The Income Tax Appellate Tribunal (ITAT), Kolkata, has allowed Tata Consumer Products Limited’s depreciation claims aggregating to ₹1,505.36 crore on goodwill, brands and a distribution network acquired through the demerger of Tata Chemicals Limited’s consumer products business for assessment year 2020–21.
The bench of Pradip Kumar Choubey (Judicial Member) and Rajesh Kumar (Accountant Member) has observed that depreciation could not be denied merely because the intangible assets had not been recorded in the books of the demerged company and clarified that the Finance Act, 2021 amendment discontinuing depreciation on goodwill applies from assessment year 2021–22 and does not affect the company’s claim for the preceding assessment year.
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The bench deleted an additional disallowance of ₹8.82 crore under Section 14A, holding that the Assessing Officer had applied Rule 8D without recording adequate reasons for rejecting the company’s own expenditure allocation. A separate claim for deduction under Section 80G was remitted to the Assessing Officer for consideration in accordance with law.
The dispute arose from an assessment order dated June 27, 2024, passed under Section 143(3), read with Section 144C(13), following directions issued by the Dispute Resolution Panel.
Under a scheme sanctioned by the National Company Law Tribunal on January 8, 2020, Tata Chemicals’ consumer products business vested in Tata Consumer Products as a going concern with effect from April 1, 2019.
As consideration for the acquisition, Tata Consumer Products allotted 29,04,21,986 equity shares to the shareholders of Tata Chemicals. The aggregate fair value of these shares was ₹6,098.87 crore. The scheme provided for the issue of 114 fully paid-up equity shares of Tata Consumer Products for every 100 shares held in Tata Chemicals.
Merchant bankers subsequently identified three brands and a distribution network forming part of the acquired undertaking and valued them at ₹2,459.01 crore. These assets had not been recorded in Tata Chemicals’ books.
After deducting the value of these identifiable intangible assets and the net tangible assets from the acquisition consideration, the residual amount of ₹3,562.41 crore was recognised as goodwill.
For assessment year 2020–21, the company claimed depreciation of ₹890.60 crore on goodwill and ₹614.76 crore on the brands and distribution network.
The Assessing Officer disallowed the claims on the reasoning that business restructuring should be tax neutral and that depreciation should be allowed only with reference to intangible assets already reflected in the demerged company’s books and their written-down value.
According to the department, intangible assets recognised for the first time in the resulting company’s books following a demerger could not generate a fresh depreciation allowance.
The Revenue also relied on the sixth proviso to Section 32(1), Explanation 7A to Section 43(1), and Explanation 2B to Section 43(6). It argued that where the cost of an asset in the transferor’s hands was nil, its cost or written-down value in the transferee’s hands should also remain nil.
Another contention was that depreciation on such intangible assets should be available only where the transferor had paid capital gains tax on the consideration received. The department additionally relied on the memorandum explaining the Finance Bill, 2021, which proposed the exclusion of goodwill from depreciable assets.
Tata Consumer Products contested these conclusions, submitting that it had acquired the undertaking for consideration and that the newly recognised intangible assets had never formed part of the demerged company’s block of assets.
The tribunal accepted the company’s position and distinguished between assets already forming part of the demerged company’s depreciable block and intangible assets identified and recognised upon acquisition.
It explained that the sixth proviso to Section 32(1) apportions depreciation between the demerged company and the resulting company in the year of demerger. On its reading, the provision applies to assets forming part of the demerged company’s block on which depreciation had been claimed.
Similarly, the provisions governing continuity of actual cost and written-down value were held to apply to assets forming part of the demerged company’s block.
The bench held that these restrictions did not apply to the intangible assets in dispute, which had not been recorded or recognised in Tata Chemicals’ books, had not formed part of its block of assets, and were identified and valued following the demerger.
Since Tata Consumer Products had acquired these assets for consideration, the tribunal held that depreciation was available under Section 32 on the apportioned acquisition cost, subject to their ownership and business use.
The tribunal also rejected the department’s argument that depreciation depended on the transferor paying capital gains tax.
It observed that the Income Tax Act treats a qualifying demerger differently from a taxable slump sale. That distinction, however, did not justify introducing an additional condition for depreciation that the statute itself did not prescribe.
