DCIT Vs Indian Cable NetCo Ltd. (ITAT Kolkata)
Summary: The Income Tax Appellate Tribunal, Kolkata Bench, in DCIT Vs Indian Cable NetCo Ltd., dismissed the Revenue’s appeal and allowed the assessee’s cross-objection for Assessment Year 2016-17. The principal dispute concerned depreciation of ₹7,89,99,274 on goodwill arising from the amalgamation of Pearltree Tradelink Pvt. Ltd. with the assessee under a scheme approved by the Calcutta High Court on 8 May 2014. The Assessing Officer disallowed the claim on the ground that goodwill had not existed in the amalgamating company’s books before the merger and that the fifth proviso to Section 32(1), read with Explanation 3 to Section 43(1), prevented depreciation on goodwill created through an accounting entry. CIT(A) rejected this reasoning, and the Tribunal upheld the appellate relief.
The assessee had filed its return on 20 November 2016 declaring income of ₹3,16,80,608. During scrutiny assessment, the Assessing Officer observed that goodwill had been recognised in the assessee’s books following the amalgamation. The Revenue treated the goodwill as an artificial accounting creation, particularly referring to an unsecured loan entry of approximately ₹150 crore in the amalgamating company’s accounts. The assessee, however, demonstrated that the separate addition made in Pearltree Tradelink’s assessment had been deleted by CIT(A) on 29 March 2019 and that the deletion was subsequently upheld by the Kolkata Tribunal on 1 September 2022 in ITA No. 2392/Kol/2019. The assessee also showed that the amalgamation involved consideration paid through issuance of shares, resulting in purchased goodwill representing the excess consideration over the net assets acquired.
The CIT(A) found that Pearltree Tradelink was not a subsidiary of the assessee before amalgamation and that there was no holding-subsidiary relationship between the entities. The merger was undertaken for consolidation of operations, reduction of administrative expenditure, business synergies and enhancement of stakeholder value. On this factual foundation, CIT(A) held that the fifth proviso to Section 32(1) and Explanation 3 to Section 43(1) were inapplicable. The Tribunal agreed, observing that the High Court had approved the amalgamation after considering objections concerning valuation of shares. The goodwill was thus recognised pursuant to the sanctioned arrangement and could not, on the facts found, be rejected merely as a bookkeeping device.
The Tribunal considered the decisions in DCIT Vs Toyo Engineering India Ltd. and United Breweries Ltd., upon which the Assessing Officer had relied. It noted that the original Toyo Engineering decision had been set aside by the Bombay High Court for fresh consideration and that the Tribunal subsequently allowed depreciation. The United Breweries decision was distinguished on its facts, particularly the nature of the amalgamation and the pre-existing goodwill. The Tribunal also relied upon CIT Vs Smifs Securities Ltd., 348 ITR 302 (SC) and the reasoning in Mylan Laboratories Ltd. concerning depreciation on goodwill arising from amalgamation.
The assessee’s cross-objection raised two further issues. First, the assessee challenged a disallowance of ₹4,20,350 under Section 14A read with Rule 8D. The Tribunal found that the assessee had not earned any exempt income during the relevant previous year and therefore directed deletion of the disallowance. Second, the assessee raised an additional legal ground contending that the opening written-down value of goodwill brought forward from the preceding assessment year could not be disturbed unless the earlier year’s written-down value had itself been revised. Relying upon the Supreme Court judgments in Jute Corporation of India Ltd. Vs CIT and National Thermal Power Co. Ltd. Vs CIT, and the Calcutta High Court decision in PCIT Vs Britannia Industries Ltd., the Tribunal admitted the additional ground.
On the merits of the additional ground, the Tribunal observed that the Department had allowed goodwill depreciation in the preceding assessment year and that no proceedings remained pending for disturbing that position. It therefore held that depreciation on the opening written-down value could not be denied without altering the preceding year’s written-down value. Consequently, the assessee’s additional ground was allowed, the Section 14A disallowance was deleted, and the Revenue’s appeal stood dismissed. The decision relates to AY 2016-17; the Finance Act, 2021 subsequently excluded goodwill from depreciable intangible assets from AY 2021-22, which must be considered when applying the ruling to later years.
Cases Discussed:
1. National Thermal Power Co. Ltd. Vs CIT, (1998) 229 ITR 383 (SC), Supreme Court: Followed for admitting an additional legal ground before the Tribunal where the relevant facts were already available on record and no further factual investigation was required.
