ITAT Overturns Disallowance of Goodwill Depreciation for AY 2016-17
The ITAT has set aside a Section 263 order disallowing goodwill depreciation for the assessment year 2016-17, ruling that IND AS 103 was not applicable for that year.
ItatGoodwill DepreciationInd As 103Assessment YearOriental Buildtech Private LimitedReal EstateMay 31, 2025
Oriental Buildtech Private Limited, the appellant-assessee, filed its return of income for AY 2016-17 on October 16, 2016, declaring a loss of ₹4.18 crore. The assessment was completed under Section 143(3) on December 22, 2018, accepting the returned loss.
Later, the Principal Commissioner of Income Tax (PCIT) invoked Section 263 on March 31, 2021, directing the Assessing Officer (AO) to verify the depreciation claimed on goodwill and pass a fresh order. The assessee challenged this before the ITAT in ITA No. 911/Del/2021. The tribunal, by order dated February 23, 2023, issued directions to the PCIT, who then passed a fresh order on October 31, 2023.
The assessee’s counsel argued that the PCIT issued a show cause notice on March 8, 2021, stating that the AO could not disallow depreciation on goodwill due to technical issues. The assessee replied in detail on March 19, 2021, but this reply was ignored when the PCIT passed the order on March 31, 2021. The ITAT set aside that order and asked the PCIT to pass a fresh one.
In the new order dated October 31, 2023, the PCIT stated that the assessee did not follow IND AS 103, which applied from April 1, 2016. However, the assessee’s counsel argued that IND AS 103 did not apply because the relevant year was 2015-16. The counsel also noted that the Finance Act, 2021 clarified that goodwill would not be a depreciable asset from AY 2021-22 onwards. Before that, depreciation on goodwill was allowed and would be adjusted when calculating capital gains.
The assessee’s counsel also relied on the Supreme Court ruling in CIT vs. Smifs Securities Ltd. [2012], where it was held that goodwill qualifies as an intangible asset under Explanation 3(b) to Section 32(1) and is eligible for depreciation. The department, on the other hand, relied on the PCIT’s order.
The two-member bench comprising Vimal Kumar (Judicial Member) and Shamim Yahya (Accountant Member) found that the PCIT issued a show cause notice on March 8, 2021, because the AO could not disallow depreciation on goodwill due to technical issues. The assessee replied on March 19, 2021, but the PCIT ignored the reply and passed an order on March 31, 2021.
The ITAT set aside this order on February 23, 2023, and asked the PCIT to pass a fresh order after considering the assessee’s reply. In the new order dated October 31, 2023, the PCIT said the assessee did not follow IND AS 103, effective from April 1, 2016. The tribunal noted that the Finance Act, 2021 clarified this rule did not apply to the assessment year 2016-17.
The appellate tribunal ruled that the PCIT’s order based on IND AS 103 for AY 2016-17 was not valid and set aside the order dated October 31, 2023. The appeal was allowed.
Frequently Asked Questions
What is Section 263 of the Income Tax Act, 1961?
Section 263 of the Income Tax Act, 1961, allows the Principal Commissioner or Commissioner of Income Tax to pass an order to revise or alter any order passed by the Assessing Officer if they believe the order is not in accordance with the law or the facts of the case.
What is IND AS 103?
IND AS 103 is an Indian Accounting Standard that deals with the impairment of assets. It provides guidance on how to identify and measure impaired assets and reflects the impairment loss in the financial statements.
When did IND AS 103 come into effect?
IND AS 103 came into effect from April 1, 2016, for companies that are required to follow Indian Accounting Standards.
What was the main argument of the assessee's counsel before the ITAT?
The assessee's counsel argued that IND AS 103 did not apply to the assessment year 2016-17 because the relevant year was 2015-16. They also relied on the Supreme Court ruling in CIT vs. Smifs Securities Ltd. [2012], which held that goodwill qualifies as an intangible asset and is eligible for depreciation.
What was the final decision of the ITAT in this case?
The ITAT ruled that the PCIT’s order based on IND AS 103 for AY 2016-17 was not valid and set aside the order dated October 31, 2023. The appeal was allowed.
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