2024 (11) TMI 1301 - AT - Income Tax

Assessee wins depreciation claim on goodwill from amalgamation under section 32(1)(ii) following Accounting Standard-14 valuation

Dow Chemical International Private Ltd. Versus DCIT – 14 (1) (2), Mumbai

The ITAT Mumbai allowed the assessee's claim for depreciation on goodwill arising from amalgamation under section 32(1)(ii). The tribunal held that ... Disallowance of depreciation claimed on goodwill - AO held that the assessee has failed to substantiate the nature and elements of “goodwill” that it has acquired from the amalgamating company upon amalgamation - primary contention of the assessee is that the goodwill recognised by the assessee in the process of amalgamation of the amalgamating company with the assessee company falls within the ambit of the expression “business or commercial rights of similar nature” under section 32(1)(ii) HELD THAT:- There is no dispute regarding the fact that the amalgamation was accounted by the assessee in its books as per the “Purchase Method” as prescribed by Accounting Standard-14. We find that due disclosure in this regard was also made by the assessee in its audited financial statements for the year under consideration. W find that in the facts of Smifs Securities Ltd. [2012 (8) TMI 713 - SUPREME COURT] the excess consideration paid by the taxpayer over the value of net assets acquired of the amalgamating company was considered as goodwill arising on account of amalgamation. It is further evident that the AO in the aforesaid decision concluded that no amount was actually paid on account of goodwill. However, in further appeal, the learned CIT(A) concluded that the difference between the cost of an asset and the amount paid constituted goodwill and the taxpayer in the process of amalgamation has acquired a capital right in the form of goodwill because of which the market worth of the taxpayer stood increased. It is evident from the perusal of the aforesaid decision that the aforesaid finding of the learned CIT(A) was upheld by the Tribunal and in further appeal, the Revenue restricted its challenge only qua the question as to whether the goodwill is an asset under section 32 of the Act and whether depreciation on “goodwill” is allowable under the said section. Therefore, it is evident from the record that the method of calculation of goodwill on which depreciation was claimed in Smifs Securities Ltd. (supra), i.e. the difference between the value of net assets acquired and consideration paid, is similar to the instant case. Thus, at the outset, we are of the considered view that the Revenue having once accepted the computation of goodwill in one case and not challenged its correctness, it will not be opened to the Revenue to challenge its correctness in the case of the other assessee without just cause. In support of the aforesaid conclusion, gainful reference can be made to the decision of the Hon’ble Supreme Court in Berger Paints India Ltd. [2004 (2) TMI 4 - SUPREME COURT] Submission of the Revenue that the amount is merely the difference between the purchase consideration and the net assets acquired of the amalgamating company and the goodwill was nothing but a balancing factor while merging the accounts of the amalgamating company into the accounts of the assessee - As following the “Purchase Method” of accounting for amalgamation as per Accounting Standard-14, the assessee sought a valuation report dated 04/07/2016 to estimate the fair value of identified intangible assets, i.e. Dealer Network and Customer Relationships (“Identified Intangible Assets”) and major tangible fixed assets i.e. land, buildings and plant and machinery (“Specified Tangible Fixed Assets”) as per the Indian Accounting Standards for the purpose of purchase price allocation exercise as at 31/03/2015, i.e. the valuation date. As noted in the foregoing paragraphs, Accounting Standard-14 further requires that any excess of the amount of the consideration over the value of net assets of the amalgamating company acquired by the amalgamated company should be recognised in the amalgamated company’s financial statements as goodwill on amalgamation. Therefore, even though there is no intangible asset under the head “goodwill” in the books of the amalgamating company on the date of acquisition by the assessee and the goodwill was not already recorded in the books of the amalgamating company which was valued by the independent merchant banker, it is pertinent to note that the value of the goodwill arose in light of the principles of Accounting Standard-14 followed by the assessee to account for the amalgamation in its accounts. Once goodwill has been recognised by the assessee in its financial statement, pursuant to the amalgamation, we are of the considered view that it is entitled to claim depreciation on the same under section 32(1)(ii) of the Act in light of the decision of the Hon’ble Supreme Court in Smifs Securities Ltd. (supra). Anticipated advantages/benefits/profitability to its business which is attributable to the goodwill - We find that the Hon’ble Karnataka High Court in Padmini Products (P.) Ltd. [2020 (10) TMI 424 - KARNATAKA HIGH COURT] held that fifth proviso (now sixth proviso) to section 32(1)(ii) of the Act restricts aggregate deduction by the predecessor and successor and if in a particular year there is no aggregate deduction, the provisions of the proviso shall not be applicable. It was further held that until and unless it is the case of aggregate deduction, the proviso has no role to play. Thus, adverting to the facts of the instant case, since the amalgamating company did not have any goodwill recorded in its books of accounts or as part of a block of depreciable assets, prior to amalgamation, therefore the question of claim of depreciation on goodwill by the amalgamating company does not arise in the instant case. Accordingly, we are of the considered view that the provisions of the sixth proviso to section 32(1) of the Act are not applicable to the facts of the present case since the goodwill did not exist in the books of the amalgamating company but has arisen in the process of amalgamation. Reliance upon the provisions of Explanation 7 to section 43(1) - As relying on Urmin Marketing (P.) Ltd. [2020 (11) TMI 47 - ITAT AHMEDABAD] we are of the considered view that provisions of the sixth proviso to section 32(1), Explanation 7 to section 43(1) and Explanation 2(b) to section 43(6) of the Act have no applicability to the facts of the present case. Applicability of provisions of section 49(1)(iii)(e) and section 55(2)(a)(ii) - As it is pertinent to note that these provisions form part of the Chapter dealing with “Capital Gains” and section 47 of the Act specifically excludes transfer of capital assets, pursuant to a scheme of amalgamation, from the purview of section 45 of the Act. Therefore, we are of the view that these provisions have no relevance to the facts of the present case. Thus the assessee is entitled to claim depreciation on goodwill arising on account of amalgamation under section 32 of the Act. Accordingly, the AO is directed to allow the claim of the assessee. As a result, the impugned order on this issue is set aside and ground no.1 raised in assessee’s appeal is allowed. Disallowance of depreciation on the distribution network and customer relations - HELD THAT:- Accounting Standard-14 provides that the identifiable assets and liabilities may include assets and liabilities not recorded in the financial statement of the transferor company. Thus, similar to our findings rendered in respect of the claim of depreciation on goodwill, we find no merits in the findings of the lower authorities that no separate asset under the head of assets by the name of “customer relationship” or “distribution network” was existing in the books of the amalgamating company. Further, we also do not find any merits in the findings of the learned CIT(A) that the aforementioned two intangible assets are actually the balancing figures while merging the accounts of the amalgamating company, as the fair value of these assets was specifically computed by the independent valuer vide valuation report dated 04/07/2016. We find merit in the claim of the assessee and accordingly we direct the AO to grant the depreciation on “customer relationship” and “distribution network” arising on account of amalgamation under section 32 of the Act. As a result, grounds no.2 and 3 raised in assessee’s appeal are allowed. Claim of refund of excess tax paid on dividend distributed by the assessee to its non-resident shareholder - We find that this issue is covered in favour of the Revenue by the decision of Total Oil India Private Ltd, [2023 (4) TMI 988 - ITAT MUMBAI (SB)]. Accordingly, respectfully following the aforesaid decision of the Special Bench of the Tribunal, ground no.9 is dismissed. Issues Involved:1. Disallowance of depreciation on goodwill.2. Disallowance of depreciation on distribution network.3. Disallowance of depreciation on customer relations.4. Validity of assessment order under specific sections.5. Denial of natural justice.6. Adjustments under section 143(1) of the Income Tax Act.7. Addition under section 36(1)(va) of the Act.8. Calculation of book profits.9. Refund of excess Dividend Distribution Tax (DDT) paid.Detailed Analysis:1. Disallowance of Depreciation on Goodwill:The primary issue was whether the assessee could claim depreciation on goodwill arising from the amalgamation. The assessee argued that goodwill should be considered a depreciable asset under section 32(1)(ii) of the Income Tax Act, as supported by the Supreme Court decision in Smifs Securities Ltd. The Tribunal found that the goodwill was recognized following Accounting Standard-14, which allowed for the allocation of excess consideration over net assets as goodwill. The Tribunal ruled in favor of the assessee, directing the allowance of depreciation on goodwill, as it fell under 'any other business or commercial rights of similar nature.'2. Disallowance of Depreciation on Distribution Network:The assessee claimed depreciation on the distribution network, arguing it was a critical intangible asset acquired during amalgamation. The Tribunal noted that the valuation report identified the distribution network as a significant asset. It was concluded that the distribution network constituted a business right similar to those specified in section 32(1)(ii), thus eligible for depreciation. The Tribunal directed the AO to allow the claim.3. Disallowance of Depreciation on Customer Relations:Similar to the distribution network, the assessee claimed depreciation on customer relations. The Tribunal found that the customer base was a valuable intangible asset, facilitating business continuity and growth. The Tribunal held that customer relations were akin to business rights under section 32(1)(ii) and allowed the depreciation claim.4. Validity of Assessment Order:The assessee challenged the validity of the assessment order, arguing it was issued under incorrect sections. The Tribunal found no merit in this argument, as procedural errors in mentioning sections do not invalidate the order under section 292B of the Act. This ground was dismissed.5. Denial of Natural Justice:The assessee claimed inadequate opportunity to respond to the show cause notice. This ground was not pressed during the hearing and was dismissed.6. Adjustments under Section 143(1):The assessee contested adjustments made under section 143(1), arguing they were beyond permissible scope. This ground was not pressed, following the Tribunal's decision in a related appeal, and was dismissed.7. Addition under Section 36(1)(va):The assessee challenged the addition under section 36(1)(va), but this ground was not pressed and was dismissed.8. Calculation of Book Profits:The assessee disputed the book profit calculation, but this ground was not pressed and was dismissed.9. Refund of Excess DDT Paid:The assessee sought a refund of excess DDT, arguing for a lower tax rate under applicable DTAA provisions. The Tribunal, following the Special Bench decision in Total Oil India Private Ltd, dismissed this ground, ruling in favor of the Revenue.Conclusion:The appeal for the assessment year 2016-17 was allowed, granting depreciation claims on goodwill, distribution network, and customer relations. The appeal for the assessment year 2018-19 was partly allowed, with similar directives for depreciation claims, but other grounds were dismissed.