ITAT Bangalore Allows Goodwill Depreciation on Amalgamation, Restores Connectivity Charges and Network Acquisition to Assessing Officer

The Bangalore Bench resolves five substantive disputes for Atria Convergence Technologies for AY 2016-17, allowing goodwill depreciation and non-compete depreciation while remanding connectivity charges and network acquisition for fresh computation.

The Income Tax Appellate Tribunal's ‘A’ Bench at Bangalore has decided cross-appeals filed by M/s Atria Convergence Technologies Limited and the Revenue against the order of the Commissioner of Income Tax (Appeals)-15, Bengaluru for Assessment Year 2016-17. The Bench, comprising Shri Waseem Ahmed (Accountant Member) and Shri Soundararajan K (Judicial Member), pronounced its order on 26 May 2026. Across five substantive issues — optical fibre connectivity charges, Section 14A disallowance, network acquisition depreciation, goodwill depreciation on amalgamation, non-compete fee depreciation, and premium on redemption of debentures — the Tribunal allowed the assessee's appeal partly for statistical purposes and dismissed the Revenue's appeal in full.

The Disputes Before the Tribunal

Atria Convergence Technologies is engaged in providing broadband and internet services. For AY 2016-17, the Assessing Officer made several additions and disallowances. The CIT(A) partly allowed the assessee's appeal, and both sides came before the Tribunal on the issues that remained in contest.

The assessee also sought admission of an additional ground — Ground No. 8 — relating to depreciation on non-compete fees, which had not been raised before the lower authorities. The Tribunal admitted it, relying on the Supreme Court's ruling in National Thermal Power Co. Limited v. CIT (229 ITR 383), which holds that the Tribunal's powers under Section 254 are wide enough to permit new grounds of law where the relevant facts are already on record.

Optical Fibre Connectivity Charges: Amortisation Remanded

The assessee had entered into an agreement dated 30 December 2009 with M/s Bell Teleservices India Pvt. Ltd. for the right to use 405 km of optical fibre cable (OFC) for 15 years, paying a fixed fee of Rs. 5,67,01,620 at Rs. 1,40,004 per pair per km. Subsequent addendum agreements in November 2011 and September 2013 added 100 km and 400 km respectively, each for 15-year periods. Annual maintenance charges were also payable separately. The total upfront payment made up to AY 2016-17 was Rs. 19,58,67,621.

The assessee amortised one-fifth of the lump-sum payment and claimed Rs. 1,12,31,385 as revenue expenditure. The AO disallowed the entire claim, treating it as capital expenditure not pertaining to the year. The CIT(A) directed allowance of one-fifteenth of Rs. 5,67,01,620, arriving at Rs. 37,80,100, on the basis of only the original agreement.

The Tribunal found both positions unsatisfactory. Ownership of the OFC network remained with Bell Teleservices throughout; the assessee held only limited user rights for defined periods. Annual maintenance charges, being recurring, were held allowable as revenue expenditure in the year of payment. For the upfront connectivity fee, the Tribunal held that the correct approach is straight-line amortisation over the 15-year tenure of each individual agreement, starting from the commencement date of that agreement or addendum.

The CIT(A) had proceeded on assumptions about a single agreement and applied an incorrect fraction. The Tribunal set aside the issue and restored it to the Assessing Officer for a limited purpose: to verify all agreements and addenda, note commencement dates and tenures, segregate upfront fees from annual maintenance charges, and recompute amortisation on a straight-line basis over the respective 15-year periods. The assessee is to be given a reasonable opportunity and to furnish agreement-wise workings. Both the assessee's and Revenue's grounds on this issue were allowed for statistical purposes.

Section 14A Disallowance: Interest Deleted, Administrative Expenses Restricted

The assessee earned dividend income of Rs. 63,982 from investment in HDFC Cash Management Mutual Fund, claimed as exempt under Section 10(35). The AO invoked Section 14A read with Rule 8D and disallowed Rs. 2,04,14,700, comprising interest under Rule 8D(2)(ii) of Rs. 1,84,72,595 and administrative expenses under Rule 8D(2)(iii) of Rs. 19,42,105. The CIT(A) restricted the total disallowance to Rs. 64,000, being the amount of exempt income earned.

