2025 (8) TMI 683 - AT - Income Tax

Depreciation on Goodwill Allowed After Court-Approved Amalgamation; Search Proceedings Under Section 153A Declared Unlawful

The ITAT Ahmedabad upheld the allowance of depreciation on goodwill arising from a High Court-approved amalgamation scheme, rejecting Revenue's ... Disallowance of depreciation on goodwill under scheme of amalgamation - as argued there was no block of assets for the intangibles in the books of the amalgamating company and, therefore, the same cannot be recorded in the books of amalgamated company (the assessee) in view of Explanation 7 to section 43(1) - AO observed that the intangible assets in the form of goodwill were owned/held up by the amalgamating company prior to the amalgamation at nil cost only - HELD THAT:- The scheme of amalgamation under which the goodwill arose has been approved by the Hon’ble High Court of Gujarat which clearly set out that the consideration paid over and above the assets should be treated as goodwill and the Revenue has accepted the said scheme before the Hon’ble High Court which is mentioned in the said order passed by the Hon’ble High Court. Since the valuation of assets, including goodwill submitted before the Hon’ble High Court was not disputed by the Revenue and no objections were raised before the Hon’ble High Court regarding the quantum, nature or basis of goodwill therein, therefore, disregarding the goodwill would amount to undermining the judicial sanctity of the order of the Hon’ble High Court which has attained the finality. Once the Revenue has accepted the goodwill recorded being part of the consideration structure approved by the Hon’ble High Court the same has to be accepted for taxation purpose. The Hon’ble Apex Court in case of Smifs Securities Ltd [2012 (8) TMI 713 - SUPREME COURT] recognized that where goodwill is acquired against consideration, it constitutes depreciable capital assets. Thus, prior to the amendment brought by the Finance Act, 2021 the same has to be allowed by the Revenue. CIT(A) has rightly allowed the same and there is no need to interfere with the findings of the CIT(A). Thus, Ground No. 1 of Revenue’s appeal is dismissed. MAT - Deduction of unabsorbed business loss/depreciation under clause (iii) of explanation (1) to Section 115JB(2) - As submitted there was accumulated profit in the books of the assessee on account of amalgamation - HELD THAT:- We deem it proper to set aside this issue to the file of the Assessing Officer with a direction to correctly work out the quantum of brought forward business loss and unabsorbed depreciation in accordance with the above referred decision. The AO may allow deduction u/s. 115JB of the Act of the amount of business loss or unabsorbed depreciation, whichever is less, in order to compute the book profit. Proceedings u/s 153A - Initiation of search proceedings is bad in law and unlawful as the order u/s. 143(3) of the Act has already been passed - HELD THAT:- From the perusal of the records, it appears that there is no incriminating material upon which the Assessing Officer has given any finding. In fact the material which was taken as base is not relevant for the present assessment year at all. Thus, the CIT(A) was right in allowing this legal ground. There is no need to interfere with the findings of the CIT(A). Disallowance of CENVAT Credit - assessee has not given the details of the components which are outside the threshold of the Cenvat Credit - HELD THAT:- It is pertinent to note that the assessee has consistently followed exclusive method of accounting and the Revenue has not disputed this method. The CENVAT credit taxes, duties and dues are embedded in purchase of raw-materials as well as in corresponding sales. The contention of the Ld. AR that the effect of such accounting does not ultimately have any impact on the profitability when followed year after year is correct in the light of decision of Narmada Chematur Petrochemicals Ltd. [2010 (4) TMI 1198 - GUJARAT HIGH COURT] - Thus, the Ground is dismissed. Disallowance of Set off of Unabsorbed Depreciation pertaining to AY's prior to AY 2002-03 - HELD THAT:- The set-off of unabsorbed depreciation prior to the Assessment Year 2002-03 was allowed by the Tribunal in assessee’s own case and, in fact, the said addition/disallowance of set-off of unabsorbed depreciation pertaining to the present assessment year was made in respect of the directions issued by the PCIT u/s 263 of the Act. The assessee filed appeal before the Tribunal against the order u/s 263, wherein the Tribunal allowed set-off of unabsorbed depreciation of years prior to AY 2002-03 against income of AY 2007-08 vide order dated 12.04.2016 and, therefore, the CIT(A) has rightly set-off of unabsorbed depreciation pertaining to the years prior to AY 2002-03 and the assessee has taken set-off of unabsorbed depreciation in AY 2007-08. Disallowance u/s 14A - HELD THAT:- It is pertinent to note that the assessee is having his own funds which increased in the present assessment year and therefore the investment made by the assessee also increased. The revenue did not dispute that the assessee is having its own huge surplus funds for investment. Therefore, the disallowance u/s 14A made by the Assessing Officer is not justifiable. The CIT(A) was correct in deleting the same. Disallowance