TaxTMI 
TaxTMI 
2022 (10) TMI 538
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....ere 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 for warranty and disallowance of Rule 8D. The AO had made roving enquiries on claims made by ....
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....tion 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 u/s.10(34) of the Act. However, made suo moto disallowance of Rs.16,13,602/- u/s.14A of the Act, has been made, even though, the Auditor in Form N....
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....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 assessee had also explained why the AO has accepted disallowance computed u/s.14A r.w.r.8D of IT Rules, 1962. 7. The learned PCIT, after considering ....
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....hus, 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 amalgamation, or to the demerged company and the resulting company in the case of demerger, as the ease may he, shall not exceed in any previous year the deduction calculate....
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.... 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 prescribed rate as if the amalgamation has not taken place". 4.7 Placing reliance on the Proviso u/s.32(1) the ITAT held "This proviso provides that depreciation allowable in the case of succession, amalgamati....
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....n 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 ITAT has held that depreciation on goodwill cannot be claimed by the company on amalgamation. The AO is directed to consider the contentions of the assessee examine the facts of the case and decide the issue after giving the assessee an op....
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.... 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 resources. Lastly, a reliable estimate can be made of the amount of the obligation. i) The assessee relied on the decision of Rotork Controls Vs CIT (Supreme Court) 314 1TR 62 civil Appeal No.3506-3510 of 2009 arising out of SLP NO. 14178-14182 OF 2007 wherein it was held that Provision for Warranty is an ascert....
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....e 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 merger order is received and approved with retrospective effect, the accounts of both entities are consolidated. On consolidation, the dividend income loses its nature and the disallowance and quantification will not be relevant for the purpose of assessment. f) When the individual lax audit report of the assessee company was compiled by the Tax Auditors and signed on 29.11.2014, they have inclu....
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.... 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 arise out of amalgamation. The assessee has claimed depreciation u/s.32(1) of the Act, on goodwill which has been arisen to the assessee on amalgamation of assessee company with M/s.Kiran Medical Systems w.e.f.01.04.2013 in a scheme amalgamation approved by the Hon'ble Madras High Court vide order dated 28.04.2015. The very same issue has been subject matter of 263 proceedings by the PCIT for the AY 2015-16, where the PCIT has directed....
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....enue, 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. In this case, the Assessing Officer has allowed claim of depreciation on goodwill without making any inquiry or verification contrary to 5th proviso to section 32(1) of the Act, and thus, the PCIT has rightly invoked jurisdiction u/s.263 of the Act and set aside the assessment order. 12. The Ld.DR further submitted that the PCIT has rightly exercised his powers conferred u/s.263 of the Act, on the issue of provision for warranty expens....
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....ights, 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 successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. Explanation 1. -Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for t....
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....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 was inserted in the statute as reflected in the Memorandum to the Finance Bill. To further clarify, 5th proviso to section 32(1) of the Act, with regard to depreciation on goodwill is restricted to assets which belongs to amalgamating company and its application cannot be extended to the assets which arise in the course of amalgamation to the amalgamated company. The intention of law was to extend benefit available to the amalgamated company on succession and not to restrict depreciation on assets ....
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....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., in the present case, the assessee in the shares of transferor company (in the present case amalgamating company) was at Rs.114,30,11,323/-. The value of investments held by the assessee company in the shares of amalgamating company extinguishes after amalgamation and consequently difference between net asset value of amalgamating company and value of investment held by amalgamated company would become goodwill in the books of account of transferee company. In the present case, difference between net va....
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....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) has no application and further, in absence of any other possible view, view taken by the Assessing Officer while allowing depreciation on goodwill in the assessment proceedings, cannot be held to be erroneous or unsustainable under the law. Since, foundation for assuming jurisdiction u/s.263 of the Act, is completely erroneous on account of wrong assumption of applicability of 5th proviso to section 32(1) of the Income Tax Act, 1961, to the facts of the present case, assessment order passed by the Assessing O....
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....on 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 questioned by the PCIT in revision proceedings. The PCIT has questioned provision for warranty expenses amounting to Rs.2,25,71,530/-. According to the PCIT, there is a five times increase in provision for warranty expenses for the AY 2014-15 when compare to AY 2013-14. Although, the assessee has not explained rational behind substantial increase in expenses, the AO has allowed the claim without carrying out required enquiries, he ought to have been carried out. Therefore, the PCIT opined that the assessment order passed b....
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....al 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 and explained how disallowance computed u/s.14A of the Act, in accordance with law. Therefore, we are of the considered view that once the issue on which the PCIT wants to assumption of jurisdiction u/s.263 of the Act, has been examined by the AO, during the course of assessment proceedings, then, there is no scope for the PCIT to revise assessment order on the said issue. Further, on merits also computation of disallowance of expenditure u/s.14A r.w.r.8D of IT Rules, is in accordance with law for two reasons. The first re....