TaxTMI 
TaxTMI 
TaxTMI 
2009 (11) TMI 85
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.... is admissible. (e) The CIT ought to have seen that the assessee furnished all the information regarding the claim of depreciation on goodwill before the AO and the AO after considering the assessee's submissions allowed depreciation on goodwill and therefore the CIT is not justified in directing the AO to disallow depreciation on goodwill. 3. (a) The CIT erred in law in directing the AO to disallow the fee paid to RoC for increase in authorized share capital on account of amalgamation. (b) The CIT ought to have seen that amalgamation expenses including the fee paid to RoC for increase in authorized share capital is to be allowed as deduction and therefore the AO rightly allowed the deduction. 4. (a) The CIT erred in law in directing the AO to rework out the book profits under s. 115JB of the Act taking into account the revaluation reserve credited to P&L a/c as income. (b) The CIT ought to have seen that the computation made under s. 115JB of the Act by the AO is correct and revaluation reserve credited to P&L a/c is to be reduced as per cl. (i) of Explanation to s. 115JB of the Act and therefore the book profits cannot be increased with the amount of revaluation reserve ....
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....ng relating to the Coastal Paper Ltd. unit at Kadiam for Rs. 1.35 crores, while the sale proceeds allocated to the building portion has been adjusted against the WDV of the block assets, in respect of the amount allocable to sale of land, capital gain has not been computed in accordance with the provisions of ss. 45 and 48 of the Act. Further, an amount of Rs. 4,83,49,178 was claimed as depreciation at 25 per cent on a goodwill of Rs. 19,33,96,711 recognised in the books of account at the time of amalgamation being the excess of actual consideration paid by the Andhra Pradesh Papers Mills Ltd. (APPML) over and above the net assets over liabilities of the erstwhile Coastal Paper Ltd. (CPL). The AO incorrectly allowed the same goodwill. According to the CIT the AO wrongly allowed the depreciation on goodwill though it is not included in Part B of Appendix 1, r. 5 of the IT Rules as an "intangible asset" eligible for depreciation and recognition of goodwill on amalgamation is not in accordance with any recognized principles of accountancy. The losses of CPL have been separately allowed in accordance with the provisions of s. 72A of the Act and as such, the recognition of the net liabi....
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.... losses of CPL have been separately allowed in accordance with the provisions of s. 72A of the IT Act and as such the recognition of the net liabilities over assets of CPL which is nothing but accumulated losses as goodwill and claiming of a deduction by way of depreciation amounts to a double deduction." 4. He submitted that the business valuation of the undertaking of CPL was done by the IDBI, Mumbai which was having an expertise in this field. The difference between the assets valuation made by the IDBI and net value of assets taken over represented intangible assets and, therefore, considered as goodwill in the books of accounts in accordance with accepted accounting principles. It was submitted that s. 32 of the Act allows depreciation not only in respect of tangible assets but also in respect of intangible assets such as know-how, patents, copyrights, trade marks, licences, franchise or any other business or commercial rights of similar nature. It is submitted that the sum of Rs. 1,933.97 lakhs represented the intangible assets in the form of commercial rights falling under the provisions of s. 32 of the Act and consequently the depreciation was rightly allowed by the AO at ....
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....and, therefore, the cost of goodwill to the assessee consequent upon amalgamation would also be 'nil' and, therefore, even on this ground also the depreciation could not be allowed. 4.2 He submitted that the order of the AO in allowing the depreciation on the goodwill cannot be said to be erroneous insofar as it is prejudicial to the interests of the Revenue on the reason that cl. 1A of the scheme of amalgamation provides that what is transferred is the undertaking of the CPL which comprised of not only all the assets and properties of the CPL but also the intangible assets comprising of all the rights, privileges, licenses and liberties, rebates, trade marks import quotas, tax relief and concessions, tax incentives and entitlements, tax benefits etc. held by the CPL before the effective date of the amalgamation. Further, it takes over the liabilities of the CPL. This is apparent from cl. 1A of the scheme itself. Therefore, it cannot be said that it is not a case of transfer of the undertaking and is mere a case of amalgamation of one company into the other. Certainly the amalgamation involves transfer of the entire business of the undertaking and, therefore, the CIT could....
