ORION INDIA SYSTEMS PRIVATE LIMITED,MUMBAI MAHARASHTRA V. .PCIT, MUMBAI-SIX CIRCLE FIFTEEN (ONE)(ONE)

ITA 1449/MUM/2024

AI Insights

The case involves Orion India Systems Private Limited, which appealed against the order of the Principal Commissioner of Income Tax, Mumbai-6, under section 263 of the Income Tax Act, 1961. The PCIT had set aside the original assessment order, which had accepted the assessee's return without further inquiry into the depreciation claimed on goodwill arising from a slump sale. The Tribunal examined whether the PCIT was justified in invoking section 263, considering the lack of detailed inquiry by the Assessing Officer into the goodwill depreciation claim. The Tribunal found that the PCIT was correct in setting aside the assessment order for a fresh examination, as the original order did not adequately address the potential underassessment of income due to unexamined claims related to goodwill.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 470889 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2024
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2018-2019
• Other Referred Cases: CIT vs. Smifs Securities Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R.A. DHYANI
• Assessee Lawyers: KHEVANA GANDHI
• Keywords: Set aside; Opportunity of being heard; Transfer pricing; International transaction; Depreciation; TDS; Valuation report; Revision of order; Related party transaction
• Section: 143(3); 142(1); 143(2); 263; 32; 2

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER ITA No.1449/MUM/2024 Assessment Year 2018-19 Orion India Systems Private Limited, 503 Powai Plaza, Hiranandani Gardens Powai Maharashatra - 400076 ……………. Appellant PAN: AAACO5306Q v/s PCIT, Mumbai-6, Circle-15(1)(1) Room No.501, 5th Floor, Aayakar Bhavan Maharishi Karve Road, Mumbai – 400020 ……………. Respondent Assessee by : Ms. Khevana Gandhi Revenue by : Mr. R.A. Dhyani, CIT-DR Date of Hearing – 26/09/2024 Date of Order – 17/12/2024 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The assessee has filed the present appeal against the impugned order dated 14.02.2024, passed under section 263 of the Income Tax Act, 1961 (“the Act”) by the learned Principal Commissioner of Income Tax, Mumbai – 6, [“learned PCIT”], for the Assessment Year 2018-19. 2. In this appeal, the assessee has raised the following grounds: - ITA No.1449/MUM/2024 (A.Y. 2018-19) 2 “1. Learned Principal Commissioner of Income Tax, Mumbai-6 has failed to appreciate that the assessment order was neither erroneous nor prejudicial to the interest of the revenue and thus order u/s 263 is bad in law, illegal, ultra- vires, in excess of and/or in want of jurisdiction and otherwise void; 2. Whether on the facts and circumstances and in law, learned Principal' Commissioner of Income Tax, Mumbai-6 was correct in assuming jurisdiction u/s 263 treating the order of AO as erroneous and prejudicial to the interest of revenue merely stating on the basis that AO failed make inquiry whether the seller has paid taxes on the profits realized on 'Slump Sale' u/s. 50B(1) of the Income Tax Act for the purpose of allowing depreciation in the hands of Purchaser(Appellant). 3. Whether on the facts and in the circumstances of case and in law, Principal Commissioner of Income Tax, Mumbai-6, was correct in arriving at conclusion that appellant is not eligible for depreciation on 'Goodwill' acquired under 'Slump Sale'.” 3. In the present appeal, the assessee is aggrieved against the invocation of revisionary proceedings under section 263 of the Act by the learned PCIT. 4. The brief facts of the case pertaining to this issue, as emanated from the record, are: The assessee is a private limited company and is engaged in software development. For the year under consideration, the assessee filed its original return of income on 29.11.2018 declaring a total income of Rs.11,18,54,440/-. The return filed by the assessee was selected for scrutiny through CASS and statutory notices under section 143(2) and section 142(1) were issued and served on the assessee. Since, during the year under consideration, the assessee entered into international transactions with its associated enterprises, reference was made to the Transfer Pricing Officer for determination of ALP in respect of said transactions. As the Transfer Pricing Officer vide its order passed under section 92CA(3) of the Act did not find any adverse inference to the value of international transactions entered into by the assessee, the Assessing Officer (“AO”) vide order dated 24/09/2021 ITA No.1449/MUM/2024 (A.Y. 2018-19) 3 passed under section 143(3) r.w. section 144B of the Act concluded the assessment by accepting the return of income filed by the assessee. 5. Subsequently, the learned PCIT issued show cause notice under section 263 of the Act on the basis that during the year under consideration, the assessee claimed depreciation on Goodwill upon acquisition of business of Vernallis Systems Pvt. Ltd., Chennai on a slump sale basis under “Business Transfer Agreement” for a total consideration of Rs.72,69,50,000/- and treated the consideration paid in excess of the value of assets as Goodwill. The learned PCIT, vide aforesaid show cause notice, alleged that the assessee has claimed depreciation to the extent of 25% on intangible asset recognized as “Goodwill” in its books, which aspect was not examined by the AO while passing the assessment order under section 143(3) r .w. section 144B of the Act and failure to examine the aforesaid aspect has resulted in under assessment of income to the extent of Rs.16,95,64,200/-. Accordingly, the assessee was asked to show cause as to why the assessment order passed under section 143(3) r.w. section 144B of the Act be not quashed for fresh adjudication after the consideration of the facts as noted above. 