Goodwill arising from amalgamation is a valid intangible asset eligible for depreciation.

By | June 1, 2025
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I. PCIT cannot revise depreciation on goodwill under Section 263 if it was allowed in prior years, accepted by the Tribunal, and no factual/legal changes occurred.

II. PCIT cannot revise Section 80-IA deduction under Section 263 if the AO made inquiries and accepted the claim based on furnished reconciliation, without clear findings of error or revenue loss.

III. PCIT cannot revise an addition already made under Section 28 as business receipt to Section 68 (cash credit) if the transaction was supported by banking channels and confirmations, and the PCIT fails to show how this would lead to a higher tax liability or that the Section 28 addition was erroneous.

I. PCIT Cannot Revise Depreciation on Goodwill if Allowed in Prior Years and Accepted by Tribunal.

Issue:

Whether the Principal Commissioner (PCIT) can invoke revisionary powers under Section 263 of the Income-tax Act, 1961, to disallow depreciation on goodwill for Assessment Year 2018-19, when such depreciation was already allowed in preceding assessment years and upheld by the Tribunal, and there has been no material change in facts or law.

Facts I:

  • A company, CLPL, amalgamated with SSPPL, which subsequently converted into the assessee.
  • In Assessment Year 2016-17, goodwill of a certain amount was recognized in the books of the amalgamated entity due to excess consideration over net assets acquired.
  • Depreciation on this goodwill was claimed and allowed in Assessment Year 2018-19.
  • The PCIT invoked Section 263, claiming that in Assessment Year 2016-17, the Assessing Officer (AO) had disallowed depreciation on such goodwill, stating it was self-generated or lacked real consideration.
  • However, it was a matter of fact that the Tribunal, in the preceding Assessment Years 2016-17 and 2017-18, had already accepted that goodwill arising from the excess of consideration over the net value of tangible assets transferred in an amalgamation was a valid intangible asset and therefore eligible for depreciation under Section 32(1)(ii).
  • Thus, the foundational presumption in the PCIT’s order that depreciation on goodwill stood disallowed in earlier years did not hold good.
  • Furthermore, once depreciation on goodwill was allowed in the initial year and its Written Down Value (WDV) was determined, depreciation in subsequent years became a matter of statutory computation under Section 32(1).
  • The PCIT could not have reopened this settled position through revision without first disturbing the allowance in the earlier year.

Decision I:

The court held in favor of the assessee. It ruled that since depreciation on goodwill was already allowed in earlier assessment years and no material change in facts or law occurred, the revenue was bound to maintain consistency, and the issue could not be arbitrarily re-examined in subsequent years. The court further affirmed that goodwill arising on amalgamation qualifies as an intangible asset eligible for depreciation. Therefore, the impugned invocation of Section 263, being based on an incorrect factual premise, could not be sustained.

Key Takeaways I:

  • Consistency in Taxation/Res Judicata (Limited): While strict res judicata does not apply to income tax proceedings for different assessment years, the principle of consistency is generally followed, especially when there’s no change in facts or law. Once an issue (like the allowability of depreciation on a specific asset) has been decided in favor of the assessee by a higher authority (like the Tribunal) in preceding years, the revenue is bound by that decision for subsequent years unless new facts or a change in law warrants a different view.
  • Depreciation on Goodwill in Amalgamation: Goodwill arising from the excess of consideration paid over the fair value of net identifiable assets acquired in an amalgamation is considered a “capital asset” and an “intangible asset” eligible for depreciation under Section 32(1)(ii). This is a well-settled legal position.
  • Scope of Section 263 – Erroneous and Prejudicial: The PCIT’s power to revise under Section 263 requires an order to be both “erroneous” and “prejudicial to the interest of revenue.” If the factual premise on which the PCIT acts is incorrect (e.g., claiming prior disallowance when it was allowed), the order cannot be sustained.
  • WDV and Statutory Computation: Once WDV is determined for an asset, its depreciation in subsequent years is a matter of mechanical statutory computation unless the WDV itself is challenged or re-computed on valid grounds, which would require disturbing the earlier year’s assessment.

