee vehemently argued referring to the following written submissions :

“By way of this appeal the assessee has challenged the revision order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income-tax Act. The assessee has claimed depreciation of Rs.1,86,95,184/- on the brought forward WVD in respect of the Block of intangible asset (goodwill). This claim of the assessee has been allowed vide assessment order dated 31-03-2022 passed under section 143(3) of the Income-tax Act. The said assessment order has been revised by holding that depreciation on goodwill is not allowable for the following reasons :-

A.

(i) The Assessing Officer has allowed the claim of depreciation on goodwill without examination of claim.

(ii) The intangible asset has been impaired in the previous year and as such cannot be considered to have been put to use for the purpose of business of the assessee.

(iii) The intangible asset is not treated as an asset in the books of accounts of the assessee.

(iv) The assessee is not getting any enduring benefit out of the intangible asset.

B.

(i) During the financial year 2015-16, M/s Gera Realty India Private Limited (GRIPL) had amalgamated with the assessee company and in accordance with the scheme of the arrangement, the assets and liabilities were taken over at fair values and the inter-company balances i.e. the amounts already invested by the assessee in the amalgamated company were reduced from the net assets to arrive at the goodwill(deficit) on amalgamation and the same amounted to Rs.20,16,30,038/- in the books of the assessee. This intangible asset was added to the Block of asset as intangible asset during the A.Y. 2016-17 and depreciation was claimed by the assessee at the rate of 25%.

On perusal of the assessment records for AY 2020-21, it is seen that the assessee company has claimed depreciation of Rs.1,86,95,184/related to this intangible asset i.e. the goodwill generated at the time of amalgamation in the year 2015-16 and the same was allowed by the Assessing Officer.

On merits, the assessee is not entitled to the claim of depreciation on goodwill generated on amalgamation due to the reasons discussed as under:

(ii) No actual cost has been incurred by the assessee company as well as the amalgamating company M/s Gera Realty India Private Ltd (GRIPL).

(iii) As per the 6th proviso of section 32(1) of the Income-tax Act, the total claim of the depreciation cannot exceed the deduction calculated, as if the amalgamation have not taken place and the deduction shall be apportioned between the amalgamating company and the amalgamated company.

(iv) As per explanation 3 of section 43(1) of Income-tax Act, the cost of acquisition of the goodwill acquired as a result of amalgamation in the hands of amalgamated company shall be deemed to be the amount for which the amalgamating company has acquired it, which was nil in this case. As such the WVD of the Block of the assets acquired by the amalgamated company will be the WVD of such asset in the hands of the amalgamating company.

(v) There was no goodwill appearing in the balance sheet of the amalgamating company, just before amalgamation. Hence, if the amalgamating company had continued to hold the goodwill, its actual cost would have been ‘nil’ and as a natural corollary, the actual cost of goodwill for the amalgamated company shall also be ‘Nil’.

No depreciation is allowable to the amalgamated company on the goodwill created at the time of amalgamation, as the actual cost of goodwill to the amalgamated company is ‘Nil’.

3.(a) As can be seen from para 2B above, the Principal Commissioner of Income Tax (PCIT) has passed the revision u/s 263 of the Act interalia on the basis/premise that the opening WVD of the Block of intangible asset (goodwill) has been acquired/generated as a result of amalgamation of M/s Gera Realty India Pvt. Ltd. (GRIPL) with the assessee.

However such facts that the opening WVD of the Block of intangible asset (goodwill) has been acquired/generated as a result of amalgamation of M/s Gera Realty India Pvt. Ltd. (GRIPL) with the assessee, does not form a part of the assessment proceedings in which the assessment order dated 31-03-2022 was passed.

(b) As per sub section (1) of section 263, the Principal Commissioner of Income Tax (PCIT) has the power/jurisdiction to call for and examine the record of any proceedings under the Income-tax Act and if considers that any order passed in the said proceedings is erroneous in so far it is prejudicial to the interest of the revenue, he may pass a revision order thereon.

The language of sub section (1) of section 263 of the Income-tax Act empowers the Principal Commissioner of Income Tax (PCIT) to pass a revision order after examining only the record of the proceedings in which the order, which is subject matter of revision, has been passed.