The bench explained that Sections 47(vib) and 47(vid) exclude specified demerger transactions and the corresponding issue of shares from the scope of transfer for capital gains purposes. Shareholders may nevertheless become liable to capital gains tax when they subsequently dispose of the shares received from the resulting company.
The absence of an immediate capital gains charge on the demerger therefore did not, by itself, defeat the resulting company’s depreciation claim on the acquired intangible assets.
On goodwill, the tribunal relied on the Supreme Court’s decision in CIT v. Smifs Securities Ltd., which recognised goodwill as an asset eligible for depreciation under the law then applicable.
The bench held that the principle also applied to goodwill arising and recognised on demerger. It rejected the Revenue’s attempt to avoid the binding precedent by arguing that certain depreciation computation provisions had not been considered by the Supreme Court.
The tribunal further held that the Finance Act, 2021 amendments discontinuing depreciation on goodwill took effect from assessment year 2021–22, leaving the earlier position undisturbed.
Consequently, the amendment did not bar Tata Consumer Products’ goodwill depreciation claim for assessment year 2020–21.
The bench separately emphasised that the 2021 amendments discontinued depreciation on goodwill and did not apply to other intangible assets such as the brands and distribution network involved in the case.
The department’s reliance on United Breweries Ltd. v. Additional Commissioner of Income Tax was also rejected.
The tribunal noted that the cited case involved goodwill already appearing in the amalgamating company’s books, which was revalued under the amalgamation scheme. Depreciation had been claimed on the enhanced value.
In the present case, the disputed goodwill and other intangible assets had not been recorded in the demerged company’s books or included in its block of assets. The bench therefore held that the earlier decision concerned a materially different factual situation.
During the hearing, the Revenue characterised the depreciation claim as a case of tax evasion or tax leakage.
The tribunal noted that this allegation had not been made at the assessment stage. The commercial rationale of the sanctioned scheme had also not been questioned by the department before the NCLT or during assessment proceedings.
The scheme contemplated expanding the company’s consumer goods presence, achieving operational and supply chain efficiencies, integrating distribution networks, and improving growth and cash flows.
The bench further observed that Explanation 3 to Section 43(1) provided a mechanism for the Assessing Officer to determine actual cost, with the prescribed approval, where the main purpose of a transfer was to reduce income tax liability by claiming depreciation on an enhanced cost. That provision had not been invoked.
In these circumstances, the tribunal rejected the attempt to characterise the demerger as a tax evasion arrangement at the appellate hearing and allowed the depreciation claims.
The company also succeeded in its challenge to an additional disallowance under Section 14A, read with Rule 8D.
During financial year 2019–20, Tata Consumer Products earned exempt dividend income of ₹19.36 crore. It voluntarily disallowed ₹62.16 lakh as expenditure attributable to managing its investments.
The Assessing Officer computed a total disallowance of ₹9,44,16,000 under Rule 8D and, after deducting the company’s voluntary disallowance, added a further ₹8.82 crore.
The Dispute Resolution Panel upheld this approach on the view that the 2016 amendment to Rule 8D made application of the prescribed formula mandatory.
The tribunal disagreed. It held that the amendment changed the computation formula but did not remove the statutory requirement that the Assessing Officer first examine the company’s accounts and record cogent reasons for dissatisfaction with its expenditure claim.
The bench found that the Assessing Officer had rejected the company’s computation essentially because it did not follow Rule 8D. That reasoning was insufficient: the formula could be applied only after the company’s allocation had been rejected on adequate grounds.
Accordingly, the tribunal deleted the additional ₹8.82 crore disallowance and restricted the Section 14A disallowance to the ₹62.16 lakh voluntarily offered by the company.
The final issue concerned donations totalling ₹14,25,37,911 and a claimed 50% deduction of ₹7,12,68,956 under Section 80G.
The tribunal noted that the donation details appeared in Schedule 80G of the return, while the admissible deduction was disclosed in the tax audit report and computation of income. However, no deduction had been claimed in Part B-TI under Chapter VI-A because the company had reported losses.
Since the assessment additions resulted in a positive gross total income, the bench held that the Assessing Officer should consider the disclosed Section 80G claim.
The issue was therefore remitted for examination in accordance with law, rather than the deduction being finally granted by the tribunal.
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