II. PCIT Cannot Revise Section 80-IA Deduction if AO Verified and Accepted Claim Based on Reconciliation.

Issue:

Whether the Principal Commissioner (PCIT) can invoke revisionary powers under Section 263 of the Income-tax Act, 1961, alleging that the Assessing Officer (AO) allowed an excess deduction under Section 80-IA (for infrastructure undertakings) without reconciling differences between depreciation claimed under books and income-tax laws, and without proper verification, when the AO had, in fact, verified the claim based on prescribed forms and reconciliation.

Facts II:

  • For Assessment Year 2018-19, the PCIT invoked Section 263.
  • The PCIT’s ground was that the Assessing Officer had allowed an “excess deduction” under Section 80-IA without reconciling the difference between depreciation claimed under books and income-tax provisions, and without proper verification.
  • However, it was noted that the Assessing Officer had, in fact, verified the Section 80-IA claim based on:
    1. Form 10CCB (the audit report for claiming 80-IA deduction).
    2. Profit and Loss statement of the eligible Windmill unit.
    3. Depreciation schedules prepared under both the Income Tax Act and the Companies Act.
  • A reconciliation of depreciation was also duly filed and accepted during the assessment proceedings.
  • There was no specific finding by the Principal Commissioner that the 80-IA claim was factually incorrect or that any demonstrable excess was apparent from the computation.

Decision II:

The court held in favor of the assessee. It ruled that when the Assessing Officer had made inquiries and taken a view after considering the material placed before him, revision under Section 263 could not be invoked merely because the PCIT believed that a better or more detailed inquiry should have been made. In the absence of any clear finding of incorrect allowance or revenue loss, the assessment could not be considered erroneous for the purpose of Section 263.

Key Takeaways II:

  • Scope of Section 263 – “Erroneous” when Inquiry Lacking: An order can be deemed “erroneous” under Section 263 if the AO did not make any inquiry or made an inadequate inquiry on a vital point.
  • “Inadequate Inquiry” vs. “Change of Opinion”: The crucial distinction is that if the AO has conducted an inquiry and taken a plausible view based on available material, the PCIT cannot substitute his/her own opinion by invoking Section 263 just because he/she thinks a more detailed inquiry could have been done. This would amount to a mere change of opinion, which is not permissible for Section 263.
  • Verification by AO: The court found that the AO had indeed verified the Section 80-IA claim by examining the relevant forms, statements, and depreciation schedules, and had accepted the reconciliation. This demonstrates application of mind and inquiry.
  • PCIT’s Duty to Establish Prejudice and Error: For a Section 263 order to be sustained, the PCIT must establish not just that the order is “erroneous” but also “prejudicial to the interest of revenue,” often by showing how a specific allowance was factually incorrect and led to a loss of revenue. A vague allegation of “excess deduction” without a clear computation is insufficient.

III. PCIT Cannot Revise Addition from Section 28 to Section 68 Without Showing Error/Higher Tax Impact.

Issue:

Whether the Principal Commissioner (PCIT) can invoke revisionary powers under Section 263 of the Income-tax Act, 1961, to change the classification of an addition already made by the Assessing Officer (AO) from Section 28 (business receipt) to Section 68 (unexplained cash credit), merely because the PCIT believes a different provision should have been invoked, without establishing how the original addition was erroneous or how the alternative classification would result in a higher tax liability.

Facts III:

  • For Assessment Year 2018-19, the assessee received an amount towards repayment of a loan from one CPL.
  • The Assessing Officer (AO), after calling for details and issuing notices under Section 133(6), concluded that the repayment of the loan by CPL was not properly explained. Consequently, the AO made an addition under Section 28 of the Act, treating it as a business receipt.
  • The Principal Commissioner (PCIT) invoked Section 263, arguing that the Assessing Officer failed to apply the provisions of Section 68 (unexplained cash credit) in respect of this loan transaction. The PCIT believed it should have been treated as an unexplained cash credit under Section 68 read with Section 115BBE (which imposes a higher tax rate on unexplained credits), instead of business income under Section 28.
  • It was noted that the PCIT had not established how the AO’s addition under Section 28 was erroneous, or how invoking Section 68 would have resulted in a higher tax liability in this specific case.
  • Furthermore, the funds received were actually a repayment of earlier advances made through banking channels and were supported by confirmations.