Thus the Principal Commissioner of Income Tax (PCIT) does not have the power/jurisdiction to revise the assessment order by referring to such facts/premise which did not form a part of the assessment proceedings.

As discussed in para 3(a) above the fact that the opening WVD of the Block of intangible asset (goodwill) has been acquired/generated as a result of amalgamation of M/s Gera Realty India Pvt. Ltd. (GRIPL) with the assessee did not form a part of the assessment proceedings. As such the revision order passed by the Principal Commissioner of Income Tax (PCIT) by referring to the said fact/premise is not sustainable in law.”

9. Ld. Counsel filed the following documents and the index of the paper book is reproduced below :

10. On the other hand, ld. Departmental Representative vehemently argued supporting the order of ld. PCIT and drew our attention to the following written submissions :

“The above appeal was heard on 24.09.2025 by the Hon’ble Bench. The Point wise argument is summarized as below.

The appellant filed this appeal challenging the revision order of the PCIT u/s. 263 of the Income tax Act, 1963.

For the year under consideration, M/s. Gera reality India Pvt. Ltd. Was amalgamated with the appellant company and all the assets and liabilities of M/s. Gera reality India Pvt. Ltd. were taken over by the appellant company. including the investments of the appellant company into the amalgamated company, same was reduced from net assets to create goodwill of Rs.20,16,30,038 in the books of the appellant on which the appellant claimed depreciation.

This establishes the fact that before the amalgamation there was no asset in the name of goodwill either in the amalgamating company or amalgamated company.

During the year under consideration, the appellant impaired the carrying amount of goodwill amounting to Rs.18,89,24,584 in the books of accounts.

On verification of record available before PCIT it was revealed that no verification/examination of the issue related to the claim of depreciation on goodwill was carried out by the AO. Therefore, as per the provisions of explanation (2) to section 263(1) of the Act, the PCIT treated the order as erroneous and prejudicial to the interest of revenue.

The Ld. AR in his arguments before the Hon’ble Bench accepted that the AO has neither asked any query in the questionnaire issued nor conducted any inquiry on this particular issue.

Hon’ble Bombay High Court in the case of Commissioner of Incometax, Nagpur v. Ballarpur Industries Ltd. (Bombay) [31-07-2017] has held that “Mere taking of a view by the Assessing Officer without having subjected the claim to examination would not make it a view of the Assessing Officer. A view has necessarily to be preceded by examination of the claim and opting to choose one of the possible results. In the absence of view being taken, merely because the issue itself was debatable, would not absolve the Assessing Officer of applying his mind to the claim made by the assessee and allowing the claim only on satisfaction after verification/enquiry on his part. A view in the absence of examination is no view but only a chance result.”

Hon’ble Pune Bench of the Tribunal while deciding the validity of the order passed u/s. 263 of the Act in ITA No. 562/PUN/2019 dated 03.08.2020 has held that “when no view has been taken, no inquiry has been conducted, when no reasons on facts has been placed on record, the order of assessment is bound to be erroneous in so far as prejudicial to the interest of the revenue.”

On merit also PCIT has held that no actual cost has been incurred by the appellant for acquiring the goodwill and the cost of acquisition of self-generated asset was nil.

In the process of amalgamation was is transferred is net assets, which consists of existing tangible assets as well as other existing intangible assets. There was no intangible asset shown in the books of accounts of the amalgamated/transferor company. Mere accounting entries do not give rise to the appellant to claim depreciation on goodwill contrary to the provisions of law.

So, the appellant created a fictitious asset in the name of goodwill in the year of amalgamation and to reduce the tax liability started claiming depreciation on goodwill.

Important point to note here is that there was no asset in the name of goodwill existed before the amalgamation and the appellant has not incurred any cost to acquire the asset of goodwill.

Goodwill cannot be created in the books of accounts as balancing figure in the process of amalgamation. Goodwill is something related to specific advantage or enduring benefits amalgamating company receives in the process of amalgamation.

