TaxTMI 
TaxTMI 
2024 (2) TMI 634
X X X X Extracts X X X X
X X X X Extracts X X X X
....gously and are being disposed of by this common order for the sake of convenience. ITA No. 682/Ahd/2023 - A.Y. 2016-17 (Lead Case) 3. The brief facts leading to the case is this that (i) KIFS Securities Pvt. Ltd. (in short 'KSPL'), (ii) KIFS International Pvt. Ltd. (in short 'KIPL') & (iii) KIFS Trade Capital Pvt. Ltd. (in short 'KTPL') entered into composite scheme of arrangement through which stock broking business undertaking of the said company, namely, KIFS Securities Pvt. Ltd. (in short 'KSPL') was transferred in slump sale to KTPL and other business undertakings was amalgamated with KIPL w.e.f. 1^st April, 2015 which was approved by the Hon'ble Jurisdictional High Court of Gujarat by and under the order dated 21^st December, 2015. Pursuant to the said scheme, the transferee company i.e. KIPL consideration determined as per valuation report of expert independent valuer, namely, SSPA & Co., Chartered Accountants, discharged by issuing shares of KIFS International Pvt. Ltd. to the shareholder KIFS. The appellant company accounted with purchase method as per Accounting Standard (AS) - 14, as per the accounting treatment preferred in the scheme. The excess consideration dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... depreciation to the appellant. Before the authorities below, one of the grounds raised by the appellant is this that the assessment order was passed in the name of KIPL which is a non-existent entity and thus bad in law and thus liable to be quashed. This additional ground was, however, dismissed by the First Appellate Authority and before us, the Ld. Counsel appearing for the appellant pressed the matter only on merit. 7. It was submitted by the Ld. AR that the Goodwill had arisen in the books of KIPL in the course of the scheme of amalgamation of KSPL to KIPL which is eligible for depreciation under Section 32 of the Act, particularly, in view of the decision passed by the Hon'ble Supreme Court in case of Smifs Securities Ltd., reported in (2012) 348 ITR 302. Once the Goodwill forms part of the block of assets of KIPL under Section 32 of the Act, it would also form part of the block of assets of the appellant formed pursuant to the conversion of KIPL into LLP (Limited Liability Partnership) in terms of the conditions specified under Section 47(xiiib) of the Act. Furthermore, in terms of Explanation 2C to Section 43(6) of the Act, if the block of assets is transferred by a Pri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....object clause and had not been conducted in any manner prejudicial to the public interest. Affidavit to that effect was also filed by the RD. The companies filed an affidavit in response to said RD's affidavit and finally upon considering the entire aspect of the matter, the Hon'ble Court sanctioned the Scheme on 21^st December, 2015 holding that the arrangement is in the interest of the shareholders and creditors of all the companies as well as in public interest which is reflecting at paragraph 8 of the said order. 9. However, the case of the appellant was turned down and the same was confirmed by the Ld. CIT(A). 10. On the other hand, the Ld. DR vehemently argued against the claim of the appellant on the premise that depreciation on Goodwill in the case of the predecessor company KIPL was disallowed contending the main object of amalgamation was to create goodwill to claim depreciation and the Scheme of arrangement was only a device for tax evasion and thus such claim of depreciation is not a genuine one. He relied upon the orders passed by the authorities below. 11. We have heard the rival submissions made by the respective parties and we have also perused the relevant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee has further contended that the potential has been quantified by experts 5. The scheme was approved by the Gujarat High Court and the Fair Market Value of equity shares was worked out by expert valuer Ort the basis of the exchange ratio, the excess value-of-shares issued vis-à-vis the asset/liability has been determined as goodwill. 6. The goodwill was created in the books as per AS-14 7. The assessee also relied on the following judicial pronouncements: 1. CIT v Smifs Securites Ltd (SC)(2012) 348 ITR 302 (SC) 2. Vimalchal Print & Pack Pvt Ltd v DCIT (Guj) 5. Rebuttal of assessee's contentions: 51. The contention of the assessee has been considered carefully but not found acceptable. At the outset it is clarified that there is no dispute that the Scheme of Amalgamation was approved by the Gujarat High Court The scheme was brought up and approved by the Hon'ble High Court as per the provisions of Companies Act. However the Assessing Officer has the liberty to check the allowability of deductions claimed on the self created assets on account of the revaluation of the assets of the transferor company d....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was not appealed by the revenue before the High Court. 