2. Jute Corporation of India Ltd. Vs CIT, (1991) 187 ITR 688 (SC), Supreme Court: Relied upon regarding the appellate authority’s power to entertain additional grounds necessary for determining the correct taxable income.
3. CIT Vs Smifs Securities Ltd., (2012) 348 ITR 302 (SC), Supreme Court, Order Dated 22 August 2012: Followed for recognising goodwill as an intangible asset eligible for depreciation under the provisions of Section 32(1)(ii) applicable to the assessment year concerned.
4. Principal Commissioner of Income Tax Vs Britannia Industries Ltd., (2017) 396 ITR 677 (Cal), Calcutta High Court: Relied upon for admitting the additional legal ground concerning brought-forward written-down value.
5. Mylan Laboratories Ltd. Vs DCIT, ITA No. 2335/Hyd/2018 as identified in the cited Hyderabad decision, ITAT Hyderabad, Order Dated 13 November 2019: Followed for distinguishing United Breweries and holding that the fifth/sixth proviso to Section 32(1) did not prevent the claim of depreciation on the goodwill arising from the amalgamation considered in that decision. The uploaded order refers to ITA No. 235/Hyd/2018.
6. DCIT Vs Toyo Engineering India Ltd., ITA No. 3279/Mum/2008, ITAT Mumbai: The Assessing Officer relied upon the original order disallowing depreciation on goodwill. The Tribunal noted that the Bombay High Court set it aside in ITA (L) No. 1330 of 2012 and that depreciation was allowed following reconsideration by the Mumbai Tribunal.
7. United Breweries Ltd., ITA Nos. 722, 801 and 1065/Bang/2014, ITAT Bangalore: Distinguished on facts because of the pre-existing goodwill and the nature of the amalgamation. The Tribunal held that the circumstances considered in United Breweries were materially different from the present transaction.
8. Pearltree Tradelink Pvt. Ltd., ITA No. 2392/Kol/2019, ITAT Kolkata, Order Dated 1 September 2022: Referred to regarding the deletion of the addition concerning the disputed unsecured loan entry in the amalgamating company’s assessment, which had been upheld by the Tribunal.
9. Zydus Wellness Ltd., judicial decision cited by CIT(A) in the extracted appellate order: Cited as supporting the goodwill depreciation claim. The source gives no complete independent case citation and appears to repeat the citation 348 ITR 302 (SC), which belongs to Smifs Securities Ltd. Its identification has therefore not been expanded without verification.
FULL TEXT OF THE ORIGINAL ORDER OF ITAT KOLKATA
The appeal of Revenue and CO by the Assessee filed against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 18.07.2025 for the AY 2016-17.
ITA No. 1951/KOL/2025
2. The only issue raised by the Revenue is against the order of ld. CIT (A) allowing the depreciation of ₹7,89,99,274/- u/s 132(1) of the Act, which has been disallowed by the ld. AO on the basis of 5th Proviso to Section 32 of the Act as amalgamating company was not claiming depreciation on goodwill before amalgamation.
2.1. The facts in brief are that the assessee filed the return of income on 20.11.2016, declaring total income of ₹3,16,80,608/-. The case of the assessee was selected for scrutiny and statutory notices along with questionnaire were issued and served upon the assessee. During the course of assessment proceedings, the AO observed that the assessee has claimed depreciation on goodwill and accordingly, the assessee was given show cause notice as to why the said depreciation should be disallowed. The ld. AO also noted that the goodwill was shown in the books of the assessee as a result of merger/ amalgamation of M/s Pearltree Tradelink Pvt. ltd. The amalgamation of the said company with the assessee was done pursuant to amalgamation u/s 391 to 394 of the Companies Act, 1956, with effect from 31.03.2014 and approved vide order of Hon’ble Kolkata High Court dated 08.05.2014. The assessee submitted before the ld. AO that goodwill on intangible asset created pursuant to the order of the Hon’ble Kolkata High Court and therefore, the assessee is entitled to depreciation thereon. However, according to the ld. AO the depreciation cannot be allowed as per explanation 3 to Section 43(1) of the Act. The ld. AO relied on the decision of DCIT vs Toyo Engineering India Ltd, ITA No. 3279 (MUM) of 2008, wherein it has been held that no depreciation is to be allowed on goodwill created out of amalgamation. Thus, it is clear that the said amount was mere an accounting entry provided to crate goodwill in order to claim bogus depreciation and therefore, the ld. AO by relying on 5th Proviso to Section 32(1) of the Act, held that the claim of depreciation of ₹7,89,99,274/- was not allowable and accordingly was disallowed.