As per 6th proviso to section 32(1) of the Act, it is clear that the total claim of depreciation shall not exceed the deduction calculated as if the amalgamation had not taken place and such deduction shall be apportioned between the amalgamating company and the amalgamated company in the ratio of number of days for which the assets were used by them.

Explanation 3 to section 43(1), which provides specific anti-abuse provisions in the event the AO is satisfied that the main purpose of the transfer of assets previously used for the purpose of business was the reduction of tax liability by way of an increased depreciation claim. Thus, cost of acquisition of goodwill acquired as a result of amalgamation/demerger in the hands of amalgamated/resulting company shall be deemed to be the cost for which the previous owner acquired it. i.e. NIL.

The actual cost of goodwill for the amalgamated company shall be NIL, as per Explanation 7 to section 43(1) read with Explanation 2 to section 43(6) of the Act. This clearly reveals that no depreciation is available to the amalgamated company on the goodwill created at the time of amalgamation, as the actual cost of goodwill to the amalgamated company is Nil

The Ld. AR argued before the Hon’ble bench that the depreciation on goodwill is allowable in view of the judgement of the Hon’ble Supreme Court in the case of ‘Commissioner of Income Tax Vs M/s. Smifs Securities Ltd. (2012) 348 ITR 302 (SC).

The Hon’ble Supreme Court in its decision in the case of M/s. Smifs Securities (supra) has only acknowledged that the goodwill is an intangible asset. The question of allowability of depreciation on goodwill arising out of valuation done for the purpose of demerger/amalgamation was not posed before the Hon’ble Supreme Court.

Reliance is placed on the decision of ITAT, Bangalore Bench in the case of United Breweries Ltd. v. Additional Commissioner of Income Tax, Range-12, Bangalore (BangaloreTrib), 30.09.2016. The Hon’ble Tribunal after referring the decision of Hon’ble Supreme Court in the case of M/s. Smifs Securities Ltd. (supra) has held that “By virtue of 5th proviso to section 32(1), assessee being amalgamated company could not claim or be allowed to claim depreciation on assets acquiring in scheme of amalgamation more than depreciation that was allowable to amalgamating company.”

In the additional ground filed before the Hon’ble bench, the Ld. AR, stated that the PCIT has the powers to examine the record of any proceedings under this Act available before him before issuing show cause notice and the information on the basis of which the PCIT has passed the revision order was not available on records before issuing the show cause notice u/s. 263 of the Act and same was furnished by the appellant for the first time in response to notice issued /s. 263 of the Act.

The revisionary powers of the PCIT are not restricted to the examination of assessment record only. As per the clause (b) of Explanation 1to Section 263, record includes all records relating to any proceedings under this Act available to PCIT at the time of examination. Hence the contention of the Ld. AR. is contrary to the facts of the case.

In view of the above, it is respectfully submitted that the order of the PCIT passed u/s. 263 of the Act may be upheld.”

11. Ld. Counsel for the assessee has filed Rejoinder controverting the submissions made by ld. Departmental Representative and the same reads as follows :

“1. In the above appeal, vide its email dated 26.09.2025, the assessee has filed the “summarised synopsis of the arguments” and the “synopsis of the arguments” of the assessee.

2. The assessee has now received, a copy of the point-wise arguments of the Ld. Department representative vide his email dated 01.10.2025.

3. All the arguments of the Ld. Department representative are covered by the summarised synopsis of the arguments and the synopsis of the arguments of the assessee, except his fresh/new reliance on the judgement of the Hon’ble Bangalore Bench of the Income Tax Appellate Tribunal in the case of United Breweries Ltd. (Bangalore – Trib.).

(1). In this regards, it is submitted that, the facts of the case of M/s. United Breweries Ltd. were different from the facts of the case of present assessee. As mentioned by the Hon’ble Bangalore Bench of the Income Tax Appellate Tribunal in para 14 of the judgement, M/s United Breweries Ltd. has acquired its subsidiary M/s. Karnataka Breweries and Distillery Ltd. (KBDL) in a scheme of amalgamation. The intangible asset in the shape of goodwill was already standing in the books of accounts of M/s. Karnataka Breweries and Distillery Ltd. (KBDL).at Rs. 7.45 crore, which has been enhanced to the value of Rs. 62.3 crores on amalgamation in the books of accounts of M/s. United Breweries Ltd. It is based on this fact that, the Hon’ble Bangalore Bench, in the context of 5th Proviso to section 32(1)(ii) of the Income Tax Act, has held that the judgement of the Hon’ble Supreme Court in the Case of Smifts Securities Ltd. (SC) will not override the provisions of the 5th Proviso to section 32(1) of the Income Tax Act.

