Depreciation on goodwill claim remanded for a fresh hearing due to lack of documents.

Issue

What is the appropriate course of action when a taxpayer’s claim for depreciation on goodwill is dismissed by the Commissioner (Appeals) without any specific finding on the merits, primarily because the taxpayer failed to furnish the required supporting documents?

Facts

The assessee-company was the resulting entity from an amalgamation (merger). In its books, it recorded goodwill arising from this process and claimed depreciation on this goodwill as an expense.
The Assessing Officer (AO) disallowed the claim, citing the fifth proviso to Section 32(1) of the Income-tax Act, 1961.
The assessee appealed to the Commissioner (Appeals), who also dismissed this ground.
However, the dismissal by the Commissioner (Appeals) was not based on the legal merits of the claim. The order noted that it could not provide a specific finding because the assessee had failed to submit crucial documents, such as the amalgamation order, pre- and post-merger financial statements, and the detailed goodwill calculation.

Decision

The Tribunal remanded the matter back to the Commissioner (Appeals).

It held that since the first appellate authority had not been able to adjudicate the issue on its merits due to the non-availability of essential documents, the most appropriate and just course of action was to provide another opportunity.
The Commissioner (Appeals) was directed to re-adjudicate the issue afresh. This would involve calling for the necessary details and documents from the assessee and then passing a speaking order on the merits of the claim.

Key Takeways

Documentation is Crucial: A taxpayer must substantiate their claims with complete and relevant documentation. Failure to do so can lead to the dismissal of an appeal without the merits of the case even being considered.
Remand for a Fair Hearing: When a lower authority dismisses a case due to a procedural gap, such as the non-submission of documents, the appellate body often remands the case. This ensures that the taxpayer gets a fair opportunity to present their case properly and that a decision is ultimately made on the substance of the issue.
Duty of the First Appellate Authority: The role of the Commissioner (Appeals) is to conduct a thorough review. The remand order implicitly reinforces the duty of the first appellate authority to seek necessary information before dismissing a ground of appeal, ensuring a complete and fair adjudication.
Legal Context (Depreciation on Goodwill): For the assessment years in question (AY 2013-14 and 2014-15), the law allowed depreciation on acquired goodwill, a position settled by the Supreme Court in the Smifs Securities Ltd. case. The 2021 amendment that disallowed it was prospective. The remand gives the assessee a chance to prove its claim was valid under the law applicable at the time.

IN THE ITAT CHENNAI BENCH ‘C’

Dynaspede Integrated Systems (P.) Ltd.

Deputy Commissioner of Income-tax

Manu Kumar Giri, Judicial Member
and AMITABH SHUKLA, Accountant Member

IT Appeal Nos.1860 & 1861 (Chny.) OF 2024
[Assessment years 2013-14 and 2014-15]

SEPTEMBER 8, 2025

Narahari Nava Kanth, CA for the Appellant. Ms. R. Anitha, Addl. CIT for the Respondent.

ORDER

Manu Kumar Giri, Judicial Member. – These two appeals by the assessee are directed against orders of even dated 07.05.2024 passed by the Ld. Commissioner of Incometax (Appeals), NFAC Delhi [in short ‘the Ld. CIT(A)’] for assessment years 2013-14 & 2014-15.

2. In both the appeals facts are identical hence adjudication in ITA No.1860/Chny/2024 for AY 2013-14 will apply mutatis mutandis to ITA No.1861/Chny/2024 for AY 2014-15.

3. The sole issue in the present appeal relates to the assessee’s claim of depreciation of Rs. 2,74,15,039/- on goodwill arising from amalgamation in the hands of the resultant entity, M/s. Dynaspede Integrated Systems Pvt. Ltd.

4. Briefly stated facts of the case are that the assessee is a company engaged in manufacturing engineering products, filed its return of income for AY 2013-14 on 28.09.2013 declaring Nil income. The return was initially processed u/s 143(1) of the Act and subsequently taken up for scrutiny u/s 143(2) of the Act, resulting in an assessment u/s 143(3) of the Act dated 17.03.2016, wherein the reported loss was recomputed. Thereafter, the assessment was reopened by issuance of notice u/s 148 of the Act dated 27.03.2018, and reassessment u/s 143(3) r.w.s. 147 of the Act was completed on 14.12.2018 by the ACIT, Circle-1, Hosur, disallowing depreciation on goodwill amounting to Rs. 2,74,15,039/-. The reopening was initiated based on the interpretation of the proviso to section 32(1) of the Act and the decision of the ITAT Bangalore Bench in the case of United Breweries Ltd. The assessee objected to the reopening vide letter dated 15.11.2018, however, the objections were rejected by the AO. It was held that depreciation on goodwill arising from amalgamation was not allowable in view of the fifth proviso to section 32(1) of the Act. Aggrieved by the same, the assessee preferred an appeal before Ld. CIT(A). However, the Ld. CIT(A) partly allowed the appeal and dismissed the ground relating to depreciation on goodwill arising from amalgamation by observing as under:

The AR of the appellant was specifically called out to submit the said documentation to decide the issue, but unfortunately it has chosen not to comply to the same. In view of the above non-compliance, it is held that Ld.JAO’s decision was correct, the ground of appeal is dismissed.

Aggrieved, assessee preferred an appeal before us.

5. At the outset, the learned Counsel for the assessee submitted that the disallowance of depreciation on goodwill, arising out of amalgamation, by invoking the provisions of the fifth proviso to section 32(1) of the Act, is unsustainable. In support of this contention, the learned AR relied upon the following judicial precedents:

CIT v. Smifs Securities Ltd. 302 (SC);

II.

Pentasoft Technologies v. Dy. CIT 209 (Madras);

III.

Asstt.CIT v. Dorma India (P.) Ltd. [IT Appeal Nos.1664 to 1666(Chny) of 2019, dated 20-11-2019].

6. The learned Departmental Representative, on the other hand, supported the order of the Assessing Officer and prayed for dismissal of the assessee’s appeal.

7. We have heard the rival submissions and perused the orders of the authorities below. We find that on the issue of ‘depreciation on goodwill arising from amalgamation’, the ld. CIT(A) has not given any specific finding as the assessee failed to provide additional documents such as Amalgamation order, Pre amalgamation and post amalgamation financials, Goodwill calculation etc. The assessee also did not dispute these facts as discernible from Sr. No. 32 of the statement of facts filed before us. Therefore, we set aside the issue relating to ‘depreciation on goodwill arising from amalgamation’ to the file of the ld.CIT(A) who will proceed with aforesaid issue a fresh after calling requisite details/documents from the assessee. Needless to say, the ld.CIT(A) will grant proper opportunity of hearing to the assessee before deciding the issue. The assessee is free to file all such documents in support of the issue in question. Further, if the issue in question is decided against the assessee by the ld. CIT(A) then the assessee is entitled to raise legal/jurisdictional grounds again before us. The ld. CIT(A) will dispose of the issue keeping in mind the judgments/orders referred supra.

8. Our above order is equally applicable to the ITA No.1861/Chny/2024 for AY 2014-15.

9. In the result, both the appeals filed by the assessee are allowed for statistical purposes.