Introduction
The Income Tax Appellate Tribunal (ITAT), Kolkata Bench, delivered a significant ruling on 28 April 2026 in the case of Indian Crable NetCo Ltd. vs. DCIT (ITA No. 1951/KOL/2025 & CO No. 86/KOL/2025). The judgment addresses two pivotal issues in Indian tax law: the allowability of depreciation on goodwill arising from a court-approved amalgamation, and the applicability of Section 14A disallowance in the absence of exempt income. By dismissing the Revenue’s appeal and allowing the Assessee’s cross-objection, the Tribunal reinforced the principle that goodwill created through a genuine amalgamation is a depreciable intangible asset under Section 32(1) of the Income Tax Act, 1961. This commentary provides a deep legal analysis of the Tribunal’s reasoning, its reliance on binding Supreme Court precedents, and the implications for taxpayers.
Facts of the Case
The Assessee, Indian Crable NetCo Ltd., filed its return of income for Assessment Year (AY) 2016-17, declaring total income of ₹3,16,80,608. The case was selected for scrutiny, during which the Assessing Officer (AO) observed that the Assessee had claimed depreciation of ₹7,89,99,274 on goodwill. This goodwill arose from the amalgamation of M/s Pearltree Tradelink Pvt. Ltd. with the Assessee, effective from 31 March 2014, pursuant to a scheme approved by the Hon’ble Kolkata High Court on 8 May 2014 under Sections 391 to 394 of the Companies Act, 1956.
The AO disallowed the depreciation, relying on the 5th Proviso to Section 32(1) and Explanation 3 to Section 43(1) of the Act. The AO argued that the goodwill was merely an accounting entry created to claim bogus depreciation, as the amalgamating company had not claimed depreciation on goodwill before amalgamation. The AO also cited the decisions in DCIT vs. Toyo Engineering India Ltd. (ITA No. 3279/MUM/2008) and United Breweries Ltd. (ITA No. 722/Bang/2014). On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the Assessee’s claim, distinguishing the cited cases and following the Supreme Court’s rulings in CIT vs. SMIFS Securities Ltd. (2012) 348 ITR 302 (SC) and Zydus Wellness Ltd.. The Revenue appealed to the ITAT, while the Assessee filed a cross-objection challenging a disallowance of ₹4,20,350 under Section 14A read with Rule 8D.
Reasoning of the Tribunal
The Tribunal’s reasoning is the cornerstone of this judgment, providing a meticulous analysis of the legal issues.
1. Depreciation on Goodwill Arising from Amalgamation
The Tribunal upheld the CIT(A)’s order, emphasizing that the goodwill was a purchased intangible asset, not a self-generated one. The amalgamation was approved by the Hon’ble Kolkata High Court, which rejected objections from the Central Government regarding share valuation. The Tribunal noted that the Assessee paid consideration in the form of shares to the shareholders of the amalgamating company, and the excess payment over net assets acquired constituted purchased goodwill. This distinction was critical because the 5th Proviso to Section 32(1) (now the 6th Proviso) applies only to self-generated goodwill or goodwill not acquired through a genuine transaction.
The Tribunal addressed the Revenue’s reliance on Toyo Engineering India Ltd., observing that the Mumbai ITAT’s decision in that case was set aside by the Hon’ble Bombay High Court for fresh consideration, and subsequently, the Tribunal decided the issue in favor of the assessee. Similarly, the United Breweries Ltd. case was distinguished on facts: in that case, the merger was with a wholly owned subsidiary, leading to self-generated goodwill, whereas in the present case, there was no holding-subsidiary relationship between the Assessee and Pearltree Tradelink Pvt. Ltd.
The Tribunal also rejected the AO’s argument that the goodwill was a bogus entry. The AO had pointed to an ex-parte assessment order under Section 144 in the case of Pearltree Tradelink Pvt. Ltd., which made additions of ₹150.20 Crores on account of a bogus unsecured loan. However, the CIT(A) noted that this addition was deleted by the CIT(A) on 29 March 2019, and the ITAT upheld that deletion on 1 September 2022. Thus, the foundation of the AO’s suspicion was demolished.
2. Applicability of the 5th Proviso to Section 32(1)
The Tribunal held that the 5th Proviso to Section 32(1) does not bar depreciation on goodwill arising from amalgamation. It relied on the coordinate bench decision in Mylan Laboratories Ltd. vs. DCIT (ITA No. 235/Hyd./2018), which explicitly held that the 6th Proviso (earlier 5th Proviso) has no applicability to goodwill generated on amalgamation. The Tribunal further noted that Explanation 3 to Section 43(1), which defines “actual cost” in cases of amalgamation, does not apply because the goodwill was not a mere book entry but a genuine asset created through a court-approved scheme.
3. Section 14A Disallowance
On the cross-objection, the Tribunal ruled that no disallowance under Section 14A read with Rule 8D is warranted when the Assessee has not earned any exempt income during the year. This is a settled position of law, as the purpose of Section 14A is to disallow expenditure incurred in relation to exempt income, and if no such income exists, the provision cannot be invoked. The Tribunal set aside the CIT(A)’s order confirming the disallowance of ₹4,20,350 and directed the AO to delete the addition.
4. Additional Ground on Opening Written-Down Value (WDV)
The Assessee raised an additional ground challenging the disturbance of the opening WDV of the goodwill asset. The Tribunal admitted this ground as a pure legal issue, noting that all facts were available on record. It held that the department had not disturbed the WDV in preceding years, and therefore, the opening WDV could not be re-agitated in the current assessment year. This finding aligns with the principle of consistency in tax assessments.
Conclusion
The ITAT’s judgment in Indian Crable NetCo Ltd. is a landmark ruling that clarifies the tax treatment of goodwill arising from amalgamation. By upholding the CIT(A)’s decision, the Tribunal reinforced that goodwill created through a genuine, court-approved amalgamation is a depreciable intangible asset under Section 32(1). The judgment also reaffirms that the 5th Proviso to Section 32(1) does not apply to purchased goodwill, and that Section 14A disallowance requires actual receipt of exempt income. Taxpayers can take comfort in the Tribunal’s reliance on Supreme Court precedents and its rejection of the Revenue’s attempt to re-litigate settled issues. This decision underscores the importance of substance over form in tax disputes, particularly when amalgamations are approved by High Courts.