5.2.1. In brief, the following factors are distinguishing vis-à-vis the case of Smits Securities Ltd: 1. The decision in Smifs Securities was only on the limited issue of whether goodwill was entitled to depreciation and whether it fell within the provisions of S.32. Other aspects such as S.43 were never dealt by the Hon'ble Court. This is clear from the finding given by Hon'ble Apex Court itself in its order. "One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. The valuation of goodwill was a finding of fact and which was accepted by both CIT(A) and ITAT, It was never a subject matter of appeal before the High Court or Supreme Court, as stated earlier. It is a settled position that a case is an authority, for what it decides, and not for what logically follows from it. Reference ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....facts of that case. It has been said long time ago that a case is orify an authenty for what it actually decides, and not what logically follows from it 2. In Bhavnagar University vs. Palitana Sugar Mills Pvt. Ltd (2003) 2 SC 111. the Hon'ble Apex Court observed, "It is well settled that a little difference in facs or additional facts may make a lot of difference in the precedential value of a decision 1. In Bharat Petroleum Corporation Ltd. & another vs. N.R.Vairamanis another (AIR 2004 SC 4778), it was held by Hon'ble Supreme Court that a decision cannot be relied on without disclosing the factual situation. In the same Judgment the Court also observed: "Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are neither to be read as Euclid's theorems nor as provisions of the statute and that too taken out of the context. These observations must be read in the context in which they appear to have been stated. Judgments of Courts are not to be construed as statutes." 1. Thus, the provisions which are re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r amalgamation has not been designed in such a way so as to defraud the Revenue and consequently being prejudicial to public interest. In terms of said Circular, since within the 15 days being prescribed time period, no objection has been forthcoming from the Income Tax Department being the Revenue Authority, the Revenue authority does not have any power to raise objection against the said scheme at this stage as the main contention made by the Ld. AR. The crux of the case of the appellant is found as follows: i. The scheme of amalgamation of KSPL into KIPL was duly sanctioned by the order of the Hon'ble Gujarat High Court and the same is binding on all the authorities. ii. No objection was raised by the Income Tax Department when time was provided by the Hon'ble High Court to that effect and therefore the Revenue department is estopped / barred to raise any further objection that the scheme was to avail the benefit of depreciation on Goodwill. Considering the ratio laid down by different High Courts on the identical issue, the scheme sanctioned by the Hon'ble Jurisdictional High Court cannot be said to be a device of tax avoidance and consequently Goodwill arisin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vs. DCIT in ITA No. 2671/Del/2014. 18. Whatever facts had been pleaded by the Ld. AR has been verified by us and found to be true. The further fact as has been submitted before us by the Ld. AR that the issue on depreciation of Goodwill as disallowed by the Revenue in the case of KIPL has ultimately been allowed by the Co-ordinate Bench in ITA No.557/Ahd/2022 for A.Y. 2016-17. A copy whereof has also been annexed with the paper book filed before us. In that view of the matter, the claim of depreciation made by the appellant before us on the same Goodwill for remaining period from 15.03.2016 to 31.03.2016 deserves to be allowed as was the ultimate submission made by the Ld. Counsel appearing for the appellant which has also been considered by us. We have carefully gone through the order passed by the Co-ordinate Bench. While dealing with this particular aspect of the matter and granting relief by directing the Ld. AO to allow the claim of depreciation on the Goodwill as made by the appellant therein, the following observation was made: "14. We have heard the rival contentions of both the parties and perused the materials available on record. It is provided under the prov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....amalgamation for numerous reasons/objectives which may include the elimination of the competition, better/effective utilization of the resources, better/effective control over the market etc. 14.2 The purchase consideration paid by the amalgamated company to the shareholders of the amalgamating company may be more than the value of the net assets taken over or some time it may be lower than the net assets taken over. As such purchase consideration to be paid to the amalgamating company by the amalgamated company is determined after considering various internal and external factors which may affect future profitability and growth. Such factors include previous earnings, future possible earnings, location, technical know-how, customer base, marketing