Decision III:

The court held in favor of the assessee. It ruled that when an addition had already been made under one provision, the Commissioner could not revise the order merely because, in his view, a different provision ought to be invoked, particularly if it doesn’t lead to a higher tax liability. The court further held that since the funds received were repayment of earlier advances through banking channels and supported by confirmations, they could not be taxed under Section 68 (which applies to unexplained credits). Thus, the PCIT erred in invoking revision jurisdiction under Section 263.

Key Takeaways III:

  • No Revision for Mere Change of Provision if Tax Impact is Same/Lower: If the AO has already made an addition to income under a particular section, the PCIT cannot invoke Section 263 merely to change the head of income or the section under which the addition is made, unless it leads to a demonstrably higher tax liability or the AO’s original addition was erroneous in itself (e.g., inadequate amount).
  • “Erroneous” and “Prejudicial to Revenue” (Specifics): For Section 263, the PCIT must establish how the AO’s order is erroneous and how it is prejudicial. A general belief that a different section is “more appropriate” is not enough, especially if the current tax outcome is not less favorable to the revenue. In this case, the PCIT failed to show how the Section 28 addition was erroneous or less beneficial for the revenue than a Section 68 addition would have been.
  • Conditions for Section 68: Funds received as “repayment of loans” (which were earlier advances through banking channels and confirmed) fundamentally differ from “unexplained cash credits.” Section 68 applies when the nature and source of a credit are unexplained. If the source is an earlier loan (even if the AO found its repayment unexplained under a different head), it’s not a fresh unexplained cash credit.
  • Banking Channels and Confirmations: The fact that the transactions were through banking channels and supported by confirmations further negates the applicability of Section 68, as it establishes the identity and genuineness of the transaction (at least the repayment itself).
  • PCIT’s Limited Supervisory Power: Section 263 is a supervisory power, not an appellate one. It cannot be used to nitpick or substitute the AO’s judgment on which specific section applies, especially when an addition has already been made and there’s no clear prejudice to the revenue.
IN THE ITAT AHMEDABAD BENCH ‘D’
Olympic Decor LLP
v.
PR. Commissioner of Income-tax-3
T.R. Senthil Kumar, Judicial member
and MAKARAND V. MAHADEOKAR, Accountant member
IT Appeal No.423 (Ahd) of 2024
[Assessment Year 2018-19]
MAY  23, 2025
Tushar Hemani, Sr.Adv. and Parimalsinh B. Parmar, ARs for the Assessee. Rignesh Das, CIT-DR for the Revenue.
ORDER
Makarand V.Mahadeokar, Accountant Member. – This appeal is preferred by the assessee against the order passed under section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) by the Principal Commissioner of Income Tax-3, Ahmedabad [hereinafter referred to as “PCIT”] dated 22.02.2024 for the Assessment Year 2018-19, wherein the learned PCIT set aside the assessment order passed under section 143(3) of the Act dated 30.04.2021 by the Assessing Officer and directed de novo assessment, holding the said order to be erroneous in so far as it is prejudicial to the interest of the Revenue.
Facts of the Case
2. The assessee, M/s. Olympic Decor LLP (formerly Sara Suppliers LLP), filed its return of income for A.Y. 2018-19, which was selected for scrutiny. The assessment was completed under section 143(3) vide order dated 30.04.2021 by the ITO, Ward 3(1)(1), Ahmedabad. During the course of assessment, the Assessing Officer examined the financials and submissions furnished by the assessee and accepted the returned income after making inquiries on certain issues.
3. Subsequently, the PCIT exercised jurisdiction under section 263 of the Act on the basis that the assessment order passed by the AO was erroneous in so far as it is prejudicial to the interest of Revenue on multiple grounds. Show cause notice under section 263 was issued, pointing out various issues, including:
i.Allowance of depreciation on goodwill allegedly created upon amalgamation of a subsidiary,
ii.Allowance of deduction under section 80IA,
iii.Non-taxation of alleged unexplained credit of Rs. 10.80 crore under section 68 r.w.s. 115BBE in respect of loan from Crown Laminates Pvt. Ltd.,
