TaxTMI 
TaxTMI 
2022 (10) TMI 538
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....as erroneous and prejudicial to the interest of revenue, where AO passed order:-. 1) without making any inquiries/verification which he/she is required to make. 2) without making inquiry into a claim which is claimed by assessee and allowed such claim. 3) which is not in accordance with any order/direction/instruction (i.e. circulars) issued by CBDT u/s 119 of Income Tax Act, 1961. 4) which is not in accordance with any decision of jurisdictional High Court or Supreme Court which is prejudicial to the assessee or any other person. In other words, where jurisdictional High Court or Supreme Court's decision is against the assessee or any other personal and AO passed their order without considering such judgment then such order shall be considered as erroneous and prejudicial to the interest of revenue. The Appellant respectfully submit that AO had called for all the records and documents in connection with the assessment under section 143 (3) and took several months to pass the order on 29/12/2016. The assessee submitted voluminous records and documents in respect of their claim including Court order relating to amalgamation, provision....
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....it is prejudicial to the interests of Revenue, because the Assessing Officer has allowed depreciation on goodwill, even though 5th proviso to section 32(1) of the Act, very clearly restricts claim of depreciation to successor company on amalgamation, as if such succession has not taken place. However, the Assessing Officer has allowed claim of depreciation on goodwill without considering necessary provisions in right perspective of law which rendered assessment order passed by the Assessing Officer as erroneous, in so far as it is prejudicial to the interests of Revenue and thus, called upon the assessee to file its objections, if any, to the proposed revision. 4. The PCIT further observed that a sum of Rs.2,25,71,530/- has been debited as provision for warranty for the AY 2014-15 as against Rs.50 lakhs debited for the AY 2013-14. This amount was not added back in the statement of taxable income nor disallowed by the AO in the assessment order, although, the assessee has not explained rational behind substantial increase in provision for warranty expenses. The PCIT further observed that the assessee has earned dividend income of Rs.1,04,39,190/- and claimed the same as exemption....
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...., the assessee has not acquired any goodwill from amalgamating company. Further, goodwill in the present case arose out of amalgamation, because the assessee has paid consideration for acquisition of asset over and above net asset of amalgamating company, therefore, submitted that proposed revision on the issue of depreciation on goodwill is incorrect. 6. The assessee further submitted that provision for warranty expenses has been thoroughly examined by the AO, where, the assessee has filed detailed reply in response to show cause notice issued by the AO and thus, merely because, the assessment order does not find place on the issue, it cannot be said that the AO has not verified the issue. Further, provision for warranty expenses is estimated on the basis of past history and scientific method, based on previous financial years' experience, because, the assessee is engaged in the business of manufacturing of diagnostic equipments and further provides warranty to its customer, in case any defects in the machines. Therefore, such provision is in accordance with ratio laid down by the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd., v. CIT [314 ITR 62] (SC). The....
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....T opined that the assessment order passed by the AO u/s.143(3) of the Act, is erroneous in so far as it is prejudicial to the interest of the Revenue and thus, set aside the assessment order passed by the AO and directed the AO to examine the issues taken up in 263 proceedings and re-do the assessment in accordance with law. The relevant findings of the PCIT are as under: 4. The arguments oi the assessee have been considered- The assessee was asked to show cause why depreciation as good will on amalgamation of Kiran Medical Systems should not be disallowed in view of the proviso u/s.32(1) of the Income Tax Act, which states as tinder; "Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets' or know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amal....
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....f depreciation on goodwill. In that case the assessee has submitted that '"when the assets are introduced in the books of the assessee being the balancing figure of excess consideration over the value of the tangible assets then 5th proviso to Section 32(1) is not applicable. He has further submitted that in all the cases before the Hon'ble Supreme Court as well as Hon'ble High Courts, the revenue has not raised this objection of restricting the claim of depreciation by applying 5th proviso to Section 32(1) of the Act. Therefore, the revenue cannot raise this objection when it was not raised in the other cases before the Hon'ble Supreme and Hon'ble High Courts". 4.6 The ITAT after considering the issue held that "there is another aspect involved in this issue of claiming depreciation on the enhanced cost of goodwill in cases of succession / IT A Nos.722, 801, 1065 & 1066/Bang/2014 amalgamation as it is restricted, in the hand of successor or amalgamated company only to the extent as apportioned between the amalgamating and amalgamated company in the ratio of number of days for which the assets used by them. Further, the deduction shall be calculated at the ....
