Reopening Notice for Depreciation on Goodwill Quashed; No Escapement of Income

Issue 1: Whether a reopening notice under Section 148 of the Income-tax Act, 1961, is valid when it is based on the same issue that was decided in a previous assessment year, and the Assessing Officer (AO) failed to consider the effect of the Tribunal’s order in that year.

Facts 1:

The assessee-company claimed depreciation on goodwill arising from the acquisition of GAIL in Assessment Year 2014-14.
In Assessment Year 2014-15, the Transfer Pricing Officer (TPO) made an upward adjustment concerning the goodwill.
The Dispute Resolution Panel (DRP) directed to disallow the depreciation claimed on goodwill, stating that the recording of goodwill was in contradiction with the amount recorded in the books of GAIL before the acquisition.
The AO issued a reopening notice for the relevant assessment year (2018-19) on the ground that the claim of depreciation on goodwill was in violation of the provisions of the Act.
In Assessment Year 2014-15, the Tribunal had deleted the addition made on account of the recommendation of the DRP.
The AO ignored the Tribunal’s order.

Decision 1:

The court held that since the addition made on account of the recommendation of the DRP was deleted as per the provisions of Section 92BA in Assessment Year 2014-15, and the AO ignored that order, there was no question of escapement of income for the relevant Assessment Year 2018-19 for the claim of depreciation on the WDV of goodwill.
Therefore, the impugned reopening notice was not sustainable and was set aside.

Key Takeaways 1 (Section 148, 32):

Reopening on Same Issue: An assessment cannot be reopened on the same issue that was already considered and decided in a previous assessment year, especially when the decision has been upheld by a higher authority like the Tribunal.
Effect of Tribunal Order: The AO must consider the effect of decisions made by higher authorities, such as the Tribunal, in related assessment years.
Escapement of Income: Reopening requires a valid reason to believe that income has escaped assessment. If the issue has already been decided and there is no new material, reopening is not justified.
Goodwill Depreciation: The allowability of depreciation on goodwill is a complex issue, and the AO must consider all relevant facts and legal precedents.

In essence:

The court quashed the reopening notice because the AO tried to revisit an issue that had already been settled in a prior year, and ignored the Tribunal’s decision.

This case emphasizes the importance of consistency in tax assessments and the need for the AO to consider the impact of decisions made in related assessment years. It also highlights that a mere change of opinion or a failure to consider a Tribunal’s order is not a valid ground for reopening an assessment.

HIGH COURT OF GUJARAT

Ammann India (P.) Ltd.

Assistant Commissioner of Income-tax

BHARGAV D. KARIA and D.N. Ray, JJ.

R/SPECIAL CIVIL APPLICATION NO. 7583 of 2024

FEBRUARY 4, 2025

Dhinal A Shah, Adv. for the Petitioner. Ms. Maithili D. Mehta, Adv. for the Respondent.

ORDER

Bhargav D. Karia, J. – Heard learned advocate Mr.Shreyansh Ranka appearing for learned advocate Mr.Dhinal Shah for the petitioner and learned Senior Standing Counsel Ms.Maithili Mehta for the respondent.

2. By this petition under Article 226 of the Constitution of India, the petitioner has prayed for the following main reliefs :-

“(b) Pass appropriate order issuing writ of certiorari and/or any other appropriate writ and/or pass appropriate order quashing and setting aside the Notice under Section 148 and Order under Section 148A(d) of the Income Tax Act dated 26.03.2024 passed by the Respondent -Authority. “

3. The brief facts of the case are that the petitioner received a notice under Section 148A(b) of the Income Tax Act, 1961 (for short “the Act”) dated 06.03.2024 calling upon the petitioner to show cause as to why the notice under Section 148 of the Act should not be issued for the Assessment Year 2018-19 along with the reasons for issuing the notice.

4. The reasons recorded in the notice under Section 148A(b) of the Act reads as under:-

“In this case, the assessee company had filed its Return of Income for A.Y.2018-19 on 30.11.2018 declaring total Income of Rs.55,65,96,580/-. The case was selected for complete scrutiny through CASS. The assessment order was passed u/s 143(3) read with section 143(3A) & 143(3B) of the I.T. Act on 13.03.2021 determining total assessed income of Rs.58,23,80,090/- after making addition of Rs.2,41,03,000/- on account of disallowance of ‘royalty expenses’ u/s.37 and ‘donation’ u/s. 35(1)(ii) of IT Act.

