Allowance of an incorrect claim in a later year cannot be used to justify the non-disallowance in an earlier year – ITAT
In a recent judgment ITAT Ahmedabad has held that the allowance of an incorrect claim in a later year cannot be used to justify the non-disallowance in an earlier year. The principle of consistency is generally invoked in cases where a claim has been accepted in the past without objection and continues without change.
ABCAUS Case Law Citation:
4710 (2025) (08) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the Principal Commissioner of Income Tax (PCIT) in invoking section 263 of the Income Tax Act, 1961 (the Act) on the issue of depreciation on goodwill.
The PCIT observed that the assessee had recorded goodwill in its books following the amalgamation and had claimed depreciation thereon by incorrectly treating the goodwill as a depreciable building asset in its return.
The PCI further observed that in the immediately previous assessment year, the same depreciation claim was disallowed by the AO. The Principal CIT was of the view that there was no new basis or change in facts that could justify allowing the depreciation claim in the subsequent year, and the AO had failed to disallow it again, leading to an underassessment of income.
The assessee, in response to the show cause notice issued under section 263 of the Act, submitted that the issue had already been examined in the reassessment proceeding under section 148 of the Act and that the reassessment had concluded with no additions, as per the order passed by the National Faceless Assessment Centre.
However, Principal CIT rejected this line of argument holding that the AO did not ask any relevant questions or verify the basis of the depreciation claimed by the assessee during the assessment, even though a similar claim had already been disallowed in the immediately previous year and was pending appeal.
The PCIT highlighted that merely showing depreciation in the computation of income does not imply that the AO has applied his mind to the issue. Moreover, Principal CIT noted that by claiming depreciation under the block for “Buildings” was inconsistent with the nature of the asset (being goodwill), which clearly demonstrated that the assessee itself was not confident in its claim.
The reliance placed by the assessee on various judicial precedents was distinguished by Principal CIT by pointing out that depreciation on goodwill, while allowed in some cases on the principle of consistency, was actually not upheld on merits by higher judicial forums. Therefore, the principle of consistency could not be used where depreciation had already been disallowed in the first year and was under appeal. Accordingly, the Principal CIT held that the AO’s failure to disallow the depreciation on goodwill, despite having disallowed it in the earlier year and despite no change in facts, made the relevant Assessment Year was both erroneous and prejudicial to the interest of the Revenue.
The Tribunal observed that admitted fact was that in the immediately preceding assessment year, the claim of depreciation on goodwill was examined and disallowed by the AO. That disallowance was based on the same facts and grounds. There was no material on record to show that the facts had changed in the present year or that there was any new justification for allowing the claim of depreciation.
The Tribunal observed that the principle of consistency, which is generally invoked in cases where a claim has been accepted in the past without objection and continues without change, is not applicable here. In fact, the position was reversed – the depreciation was disallowed in the first year and the same claim was again made in the next year without any new basis, but the AO failed to disallow it again. That failure on the part of the AO, without any inquiry or reasoning, clearly makes the assessment order erroneous and prejudicial to the interest of the Revenue.
The Tribunal rejected the argument of the assessee that because depreciation was allowed in subsequent years, it should have been allowed in the current year as well following the principle of consistency observing that The he allowance of an incorrect claim in a later year cannot be used to justify the non-disallowance in an earlier year when the facts and legal position have remained the same.
Moreover, as noted by the Principal CIT, the fact that the goodwill was shown under the block of “Building” when it was admittedly an intangible asset (if at all allowable), further reinforces that the AO had not properly examined the claim.
Therefore, the Tribunal opined that the Principal CIT was fully justified in invoking the provisions of section 263 of the Act. Once depreciation on goodwill was disallowed in the earlier year and there was no change in facts or legal position, the AO should have disallowed the claim again.
Accordingly, the appeal filed by the assessee was dismissed.
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