6. In response thereto, the assessee submitted that the return of income filed by it was selected for complete scrutiny under the CASS on the following issues: - i. Default in TDS & Disallowance for such Default ii. International Related Party Transactions in Services iii. Default in TDS iv Refund claim v. Investment in intangible Assets ITA No.1449/MUM/2024 (A.Y. 2018-19) 4 7. It was further submitted that during the assessment proceedings, inter- alia, the specific query was raised by the AO as regards the investment in intangible assets made during the year under consideration. Further, the assessee was also asked to furnish the bills/vouchers in respect of the purchase of above referred intangible assets and the bank account from which payment against the purchase of the said intangible asset was made. The assessee submitted that in response to the queries raised by the AO, the assessee filed details and after consideration of the same, the assessment order was passed under section 143(3) r.w. section 144B of the Act. Further, the assessee submitted that the consideration paid for the acquisition of the business of Vernallis Systems Pvt. Ltd. was allocated to various tangible and intangible assets and balance amount was treated as Goodwill of the business. Further, by placing reliance upon the decision of the Hon’ble Supreme Court in CIT vs. Smifs Securities Ltd., reported in (2012) 348 ITR 302 (SC), the assessee submitted that Goodwill is an intangible asset eligible for claiming depreciation under section 32 of the Act. 8. The learned PCIT, vide impugned order, passed under section 263 of the Act disagreed with the submissions of the assessee and held that there was a complete lack of inquiry on the part of the AO and the claim of Depreciation on Goodwill was accepted by the AO without any inquiry or examination of evidence whatsoever, which has resulted in passing of the assessment order, which is erroneous insofar as it is prejudicial to the interest of Revenue. Accordingly, the learned PCIT set aside the assessment order on the issue of allowance of Depreciation on Goodwill. The learned PCIT, vide impugned order, ITA No.1449/MUM/2024 (A.Y. 2018-19) 5 also directed the AO to verify whether the transferor company has declared profits on the transfer and paid taxes on the same and accordingly re-assess the income after giving an opportunity of being heard to the assessee. Being aggrieved, the assessee is in appeal before us. 9. During the hearing, the learned Authorized Representative (“learned AR”) by referring to the notices issued during the assessment proceedings under section 143(2) and section 142(1) submitted that a specific query was raised by the AO, during the assessment proceedings, in respect of intangible assets acquired by way of slump sale. The learned AR submitted that all the notices were duly responded to and necessary details, as called for, were furnished by the assessee before the AO and after consideration of same, vide assessment order passed under section 143(3) r.w. section 144B of the Act the claim of Depreciation on Goodwill was allowed by the AO. Thus, the learned AR submitted that the aspect of the claim of Depreciation on Goodwill was duly examined by the AO during the assessment proceedings and it is not a case where the claim of the assessee was allowed without making any inquiry during the assessment proceedings. 10. On the contrary, the learned Departmental Representative (“learned DR”) by vehemently relying upon the impugned order passed by the learned PCIT under section 263 of the Act submitted that there was no inquiry on the aspect of claim of Depreciation on Goodwill by the AO during the assessment proceedings and no notice on this aspect was issued despite the fact that the return of income filed by the assessee was selected for complete scrutiny. Thus, the learned DR submitted that there was no formulation of any opinion ITA No.1449/MUM/2024 (A.Y. 2018-19) 6 by the AO on this aspect and there was a complete lack of inquiry on the part of the AO. 11. We have considered the submissions of both sides and perused the material on record. During the year under consideration, the assessee acquired the business of Vernallis Systems Pvt. Ltd. on a ‘Slump Sale basis’ through a ‘Business Transfer Agreement’ dated 28.06.2017 for a total consideration of Rs.72,69,50,000/-. The sale consideration plus stamp duty was allocated towards the assets acquired via Slump Sale as follows: - “Assets Current Assets Rental Advance 59,65,444.00 Fixed Assets Computer A/C 2,76,44,230.17 Electrical & fittings A/C 67,63,854.36 Furniture A/C 1,57,32,772.14 Interior & Design A/C 1,76,09,081.93 Office Equipment A/C 57,79,650.38 Plant & Machinery A/C 28,68,709.00 Building 26,18,340.00 Fa Temporary Partitions (100) Investments Subsidiary Company Investment 599.00 Goodwill 67,82,56,801.02 Total 76,32,39,44100 12. Accordingly, the assessee considered the payment of sale consideration in excess of the assets acquired by way of Slump Sale amounting to Rs.67,82,56,801/- as Goodwill and claimed depreciation @ 25% on such Goodwill under section 32(1)(ii) of the Act. From the perusal of statutory notices issued during the assessment proceedings, forming part of the paper book, we find that the return of income filed by the assessee was selected for scrutiny through CASS for examination of the issues as noted in the foregoing paragraph. From the perusal of the notice dated 21.09.2019 issued under ITA No.1449/MUM/2024 (A.Y. 2018-19) 7 section 143(2) of the Act, forming part of the paper book from pages 166- 167, we find that investment in intangible assets was one of the issues on which the return was selected for complete scrutiny. In this regard, we find that the AO vide notice dated 11.12.2020 directed the assessee, inter alia, to furnish the following details: - (a) Details of intangible assets purchase/introduced (b) Cost at which introduced in your books of accounts (c) Date of purchase (d) Amount paid (e) Mode of payment (f) Source of payment. 