2.2. In the appellate proceedings, the ld. CIT (A) allowed the appeal of the assessee after taking into consideration of contentions raised by the assessee by observing and holding as under:-
“Ground 2 is regarding disallowance of depreciation on an intangible asset i.e. goodwill which has come into existence after amalgamation with M/S PearltreeTradelinkPvt. Ltd.,(amalgamating company) with the company u/s 391 to 394 of the Companies Act,1956 w.e.f . 31.03.2014. It has been noted that this asset “goodwill” was not in existence prior to amalgamation in the books of amalgamating company, it has been created due to amalgamation itself being the difference between the amount of payment to the shareholders of the amalgamating company and value of the assets transferred from amalgamating company to the amalgamated company. In this circumstances 5th Proviso to Section 32(1) of the Income Tax Act, 1961 will not be applicable. Further, it is a fact that the scheme of merger stands approved by Hon’ble High Court of Calcutta. As per the Preamble of the Scheme of Amalgamation filed before the Hon’ble Calcutta High Court and forming part of the Order dated 08.05.2014 of the Hon’ble High Court, the amalgamation was done with the objective of:
a. Consolidation of operations
b. Reduction in administrative cost and overheads
c. Incremental business synergies in business operations and cost savings
d. Maximizing overall stakeholder value
Furthermore, the company has paid consideration in the form of issue of shares to the shareholders of Erstwhile PearltreeTradelinkPvt. Ltd. (“PTPL”) as per the Approved scheme of Amalgamation and therefore the excess payment over the net assets acquired is Purchased goodwill and cannot be treated as a mere book entry for reduction of liability of income tax and Section 43(1) Explanation 3, therefore cannot be said to be applicable in this case. Further, appellant has also shown that “PTPL” was not the Subsidiary of the company prior to its amalgamation with the company and that there was no Holding and Subsidiary relationship between the company and “PTPL”. More so ever, Assessing officer has made an observation in the Assessment Order that an Order u/s 144 dated 31/12/2016 was passed in the case of PearltreeTradelink Private Limited making additions of Rs 150.20 Crores on account of a bogus entry of unsecured loan from M/s Dreamline Manpower Solution Pvt Ltd, which is a 100% holding company of M/s PearltreeTradelink Pvt Ltd. The AO has concluded the amount of Rs. of Rs. 150,00,00,000/ was a bogus entry of unsecured loan to manipulate the accounts of the assessee to raise a non-existant goodwill and evade taxation in the scheme of merger/amalgamation. Now the appellant has shown that this additions/disallowances made by the AO in Order u/s 144 in the case of PearltreeTradelinkPvt. Ltd. has been deleted by the CIT(A) vide Order dated 29/03/2019 and on further appeal by the Revenue before the Hon’ble ITAT Kolkata Bench in ITA No. 2392/Kol/2019, the Order of the CIT(A) deleting the additions/disallowances has been upheld vide Order dated 01/09/2022. Thus, I am not in agreement that the asset has been created only as a book entry. I am also not in agreement with the AO that in this case Expl.3 of Section 43(1) of the Act will come into play. Similarly, for the reason given above, 5th Proviso to Section 32(1) of the Income Tax Act, 1961 will also not come into play. AO’s reliance on the United Breweries Limited (2014) judgement of ITAT and similar judgment in the case of DCIT vs Toyo Engineering India Ltd, ITA No. 3279 (MUM) of 2008 is of no help to him as in the case of DCIT vs. Toyo Engineering India Ltd. (ITA No. 3279(Mum) of 2008), the judgment of Mumbai ITAT(wherein depreciation on Amalgamation Goodwill was disallowed) has been set aside by the Hon’ble Bombay High court in ITA (L) No. 1330 of 2012 for fresh consideration on merits following which the Mumbai ITAT allowed the claim of depreciation on Goodwill arising on amalgamation. In the case of United Breweries Ltd. facts of the case were different, in that case the merger was with a wholly owned subsidiary of United Breweries Ltd and ITAT was of the opinion that in such case, any goodwill would be in the nature of Self Generated Goodwill and in such a case the same should not be allowed as depreciation. This fact is not present in this case. Following the binding decisions of CIT Vs. SMIFS Securities Ltd. (SC) (2012) 348 ITR 302 (SC) and Zydus Wellness Ltd., 348 ITR 302 (SC), this Ground of appellant is allowed and disallowance of the claim of depreciation on goodwill is deleted.”