iv.Carry forward and set-off of unabsorbed depreciation on such goodwill and Acceptance of set-off of losses of Rs.11,18,52,160/-without proper verification,
4. After going through the detailed reply of the assessee, in the detailed revisionary order dated 22.02.2024, the PCIT recorded that the AO had failed to examine the claim of depreciation on goodwill under section 32(1)(ii), though it had been disallowed in earlier years (A.Y. 2016-17) and was claimed again in the year under consideration despite the matter being sub judice. The PCIT also recorded that the AO had allowed set-off of unabsorbed depreciation without verifying the availability of carry forward and its allowability under section 32(2). The PCIT further recorded that the claim under section 80IA was allowed without reconciling the difference between depreciation claimed under books and income-tax and without verification. The PCIT concluded that the AO failed to apply the provisions of section 68 in respect of loan transaction of Rs. 10.80 crore with Crown Laminates Pvt. Ltd., which was treated as business income under section 28 instead of unexplained cash credit under section 68 r.w.s. 115BBE and no inquiry was made regarding the availability and allowability of loss set-off of Rs.11.18 crore.
5. Holding that the assessment order was passed without conducting proper inquiries and verification as warranted, and thereby resulting in loss of revenue, the learned PCIT invoked Explanation 2 to section 263 and set aside the assessment order with a direction to the AO to conduct de novo proceedings on the above issues.
6. Aggrieved by the order passed by the PCIT, the assessee has raised the following grounds before us:
1.The Ld. PCIT has grossly erred in law and on facts in assuming jurisdiction u/s.263 of the Act on the erroneous ground that the impugned assessment order is erroneous in so far as it is prejudicial to the interest of the revenue.
2.The Ld. PCIT has grossly erred in not appreciating that in order to invoke s.263, two conditions must be fulfilled viz. the impugned assessment order must be erroneous and that error must be prejudicial to the interest of the revenue. In the present case, Ld. AO has passed the reasoned assessment order after analyzing all details and therefore there was no error in the impugned assessment order so as to justify action u/s.263 of the Act. Under the circumstances, the very assumption of power u/s.263 of the Act is unjustified and bad in law and therefore, order u/s.263 of the Act deserved to be quashed.
3.The subject order us. 263 passed by the Ld. PCIT is illegal and bad in law in absence of any finding of Ld. PCIT how the alleged error of AO has resulted in loss of revenue particularly when depreciation on goodwill on amalgamation has been rightly claimed under the provisions of the Act.
4.The subject order u/s. 263 passed by the Ld. PCIT is illegal and bad in law in absence of any finding of Ld. PCIT how the alleged error of AO has resulted in loss of revenue particularly when unabsorbed depreciation on goodwill on amalgamation has rightly been carried forward and set off in accordance with the provisions of Section 32(2) of the Act.
5.The subject order u/s. 263 passed by the Ld. PCIT is based on the wrong assumption that the case of the appellant for AY 2016-17 with respect to depreciation on goodwill on amalgamation is subjudice. The Hon’ble ITAT has pronounced its judgement for AY 201617 in favour of the appellant before passing of the subject order u/s. 263. The Hon’ble ITAT has allowed the depreciation on goodwill on amalgamation for AY 2016-17 rendering the revisionary proceedings bad in law.
6.The subject order u/s. 263 passed by the Ld. PCIT is illegal and bad in law in absence of any finding of Ld. PCIT how the alleged error of AO has resulted in loss of revenue particularly when the deduction has rightly been claimed u/s. 80IA of the Act.
7.The subject order u/s. 263 passed by the Ld. PCIT is illegal and bad in law in absence of any finding of Ld. PCIT how the alleged error of AO has resulted in loss of revenue particularly when there is no receipt of loan during the year from M/s. Crown Laminates Pvt. Ltd. liable to be taxed u/s. 68 r.w.s. 115BBE of the Act.
8.The Ld. PCIT has further erred in law and on facts in not appreciating that the view taken by the AO during the assessment proceedings is a possible view and hence the revisionary proceedings are illegal and bad in law.