network etc. Thus, it leads to a difference between the net value of assets taken over and purchase consideration paid. 14.3 Accounting standard-14, issued by the ICAI prescribes two methods of accounting for the transaction carried out in the scheme of amalgamation namely pooling of interest method and purchase method. If the scheme of the amalgamation fulfills the conditions of para 3(e) of the Accounting Standard-14,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee company issued 2,54,54,560 new shares for 1,27,27,280/- shares of KSPL @ Rs. 235/- having face value of Rs. 10 each and premium of Rs. 225/- each. Thus, the assessee company paid purchase consideration of Rs. 598.18 crores only (2.54 crore x Rs. 235/-) against the net book value of the assets and liabilities taken over by it at Rs. 298,30,45,656/- only leading to a difference between NAV and purchase consideration of Rs. 308,87,75,944/-. The assessee, by following the pooling of interest method of accounting as prescribed under AS-14 recognized such difference as Goodwill in the books of account. The scheme of amalgamation was approved by the Hon'ble Gujarat High Court vide order dated 21^st December 2015 which was effective from 1-4-2015. Subsequently, the assessee at the time of filing return of income claimed depreciation on such goodwill by treating the same as intangible asset which was disallowed by the AO and confirmed by the learned CIT (A) by holding it at NIL value for the purpose of taxation. 14.8 Undeniably, the purchase consideration paid by the assessee to the shareholders of the transferor/ amalgamating company stands at Rs. 598.18 crores as evident f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the slump sale to the Transferee-1 and that of the remaining undertaking of the Transferee-2, as on the date of this order and the scheme duly authenticated by the Registrar, High court of Gujarat with concerned superintendent of stamps, for the purpose of adjudication of stamp duty, if any, on the same within 60 days from the date of the order. The Petitioner companies are directed to file a copy of this order along with a copy of the scheme with the concerned Registrar of Companies, electronically, along with INC-28 in addition to a physical copy as per relevant provisions of the Act. Filing and issuance of drawn up order is hereby dispensed with. All concerned authorities to act on a copy of this order along with the Scheme duly authenticated by the Registrar, High Court of Gujarat. The Registrar, High Court of Gujarat shall issue the authenticated copy of this order along with the Scheme of expeditiously as possible. 14.10 Furthermore, it was mentioned in the scheme of amalgamation that the difference if any between the value of the assets acquired by the amalgamated company and the consideration paid shall be recorded either as capital res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hall give notice of every application made to it under section 391 or 394 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing any order under any of these sections. 1. Substituted for `Court' by the Companies (Second Amendment) Act, 2002 (w.e.f. a date yet to be notified). 14.13 Accordingly, we find that there was no requirement to invite objections from the Income Tax Department. However, we find that the MCA has issued a circular No. 1/2014 dated 15.01.2014 directing regional directors of Ministry of Corporate Affair to invite comments and inputs from the Income Tax Department as well as from other regulatory department before the amalgamation. The relevant copy of the circular recess under: General Circular No 1/2014 F.No 2/1/2014 Dated 15^th January 2014 Subject: Report u/s 394A of the Companies Act, 1956- Taking accounts of comments/inputs from Income Tax Department and other sectoral Regulators while filing reports by RDs. Section 394A of the Companie Act, 1956 requires service of a notice on the Central Government wherever cases involving arrangement/com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de F. No. 279/MISC./M-171/2013-ITJ, dated 11th April 2014 which reads as under: F.NO.279/MISC./M-171/2013-ITJ, Dated- 11^th April, 2014 Government of India,Ministry of Finance, Department of Revenue, C.B.D,T., New Deihl Subject: Merger/Amalgamation/de-merger Objections entertained by High Courts -reg. I am directed to refer to the above mentioned subject. 2. In a recant case of proposed amalgamation, it was noted that the scheme of amalgamation was designed seeking amalgamation with retrospective dates so as to claim set off of losses of loss-making Companies against the profits of profit making Companies of the group and thus impacting adversely the much needed public revenue. This fact of proposed amalgamation was not brought to the notice of Income Tax Department either by the Ministry of Corporate Affairs (MCA) or Registrar of Companies (ROC). The Deportment had to file an intervention application opposing such amalgamation before the High Court which was rejected on the ground that the Department had no locus standi in the matter and that Regional Director, MCA has been delegated power in this regard. 