On perusal of the financial statements and tax audit report of the assessee, it was seen that assessee had shown intangible asset worth Rs.53,17,57,633/- on which 25% depreciation i.e. Rs. 13,29,39,408/- had been claimed while computing the total income. On perusing case records of the assessee, it was observed that the said intangible asset had been created by the assessee company during F.Y. 2013-14 on acquired of Gujarat Apollo Industries Ltd. On verification of the case record in the case of the assessee company, it is seen that the TPO had made upward adjustment of Rs.116.32 Cr. In A.Y. 2014-15. Thereupon, the assessee objected before the Dispute Resolution Penal (DRP) and DRP-2, Mumbal issued direction u/s. 144C(5) of I.T. Act in the favour of Revenue to make disallowance of Rs.29,08,15,170/- being depreciation claimed on the goodwill (@25% of Rs.1,16,32,60,681/-).

It is clear that the amount of goodwill if any allowable to be recorded in the books of the assessee company is only to the extent it is recorded in the books of M/s Gujarat Apollo Industries Ltd (GAIL) before acquisition which is in complete contradiction with the recording of goodwill worth Rs.1,16,32,60,681/- by the assessee company. Hence the claim of depreciation by the assessee is clearly in violation of the explicit provisions of I.T Act.

It was observed that the said intangible asset worth Rs.53,17,57,633/- on which 25% depreciation i.e. Rs.13,29,39,408/- had been claimed by the assessee was created by the assessee company during F.Y. 2013-14 on acquire of Gujarat Apollo Industries Ltd. The TPO had made upward adjustment of Rs.116.32 Cr. in A.Y.2014-15. Thereupon, the assessee objected before the Dispute Resolution Penal (DRP) and DRP-2, Mumbai issued direction u/s. 144C(5) of IT Act in the favour of Revenue to make disallowance of Rs.29,08,15,170/- being depreciation claimed on the goodwill (@25% of Rs. 1,16,32,60,681/-). It is clear that the amount of goodwill if any allowable to be recorded in the books of the assessee company is only to the extent it is recorded in the books of M/s Gujarat Apollo Industries Ltd (GAIL) before acquisition which is in complete contradiction with the recording of goodwill worth Rs.1,16,32,60,681/- by the assessee company. Hence the claim of depreciation by the assessee is clearly in violation of the explicit provisions of I.T.Act.

Please justify/explain the above transactions/Investment/income alongwith supporting documentary evidences. Failure to which it is presume that you have nothing to say about the above-mentioned financial transactions and the same will be treated as escapement of income liable to be added in your total income.

On the basis of the information flagged in the case of the assessee, it appears that income chargeable to tax has escaped assessment and therefore, before forming the opinion for issuing the notice under section 148, an opportunity of being heard is being be provided as per provisions of section 148A(b) of the Act as why a notice under section 148 of the Income tax, 1961, should not be issued, information which suggest that income chargeable tax of Rs.13,29,39,408/- has escaped assessment for the assessment year under consideration on the basis of the information available in this office

5. The petitioner filed reply to the aforesaid notice contending inter alia that the petitioner filed return of income claiming the depreciation on goodwill on the basis of the Written Down value of Rs.53,17,57,633/- amounting to Rs.9,20,15,737/- and not Rs.13,29,39,408/- as mentioned in the notice. It was further contended that the petitioner has claimed the depreciation on goodwill which was being allowed pursuant to the orders passed by the Income Tax Appellate Tribunal in case of the petitioner for Assessment Year 2014-15. It was therefore submitted that if there is no escapement of income on the basis of the information available with the Assessing Officer reopening of assessment was not permissible.

6. However, after considering the reply filed by the petitioner, respondent-Assessing Officer passed the impugned order under Section 148A(d) of the Act ignoring the order passed by the Income Tax Appellate Tribunal deleting the addition which was made on the basis of the order of the Dispute Resolution Panel. The Assessing Officer while passing the impugned order has observed as under :-

“8. The reply filed by the assessee is not acceptable. The assessee has submitted that during the year under consideration AIPL has claimed depreciation amounting to Rs.9,20,15,737/- (Instead of Rs. 13,29,39,408/- mentioned in the notice) on intangible asset being goodwill arising on business acquisition of GAIL and AEML. The written down value of Rs.53,17,57,633/- is closing written down value of the goodwill as well as other intangible assets (i.e., value as on 31 March 2016). Accordingly, during the year under consideration the depreciation claimed by AIPL is Rs.9,20,15,737/-instead of depreciation of Rs.13,29,39,408/- mentioned by Your Honour in the notice issued under section 148A(b) of the Act.