9.The Id. PCIT has further erred in law in not coming to any concrete conclusion and without conducting any inquiry or investigating the issue, merely directed the AO to frame the assessment order afresh. Without there being any positive finding about order being erroneous and prejudicial to the interest of the revenue, the action of Id. PCIT is without jurisdiction and illegal and hence deserves to be deleted.
10.Ld. PCIT has erred in not considering various facts, submissions, explanations and clarifications as given by the appellant and further erred in not appreciating the facts and law in their proper perspective.
11.The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of hearing of the appeal.
7. The learned AR, reiterating the grounds of appeal, submitted that the assumption of jurisdiction under section 263 of the Act by the Ld. PCIT is not justified and devoid of merit. It was submitted that the assessment was completed under section 143(3) r.w.s. 144B vide a reasoned order dated 30.04.2021, after issuance of multiple notices under sections 142(1) and 143(2), and after detailed verification of all material facts and supporting evidence. Therefore, it cannot be alleged that the assessment was completed without inquiry or that the AO accepted claims mechanically without application of mind.
8. In relation to Grounds relating to depreciation on goodwill, the learned AR submitted that the primary reason for invocation of section 263 was the alleged erroneous allowance of depreciation on goodwill arising out of amalgamation. He submitted that the issue was not only duly examined by the AO in earlier years but also adjudicated by the Coordinate Bench in the assessee’s own case for A.Y. 2016-17 (in the case of Sara Suppliers Pvt. Ltd., ITA No. 432/Ahd/2022, order dated 21.02.2024), wherein the claim of depreciation on goodwill was upheld after thorough analysis of the amalgamation scheme, valuation report, and relevant provisions of section 32(1)(ii). It was therefore submitted that once the depreciation on goodwill was allowed in earlier years and has attained finality by way of a binding decision of the Co-ordinate Bench, the opening WDV in the subsequent year has to be accepted, and depreciation thereon has to be mandatorily allowed as per settled law. Consequently, the order of the AO allowing such depreciation cannot be regarded as erroneous.
9. In respect of Ground No. 6, pertaining to the deduction under section 80IA, the learned AR submitted that the AO had duly examined the claim during the assessment proceedings. The assessee had filed Form 10CCB, profit and loss account of the eligible unit, and reconciliation of depreciation under the Companies Act and the Income Tax Act. The difference between book depreciation and tax depreciation had been explained and matched, and the AO was satisfied with the same. There was no finding by the PCIT to demonstrate how the claim was factually incorrect or resulted in excess deduction. In the absence of any such finding, the assessment order cannot be deemed erroneous or prejudicial, and hence, invocation of section 263 on this count is without jurisdiction.
10. As regards the set-off of brought forward depreciation, the learned AR submitted that the amount pertained to depreciation already allowed in earlier years and brought forward as per the provisions of section 32(2). He argued that the AO had verified the claim based on depreciation schedules and tax audit reports, and that the Ld. PCIT’s observation that the set-off was incorrectly allowed is factually untenable and legally unsustainable. He pointed out that the Ld. PCIT was factually incorrect in stating that the issue for A.Y. 2016-17 was subjudice, since the order of the ITAT allowing depreciation on goodwill had already been pronounced on 21.02.2024, prior to the passing of the impugned order under section 263 on 22.02.2024. Thus, the entire foundation for revision in respect of depreciation on goodwill and its carry forward collapses.
11. Regarding Ground No. 7, on the alleged non-application of section 68 to the transaction with Crown Laminates Pvt. Ltd., the learned AR submitted that no new loan was received by the assessee during the relevant previous year. The amount in question was repayment of earlier advances made by the assessee and routed through banking channels. The AO, after considering the facts, made a substantive addition of Rs.10.80 crore under section 28, treating the repayment as a business receipt lacking explanation. The learned AR relied on the judgment of the Hon’ble Gujarat High Court in JMC Projects (India) Ltd. v. PCIT (Gujarat) ), to argue that when the AO has already made a larger addition under one