3. In this co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onale given in the scheme among others things are the proposed amalgamation of the transferor company into Transferee Company by the scheme, as a result of which the share holdersoft he transferor company viz. the promoters of the transferor company (who are also the promoters of the transferee company) shall directly hold shares in the transferee company and the promoters would continue to hold the same percentage of shares in the Transferee company pre and post merger. 37. The above rationale presented by the petitioner company is without any Justification. Petitioner has to comply with all applicable laws. By this scheme of amalgamation and arrangement Gabs/shareholders of Gabs are avoiding full tax liability which is strenuously objected by the Income Tax Department as discussed Supra. Any transfer of property from one entity to other has to be treated as sale/transfer and the same has to comply with applicable provisions of law including applicable tax liability, stamp duty. In the instant case, the transferor is a private Ltd. company which is a separate legal entity and any transfer of shares to other entity including individuals from the legal entity would attract ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 14.17 Now, the question arises whether the scheme once approved by the Hon'ble Gujarat High Court after receiving no objection from the Income Tax Department, the AO/revenue has authority to challenge the same. What is the inference that flows from a cumulative consideration of all the aforesaid contending facts is that the revenue cannot object to the impugned scheme of amalgamation. It is because, it is implied that the revenue has given its consent in the impugned scheme of amalgamation by raising no objection in response to the letter issued by the regional director of the MCA as discussed above. Furthermore, had there been any grievance to the revenue, then it should have approached the Hon'ble High Court through the regional director of the MCA. But it did not do so. As such the revenue on one hand is issuing circulars to its officers to object the scheme of amalgamation if it is found prejudicial to the interest of revenue but on the other hand it remains silent when such opportunity was afforded to it and raising the same issue during the assessment proceedings which in our considered view is not desirable. 14.18 Moving ahead, there is also no dispute in the amo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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.] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Explanation 2.-For the purposes of this ^40[sub-section] "written down value of the block of assets" shall have the same meaning as in clause *(c) of sub-section †(6) of section 43.] ^41[Explanation 3.-For the purposes of this sub-section, the expressions "assets" and "block of assets" shall mean- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.] 15.4 As per section 32(1) of the IT Act 'depreciation' is to be computed on 'actual cost'/'written down value of the block of assets' ascertained in accordance with the provisions of section 43 of the Act. Further, a reading of the above provision shows that in respect of 'capital assets' transferred by the amalgamating company to the amalgamated company, the cost/written down value of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been had the amalgamating company continued to hold the capital asset for the purposes of its own business. 15.5 A combined reading of the above provisions reveals that the intention of the legislature behind the introduction of the amalgamation scheme was to achieve tax neutrality. Besides the above, the in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the books of the transferor/amalgamating company. In other words, the assets which have been acquired by the assessee in the scheme of amalgamation would continue at the book value in the books of the amalgamated company. The question arises whether the goodwill shown by the assessee as discussed above was acquired in the scheme of amalgamation from the amalgamating company. The answer stands in negative. It is because there was no entry in the books of accounts of the amalgamating/transferor company reflecting the value of goodwill. As such, the amount of goodwill as claimed by the assessee represents the difference between the purchase consideration and the NAV acquired by it. The purchase consideration paid by the assessee was based on the valuation report as discussed above after considering the various factors. Thus, the assessee has not acquired any goodwill from the amalgamating/transferor company as alleged, accordingly the provisions of the Act i.e. 6 proviso to section 32, explanation 7 to section 43(1), explanation 2 to section 43(6)(c) of the Act cannot be applied to the case on hand. 15.7 Normally, the issue/question of goodwill arises when one company is acq....