Before the Tribunal, the assessee argued that borrowed funds were not used for the investments, which were funded from share application money and securities premium received from its holding company. The Revenue contended that once exempt income is earned, Section 14A disallowance is mandatory.

The Tribunal held that since the assessee had sufficient interest-free own funds far exceeding the investments yielding exempt income, no disallowance of interest under Rule 8D(2)(ii) was warranted. On administrative expenses under Rule 8D(2)(iii), the Tribunal held that a presumptive disallowance is justified, but only with reference to investments that actually yielded exempt income during the year. Since exempt income arose only from the HDFC mutual fund investment, strategic investments in subsidiaries and associates — which yielded no exempt income — could not be included in the average value of investments for Rule 8D(2)(iii). The total disallowance was in any case capped at the exempt income of Rs. 63,982. The AO was directed to recompute accordingly. The assessee's ground was allowed for statistical purposes; the Revenue's ground was dismissed.

Network Acquisition: Intangible Asset Question Remanded

Over the years, the assessee had acquired the internet broadband businesses of various Local Cable Operators (LCOs). During AY 2016-17, it paid Rs. 5,19,97,358 for such acquisitions and claimed depreciation of Rs. 2,35,83,242 at 25% under Section 32(1)(ii) on the opening written-down value and new additions, treating the acquired rights as intangible assets. The AO disallowed the claim, holding that “customer access rights” do not fall within the residual category of business or commercial rights under Section 32(1)(ii). The CIT(A) confirmed the disallowance.

The Tribunal examined a sample agreement dated 1 September 2015 for the acquisition of the broadband business of M/s Guru Video, a proprietary concern with 45 subscribers. The assessee acquired all rights, titles and interest in the business as a going concern — the subscriber list, the network diagram, and territorial operating rights — at Rs. 7,518.35 per customer. The seller was also prohibited from carrying on a competing business in the locality.

The Tribunal found that what was transferred was not merely a list of customers but a complete operating set-up, including commercial rights attached to the subscriber base and a non-compete covenant. Such rights are capable of generating enduring income and form part of the profit-earning apparatus. Applying the rule of ejusdem generis to the residual clause in Section 32(1)(ii), the Tribunal held that rights of this nature are commercially comparable to licences or franchises, permitting the holder to operate in a defined area and derive recurring income.

However, the Revenue had raised doubts about whether any portion of the consideration related to tangible infrastructure. The Tribunal directed the AO to verify the composition of the block, the treatment adopted in the initial year of capitalisation, consistency of allowance in prior assessments, and whether any portion of the consideration is attributable to tangible assets. Subject to such verification, the matter was restored to the AO. The assessee's ground was allowed for statistical purposes.

Goodwill on Amalgamation: Depreciation Allowed

The assessee acquired the business of M/s Beam Telecom Private Limited through a scheme of amalgamation effective 1 April 2013. Goodwill of Rs. 86,86,66,741 arose in the books, being the excess of purchase consideration over net assets taken over. For AY 2016-17 — the third year following the amalgamation — the assessee claimed depreciation of Rs. 12,21,56,682 on this goodwill. The AO and CIT(A) disallowed the claim by invoking the fifth proviso to Section 32(1), which restricts aggregate depreciation in cases of amalgamation to what would have been allowable had the amalgamation not taken place. Since the amalgamating company had never claimed depreciation on goodwill, the lower authorities held that no depreciation was permissible.

The Tribunal disagreed. It held that the fifth proviso operates in respect of existing depreciable assets transferred from the predecessor to the successor, and is intended to prevent double depreciation on the same asset. Goodwill in the present case did not exist in the books of the amalgamating company and arose for the first time in the hands of the assessee pursuant to the amalgamation itself. There was therefore no question of double deduction or inflation of depreciation.