provision, the Commissioner cannot revise the assessment merely on the basis that a different provision ought to have been applied. It was emphasized that such a substitution of opinion does not render the original order erroneous or prejudicial to the interest of the Revenue. In support, the AR placed reliance on the decision of the ITAT Ahmedabad Bench in Radhe Developers (India) Ltd. (ITA No. 1226/Ahd/2018), where it was held that when repayment of a past advance is routed through the banking channel and explained by the assessee, the same cannot be treated as unexplained credit under section 68. The AR argued that in the present case, the assessee had submitted confirmations, bank statements, and details of past transactions to substantiate that the repayment was out of earlier recorded advances, and the AO had accepted the same after inquiry. Thus, there was no error in the assessment.
12. The AR further submitted that the revisionary order does not contain any independent inquiry or conclusive finding by the Ld. PCIT as to how the assessment order is both erroneous and prejudicial. The PCIT merely reproduced certain figures and directed the AO to conduct de novo assessment without any finding on incorrect allowance or loss of revenue. The revisionary jurisdiction under section 263, it was submitted, cannot be invoked merely for directing roving inquiries or for improvement of reasoning. It was stressed that where the AO has taken a plausible view after inquiry, the jurisdiction under section 263 is barred.
13. On the other hand, the learned Departmental Representative (DR) placed strong reliance on the impugned order passed by the Ld. PCIT. It was submitted that the Assessing Officer had failed to examine the core issue relating to the allowability of depreciation on goodwill, which was the subject matter of extensive litigation in earlier assessment years. The DR contended that despite the substantial claim of depreciation of Rs.26,86,17,589/- on goodwill the AO did not call for or examine the valuation report, computation of goodwill, or its allowability.
14. We have carefully considered the rival submissions, perused the assessment order, the revisionary order passed by the Ld. PCIT, submissions of both parties, and the judicial precedents relied upon by the assessee and the Revenue. The central question before us is whether the order passed by the Assessing Officer is “erroneous in so far as it is prejudicial to the interest of the revenue” so as to justify invocation of section 263 of the Act. The impugned revisionary order revolves around the following four issues:
i.Allowance of depreciation on goodwill arising out of amalgamation.
ii.Set off of unabsorbed depreciation on goodwill.
iii.Deduction under section 80IA; and
iv.Non-application of section 68 on the transaction with Crown Laminates Pvt. Ltd.
15. Before we proceed to address the specific issues raised in the impugned order under section 263, it is relevant to consider the foundational background as recorded by the Ld. PCIT in paragraph 6 (page 4) of the revisionary order. In the said paragraph, the Ld. PCIT has outlined the facts relating to the conversion of Sara Suppliers Pvt. Ltd. into Olympic Decor LLP and the preceding amalgamation of Crown Laminates Pvt. Ltd. (CLPL) into the said entity. The PCIT noted that Sara Suppliers Pvt. Ltd. was converted into Olympic Decor LLP during F.Y. 2016-17 and had earlier amalgamated with CLPL pursuant to a scheme approved by the Hon’ble Gujarat High Court. It is further observed that as per the books of the amalgamated entity, goodwill of Rs.191.08 crores was recognized in A.Y. 2016-17 due to excess of consideration over the net assets acquired, and depreciation of Rs.26.86 crores was claimed thereon in A.Y. 2018-19. The Ld. PCIT observed that in A.Y. 2016-17, the AO had disallowed the depreciation on such goodwill on the ground that it was a self-generated asset and not eligible for depreciation. Based on this history, the Ld. PCIT formed a prima facie view that the goodwill on which depreciation was claimed in A.Y. 2018-19 had no actual cost in the hands of the amalgamating company and hence was not eligible for depreciation under section 32(1)(ii) read with Explanation 7 to section 43(1). It was also mentioned that the matter for A.Y. 2016-17 was pending in appeal, and therefore, the claim made by the assessee in A.Y. 201819 was incorrect, and the AO erred in allowing such depreciation without inquiry. Furthermore, the PCIT linked this background to subsequent claims made by the LLP for set-off of brought forward depreciation and observed that if the base depreciation itself was inadmissible in earlier years, the consequential set-off in A.Y. 201819 also stood vitiated. Accordingly, the Ld. PCIT treated the entire chain of events—recognition of goodwill, claim of depreciation, and set-off—as forming an “erroneous and prejudicial” part of the assessment requiring revision under section 263.
