2025 (2) TMI 240 - HC - Income Tax

Depreciation on goodwill from amalgamating company allowed when revenue fails to object during scheme approval

Principal Commissioner Of Income Tax-2, Kolkata Versus Carolina Food And Industries Private Limited

Principal Commissioner Of Income Tax-2, Kolkata Versus Carolina Food And Industries Private Limited - TMI ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:i) Whether the Tribunal correctly deleted the disallowance of depreciation on goodwill accounted from the amalgamating company.ii) Whether the Tribunal correctly applied the law of amalgamation given that full disclosure into assets of the amalgamating company was allegedly not made, and the goodwill was not accounted for in the swap ratio of shares, purportedly violating accounting standard AS-14.iii) Whether the Tribunal correctly held that post-amalgamation, after the scheme was approved by the High Court, the revenue has no jurisdiction to examine the financials and tax avoidance under the scheme, particularly when the assessee failed to disclose goodwill in the amalgamation scheme.ISSUE-WISE DETAILED ANALYSISDepreciation on GoodwillThe relevant legal framework involves the Income Tax Act, 1961, particularly concerning depreciation claims on goodwill post-amalgamation. The Tribunal's interpretation was based on the principle that once a scheme of amalgamation is sanctioned by a High Court, it is binding on all stakeholders, including statutory authorities. The Tribunal referenced precedents such as Marshall Sons & Co. (India) Ltd. vs. ITO, which established that sanctioned schemes are binding.The Tribunal noted that the Income Tax Department had an opportunity to object to the amalgamation scheme but did not do so. This lack of objection was crucial in the Tribunal's reasoning, leading to the conclusion that the revenue is estopped from challenging the scheme's validity later. The Tribunal cited the decision in Electrocast Sales India Ltd. Vs. DCIT, which supported the view that post-sanction, tax authorities cannot reopen valuation issues.The key evidence included the scheme's approval process, where the Regional Director of Company Affairs raised valuation issues, which the assessee addressed. The Income Tax Department's failure to object was pivotal. The Tribunal applied the law to these facts, concluding that the revenue's attempt to deny depreciation was unjustified.Application of Amalgamation Law and Accounting StandardsThe Tribunal considered whether the amalgamation complied with accounting standard AS-14, focusing on the swap ratio and disclosure of goodwill. The Tribunal found that the revenue's argument about non-compliance was not sustainable because the scheme was approved by the High Court after due process, including stakeholder notifications.Competing arguments centered on whether the scheme was a device for tax avoidance. The Tribunal, referencing the Gujarat High Court's decision in Vodafone Essar Gujarat Ltd., found that even if a scheme results in tax avoidance, it does not imply that tax avoidance was the sole objective. The Tribunal concluded that the scheme had legitimate business purposes beyond tax considerations.Jurisdiction Post-Amalgamation ApprovalThe Tribunal addressed whether the revenue could examine financials and tax avoidance after the scheme's approval. The Tribunal emphasized that the High Court's sanction, following stakeholder notifications, limits the revenue's jurisdiction to reopen such matters. The Tribunal noted that the valuation issue was specifically addressed during the approval process, and the revenue's subsequent challenge was unfounded.The Tribunal's conclusion was that the revenue's lack of objection during the approval process precluded it from later contesting the scheme's validity or the associated depreciation claims.SIGNIFICANT HOLDINGSThe Tribunal's significant holdings include:- The principle that once a scheme of amalgamation is sanctioned by a High Court, it is binding on all stakeholders, including statutory authorities, as supported by Marshall Sons & Co. (India) Ltd. vs. ITO.- The Tribunal's rejection of the revenue's challenge based on alleged non-compliance with accounting standards, given the High Court's approval process and the absence of objections.- The Tribunal's determination that post-approval, the revenue cannot reopen issues related to valuation and depreciation claims, as evidenced by the lack of objections during the scheme's approval process.Final determinations on each issue were against the revenue, affirming the Tribunal's decision to allow the depreciation claim on goodwill and dismissing the revenue's appeal.