ITAT Bangalore Allows Goodwill Depreciation on Amalgamation, Remands Connectivity Charges and Network Acquisition for Fresh Computation

The Bangalore Bench resolves five substantive disputes for Atria Convergence Technologies for AY 2016-17, covering optical fibre charges, section 14A, network acquisition, goodwill, and debenture redemption premium.

The Income Tax Appellate Tribunal, Bangalore ‘A’ Bench, pronounced its order on 26 April 2026 in cross-appeals filed by M/s Atria Convergence Technologies Limited and the Deputy Commissioner of Income Tax, Central Circle-2(4), Bangalore, arising from 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), decided five substantive issues: the revenue or capital character of upfront connectivity charges paid for optical fibre usage rights; disallowance under section 14A read with Rule 8D; depreciation on network acquisition from Local Cable Operators; depreciation on goodwill arising on amalgamation; and the allowability of premium on redemption of debentures as an additional claim. The assessee’s appeal was partly allowed for statistical purposes; the Revenue’s appeal was dismissed.

The Dispute Before the Tribunal

Atria Convergence Technologies provides broadband and internet services. For AY 2016-17, the Assessing Officer made several additions. He disallowed amortisation of Rs. 1,12,31,385 claimed on upfront fees paid to Bell Teleservices India Pvt. Ltd. for a right to use optical fibre cables, treating the expenditure as capital and not pertaining to the year. He invoked section 14A read with Rule 8D to disallow Rs. 2,04,14,700 on account of exempt dividend income of Rs. 63,982 earned from HDFC Cash Management Mutual Fund. He disallowed depreciation of Rs. 2,35,83,242 claimed at 25 per cent on network acquisition from Local Cable Operators, holding that customer access rights do not qualify as intangible assets under section 32(1)(ii). He disallowed depreciation of Rs. 12,21,56,682 on goodwill of Rs. 86,86,66,741 arising from the amalgamation of Beam Telecom Private Limited with effect from 1 April 2013, invoking the fifth proviso to section 32(1). He also rejected an additional claim of Rs. 17,01,11,111 towards premium on redemption of debentures on the ground that no revised return had been filed.

The CIT(A) partly allowed the assessee’s appeal. On connectivity charges, the CIT(A) directed allowance of one-fifteenth of Rs. 5,67,01,620, amounting to Rs. 37,80,100, instead of the full amortised claim. On section 14A, the CIT(A) restricted the disallowance to the exempt income of Rs. 64,000. On network acquisition, the CIT(A) confirmed the disallowance. On goodwill, the CIT(A) upheld the AO by following the Bangalore Bench decision in United Breweries Ltd. v. Addl. CIT. On debenture redemption premium, the CIT(A) directed the AO to allow Rs. 17,01,11,111. Both sides appealed to the Tribunal.

Connectivity Charges: Amortisation Remanded for Agreement-Wise Computation

The assessee had entered into an original agreement with Bell Teleservices in December 2009 for the right to use 405 km of optical fibre for 15 years at Rs. 1,40,004 per pair per km, aggregating Rs. 5,67,01,620. Two addendum agreements followed: one in November 2011 for an additional 100 km at Rs. 1,40,00,400, and another in September 2013 for 400 km at Rs. 6.4 crore. The total payment up to the year under consideration was Rs. 19,58,67,621. The assessee amortised the upfront fees as prepaid expenditure and claimed Rs. 1,12,31,385 for AY 2016-17.

The Tribunal held that the AO was wrong to deny the claim entirely on the ground that the payment was made in an earlier year, since the benefit flows over the contractual period and the expenditure relatable to the year must be matched with revenue. Equally, the assessee was not correct in claiming an arbitrary fraction without linking it to the tenure and commencement of each individual agreement. The CIT(A) had also proceeded on assumptions regarding only one agreement and an incorrect fraction.

The Tribunal directed the AO to verify all agreements and addenda, note the commencement date and tenure of each, segregate upfront connectivity fees from recurring annual maintenance charges, and allow amortisation of the upfront fees on a straight-line basis over the respective 15-year periods. Annual maintenance charges were directed to be allowed in full as revenue expenditure. The assessee was to be given a reasonable opportunity to furnish agreement-wise details. Both grounds were allowed for statistical purposes.

Section 14A Disallowance: Interest Deleted, Administrative Expenses Restricted to Exempt Income

The AO had disallowed Rs. 1,84,72,595 as interest under Rule 8D(2)(ii) and Rs. 19,42,105 as administrative expenses under Rule 8D(2)(iii). The Tribunal found it undisputed that the assessee had sufficient interest-free own funds in the form of share application money and securities premium, far in excess of the investments yielding exempt income, and that borrowed funds were used for business purposes. Accordingly, 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 once exempt income is earned, but only with reference to investments that actually yielded exempt income during the year. Since exempt income arose only from the HDFC Cash Management Mutual Fund, strategic investments in subsidiaries and associates — which yielded no exempt income — could not be included in the average value of investments. 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 from LCOs: Depreciation Remanded for Verification

The assessee paid Rs. 5,19,97,358 during the year to acquire internet broadband businesses of various Local Cable Operators and capitalised the amount as an intangible asset, claiming depreciation of Rs. 2,35,83,242 at 25 per cent under section 32(1)(ii).