16. We have carefully considered this background framing by the Ld. PCIT. However, for reasons discussed hereinafter in the issue-wise adjudication, we are of the view that the foundational presumption in the PCIT’s order that the depreciation on goodwill stood disallowed and that the issue was sub-judice does not hold good in light of the fact that the Hon’ble ITAT had already allowed the depreciation in favour of the assessee for A.Y. 2016-17 in its order dated 21.02.2024, a day prior to the passing of the PCIT’s order on 22.02.2024. Moreover, the goodwill arose from a High Court-sanctioned scheme of amalgamation and was supported by a valuation report, and depreciation was allowed by the AO in A.Ys. 2016-17 and 2017-18 and carried forward accordingly. Hence, while the background narrated by the PCIT provides the contextual basis for initiating proceedings under section 263, the assumption that the goodwill was fictitious and depreciation thereon inadmissible—without considering binding appellate orders and factual documentation—renders the foundation of revisionary jurisdiction unsustainable.
17. We now proceed to examine each issue raised by the PCIT on merits.
The first and principal ground on which the Ld. PCIT has assumed jurisdiction under section 263 pertains to the assessee’s claim of depreciation of Rs.26.86 crore on goodwill recorded in its books as part of the intangible block. The Ld. PCIT has, in para 6 of the impugned order, traced the genesis of the goodwill to a scheme of amalgamation sanctioned by the Hon’ble Gujarat High Court, wherein Olympic Laminates Pvt. Ltd. was amalgamated with Sara Suppliers Pvt. Ltd., which was subsequently converted into the present assessee, Olympic Decor LLP. It is noted by the PCIT that the goodwill of Rs.191.08 crore was recognized in A.Y. 2016-17 upon amalgamation, and depreciation thereon was claimed thereafter. The PCIT also records that depreciation was disallowed by the AO in A.Y. 2016-17 and alleges that the issue remained unresolved and sub judice. On that basis, it was concluded that the AO erred in allowing depreciation of Rs. 26.86 crore in the year under consideration without inquiry or verification.
18. Once depreciation on goodwill has been allowed in the initial year and the WDV has been determined, depreciation in subsequent years becomes a matter of statutory computation under section 32(1). Depreciation once allowed enters into the block of assets and must be carried forward irrespective of actual use. The WDV having been established, the AO was not required to revisit the allowability of depreciation on the same asset unless the claim for the earlier year had been reversed. It is also well established that where depreciation has been allowed in an earlier year and no material change in facts or law occurs, the Revenue is bound to maintain consistency which means that once a view is taken and accepted in an earlier year, it cannot be arbitrarily re-examined in subsequent years. The PCIT’s contention that the goodwill was self-generated or lacked real consideration was already examined and rejected by the Tribunal in A.Y. 2016-17. The Co-ordinate Bench accepted that the goodwill arose from the excess of consideration over the net value of tangible assets transferred in amalgamation and was therefore a valid intangible asset eligible for depreciation under section 32(1)(ii). The Ld. PCIT could not have reopened the settled position through revision without first disturbing the allowance in the earlier year. In our opinion goodwill arising on amalgamation qualifies as an intangible asset eligible for depreciation. The finding of Co-ordinate Bench in A.Y. 2016-17 clearly brings the assessee’s goodwill within the scope of this principle.
19. In light of the foregoing, we are of the opinion that the PCIT’s invocation of section 263 on this issue is based on an incorrect factual premise and a difference of opinion does not satisfy the jurisdictional threshold of an “erroneous” order prejudicial to the interests of the Revenue.