(ii). It is respectfully submitted that, the 5th proviso to section 32(1) of the Income Tax Act mandates that in the event of the amalgamation or demerger, the amount of depreciation shall not exceed, in any previous year, the depreciation calculated, as if the amalgamation or demerger has not taken place, and that the depreciation shall be apportioned between the predecessor and the successor in the ratio of the number of days for which the asset were used by the predecessor and the successor.

It is thus clear that, the 5th proviso to clause (ii) of section 32(1) comes into the picture only, if the asset in question was already existing in the books of accounts of the Predecessor (Amalgamating Company). It is only then that the question of apportioning the depreciation, in the ratio of the number of days for which the assets were held by the Predecessor (Amalgamating Company) and the successor (Amalgamated Company), will arise.

(iii). It is further respectfully submitted that, as per explanation 5 to the said clause (ii) for the purpose of restricting the depreciation, (by applying 5th proviso to clause (ii) of sub section (1) of section 32 of the Income Tax Act,) the intangible assets do not include goodwill. This means the said 5th proviso does not apply to goodwill. For this reason, also the 5th proviso to clause (ii) of sub section (1) of section 32 of the Income Tax Act to restrict depreciation is not relevant in the present case.

In this case, the intangible asset; goodwill was recognised for the first time in the books of accounts of the assessee company, after the amalgamation.

The principal Commissioner of Income Tax has totally confused himself on this aspect. He has proceeded entirely on the misunderstanding that the goodwill was already existing in the books of the accounts of the Predecessor (Amalgamating Company) before the amalgamation.

As such the reliance of the Ld. Department Representative on the judgement of Hon’ble Bangalore Bench in United Breweries Ltd. (supra) is totally misplaced.”

12. We have heard the rival contentions and perused the record placed before us. Impugned revisionary order u/s.263 of the Act has been challenged by the assessee raising various grounds extracted supra. We find that the provision of Section 263 of the Act has direct bearing on the issue raised before us, therefore, it is pertinent to take note of this section which reads as under:

“263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

Explanation- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-

(a) an order passed on or before or after the 1^st day of June, 1988 by the Assessing Officer shall include-

(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;

(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120;

(b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner;

(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1^st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.

(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.

Explanation- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”

12.1 On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4^th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263.

12.2 Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (SC)/[2000] 243 ITR 83 (SC)has laid down following ratio with regard to provisions of section 263 of the Act:

“There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase ‘prejudicial to the interests of the 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 interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue – RampyariDevi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). [Emphasis Supplied]”

13. On examining the facts of the instant case, in light of the provisions of section 263 of the Act and judicial precedence, we note that the discussion of Ld. PCIT in the impugned order and also the directions given in the impugned order are mainly focussed on the issue of depreciation claimed on Goodwill which was generated during F.Y. 2015-16 when M/s.Gera Realty India Private Limited amalgamated with the assessee and in accordance with the scheme of arrangement the Assets and Liabilities were taken over at fair values. The excess amount over the above the value of assets of the amalgamating company paid by the assessee has been booked as Goodwill amounting to Rs.20,16,30,038 and that the assessee has been claiming depreciation on the intangible asset, i.e. goodwill from A.Y. 2016-17 onwards and this claim has been allowed consistently upto A.Y. 2020-21.