of Marked to Market loss on hedging of foreign exchange - HELD THAT:- As seen that the Marked-to-Market Loss on hedging of foreign exchange on the balance-sheet date is an allowable expenses u/s 37 as stated by the Ld. AR and, in fact, in the decision of Woodward Governor India Pvt. Ltd [2009 (4) TMI 4 - SUPREME COURT] it has been categorically held that loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet is an item of expenditure u/s 37(1) of the Act. The contention of the Ld. AR is justifiable and hence disallowance of Marked-to-Market Loss on hedging of foreign exchange is not justified. Chargeability of interest u/s 234B & 234C for non payment of advance tax of MAT - HELD THAT:- The Hon’ble Apex Court in case of Rolta Ltd. [2011 (1) TMI 5 - SUPREME COURT] has categorically held that the assessee cannot envisage any liability of interest under Section 234B and 234C of the Income Tax Act, 1961 as on the date of filing the return of income. Thus, following the said decision CIT(A) has rightly directed the Assessing Officer not to charge interest under Section 234B on returned income for any delay in depositing self assessment tax. Interest u/s 234C - The same is always levied on return income, hence the CIT(A) rightly directed the Assessing Officer to levy such interest from the date of decision of Hon’ble Supreme Courts in case of Rolta Ltd. [2011 (1) TMI 5 - SUPREME COURT] to the date of assessment order. Thus, the CIT(A) correctly directed the Assessing Officer to recompute interest under Section 234B and 234C of the Act. Disallowance u/s 14A - It is pertinent to note that the assessee is having his own funds which increased in the present assessment year. In fact during the present assessment year the investment made by the assessee decreased. The revenue did not dispute that the assessee is having its own huge surplus funds for investment. Therefore, the disallowance u/s 14A made by the Assessing Officer is not justifiable. 1. ISSUES PRESENTED and CONSIDERED 1. Whether depreciation on goodwill arising from amalgamation, not recorded as an asset in the books of the amalgamating company, is allowable under the Income Tax Act, specifically in light of Explanation 7 to Section 43(1) and related provisions. 2. Whether unabsorbed business loss and depreciation can be claimed as deduction under clause (iii) of Explanation 1 to Section 115JB(2) when there exists accumulated profit or general reserves on amalgamation. 3. Whether assessment or reassessment under Section 153A can be initiated and additions made beyond incriminating material found during search under Section 132(1), especially when original assessments under Section 143(3) are complete. 4. Legality and scope of disallowance of depreciation on goodwill under Sections 32(1), 43(1), 43(6) and related explanations. 5. Validity of disallowance of CENVAT credit under Section 145A when exclusive method of accounting is followed. 6. Allowability of set-off of unabsorbed depreciation pertaining to assessment years prior to AY 2002-03. 7. Allowability of marked to market loss on foreign exchange hedging under Section 37(1). 8. Disallowance under Section 14A regarding expenses related to exempt income when sufficient own funds are available for investment. 9. Levy of interest under Sections 234B and 234C when tax is payable under Minimum Alternate Tax (MAT) provisions. 10. Treatment of general grounds and procedural objections raised by Revenue and assessee. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Allowability of Depreciation on Goodwill Arising from Amalgamation Legal Framework and Precedents: Depreciation on intangible assets including goodwill is governed by Section 32(1)(ii) of the Income Tax Act. Explanation 7 to Section 43(1) provides that in a scheme of amalgamation, the actual cost of transferred capital assets to the amalgamated company shall be the same as if the amalgamating company had continued to hold the asset. The Apex Court in Smifs Securities Ltd. held that goodwill arising on amalgamation is an intangible asset and eligible for depreciation. Court's Interpretation and Reasoning: The Court observed that Explanation 7 to Section 43(1) applies only where the amalgamating company transfers a capital asset recorded in its books. In the present case, goodwill was not an asset in the amalgamating company's books but arose on amalgamation as excess consideration paid over net assets. Therefore, Explanation 7 is inapplicable. The goodwill is a self-generated intangible asset recognized in the amalgamated company's books as per Accounting Standard 14 (AS-14) and is supported by valuation accepted by the High Court in the amalgamation scheme. Key Evidence and Findings: The assessee submitted detailed valuation of intangibles including commercial rights, technical know-how, and other intangible assets forming goodwill, supported by independent valuation and accounting standards. The Revenue did not dispute the valuation before the High Court or during assessment proceedings. Application of Law to Facts: Since goodwill was acquired for consideration in amalgamation and recognized as an intangible asset, it qualifies as a depreciable asset under Section 32(1)(ii). The Court rejected Revenue's argument that absence of block of assets in amalgamating company's books disallows