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....t considering the scheme of amalgamation and the amended definition of s. 32, the assessee was entitled to claim depreciation as per rules. The learned counsel submitted that the CIT was wrong in observing that the excess consideration represents the accumulated losses of CPL and, therefore, it was a case of double deduction. There is no basis for such assumption. Once there is transfer of assets and liabilities of a company as per the scheme of amalgamation approved by the High Court the question does not arise for attributing the consideration for a thing which does not find place in the scheme itself. Clause (1) of the scheme specifically points out the assets and properties which were transferred and there is no reference to the accumulated losses of the transferor company. Hence, the question of attributing the consideration paid towards accumulated losses does not arise. 5.1 Further he submitted that the CIT on one hand holds that there was no transfer of goodwill while on the other hand, he observes that goodwill does not find place in the amended provisions of s. 32 of the Act. Having held that difference between the assets over the liabilities could not be treated as good....
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....rned counsel further submitted that the accounting treatment given in the books for a particular transaction is not decisive of the real nature of the transaction. For understanding any transaction all the facets of the transaction are required to be considered and assessed and on the mere ground that the assessee has accorded a particular accounting treatment to the transaction no proper or correct conclusion can be drawn on that basis alone. This is in terms of several authorities viz., K.S. Narayanaswami Iyer vs. CIT (1956) 29 ITR 515 (Mad), CIT vs. Vasantha Mills Ltd. (1957) 32 ITR 237 (Mad) at 252, CIT vs. Chamanlal Mangaldas & Co. (1960) 39 ITR 8 (SC), Delhi Stock Exchange Association Ltd. vs. CIT (1961) 41 ITR 495 (SC) at 498, Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC), Chowringhee Sales Bureau (P) Ltd. vs. CIT 1973 CTR (SC) 44 : (1973) 87 ITR 542 (SC) and Sutlej Cotton Mills Ltd. vs. CIT 1978 CTR (SC) 155 : (1979) 116 ITR 1 (SC) and many others. 6. It is now well settled through a catena of citations that the guidelines and Accounting Standards issued by the ICAI are required to be followed for the computation of income for tax purposes. He relied on the f....
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....submitted that with regard to capital gain on sale of land that the assessee company had brought forward capital loss of Rs. 2,82,26,900 as already mentioned in the computation of income and the capital gain earned during this year on sale of land is to be set off against such brought forward capital loss and balance brought forward loss is to be carried forward. 7.3 Regarding the issue of payment of fees to RoC for enhancement of authorized capital the learned counsel for the assessee submitted that it paid Rs. 1,87,500 to increase authorized capital from Rs. 20 crores to Rs. 23.75 crores. The said amount was included in rates and taxes and charged to P&L a/ c and the same was not considered for disallowance while computing taxable income by oversight. Regarding claim of amalgamation expenses, it is submitted that the assessee incurred Rs. 34.09 lacs towards acquisition expenses which were considered as part of the acquisition cost of Rs. 2,592.92 lacs. He submitted that the assessee has charged to profit and loss Rs. 14.99 lacs, being the expenditure incurred towards printing and stationery, consultancy charges towards amalgamation. Finally, he submitted that the CIT has no juri....
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....mation, the assets and liabilities of the transferor company become part of the assets and liabilities of the transferee company with effect from effective date. 8.1 He drew our attention to the AS-14 issued by ICAI, New Delhi and submitted that it recognizes that two methods of accounting of amalgamation, viz., (i) Pooling of interest method; (ii) the purchase method. 8.2 He submitted that pooling of interest is to be adopted in case of amalgamation in the nature of merger, satisfying the following conditions: (i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. (ii) Shareholders holding not less than 90 per cent of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation. by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. (iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company i....
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.... has duly taken advantage of the same. Thus, recognizing the difference between the net assets and liabilities and deducting it from the notional consideration paid for the acquisition of the shares of CPL and treating the difference as goodwill and as an asset is erroneous and is not recognized by any legal proposition. The computation of goodwill adopted by the assessee is neither a recognized nor prescribed practice and hence cannot be accepted. Thus, acceptance of the recognition of goodwill in the account at the time of amalgamation is an error. The AO should not have accepted such a treatment. Consequently, he should not have allowed depreciation on such incorrectly recognized goodwill. Thus, the order of the AO is erroneous and prejudicial to the interests of Revenue. 10. The learned Departmental Representative contended that without prejudice to the contention that on amalgamation, the net of assets over liabilities should have been recognized on goodwill, depreciation permitted @ 25 per cent on intangible assets does not include goodwill. Intangible assets include such assets like know-how, patents, copyrights, trade marks, franchises or any other business or commercial a....
