2023 (9) TMI 1439 - AT - Income Tax

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 ... Assessment in the name of non-existing company - assessee itself has filed the return of income, appeals in the name of non-existent company - HELD THAT:- Mistake committed by the assessee does not empower the Revenue to also commit the same mistake especially in a situation where the fact about the scheme of amalgamation and conversion of the assessee into LLP was known by the AO which is evident from the assessment order discussed above. The department was aware of the complete fact that the company was no longer in existence, yet the AO has framed the assessment in the name of non-existing company. Therefore, contention of the DR fails on this count that the assessee has also made a mistake in filing the returns of income and appeal papers in the name of non-existing company. We also note that this Tribunal in case of Urmin marketing (P) Ltd. [2020 (11) TMI 47 - ITAT AHMEDABAD] has already decided the identical issue in favor of assessee on the similar facts and circumstances. Assessment framed u/s 143(3) of the Act is not sustainable. Hence the ground of appeal of the assessee is allowed. Disallowance of depreciation on the intangible assets/goodwill acquired in the scheme of amalgamation - all assets and liabilities of the amalgamating company were transferred to the assessee company at their book value - HELD THAT:- Goodwill generated in the scheme of amalgamation is acquired by the assessee. Thus, in our considered view the assessee has complied with all the conditions provided under section 32 of the Act. Accordingly, we are not convinced by the findings of the authorities below. All the necessary details about the management of both companies were disclosed in the scheme of amalgamation and nothing was hidden. The scheme contained all the information related to purchase consideration, its valuation, mode of payment and accounting treatment. The Hon’ble High Court approved such scheme after inviting observation and comment from ROC, MCA, and official liquidator including the income tax department. Thus, in the given fact and circumstances the reasonableness of the scheme cannot be doubted. Accordingly, no inference can be drawn that the assessee has employed colorable device in order to record high value of purchase consideration which is resulting goodwill. There is no prohibition under the Act for disallowing the depreciation on the goodwill generated in the scheme of amalgamation. There are certain kinds of transactions, prejudicial to the interest of Revenue, which may fall under the purview of the provisions of General Anti-Avoidance rule (GAAR), POEM, and BEPS provided under section 95 to 102, section 6(3) of the Act respectively under which the impugned transaction (depreciation on the goodwill in a scheme of amalgamation) can be denied. But such provisions are not applicable for the year under consideration. There is no dispute about the fact that the payment was made by the assessee to the shareholders of the amalgamating company in the form of shares and not through the cash payment. But the payment through the shares is a valid mode of payment. As pertinent to note that scheme of the amalgamation can be approved under the provisions of section 2(1B) of the Act where shareholders holding not less than 75% in the value of shares of the amalgamating company become the shareholders of the amalgamated company. It is possible only when the shares are issued to the shareholders of the amalgamating company. Accordingly, we are not impressed with the finding of the AO that there was no cash payment for the acquisition of the goodwill by the assessee, rather it was recognized in the books of accounts by way of accounting entries. Thus, we hold that the impugned transaction cannot be regarded as colorable device merely on the reasoning that the assessee claimed the depreciation on the goodwill in the scheme of amalgamation. There was an amendment to section 32, section 2(11) of the Act and other relevant sections of the Income Tax Act from the Finance Act 2021, effective from AY 2021-22. The amendment was brought into section 32 of the Act to exclude goodwill from depreciable assets. As no depreciation is allowable on goodwill from the AY 2021-22 onwards. However, goodwill is not excluded from capital assets. The purpose of exclusion of goodwill from the depreciable assets is that it is seen that Goodwill, in general, is not a depreciable asset and in fact depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, there may not be a justification of depreciation on goodwill. Accordingly, there is no need to provide for depreciation on goodwill of business/profession like other intangible assets or plant & machinery. But such an amendment is not applicable for the year under consideration. Thus we reverse the order of the authorities below and direct the AO to allow the claim of the assessee for the depreciation on the impugned goodwill. Decided in favour of assessee. 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 GoodwillThe 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 OrderThe 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.