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....32(1) of the Act. Therefore, there is no quarrel on the issue that goodwill is eligible for depreciation. However, the said ITA Nos.722, 801, 1065 & l066/Bang/2014 judgment would not over-ride the provisions of 5th proviso to Section 32(1) of the Act which restricts the claim in the cases specified there under. The consideration paid by the assessee for acquiring the shareholding of the subsidiary in the earlier years is not relevant for the issue of depreciation on the assets taken under amalgamation and for the purpose of 5th proviso to Section 32(1) of the Act. Accordingly, in view of the above facts and circumstances of the case as well as the above discussion, we hold that the claim of depreciation in the hands of the assessee is subjected to the 5th proviso to Section 32(1) of the Act. Accordingly, this issue is decided against the assessee". 4.8 In view of the above discussions, the issue is set aside to the AO. The AO is directed to examine the applicability of the 5th Proviso to Sec.32(1) of the Act. The assessee has further sought to distinguish the facts of this case from the facts in the case of M/s United Breweries where the decision of Bangalore Bench of the ....
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....nd hence 1.68%, is quite normal for a company of this nature particularly when the company is dealing with medical and electronic equipment with very heavy obsolescence, wear and tear and where the break down instances are many and common. f) The Company in the subsequent year (Financial Year 2014-15) had utilized a sum of Rs.1,98,09,774/- from the provision made in FY 2013-14, which justifies the provision of Rs.2,25,71,530/- made in the FY 2013-14. g) In view of the above it is submitted that the Provision for warranty is made on scientific and systematic basis and there has been significant utilization of such warranty in the subsequent year and as such it is an allowable deduction h) Warranty becomes an integral part of the sale price of the product. In other words, warranty stood attached to the sale price of the product- As stated above, obligations arising from past events have to be recognized as provisions. These past events ae known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of....
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....ains to the dividend declared by Kiran Medical Systems Private Ltd, which was merged with the Company with effect from 01/04/2013 vide court order dated 19/03/2015. b) As the merger scheme was approved only on 10/03/2015, the dividend declared by Kiran Medical Systems Private Ltd in the year was disclosed in the audited accounts of the assesse, which was adopted in the Board Meeting held on 29.09.2014 much before the court order which was received only on 19/03/2015. c) Consequent to the merger effective from 01/04/2013, when both asseesee's financials and Kiran Medical Systems accounts are merged, the dividend earlier received from the amalgamating company loses it nature of dividend as no company can declare a dividend for itself and accordingly the same cannot be treated as dividend for the purpose of section I4A. d) Accordingly, dividend received from Kiran Medical systems Private Ltd., becomes only a profit and loss surplus and cannot be called as dividend. e) Besides, the Tax audit report of Trivitron Healthcare Private Ltd was filed before the merger was approved by the Court and the disallowance may be relevant at that time. Once the ....
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....ar reference to the observations made by the Auditor in the Tax Audit Report. The AO is directed to verify the facts regarding, the contentions reproduced in Para(1) in page 13 of this order. The assessee's contentions regarding cross investments relating to Kiran Medical Systems P. Ltd is also to be verified by the AO. 9. From the above discussions, it is evident that the AO has tailed to apply his mind before passing the order, lie has failed to properly enquire the issues with reference to the submissions made by the assessee. There-tore., the assessment u/s 143(3) is rendered erroneous in so far as it is prejudicial to the interest of the revenue. The assessment is therefore set aside on the issues discussed in the above paras. The AO is directed to examine these issues, with reference to the submissions made by the assessee on each issue, after giving an opportunity of hearing to the assessee. The assessment is set aside to be redone with the above directions. 9. The Ld.AR for the assessee submitted that the PCIT has taken up three issues in revision proceedings u/s.263 of the Act. The first and foremost issue taken up by the PCIT is depreciation on goodwill ar....
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...., the same cannot be treated as dividend for the purpose of s.14A of the Act. The AO after considering relevant facts allowed the claim of the assessee and thus, the PCIT erred in revision of assessment order on this issue. 11. The learned DR, on the other hand, supporting order of the learned CIT(A) submitted that the assessment order passed by the Assessing Officer is erroneous, in so far as it is prejudicial to the interests of Revenue, because assessment order passed by the Assessing Officer, is silent on the issue of depreciation claim on goodwill arising out of amalgamation and thus, it cannot be argued that the Assessing Officer has considered issue and has taken one possible view. The learned DR further submitted that by insertion of Explanation 2 to section 263 of the Income Tax Act, 1961, revisionary powers of the PCIT has been enlarged and an order passed by the Assessing Officer shall be deemed to be erroneous, insofar as it is prejudicial to the interests of Revenue, if in the opinion of the PCIT, the order is passed without making inquiries or verification which should have been made and further, the order is passed allowing any relief without inquiring into claim.....
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....cheme of amalgamation. According to the PCIT, in a scheme of amalgamation, claim of depreciation should be in accordance with 5th proviso to section 32(1) of the Act. Therefore, it is necessary to refer to 5th proviso to section 32(1) of the Act and relevant proviso reads as under:- "Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the success....