14. Now for the year under consideration, the assessee has claimed the depreciation on Goodwill at Rs. 1,86,95,184 as per the Income Tax Act. Ld. PCIT observed that there is impairment of Asset, i.e. Goodwill and the total balances brought forwarded from preceding years in the Fixed assets at Rs. 18,89,24,584, i.e. Opening balance of Goodwill has been impaired during the year and there is Nil balance. However, in the computation of income, assessee has claimed depreciation on Goodwill as per the chart prepared under the Income Tax Act at Rs. 1,86,95,184. Ld. PCIT observed that ld. AO has not made any enquiry in this aspect as to how such depreciation can be allowed on the asset which is shown as totally impaired during the year.

15. Before us, ld. Counsel for the assessee submitted that all these details were placed before ld. AO including the Audited Financial statements and Tax Audit Report and that the Block of assets concept under the Income Tax Act and depreciation claim is calculated separately and has no bearing to fixed asset chart and depreciation calculated as per the Companies Act. He submitted that assessee added back the depreciation as per the books to be considered separately and thereafter reduced the depreciation calculated as per the Block of Asset under the Income Tax Act. Ld. Counsel for the assessee also claimed that all these details of Fixed Assets chart as per the Income Tax Act are shown in the Tax Audit Report and impairment is just an exercise for the year under consideration where for the Companies Act and under the Fair Market Value concept assessee has impaired the asset but the same can be added back as per the Fair Market Value of such intangible asset in subsequent period.

16. We find that admittedly the Audited balance sheets were there before the ld. AO but then as per the Fixed Asset chart attached to the Audited balance sheet indicate that on account of impairment closing balance of the Goodwill has been brought down to Nil value. The opening written down value of Goodwill in books of account standing at Rs. 18,89,24,584 has been scaled down to Nil amount due to impairment of Goodwill. Impairment of an asset comes into picture if the assets have been permanently impaired whether by damage, negligence or obsolescence or change in the economic landscape such that future expected cash flow from the asset are less than the net book value on the balance sheet, and that the assets must be written down to their estimated remaining value or in some cases written off entirely. This write down or write off is accounted in the same manner as described in the sales of asset and demolition. Assessee in the instant case following the Accounting Standards has calculated the value of goodwill at Nil and impaired the Goodwill asset by Rs. 18,89,24,584. Now such impairment loss needs to be recognised in the books which the assessee has duly done. On one hand assessee has accepted in the Audited Financial statements that the Fair Market Value of the Goodwill as on the close of the year is Nil but on the other hand on the very same asset which is forming part of the Block of Asset under the Income Tax Act under intangible assets, assessee has claimed depreciation. Ld. AO on going through the details of depreciation claimed by the assessee ought to have taken note of this issue and should have carried out further enquiry asking the assessee to explain as to how this depreciation on Goodwill can be allowed when in the books of account the value is adopted at Nil. Ld. Counsel for the assessee admitted that ld. AO has not enquired into this issue at all. He therefore submitted that there was no need for making any enquiry because Tax Audit Report was there to support the assessee’s claim.

17. We however fail to find any merit in such contention made by ld. Counsel for the assessee and find that under the revisionary power ld. PCIT on going through the records has noticed that the claim of depreciation on Goodwill has been made inspite of the fact that total book value of the Goodwill has been impaired during the year and is shown at Nil amount and under these given facts and circumstances ld. AO ought to have carried out the detailed enquiry and in absence thereof, there is no inconsistency in the impugned finding of ld. PCIT directing the AO to verify such claim of depreciation on Goodwill at Rs.1,86,95,184 made by the asset in the computation of income.

18. Next issue for our consideration is that ld. PCIT while dealing with the issue of depreciation has further made reference to the claim of depreciation on the Goodwill in the preceding years. Ld. PCIT has also made discussion about the transactions which took place during F.Y. 2015-16 when there was amalgamation of Gera Realty India Private Limited with the assessee and under the scheme of arrangement the amount paid over and above the book value of the net assets of amalgamating company has been treated as Goodwill. Ld. PCIT has observed that such excess payment has been treated as self generated Goodwill by the assessee and the same is not as per the Accounting principles. Ld. PCIT has also observed that the assessee ought to have reduced the amount from the Reserves and Surplus rather than treating it as self generated intangible asset, i.e. Goodwill and thereby claiming depreciation thereon. Observation of ld. PCIT in para Nos. 9.2 to 9.9.7 of the impugned order reads as under :