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Moving further, we note that for claiming the depreciation, among other conditions as provided under section 32 of the Act, one of the conditions is that the assessee can claim depreciation on the goodwill being intangible asset if acquired on or after 1st day of April 1998. In other words, the assessee can claim depreciation on the goodwill acquired by it. Thus, the controversy arises whether the goodwill generated in the scheme of amalgamation is acquired by the transferee company. Such controversy has been answered by the Hon'ble Supreme Court in the case of Smifs securities Ltd (supra) by holding as under: One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner (Appeals) has come to the conclusion that the assessee had filed copies of the orders of the High Court ordering amalgamation of the above two companies; that the assets and liabilities of 'Y' Ltd. were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red by the assessee. Thus, in our considered view the assessee has complied with all the conditions provided under section 32 of the Act. Accordingly, we are not convinced by the findings of the authorities below. 16. The next allegation of the AO is that there was contradiction and inconsistency in the valuation report filed by the assessee. Admittedly the valuation report was prepared by the SSPA & CO, a firm of chartered accountants. The valuation of the business being a technical matter, in our view, the assistance of the expert is required. The AO himself cannot determine such value. If he was not satisfied with the valuation report, then the only recourse available to the AO is to refer the matter to the technical person. In holding so we draw support and guidance from the judgment of this tribunal in case of Synbiotics Ltd vs. ACIT reported in [2016] 48 ITR(T) 210 (Ahd) where it was held as under: Assessing Officer has adopted the value of Rs. 250 per sq. mtr. On the basis of the sale instances related to residential areas situated 2 to 3 kms. away from the property in question. There is no dispute with regard to the fact that property in question is an ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... circumstances the reasonableness of the scheme cannot be doubted. Accordingly, no inference can be drawn that the assessee has employed colorable device in order to record high value of purchase consideration which is resulting goodwill. 16.4 Without prejudice to the above, we also note that the Revenue has to consider certain facts before arriving at a finding whether a particular series of the transactions is a colourable device or not as the primary onus is on the AO to find out: (i) Whether the parties to the transactions have concealed or hidden any fact and/or whether what is shown to be done could have actually happened in different time or at different place: Ans: Regarding the facts of the transactions, we note that all the necessary facts were duly disclosed by the assessee in the scheme of amalgamation. The following facts were duly disclosed: a) The purchase consideration by the amalgamated company to the shareholders of the amalgamating company was duly disclosed in the scheme of amalgamation. b) The valuation of the business of the amalgamating company was based on the approved valuation report. c) The fact of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....udgment of Hon'ble Delhi High Court in the case of CIT vs. Mira Exim Ltd reported in 359 ITR 70 wherein it was held as under: In terms of the order passed under section 394 of the Companies Act, 1956 the respondent company acquired the imported motor cars. The cars were not acquired and the respondent assessee was not owner of the motor cars prior to the said date. On merger of the three concerns with the respondent assessee, shares were issued as consideration to the proprietors of the business concerns. The shares issued were consideration for the transfer of the assets. It is immaterial, whether there was transfer of an undertaking, including the block of assets, which also included the imported motor cars. [Para 15] It is clear that the respondent assessee had acquired the asset, i.e., imported cars, after the cut off date, i.e., 1-4-2001 and, therefore, is entitled to depreciation and the bar/prohibition in clause (a) to proviso to section 32(1) would not apply. The Tribunal has rightly decided the issue in favour of the respondent assessee and against the revenue. [Para 16] 16.7 It is also pertinent to note that scheme of the amalgamation can be app....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, there may not be a justification of depreciation on goodwill. Accordingly, there is no need to provide for depreciation on goodwill of business/profession like other intangible assets or plant & machinery. But such an amendment is not applicable for the year under consideration. 16.11 In view of the above and after considering the facts in totality, we reverse the order of the authorities below and direct the AO to allow the claim of the assessee for the depreciation on the impugned goodwill. Hence, the ground of appeal of the assessee is allowed. 