depreciation. Treatment of Competing Arguments: Revenue contended that intangible assets not recorded in transferor's books cannot be capitalized or depreciated by transferee, and that allowing depreciation would render Explanation 2 to Section 43(6) redundant. The Court held this argument untenable as Explanation 7 applies only to assets recorded in transferor's books and goodwill here is a new asset arising on amalgamation. Conclusion: Depreciation on goodwill arising on amalgamation, even if not recorded in amalgamating company's books, is allowable. The claim of depreciation on goodwill was rightly allowed by CIT(A) and upheld by the Tribunal. Issue 2: Deduction of Unabsorbed Business Loss and Depreciation under MAT Provisions (Section 115JB) Legal Framework: Clause (iii) of Explanation 1 to Section 115JB(2) allows deduction of lower of brought forward loss or unabsorbed depreciation as per books while computing book profit for MAT. Court's Interpretation and Reasoning: The Assessing Officer reduced brought forward losses by adjusting general reserves and accumulated profits of amalgamating company, treating these as accumulated profits, thereby disallowing losses. CIT(A) found that general reserves were created on amalgamation and not purely out of accumulated profits, hence cannot be adjusted against losses. Key Evidence and Findings: Audited financials and scheme of amalgamation showed general reserves arose from amalgamation transactions, not accumulated profits. Revenue did not dispute CIT(A)'s factual finding. Application of Law to Facts: Since general reserves were not accumulated profits, they could not be offset against brought forward losses. The assessee had continuous losses and unabsorbed depreciation available for set-off. Treatment of Competing Arguments: Revenue argued adjustment was proper to negate brought forward losses. The Court rejected this due to absence of evidence that reserves represented accumulated profits. Conclusion: Deduction of unabsorbed losses and depreciation under MAT provisions is allowable without adjusting general reserves created on amalgamation. However, quantum of losses to be determined as per Tribunal's earlier directions considering year-wise figures. Ground partly allowed for statistical purposes and remanded for correct computation. Issue 3: Scope and Legality of Assessment/Reassessment under Section 153A Post Search Legal Framework: Section 153A requires assessment or reassessment of total income for six assessment years following search under Section 132. Section 158BB (block assessment) provisions do not apply to searches after 31.05.2003. Court's Interpretation and Reasoning: CIT(A) and Tribunal held that additions in proceedings under Section 153A must relate to incriminating material found during search. Where no incriminating material is found or additions have no nexus to such material, assessment under Section 153A cannot be sustained. Key Evidence and Findings: In the present case, no incriminating documents were found during search that were not already accounted for in books. Assessing Officer made additions unrelated to search material. Application of Law to Facts: Since no incriminating material was found, reopening or reassessment under Section 153A for issues already assessed is impermissible. The principle of finality and protection against arbitrary reassessment applies. Treatment of Competing Arguments: Revenue argued that Section 153A does not restrict additions only to incriminating material found. The Court rejected this, emphasizing the legislative intent to confine reassessment to search-related matters. Conclusion: Assessment or reassessment under Section 153A must be confined to incriminating material found during search. Additions without such nexus are invalid. Grounds challenging validity of search proceedings and reassessment are upheld. Issue 4: Disallowance of Depreciation on Goodwill under Sections 32(1), 43(1), and 43(6) Legal Framework: Section 32(1)(ii) allows depreciation on intangible assets including goodwill. Section 43(6) and its explanations regulate cost of assets in amalgamation. Court's Interpretation and Reasoning: The Court reiterated that goodwill arising on amalgamation is a depreciable intangible asset. Explanation 7 to Section 43(1) applies only where asset is transferred as recorded in transferor's books. Since goodwill was self-generated on amalgamation and not recorded in transferor's books, Explanation 7 does not apply to disallow depreciation. Key Evidence and Findings: Valuation of goodwill and intangible assets was accepted by Revenue before High Court. Accounting standards require capitalization of such goodwill. Application of Law to Facts: Depreciation on goodwill is allowable as per law and accounting standards. Disallowance by AO was without basis. Treatment of Competing Arguments: Revenue's reliance on Explanation 7 and Section 43(6) to deny depreciation was held untenable. Conclusion: Disallowance of depreciation on goodwill under these provisions is not justified. Depreciation claims are allowed. Issue 5: Disallowance of CENVAT Credit under Section 145A Legal Framework: Section 145A mandates valuation of closing stock inclusive of taxes, duties, and CENVAT credit adjustments. Court's Interpretation and Reasoning: The assessee consistently followed exclusive