The Tribunal drew support from the Karnataka High Court's judgment in Padmini Products (P) Ltd (121 taxmann.com 237), which held that the fifth proviso applies only in the year of succession and only where there is an aggregate deduction; it has no role to play in subsequent years or where no aggregate deduction arises. The Tribunal also noted coordinate Bench decisions in I & B Seeds (P.) Ltd., Altimetrik India (P.) Ltd., Atos IT Services (P.) Ltd. and Urmin Marketing (P.) Ltd., which consistently hold that goodwill arising on amalgamation is a depreciable intangible asset not hit by the proviso.

An additional procedural consideration arose: the year under consideration was not the first year of the claim, and the CIT(A) had treated it as the lead case, with the first year's claim (AY 2014-15) having been decided by following the present year's order. The Tribunal resolved the dispute in the present appeal to avoid a circular situation. The assessee's ground was allowed.

Non-Compete Fee Depreciation: Allowed, Following Karnataka High Court

In March 2009, the assessee paid Rs. 2.55 crore as non-compete fees to the promoters of a partnership firm from whom it had acquired a cable television distribution business. The promoters were restrained from carrying on a competing business. The amount was capitalised and depreciation was claimed at 25% under Section 32(1)(ii). For AY 2016-17, the depreciation claimed on the written-down value was Rs. 15,12,817. The AO disallowed it; the CIT(A) allowed it, following the Karnataka High Court in Ingersoll Rand International Limited v. CIT (48 taxmann.com 349).

The Revenue appealed. The Tribunal upheld the CIT(A)'s order. The Karnataka High Court in Ingersoll Rand International Limited had held that the right acquired under a non-compete agreement is a valuable business or commercial right enabling the assessee to carry on business more efficiently by avoiding competition, and falls within the expression “any other business or commercial rights of similar nature” in Section 32(1)(ii). The Tribunal also noted that in the assessee's own case for an earlier assessment year, the CIT(A) had allowed the claim and the Revenue had not appealed, and no change in facts or law had been shown for the present year. The Revenue's ground was dismissed.

Premium on Redemption of Debentures: Additional Claim Upheld

During AY 2016-17, the assessee redeemed non-convertible debentures at a total premium of Rs. 34,45,96,011. Of this, Rs. 17,44,84,900 was adjusted against the Securities Premium Account and Rs. 17,01,11,111 against the Debenture Redemption Reserve. The AO allowed the Rs. 17.44 crore portion but rejected the additional claim of Rs. 17.01 crore on the ground that it had not been claimed in the return of income, relying on the Supreme Court's ruling in Goetze (India) Ltd. v. CIT (284 ITR 323). The CIT(A) directed allowance of the Rs. 17.01 crore.

The Revenue challenged this before the Tribunal. The Tribunal upheld the CIT(A). It noted that the Supreme Court in Goetze (India) Ltd. itself clarified that the limitation on making claims outside a revised return applies only at the assessment stage and does not curtail the jurisdiction of appellate authorities. The facts relating to debenture redemption and payment of premium were already before the AO, and part of the same expenditure had been accepted by him, establishing the genuineness of the claim. On merits, premium on redemption of debentures has been consistently held to be revenue in nature and allowable as borrowing cost under Sections 36(1)(iii) or 37. The Revenue's ground was dismissed.

Outcome

The Tribunal allowed the assessee's appeal in ITA No. 1094/Bang/2024 partly for statistical purposes. The Revenue's appeal in ITA No. 1206/Bang/2024 was dismissed in its entirety. Specifically: the connectivity charges issue was restored to the Assessing Officer for agreement-wise amortisation computation; the Section 14A disallowance was directed to be recomputed with interest disallowance deleted and administrative expense disallowance capped at exempt income of Rs. 63,982; the network acquisition depreciation issue was restored to the AO for verification of the block composition; depreciation on goodwill of Rs. 12,21,56,682 was allowed; depreciation on non-compete fees of Rs. 15,12,817 was upheld; and the additional claim of Rs. 17,01,11,111 towards premium on redemption of debentures was upheld. The order was pronounced in court on 26 May 2026.