19. We find that the Hon'ble Supreme Court in the case of Smifs Securities (supra) has now settled the legal position that difference between the total consideration paid and the amount of net assets acquired constitutes goodwill eligible as an asset for claiming depreciation under Explanation 3(b) of section 32(1) of the Act This has not been controverted by the Ld. AO as well. In the instant case, the business of KSPL was acquired by KIPL by way of a court approved scheme of amalgamation and it is for this acquisition of busine....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion was not a genuine one, giving a complete go by to the sanction given on 21.12.2015 by the Hon'ble Jurisdictional High Court upon considering various aspects of the Scheme, the documents and also the representations received from different regulatory authorities including the report of the Official Liquidator and Income Tax department and furthermore, the affidavit filed by the RD, holding that the arrangement is in the interest of the shareholders and the creditors of all the companies as well as in public interest which is evident at Paragraph No.8 of the order so passed by the Hon'ble Gujarat High Court. We further find that depreciation on goodwill claimed by the predecessor for the period from 01.04.2015 to 14.03.2016 has been allowed by the ITAT. Accordingly, the claim of depreciation by the appellant on the very same goodwill for remaining period (from 15.03.2016 to 31.03.2016) deserves to be allowed by following order of ITAT passed in the case of the predecessor. Thus, respectfully relying upon the order passed by the Co- ordinate Bench, we allow the appeal preferred by the appellant with a direction upon the Ld. AO to allow the claim of depreciation on goodwill mad....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cts of this case have TR 302 inity distinguished Commissioner of Income Tax v SMIFS Securities Ltd., 348 TR 302, has allowed depreciation. the claim for Dharu Taletech Ltd. (Delhi Tabunal Since the ITAT in assessee's own Fact of the case are case for AY 2008-09 and 2009- 10 dimorant as in the while agreeing with the CIT(A) has subject cose it is issue nald that the assessee is entitled to of depreciation creation of goodwi and its valuation andr not depreciation Cosmos Co-op Bank Ltd. Pune Tribune) Goodwill. The appellant takeover of four banks Fact of the case are by way of merger in this regard, the diferent 93 the relevant facts are that during the year subject case it is issue under consideration, assessee had of taken-over four Annapurna Mahila banks. namely, Sahakari Bankreation Ltd., goodwi Hyderabad, Manasa Coop and as valuation Urban Bank Ltd, Hyderabad. Co-op Bank Ahmedabad Ltd depreciation Ahmedabad and Unnati Cup. Bank Goodwill. Vadodara 2177 forms of the respective schemes of merger as per the approvals of the Reserve Bank of dia and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of the case are Pump sum (P) Ltd. not similar as the case jaw is Mumbai Tribunal consideration of Rs. 5,25,00,000. The assessed attributed Rs. 4,85,00,000related to the slump towards goodwill and business sale and not fo knowhow. goodwillr is an asset underamalgamation. There Explanation 3(b) to section 32(1) afwas actual payment the Act." over and above the value of Assets wherein assessee case no such actual payment. 10 India Capital Markets (P) Ltd. Mumbai Tribunal 17 Indian Research Monifestation Labs (P) Ahmedabad Tribunal The Assessing Officer further Fact of the case are observed that during the year the not similar as the case assessee has purchased entire low is clientele business of M/s. Ashmavin Financial Consultants Pvt. hereinafter called as "M/s.AFC by assigning ad clients to the appellantamalgamation. company for a consideration o was actual payment Rs.2.50 crores Ltd. related to the purchase business not to There over The Assessing Officer was of the opinion that and above the value depreciation is allowable only of Assets....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s or commercial rights of not to similar nature specified in Sectionrelated to the slump 32(1)() of the Act and were accordingly eligible for depreciation under that Section - sale and amalgamation as in the case of assessee Following wherein decision of reva T and D India Ltd. vs. Deputy Commissioner of Income Goodwill Tax [2012 (4) TMI 79 - DELHI HIGH COURT Decided against Revenue payment. ITA No. 12 of 2014 with ITA Nos. 15, 4 and 13 of 2014 Dated:- 31-12-2014 Mansoor Ahmad Mir, Chief Justi without is created any actual 14 15 SKS Micro Finance Ltd. Hyderabad Tribunal Tirumale Music Centre (P) Ltd. Hyderabad Tribunal related to the purchase not of business amalgamation theraby creation of to and Further, The assessee acquired over one lakh Fact of the case are clients at a cost of Rs.3.97 croresnot similar as the case. Rs.350 per customer. It was further law is submitted that these were trained, motivated, credit checked and risk nitered and are a source of