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....re existing assets of amalgamating company are acquired by amalgamated company, then while claiming depreciation after amalgamation, amalgamated company can claim depreciation only on the basis of number of days a particular asset were used by them. Therefore, in our considered view, said proviso only determines amount of depreciation to be claimed in the hands of predecessor / amalgamating company and in hands of the successor or amalgamated company only in the year of amalgamation based on the date of such amalgamation. However, it does not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation. Therefore, it is very clear from 5th proviso to section 32(1) of the Act, that once any asset, including intangible asset, more particularly, goodwill is added to the respective block of asset of the amalgamated company, in the context of claim of depreciation in the hands of amalgamated company and such addition to the block of assets would not fall within the purview of the 5th proviso to section 32(1) of the Act. Effectively, scope of the said proviso is narrow as could be culled out for the purpose for which said proviso wa....
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....d shall be recorded by the transferee company at their book value. The excess of or deficit in net asset value of the transferee company, after reducing aggregate face value of shares issued by the transferee company to the members of the transferor company, pursuant to the scheme and cost of investment in the books of the transferee company for the shares of transferor company held by it on the effective date be either credited to the capital reserve or debited to the goodwill account, as the case may be in the books of transferee company. Such resultant goodwill, if any shall be amortized in the books of transferee company as per principles laid down in Accounting Standard-14. Therefore, from scheme of amalgamation and Accounting Standard-14 issued by the ICAI, it is very clear that once amalgamation is in the nature of 'purchase method', then excess consideration paid over and above net asset value of transferor company shall be treated as goodwill and can be amortized in the books of account of the transferee company. In this case, net asset value of the transferor company (amalgamating company) was at Rs.42,66,49,594/-. Further, value of investments of transferee company i.e.,....
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....on proportionate basis for number of days assets used by them, however, they cannot claim depreciation over and above normal depreciation allowable on a particular asset. 13. In this case, there was no goodwill in the books of account of the amalgamating company and further, goodwill has been acquired by amalgamated company by paying consideration over and above net value of assets at amalgamating company. Therefore, in our considered view, case of the assessee squarely comes under ratio laid down by the Hon'ble Supreme Court in the case of M/s.Smifs Securities Ltd.(supra). In any way, in a subsequent decision, ITAT ., Bangalore Bench in the case of M/s. Altimetrik India Pvt.Ltd, Vs. DCIT (2022) 137 taxmann.com 9 had considered an identical issue and after considering decision of the United Breweries Ltd. (supra) held that consideration paid by the amalgamated company over and above net assets of amalgamating company should be considered as goodwill arising on amalgamation and such goodwill is a capital asset eligible for depreciation. Therefore, from the above facts, it is very clear that in the given facts & circumstances of the case, the 5th proviso to section 32(1)....
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.... assumed jurisdiction u/s.263 of the Act on the sole basis of application of 5th proviso to section 32(1) of the Act, towards depreciation on goodwill. In view of the factual matrix as stated in preceding paragraphs and non-applicability of 5th proviso to section 32(1) of the Income Tax Act, 1961, to the facts of the present case, there cannot be error in relation to the view taken by the Assessing Officer while framing the original assessment. Therefore, in absence of any such error in the assessment order, assumption of jurisdiction u/s.263 of the Act, by the learned PCIT should be reckoned as invalid. Hence, we quash impugned order passed by the learned PCIT u/s.263 of the Income Tax Act, 1961. 14. In this view of the matter and by following the decision of the ITAT, in the assessee's own case for the AY 2015-16, we are of the considered view that the assessee has rightly claimed depreciation on goodwill arise out of amalgamation, because, 5th proviso to sec.32(1) of the Act, has no application to the facts of the present case. Therefore, we are of the considered view that assumption of jurisdiction by the PCIT on this issue is fails. 15. Coming back to the second issue qu....
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....dered view that assumption of jurisdiction by the PCIT on this issue also fails. 16. Coming back to the third issue taken up by the PCIT for revision proceedings. The PCIT has set aside the assessment order passed by the AO on the issue of disallowance u/s.14A r.w.r.8D of IT Rules. According to the PCIT, although, the Tax Auditor of amalgamation company i.e. the assessee has quantified the disallowance u/s.14A of the Act, at Rs.68,94,556/-, but the assessee has made disallowance of Rs.16,13,602/- in the statement of total income. The AO without verifying the relevant facts has simply allowed the claim of the assessee which rendered the assessment order passed by the AO to be erroneous in so far as it is prejudicial to the interest of the Revenue. We do not find any merits in the findings of the PCIT on the issue of disallowance u/s.14A of the Act. First of all, the issue has been thoroughly examined by the AO during original assessment proceedings, which is evident from the fact that the AO had issued a specific questionnaire on disallowance of expenditure u/s.14A r.w.r.8D of IT Rules, for which, the assessee vide letter dated 30.11.2016 has filed a detailed Written Submissions ....