“9.2 Claim is not in accordance to the provision of the Act

9.2.1 Explanation 3 to section 32 of the Act whereby ‘asset includes an intangible asset, being know-how, patents, copyrights, trademarks, licenses. franchises or any other business or commercial rights of similar nature. That goodwill is included in the definition of intangible assets being any other business or commercial right of a similar nature has been settled by the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd. CIT v. Smifs Securities Ltd. ITR 302 (SC)/ (2012) 348 ITR 0302. However, the question that has been answered by the Hon’ble Supreme Court in Smifs Securities supra is whether Goodwill is included in the definition of intangible assets being any other business or commercial right of a similar nature. The Hon’ble Court has refrained from answering any other issue of law or fact in this regard and has strictly decided only upon the question before it. The question of allowability of depreciation on Goodwill arising out of valuation done for the purpose of demerger/amalgamation was not posed before the Hon’ble Supreme Court.

9.9.2 What is transferred is the net assets, which consists of existing tangible assets as well as other existing intangible assets. There are no intangible assets shown in the books of accounts of the transferor company. It may be true that goodwill is to be recognized in the books of the assessee company as per prescribed accounting standards. However, this accounting treatment itself does not entitle the assessee to claim depreciation in its books of accounts. The claim of depreciation to be allowed under the Income Tax Act is governed by the provisions of the Income Tax Act.

9.9.3 Mere accounting entries do not give rise to the assessee to claim depreciation on goodwill (intangible asset) contrary to the provisions of law. Under the Income-tax Act, the total income of a company is chargeable to tax under section 4. The total income has to be computed in accordance with the provisions of the Act.

The standard accounting practices might have taken some other view but such accounting practices were not necessarily a good law, these practices cannot override the specific provisions contained in the scheme of the Income-tax Act with respect to the actual cost for allowing depreciation to the assessee.

9.9.4 In view of the fact that there is no actual cost having been incurred by the assessee company as well as by earlier company GRIPL, the claim made by the assessee in the return of income for the respective assessment years with regard to depreciation on goodwill (intangible asset) which is found to be a fictitious asset in the hands of the assessee, is neither bona fide nor tenable.

9.9.5 As per the 6th Proviso of Section 32(1) of the IT Act, it is clear that the total claim of depreciation shall not exceed the deduction calculated as if the amalgamation had not taken place and such deduction shall be apportioned between the amalgamating company and the amalgamated company in the ratio of number of days for which the assets/businesses were used by them.

9.9.6 Further, Explanation 3 to section 43(1), which provides specific anti-abuse provisions in the event the Assessing Officer is satisfied that the main purpose of the transfer of assets previously used for the purposes of business was the reduction of tax liability by way of an increased depreciation claim. Thus, cost of acquisition of goodwill acquired as a result of amalgamation/demerger in the hands of amalgamated/resulting company shall be deemed to be the cost for which the previous owner (amalgamating/demerged company) acquired it, i.e. NIL.

9.9.7 From the discussion made in foregoing paragraphs, it can be concluded that in the hands of the Resulting Company, in the amalgamation with respect to the instant case, the cost of the transferred capital asset to the amalgamated company shall be the same as the cost to the amalgamating company. The WDV of the block of assets acquired by Resulting Company will be the WDV of such assets in the hands of amalgamated company. Depreciation shall be apportioned between the amalgamating company and amalgamated company in the ratio of number of days for which those assets were respectively used by them. The aggregate depreciation available in the previous year shall not exceed the depreciation calculated at the prescribed rates, as if the amalgamation had not taken place. Thus, the claim of depreciation on goodwill by the assessee company, which was created during the process of amalgamation, is not as per law.”

19. On going through the above finding of ld.PCIT and also taking note of the written submissions filed by both the sides during the course of hearing, admittedly assessee has taken over the business of Gera Realty India Private Limited during F.Y. 2015-16 and as per the scheme of arrangement has paid the sum which is in excess of the book value of the net assets received by it on account of amalgamation. Such excess amount has been treated as Goodwill in the books and from A.Y. 2016-17 onwards assessee has been consistently claiming depreciation thereon.