assured economic benefits over the next five years and in that process, the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of APL ouer sub representative After transaction of transfer the assessee representative acquired the night representative of Western Union in case is not related to place of AFL and consequently to the goodwill due deal with and to do the businessmalgamation withou through the sub representative earlien atual payment. working with AFL Allowabany of depreciation on the distribution rights trademarks and technical know-how is another issue which was already decided by the CIT (A) in favour or the assessee. Tayo Engineering The Hon'ble High Court sanctioned The feet of the case the Amalgamation of Casablancasare not same as the India Ltd. Gannon Engineering Limited (CGEL Hon'ble Bombay High Bombay High Court with the assessee company. As per Court also that order, assets and liabilities appearing in the books of CGEL were relying on the decision transferred to the assesseef company. The difference between the value of assets and Babaties of Supreme Court's the case of Smits Securities taken from CGEL were transferred asset aside the decision Goodwill to the assessee company of the Mumbai ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... transferor company, was recorded as goodwill in the books of KIPL, transferee company. The appellant claimed depreciation of Rs.73,84,36,872 @ 25% on the goodwill so created and saved the tax to that extent 6.3.4 It is pertinent to mention here that the amalgamated company was converted in to Limited Liability Partnership (LLP) firm and shareholders were converted in to partners. The share capital issued to share holders of the amalgamating company was converted in to partners' capital. 6.3.5 The amalgamating company (KIFS Securities Pvt. Ltd) has valued goodwill of Rs.3,08.87,75,944/- in the books of accounts and depreciation @25% amounting to Rs.73,84,36,872/- was claimed by the successor/arnalgamated company KIFS International Pvt. Ltd. As per 5th proviso to section 32(1) of the Income-tax Act, the depreciation allowable in case of amalgamation shall not exceed the depreciation allowable had amalgamation would not have taken place. In other words, the allowance of depreciation to the amalgamated company in the year of amalgamation shall be on WDV of assets in books of amalgamating company and not on value recorded in the books ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ti Plastics (P) Ltd. [1993] 78 Comp. 138 (MP HC) ACIT vs TVS Motors Co. Ltd. [2011] 128 JTD 47 (Chennai JK Bombay Pvt. Ltd. vs New Kesar-e-Hind Sponing & Weaving Co. (1971) AIR 1035 Pentamedia Graphics Ltd. vs, ITO (2011) 236 CTR 204 Sadanand Varde vs. State of Maharashtra (20011 247 ITR 609 (Bom HC) . Wrigley India (P) Ltd. vs. ACIT (2011) 14 ITO vs. Purbanchal Power Co. Ltd (A No. 2010/2010) CIT vs. Smifs Securities Ltd. (2012) 348 1TH 302 (SC) PGIT vs. Zydus Weliness Ltd. and CIT vs Zydus Wellness [2017] 87 taxmann.com 82 (G) I have perused the matter and the relevant factors to be considered in this case including the surrounding circumstances, objective facts, evidences adduced and material available on record. 6.4.1 It is noticed from the assessment order that the main object of Amalgamation is creation of goodwill of Rs. 3,08,87,75,944/- in the books of Amalgamated Company and claiming depreciation to that extent thereby reducing the profit in the books of the amalgamated company. Thora is no question of streamlining of organization structure and realize commercial synergies because as on 31/03/2015 KIPL was defunct an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 (x), clause (xilib) 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." In view of the above, in case of amalgamation depreciation shall not exceed in any previous year the deduction calculated at the prescribed rates as if the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecurities Ltd. while arriving at this conclusion. . CIT vs JB Roy 26 taxmann.com 235 (Delhi), 265 CTR 505 [2012] (SC) âš«CIT vs Vachenband investment Ltd. 212 Taxman 131, Delhi HC (2012), . Sree Meenakshi Mits Hd vs CIT (SC), 31 JTR 28 (1956)" 6.5. It is discussed above, the appellant has tried to make it a compulsion to create good will on account of amalgamation and used the 56 Document 8 IFS INTERMATIONAL LLP AAQFK2892L account standards as a mask to create goodwill in the books of transferee company on account of revaluation and evading the tax to the extent of depreciation. Since the appellant has allegedly followed the purchase method of accounting the goodwill was created on account of the market rate and depreciation is not allowed on the market rate but only on cost of acquisition or WDV. There is no dispute that no goodwill was in existences in the books of amalgamating company and it created in the books of amalgamated company solely on account of amalgamation. As per the Accounting Standards the difference between the book value and market value should be transferred to Revaluation Account and the same should....