13. Further, vide notice dated 15.09.2021 issued under section 142(1) of the Act, the AO sought the following information from the assessee in respect of Goodwill purchased under the Business Transfer Agreement: - “1. It is seen that during the year under consideration you had purchased Goodwill of Rs. 72,69,50,000/- as per Business Transfer Agreement and stamp duty was also paid on the same amount whereas the Goodwill has been recorded at Rs. 67,82,56,801/- in your books of account. Kindly explain such difference. 2. As regard to source of payment for purchasing goodwill, it is seen that you had issued 623 shares @ Rs. 2,66,000/- per share. Kindly provide the valuation report of the equity share and furnish the following detail:- S.No. Name and address PAN No. of equity share Nominal value per equity share NAV per share Premium Received per share Total amount received 14. We find that all the notices were duly responded to by the assessee and the details as sought were furnished during the assessment proceedings. On the basis of the aforesaid notices issued under section 143(2) and section 142(1) of the Act and the information provided in response thereto, it is the ITA No.1449/MUM/2024 (A.Y. 2018-19) 8 plea of the assessee that the issue of claim of Depreciation on Goodwill was duly examined by the AO during the assessment proceedings and therefore, the learned PCIT erred in invoking the provisions of section 263 of the Act in the present case. 15. However, from the careful perusal of the notices issued during the assessment proceedings and the details filed by the assessee, we are of the considered view that the claim of Depreciation on Goodwill was not examined by the AO and the scope of investigation by the AO, during the assessment proceedings, was only qua the examination of investment in intangible assets, i.e., Goodwill and various queries raised by the AO and information sought vide notices issued under section 142(1) were also confined to the examination of the said aspect. At this stage, it is pertinent to note that the examination of the investment in intangible assets and the examination of the claim of Depreciation on Goodwill are two different aspects, which may have some overlapping features but examination/inquiry in respect of first cannot lead to the conclusion that the second aspect of claim of Depreciation on Goodwill was also examined during the assessment proceedings. In the present case, undoubtedly there is an examination of the earlier one but no query or examination was made by the AO in respect of the latter. Once there is no examination or inquiry by the AO as regards the claim of Depreciation on Goodwill, we find merits in the submissions of the learned DR that there was no formulation of any opinion by the AO on this aspect. In this regard, gainful reference can be made to the provisions of Explanation 2 to section 263(1) of the Act, which reads as follows: ITA No.1449/MUM/2024 (A.Y. 2018-19) 9 “Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.” 16. From the perusal of the provisions of clause (a) and clause (b) of the aforesaid explanation, it is evident that in case the assessment order is passed without making inquiries or verification which should have been made or the assessment order has been passed allowing any relief without inquiring into the claim of the assessee, then the said assessment order shall be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue. From the perusal of the material placed on record by the assessee, it is discernible that the aspect of the claim of Depreciation on Goodwill by the assessee was not examined by the AO and no query/information was sought from the assessee. Such being the facts, we are of the considered view that the learned PCIT has rightly invoked its jurisdiction under section 263 of the Act and initiated the revisionary proceedings. 17. We find that vide impugned order, the learned PCIT has also directed the AO to verify whether the transferor company has declared profits on the transfer and paid taxes on the same. Further , we find that in paragraph 10 of ITA No.1449/MUM/2024 (A.Y. 2018-19) 10 the impugned order, the learned PCIT has given its findings on the merits of the claim of Depreciation on Goodwill. We are of the considered view that once the assessment order passed under section 143(3) r.w. section 144B of the Act has been set aside for de novo adjudication on limited issue, pursuant to the impugned order passed under section 263 of the Act, such observations are irrelevant at this stage and the AO should decide the issue of claim of Depreciation on Goodwill as per law. We order accordingly. With the above directions, we uphold the invocation of revisionary proceedings under section 263 of the Act by the learned PCIT. Accordingly, the grounds raised by the assessee are dismissed. 18. In the result, the appeal by the assessee is dismissed. Order pronounced in the open Court on 17/12/2024 SdSd/- OM PRAKASH KANT ACCOUNTANT MEMBER Sd/- SANDEEP SINGH KARHAIL JUDICIAL MEMBER MUMBAI, DATED: 17/12/2024 Prabhat Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order Assistant Registrar ITAT, Mumbai "