9. Further, the assessee submits that the disallowance of depreciation on goodwill made by the learned TPO/AO during the course of assessment proceedings of A.Y. 2014-15. Accordingly, A.Y. 2014-15 was the base year of litigation and disallowance of depreciation on goodwill made by the learned AO during A.Y. 2016-17 is consequential disallowance. The disallowance of depreciation on goodwill made by the learned AO in A.Y. 2014-15 (being the base year) has been deleted by Hon’ble Ahmedabad Income Tax Appellate Tribunal (ITAT) in AIPL’s case through order dated 3rd January 2022 (ITA No. 2262/Ahd/2018).

10. Further, the assessee has stated that although AIPL and GAIL and AEML may be considered as related parties under section 40(A)(2)(b) of the Act, the transaction of business transfer and the consideration agreed for the same was ultimately decided pursuant to the joint venture agreement. Therefore, in substance, the said transaction is not a transaction influenced by the related parties and can be considered as an uncontrolled transaction.

11. Assessee has raised an issue that as per clause (a) to sub-section (1) of section 149 of the Act (amended by Finance Act 2021), no notice under section 148 can be issued for the relevant assessment year if three years have lapsed from the end of relevant assessment year. Clause (b) to sub-section (1) of Section 149 provides that the notice under section 148 of the Act can be issued beyond a period of three years but within ten years from the end of the relevant AY only if the specified conditions are satisfied.

12. On perusal of the financial statements and tax audit report of the assessee, it was seen that assessee had shown intangible asset worth Rs.53,17,57,633/- on which 25% depreciation i.e. Rs.13,29,39,408/- had been claimed while computing the total income.

The said intangible asset had been created by the assessee company during F.Y. 2013-14 on acquired of Gujarat Apollo Industries Ltd. The TPO had made upward adjustment of Rs.116.32 Cr. in A.Y. 2014-15. Thereupon, the assessee objected before the Dispute Resolution Penal (DRP) and DRP-2, Mumbai issued direction u/s.144C(5) of IT Act in the favour of Revenue to make disallowance of Rs.29,08,15,170/- being depreciation claimed on the goodwill (@25% of Rs.1,16,32,60,681/-).

13. Therefore, it is clear that the amount of goodwill if any allowable to be recorded in the books of the assessee company is only to the extent it is recorded in the books of M/s. Gujarat Apollo Industries Ltd (GAIL) before acquisition which is in complete contradiction with the recording of goodwill worth Rs.1,16,32,60,681/- by the assessee company. Hence the claim of depreciation by the assessee is clearly in violation of the explicit provisions of I.T Act.

14. Against the order, the assessee had filed appeal before the ITAT and the ITAT has deleted the addition. However, Hon’ble ITAT has not decided the issue on facts of the case but decided on the applicability of Section 92BA(i) when the said section was omitted from the statute by the Finance Act, 2017 w.e.f. 01.04.2017. The Department has filed Tax Appeal before Hon’ble High Court of Gujarat vide Tax Appeal No. 459 of 2022 and the final out come is pending.

15. Further, the A.O. has followed up the procedure as per law and the case fall within the ambit of Clause (b) to sub-section (1) of Section 149 of the Income Tax Act as the books of accounts are in possession of the Assessing Officer, the escapement of income is above Rs.50 lakhs and in the form of asset on account of depreciation claimed by the assessee.

16. In view of the above, as per the provision of section 148A(d) of the Act, after considering the material available on record and reply of the assessee, it is clear that income chargeable to tax to the extent of Rs. 13,29,39,408/- has escaped assessment within the meaning of section 147 of the I.T. Act for A.Y.2018-19 represented in the form of entries in books of accounts as per the provision of section 149(1)(b) of the Act.

17. Therefore, it is a fit case to issue notice u/s.148 of the Act. This order is being passed under section 148A(d) of the Act with prior approval of specified authority as defined under section 151 of the Act for the A.Y. 2018-19.

7. On perusal of the aforesaid order, it is clear that the respondent-Assessing Officer has failed to take into consideration the order passed by the ITAT which is placed on record by the petitioner at Annexure “D” [page 33 of the petition] which clearly shows that the addition made on account of the recommendation of the Dispute Resolution Panel which was deleted as per the provision of Section 92BA of the Act were not applicable for the year under consideration and only because the Tribunal has not dealt with the merits of the matter, the same cannot be considered as an information, so as to assume the jurisdiction to issue the notice under Section148 of the Act more particularly when the Assessing Officer has failed to point out the effect of deletion of the addition made in the year 2014-15 and therefore, there is no question of escapement of income for the Assessment Year 2018-19 for claim of the depreciation on the Written Down value of the goodwill for the year under consideration.

8. Considering the above facts, the impugned order dated 26^th March, 2024 as well as the notice issued under Section 148 of the Act are hereby quashed and set aside. The petition is accordingly disposed of.