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....ble to the revaluation of the assets, he submitted that the book profit under s. 115JB is to be computed in accordance with the cl. (g) to Expln. 1 to s. 115JB which has been inserted w.e.f. 1st April, 2007 as per which there should be exclusion of depreciation relating to the revaluation of the assets. 11. We have heard both sides and perused the material on record. In the present case, the assessee acquired 42,60,000 of equity shares of Rs. 10 each of CPL representing 71 per cent equity share capital. With the said acquisition, CPL became a subsidiary of the company. The object of acquisition of CPL by the company was to facilitate synergized operations between both the companies and also to consolidate its market share in the paper industry with a diversified product range of newsprint. 11.1 As the company and CPL are engaged in the similar line of manufacture, it was proposed to amalgamate CPL with the company w.e.f. 1st Oct., 2000 so that the amalgamation will result in the combined operations being carried on more advantageously and also economically and efficiently. The board of directors of the company met on 31st Jan., 2001 and announced an exchange ratio of 1 : 3 for th....
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....he transferor company become, after amalgamation, the assets and liabilities of the transferee company. (ii) Shareholders holding not less than 90 per cent of the face value of the equity shares of the transferor company (other than equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. (iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares. (iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. (v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies. 30. An amalgamation....
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....gnized in the transferee company's financial statements as goodwill arising on amalgamation. If the amount of the consideration is lower than the value of the net assets acquired, the difference should be treated as capital reserve. 38. The goodwill arising an amalgamation should be amortized to income on a systematic basis over its useful life. The authorization period should not exceed five years unless a somewhat longer period can be justified. 39. Where the requirements of the relevant statute for recording the statutory reserves in the books of transferee company are complied with, statutory reserves of the transferor company should be recorded in the financial statements of the transferee company. The corresponding debit should be given to a suitable account head (e.g. amalgamation adjustment account) which should be disclosed as a part of 'miscellaneous expenditure' or other similar category in the balance sheet. When the identify of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account should be reversed." 11.2 As per AS-14, pooling of interest method is applicable if the amalgamation is in the nature of me....
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....judgments: "Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC), wherein it was held whether the assessee is entitled to a particular deduction or not will depend upon the provisions of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entry in his books of account be decisive or conclusive in the matter." In Sutlej Cotton Mills Ltd. vs. CIT, it was held as follows: "It is now well-settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee." 13. In our opinion, in view of the above judgment, the concept of materiality (substance) is threshold for recognition of transaction in accounting process. 14. The c....
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.... of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically it is a habit and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego vs. Hunt (1896) AC 7 (HL) as the 'sap and life' of the business. Architecturally, it has been described as the 'cement' binding together the business and its assets as a whole and a going and developing concern." 15. In the present case, consequent upon amalgamation of CPL with APPM, the market share of assessee company has increased substantially, as submitted by the assessee's counsel. It increased from a level of 98,500 MT to 1,74,000 MT per annum i.e., an increase of 75,500 MT. Further, the brands of the CPL viz., (1) Azurwove/Azurlaid (2) Colour printing (3) Newsprint (4) Manilla board (5) Kraft have become the brands of the assessee company. Further, on amalgamation unit APPM had commissioned a single street state of art technology pulp mill of 550 MT per day in the year 2006. The pulp mill was operating at cap....
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....he rights mentioned in s. 32 of the IT Act is acquired by the assessee in this case. Thus goodwill is a business or commercial right of similar nature and the assessee is benefited by amalgamation by acquiring that commercial value being intangible assets which the assessee has paid on amalgamation i.e., excess consideration over and above the excess of assets over liabilities is a goodwill which is an asset entitled for depreciation under s. 32 of IT Act. As such, AO is justified in granting the depreciation on goodwill while completing the assessment under s. 143(3) of the IT Act and CIT is not justified in invoking of provisions of s. 263 on this issue. Further, the provision of s. 263 could be invoked by the CIT if the circumstances specified therein viz., (1) the order is erroneous (2) by virtue of the order being erroneous, prejudice has been caused to the interest of the Revenue, exist. For invoking the provision s. 263, both the conditions precedent. for exercising the jurisdiction are conjunctive or not disjunctive. In the instant case, the AO followed one course of action which is permitted by law and that resulted in loss to the Revenue, that cannot, be said erroneous so....