20. The second limb of the PCIT’s order pertains to the set-off of Rs. 11.18 crore of brought forward depreciation, which the PCIT claims to be erroneously allowed as it pertains to goodwill depreciation disallowed in earlier years. This conclusion, however, directly stems from the PCIT’s incorrect assumption in respect of the disallowance of depreciation on goodwill in A.Y. 2016-17. As already discussed, the Coordinate Bench of has allowed the claim of depreciation on goodwill in A.Y. 2016-17, and the said order was available on record before the PCIT. Once the base depreciation is judicially accepted and becomes part of assessed depreciation for that year, the unabsorbed portion thereof lawfully enters the pool of carry forward depreciation eligible for set-off under section 32(2). Once depreciation is allowed and brought forward as per returns and records, its set-off cannot be denied in later years unless the original allowance is proved to be incorrect or is otherwise reversed. There is no finding in the present case that the allowance in earlier year was reversed or disturbed. In fact, it stands judicially confirmed.
21. In light of the above, we find that the AO’s decision to allow the set-off of brought forward depreciation was entirely in accordance with the law and the facts of the case. No error, much less a prejudicial error, is demonstrated in this regard.
22. The PCIT alleged that the assessee claimed excess deduction under section 80IA of Rs.1,89,435/- and that AO accepted the same without inquiry. However, we find from the assessment records and assessee’s submissions that the AO had verified the 80IA claim based on Form 10CCB, profit and loss statement of the eligible Windmill unit, and depreciation schedules under both Income Tax and Companies Act. The reconciliation was duly filed and accepted. There is no finding by the PCIT that the claim was factually incorrect or that any excess was demonstrable from the computation. There are several judicial precedents where it was held that where the AO has made inquiries and taken a view after considering material placed before him, revision cannot be invoked merely because the PCIT believes that a better or more detailed inquiry should have been made. In absence of any clear finding of incorrect allowance or revenue loss, the assessment cannot be considered erroneous. The AO’s view is plausible and duly supported by documents.
23. The next ground for revision is that the AO made addition of Rs. 10.80 crore under section 28 whereas, according to PCIT, it ought to have been added under section 68. The AO, after calling for details and issuing notices under section 133(6), concluded that the repayment of loan by Crown Laminates was not properly explained, and made addition under section 28 treating it as business receipt. The PCIT has not established how such addition under section 28 was erroneous, or how invoking section 68 would have resulted in a higher tax liability.
24. In case of JMC Projects (India) Ltd. v. PCIT  (Gujarat) (Guj.)], the Hon’ble Gujarat High Court held that when an addition has already been made under one provision, the PCIT / Commissioner cannot revise the order merely because, in his view, a different provision ought to have been invoked. This is a classic case of improvement of reasoning, which is outside the scope of section 263. Further, the ITAT Ahmedabad in Radhe Developers (India) Ltd., ITA No. 1226/Ahd/2018, held that where funds received were repayment of earlier advances through banking channels and supported by confirmations, they could not be taxed under section 68. The facts of the present case are on all fours. Accordingly, we find no merit in this ground of revision either.
25. We find that the AO made detailed inquiries on all issues during the assessment proceedings. The assessee responded to notices under section 142(1) with supporting documents. The PCIT has not demonstrated how the AO’s view was legally untenable or factually incorrect. No new evidence or inquiry has been conducted by the PCIT either. The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT ITR 83 (SC) (SC)] has clearly laid down that both conditions of section 263 must be cumulatively satisfied. In the absence of prejudice to Revenue or demonstrable error, the order cannot be revised.
26. In view of the foregoing discussion, we are of the considered view that the assessment order was neither erroneous nor prejudicial to the interest of Revenue. The PCIT erred in invoking revisionary jurisdiction under section 263. The impugned order is accordingly quashed.
27. In the result, the Appeal of the assessee is allowed.