20. Now the purpose of discussion by ld. PCIT on this issue seems to be just extension of the issue of claim of depreciation on the Goodwill during the year and while examining such claim ld. PCIT has also taken into consideration the facts of the preceding years and has come to a finding that value of self generated asset, i.e. Goodwill is Nil and no claim of depreciation is allowable thereon. We note that the revisionary proceedings has been carried out only for the assessment year in question in A.Y. 2020-21 and whatever issues pertain to this particular year and which are the subject matter of scrutiny proceeding carried out by ld. AO can only be touched upon by ld. PCIT and therefore such observations made for A.Y. 2016-17 will not have any bearing in the set aside assessment proceedings. However, such observations may be of some help to the Revenue authorities to examine the issue in the preceding years in case the reopening of those assessment years is possible under the provisions of the Income Tax Act. Thus in our considered view the discussion about the self generated asset, i.e. Goodwill and the observations of computing the quantum of Goodwill at Nil by making reference to the transactions which took place during F.Y. 2015-16 is uncalled for. Therefore, so far as the impugned order is concerned, we find that the assessment order is erroneous and prejudicial to the interest of Revenue only to the extent of non examination of issue of depreciation claimed on Goodwill at Rs. 1,86,95,184 and Id. PCIT has rightly directed the AO to carry out the necessary exercise for examining this issue. Ground Nos. 3, 4 and 6 raised by the assessee are dismissed. To this extent, the impugned order is sustained.

21. So far as Ground No.2 raised by the assessee regarding the validity of the impugned order on the ground that show cause notice dated 05.03.2024 do not contain any DIN Number, we note that in the impugned order in Para No.3 reference has been made to the DIN No.1061484781(1)/3809 in the notice issued u/s.263 of the Act dated 26.02.2024. Even in the impugned order also DIN Number has been mentioned. We therefore fail to find any merit in Ground No.2 raised by the assessee and same is dismissed.

22. We find that assessee has not made out the grounds of appeal in a proper way. The issues have been mixed in the grounds of appeal Nos. 5, 7, 8 and Additional ground. We observe that in the additional ground the assessee has stated that the impugned revisionary order passed u/s.263 of the Act is invalid and unsustainable in law as it has been passed on the basis of the fact/premise that the opening written down value of the Block of intangible asset (Goodwill) has been acquired/generated as a result of amalgamation of M/s. Gera Realty India Pvt. Ltd. (GRIPL) with the assessee. We fail to find any merit in this additional ground as well as remaining grounds of appeal 5, 7 and 8 raised in the main grounds of appeal because ld. PCIT while dealing with the issue of nonexamination of the depreciation claimed on Goodwill has made certain observations regarding the written down value of the intangible asset, i.e. Goodwill. In the preceding paras, we have observed that the alleged intangible asset (Goodwill) was generated during A.Y. 2016-17 when the amalgamation of GRIPL took place with the assessee. Subsequent to A.Y. 201617, the written down value of the Goodwill is being carried forward on year to year basis and for the impugned order under consideration also written down value of Goodwill was brought forward from the preceding year. Since the balance of written down value was brought forward from the preceding year there was no occasion with the AO to have examined the correctness of the written down value as well as the actual cost of such asset introduced for the first time in the books of account. Certainly, the observation of ld. PCIT of treating the value of Goodwill as Nil in the course of the revisionary proceedings carried out for A.Y. 2020-21 is not in accordance with law because the subject matter of the revisionary proceedings is the assessment for A.Y. 2020-21 and during which as on 01.04.2019 the written down value of the actual asset was brought forward from the preceding year audited balance sheets which have already passed through the assessment proceedings. However, while making observation challenging the correctness of the creation of Goodwill during A.Y. 2016-17 will in itself cannot make the impugned order unsustainable and find it to be a general discussion in corollary to the issue of depreciation on Goodwill. We therefore fail to find any merit in the Grounds 5, 7 and 8 and the additional ground raised by the assessee and the same are dismissed as per the terms indicated above.

23. In the result, the appeal filed by the assessee is dismissed.