2.3. After hearing the rival contentions and perusing the materials available on record, we find that in this case the ld. AO has disallowed the depreciation on goodwill crated out of amalgamation approved by the Hon’ble High Court vide order dated 08.05.2014, with effect from 01.04.2014. We also note that the court rejected the objections raised by the Central government with regard to valuation of shares of transferor company and approved the valuation of shares. Thus, the goodwill was accounted for by the assessee in the books of accounts. The ld. AO disallowed the depreciation on goodwill by relying on the decision of United Breweries Limited, Bangalore ITA No. 722, 801, 1065/Bang/2014 and Mumbai Bench in the case of Toyo Engineering India Ltd. 3279 of 2008 Mumbai. We note that so far as the Toyo Engineering India Ltd (supra), is concerned, the decision was set aside by the Hon’ble High Court for reconsideration of the Tribunal and then, Tribunal decided the issue in favour of the assessee as has been noted by the ld. CIT (A) in page no. 59 above. Similarly, the ld. CIT (A) noted in the appellate order that the decision in the case of United Breweries India Ltd (supra), is distinguishable on facts. We also note that the ld. CIT (A) while passing the order after following the decision of the co-ordinate bench in the case of Mylan Laboratories Ltd. Vs. DCIT Cir 6(2)/Hyderabad (ITA No. 235/Hyd./2018) wherein the Hon’ble ITAT has dealt with the judgment of ITAT Bangalore in the case of United Breweries Ltd. (Supra) and held that 6th proviso (earlier 5th proviso) to section 32(1)(ii) has no applicability on the Goodwill generated on amalgamation. We note that the ld. CIT (A) also relied on the decisions of Hon’ble Supreme Court in case of CIT Vs SMIFS Securities Ltd (2012)348ITR302(SC) and various other decisions of various High Courst in the above extraction. Therefore ,we are inclined to uphold the order of ld. CIT (A), which is a very reasoned and speaking order by dismissing the appeal of the Revenue.
CO No. 86/KOL/2025
3. The only issue raised by the assessee is against the confirmation of disallowance of ₹4,20,350/- by the ld. CIT (A) as made by the ld. AO u/s 14A read with section 8D of the it Rules.
3.1. After hearing the rival contentions and perusing the materials available on record, we find that during the year the assessee has not earned any income by way of exempt income. Therefore, being a settled position of law that no disallowance is called for when there is no exempt income earned during the year. Accordingly we set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition.
4. At the time of hearing, the assessee raised additional ground which is extracted below:
“3. For that the ld. CIT (A) should have also held that the opening Written-down value of asset brought forward from earlier year cannot be distributed and as such depreciation on goodwill was also allowable on that score.”
4.1. After hearing the rival contentions and perusing the material on record, we find that the assessee has raised the above additional ground of appeal challenging brought forward of Written-down value from earlier cannot be disturbed . In our opinion the issued raised in the additional ground is a purely a legal issue qua which all the facts are available in the appeal folder and no further verification of facts are required from any quarter whatsoever. In our considered view the assessee is at liberty to raise any legal issue before any appellate authority for the first time even when the same has not been raised before the lower authorities. The case of the assessee is squarely coverd by the decisions of the Apex court in the case of i) Jute Corporation of India Ltd. Vs CIT in 187 ITR 688 , ii) National Thermal Power Co. Ltd v. CIT [1998] 229 ITR 383 and also by the decision of Hon’ble Calcutta High Court in PCIT vs. Britannia Industries Ltd. [2017] 396 ITR 677 (Cal). Therefore, we are inclined to admit the same for adjudication.
4.2. We have heard the rival contentions and perused the material on record. We note from the goodwill has been allowed by department in the preceding assessment year and there is no pending proceedings. Therefore we are in agreement with the contention of the counsel that unless the Written-down value of preceding assessment year is changed or disturbed , the depreciation claimed on the brought forward Written-down value cannot be disallowed, The additional ground raised by the assessee is allowed.
5. In the result, the CO of the assessee is allowed and the appeal of the Revenue is dismissed.
Order pronounced on 28.04.2026.