method of accounting, excluding embedded taxes in stock valuation, which is tax neutral. The Revenue did not dispute the accounting method. Key Evidence and Findings: Consistent accounting practice and judicial precedents support assessee's method. Application of Law to Facts: Disallowance of CENVAT credit on account of exclusive accounting method is not justified. Treatment of Competing Arguments: Revenue's contention on lack of details for CENVAT components was not substantiated. Conclusion: Disallowance of CENVAT credit is dismissed. Issue 6: Allowability of Set-Off of Unabsorbed Depreciation Prior to AY 2002-03 Legal Framework: Carry forward and set-off of unabsorbed depreciation is governed by Income Tax provisions and judicial precedents. Court's Interpretation and Reasoning: Tribunal in assessee's own case allowed set-off of unabsorbed depreciation prior to AY 2002-03. CIT(A) upheld this position. Key Evidence and Findings: Relevant orders and appeals confirm set-off was allowed previously. Application of Law to Facts: Disallowance of set-off in current year contrary to earlier Tribunal findings is unjustified. Treatment of Competing Arguments: Revenue's reliance on directions under Section 263 was rejected. Conclusion: Set-off of unabsorbed depreciation prior to AY 2002-03 is allowable. Issue 7: Allowability of Marked to Market Loss on Foreign Exchange Hedging Legal Framework: Section 37(1) allows deduction of business expenditure. Apex Court in Woodward Governor India Pvt. Ltd. held marked to market loss on foreign exchange derivatives is allowable. Court's Interpretation and Reasoning: Marked to market loss on hedging is an allowable business expenditure, not a contingent liability, as it reflects real economic loss on balance sheet date. Key Evidence and Findings: Assessee entered into forward contracts for hedging, not speculation. Losses were quantified as per accounting standards. Application of Law to Facts: Disallowance of such loss is contrary to settled law. Treatment of Competing Arguments: Revenue contended loss was contingent and not allowable; Court rejected this view. Conclusion: Marked to market loss on foreign exchange hedging is allowable deduction under Section 37(1). Issue 8: Disallowance under Section 14A Regarding Expenses Related to Exempt Income Legal Framework: Section 14A disallows expenses incurred to earn exempt income. However, if sufficient own funds are available for investment, disallowance is not warranted. Court's Interpretation and Reasoning: Assessee had sufficient own funds to make investments, and disallowance under Section 14A was not justified. Key Evidence and Findings: Increase in own funds and audited financials showed surplus funds available. Application of Law to Facts: Disallowance under Section 14A was rightly deleted by CIT(A). Treatment of Competing Arguments: Revenue did not dispute sufficiency of own funds. Conclusion: Disallowance under Section 14A is not sustainable. Issue 9: Levy of Interest under Sections 234B and 234C when Tax is Payable under MAT Legal Framework: Earlier decisions held no interest under Sections 234B and 234C when tax payable under MAT. Apex Court in Rolta Ltd. held interest is leviable. Bombay High Court later held interest not leviable for AY 2004-05 under MAT. Court's Interpretation and Reasoning: CIT(A) directed no interest under Section 234B on returned income for delay in self-assessment tax payment under MAT. Interest under Section 234C to be levied from date of Apex Court decision onwards. Key Evidence and Findings: Relevant judicial precedents and circulars considered. Application of Law to Facts: Interest liability computed accordingly. Treatment of Competing Arguments: Revenue's reliance on Apex Court decision was considered but retrospective effect limited. Conclusion: Interest under Sections 234B and 234C to be levied in accordance with judicial pronouncements; CIT(A) directions upheld. Issue 10: Treatment of General Grounds and Procedural Objections General grounds and procedural objections raised by parties were not adjudicated as they were either technical or not relevant to merits of substantive issues. 3. CONCLUSIONS - Depreciation on goodwill arising from amalgamation is a depreciable intangible asset even if not recorded in amalgamating company's books; such depreciation is allowable. - Deduction of unabsorbed business loss and depreciation under MAT provisions is allowable without adjustment of general reserves created on amalgamation, subject to correct computation. - Assessment under Section 153A must be confined to incriminating material found during search; additions without such nexus are invalid. - Disallowance of CENVAT credit is not justified where exclusive method of accounting is followed consistently. - Set-off of unabsorbed depreciation prior to AY 2002-03 is allowable as per Tribunal's earlier decisions. - Marked to market loss on foreign exchange hedging is allowable deduction under Section 37(1). - Disallowance under Section 14A is not sustainable where assessee has sufficient own funds for investment. - Interest under Sections 234B and 234C to be levied in accordance with judicial precedents and circulars. - Grounds challenging validity of search proceedings and reassessment under Section 153A are upheld where no incriminating material was found.