Assessment against non-existing company unsustainable despite filed returns; depreciation on amalgamation goodwill allowed under section 143(3)

ITAT Ahmedabad ruled in favor of the assessee on two key issues. First, the assessment framed under section 143(3) against a non-existing company was held unsustainable, despite the assessee filing returns in the defunct company's name. The AO was aware of the amalgamation and conversion to LLP but erroneously assessed the non-existent entity. Second, depreciation on goodwill acquired through amalgamation was allowed. The court-approved scheme was deemed reasonable with proper disclosure, and no colorable device was found. The 2021 amendment excluding goodwill from depreciable assets was not applicable to the assessment year under consideration.

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Issues Involved:
1. Disallowance of depreciation on goodwill under section 32(1) of the Income Tax Act.
2. Validity of assessment order passed in the name of a non-existent entity.

Summary:

Issue 1: Disallowance of Depreciation on Goodwill

The assessee challenged the disallowance of depreciation on goodwill recognized pursuant to an amalgamation sanctioned by the Hon'ble High Court of Gujarat. The goodwill was treated as an intangible asset under Explanation 3(b) to section 32(1) of the Income Tax Act. The AO disallowed the depreciation, arguing that the goodwill was not a depreciable asset and that the amalgamation was a colorable device to evade taxes. The AO also contended that the provisions of sections 43(1) and 43(6) of the Act required the actual cost and WDV of assets to remain the same as in the books of the amalgamating company, which did not have goodwill recorded before amalgamation.

The Tribunal held that the goodwill arising in the scheme of amalgamation represents the excess payment over the net value of assets acquired and is eligible for depreciation under section 32(1) of the Act. The Tribunal relied on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Smifs Securities Ltd, which recognized goodwill as an intangible asset eligible for depreciation. The Tribunal also noted that the scheme of amalgamation was approved by the Hon'ble Gujarat High Court, and the Income Tax Department did not raise any objections within the stipulated time. Therefore, the Tribunal directed the AO to allow the claim of depreciation on goodwill.

Issue 2: Validity of Assessment Order

The assessee contended that the assessment order was invalid as it was passed in the name of a non-existent entity, KIFS International Pvt. Ltd., which had been converted into a limited liability partnership (LLP) before the assessment order was passed. The AO was aware of this conversion, yet framed the assessment in the name of the erstwhile company.

The Tribunal agreed with the assessee, citing the Hon'ble Supreme Court's decision in PCIT vs. Maruti Suzuki India Limited, which held that an assessment order passed in the name of a non-existent entity is void ab initio. The Tribunal noted that the AO mentioned the conversion in the assessment order itself, indicating awareness of the change. The Tribunal emphasized that the mistake committed by the assessee in filing returns in the name of the erstwhile company does not empower the Revenue to frame the assessment in the name of a non-existent entity. Consequently, the Tribunal quashed the assessment order.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the AO to allow the claim of depreciation on goodwill and quashing the assessment order passed in the name of a non-existent entity.

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