The Tribunal examined a sample agreement dated 1 September 2015 with M/s Guru Video, a proprietary concern of Shri Rajendra Eshwarappa, who was carrying on broadband services to around 45 customers. The assessee acquired all rights, titles and interest in the business as a going concern, including the subscriber list, territorial operating rights, network diagram, and a non-compete covenant preventing the seller from operating in the same locality. Consideration was paid at Rs. 7,518.35 per customer.

The Tribunal held that what was transferred was not merely an isolated right to collect revenue from customers but the complete operating set-up of the broadband activity in that area, together with commercial rights attached to the subscriber base and an element of non-competition. Such rights are capable of generating enduring income and are commercially comparable to licences or franchises, satisfying the attributes of an intangible asset under section 32(1)(ii). However, since the Revenue raised doubts about whether any part of the consideration related to tangible infrastructure, the AO was directed to verify the composition of the block, the treatment in the initial year of capitalisation, consistency of allowance in prior assessments, and whether any portion is attributable to tangible assets. The matter was restored to the AO for fresh examination. The assessee’s ground was allowed for statistical purposes.

Goodwill on Amalgamation: Fifth Proviso to Section 32(1) Held Inapplicable

Atria Convergence acquired the business of Beam Telecom Private Limited through amalgamation with effect from 1 April 2013. Goodwill of Rs. 86,86,66,741 arose as the excess of purchase consideration over net assets. For AY 2016-17, the third year following amalgamation, the assessee claimed depreciation of Rs. 12,21,56,682. The AO and CIT(A) disallowed the claim by applying the fifth proviso to section 32(1), reasoning that since Beam Telecom had not claimed depreciation on goodwill prior to amalgamation, no depreciation would have been allowable had the amalgamation not taken place.

The Tribunal disagreed. It held that the fifth proviso is intended to prevent double depreciation on the same asset transferred from a predecessor to a successor, and to restrict aggregate depreciation to what would have been allowable had the amalgamation not taken place. The proviso primarily operates in respect of existing depreciable assets transferred from the predecessor. It cannot be extended to goodwill that comes into existence for the first time in the hands of the amalgamated company as a result of the amalgamation itself.

The Tribunal drew support from the Karnataka High Court judgment in Padmini Products (P) Ltd. reported in 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, and does not apply in subsequent years. It also relied on 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 held that goodwill arising on amalgamation is a depreciable intangible asset not hit by the proviso.

The Tribunal also noted a procedural dimension: the year under consideration was not the first year of the claim, and the CIT(A) had treated it as the lead case when deciding AY 2014-15 by following the finding for AY 2016-17. Given that the lower authorities had themselves made the present year the reference point, the Tribunal resolved the dispute in the present appeal. The assessee’s ground was allowed.

Non-Compete Fee Depreciation: Revenue’s Appeal Dismissed

The assessee had paid Rs. 2.55 crore in March 2009 to the promoters of an erstwhile partnership firm as non-compete fees and capitalised the amount. For AY 2016-17, depreciation of Rs. 15,12,817 was claimed on the written-down value. The CIT(A) allowed the claim following the Karnataka High Court decision in Ingersoll Rand International Limited v. Commissioner of Income-tax reported in 48 taxmann.com 349.

The Tribunal upheld the CIT(A). It found that the Karnataka High Court had categorically held that the right acquired under a non-compete agreement is a valuable business or commercial right falling within “any other business or commercial rights of similar nature” under section 32(1)(ii), and that depreciation is allowable thereon. The Tribunal also noted that the claim had been allowed by the CIT(A) for AY 2011-12 without the Revenue filing an appeal, and that the depreciation in the present year was on the written-down value of the same intangible asset. The Revenue’s ground was dismissed.

Debenture Redemption Premium: 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 from the securities premium account and allowed by the AO. The balance Rs. 17,01,11,111, adjusted from the Debenture Redemption Reserve, was rejected by the AO solely because it was not claimed in the original return and no revised return had been filed, relying on the Supreme Court decision in Goetze (India) Ltd. (284 ITR 323).

The Tribunal held that Goetze (India) Ltd. restricts only the powers of the Assessing Officer and does not curtail the jurisdiction of appellate authorities to entertain and decide additional claims. The facts relating to redemption of debentures were already on record before the AO, and part of the very same expenditure had been accepted by him, establishing the genuine and business nature 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 Tribunal upheld the CIT(A)’s direction to allow Rs. 17,01,11,111. 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 connectivity charges issue and the network acquisition issue were restored to the Assessing Officer for limited verification and recomputation on the principles set out in the order. The section 14A disallowance was directed to be recomputed with interest expenditure deleted and administrative expenses restricted to investments yielding exempt income, capped at Rs. 63,982. Depreciation on goodwill arising on amalgamation was allowed. The Revenue’s appeal in ITA No. 1206/Bang/2024 was dismissed in its entirety. The order was pronounced in court on 26 April 2026 by the Bangalore ‘A’ Bench.