X X X X Extracts X X X X
X X X X Extracts X X X X
....very same decision, issue of allowability of depreciation on Goodwill on merits of the case was decided against the assessee and observed as under: "However, for the completeness of the case, now we turn to the merit of the case. In the scheme of amalgamation, one company is acquired by another company with all the assets and liabilities including reserve, provisions etc. Upon acquisition, if the purchase consideration to be paid to the shareholders of the amalgamating company exceeds the net asset value (NAV), the excess amount is recorded as goodwill. If not, it is recorded as capital reserves in the books of the amalgamated company. In the case on hand, the assessee company acquired another company with all the assets, liabilities/reserves against the purchase consideration to the shareholders of the transferor/ amalgamating company exceeding the net asset value (NAV), the excess amount was recorded as goodwill. Admittedly, the assessee incurred the cost more than the NAV acquired by it which has also been approved by the Hon'ble Gujarat High Court in as discussed above. The relevant finding of the Hon'ble High Court reads as under....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment 10 FS INTERMATIONAL LLP AAQFK2892L 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.] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXX Explanation 2.-For the purposes of this 40[sub-section] "written down value of the block of assets" shall have the same meaning as in clause "(c) of sub- section (6) of section 43.] [Explanation 3.-For the purposes of this sub- section, the expressions "assets" and "block of assets" shall mean-- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature." The above provisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor- 59 Document 11 KIFS INTERMATIONAL LLP AAQFK2892L company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.] As per section 32(1) of the IT Act 'depreciation' is to be computed on 'actual cost'/written down value of the block of assets' ascertained in accordance with section 43 of the Act. Further, a reading of the above provision shows that in respect of 'capital assets' transferred by the amalgamating company to the amalgamated company, the cost/written down value of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been had the amalgamating company continued to hold the capital asset for the purposes of its own business. A combined reading of the above provisions reveals that the intention of the legislature behind the introduction of the amalgamation scheme was to achieve tax neutrality. Besides....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the depreciation of the assessee in the 1st year has attained finality. Admittedly the 1st year is the base assessment year from where the issue of depreciation is emanating. 13. The question arises once the depreciation has been allowed in the 1st year then the same can be disturbed in the subsequent year without having any change in the facts and circumstances. In our considered view, in such a case the principles of consistency shall be applied as held by the Hon'ble 60 Document 12 KIFS INTERMATIONAL LLP AAQFK28921 Bombay High Court in the case of PCIT Vs. Quest Investment Advisors Ltd. reported in 96 taxmann.com 157 wherein it was held as under: "Once this principle was accepted and consistently applied and followed, the revenue was bound by it. Unless of course it wanted to change the practice without any change in law or change in facts therein, the basis for the change in practice should have been mentioned either in the assessment order or atleast pointed out to the Tribunal when it passed the impugned order. None of this has happened. In fact, all have proceeded on the basis that there is no change in the principl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the effect in the books of the assessee was given in the Financial Year 2005-06 corresponding to the A.Y. 2006-07. It is observed that appellant's main thrust is that depreciation on Goodwill should be allowed in year under consideration mainly considering appellate order passed in case of it for A.Y.2006-07 being the year in which Goodwill was recognized in books of account and depreciation has been allowed. 7.5 It is undisputed fact that appellant has recognized Goodwill of Rs 10,13,82,620/-in books of account for A.Y. 2006-07 and depreciation @ 25% was claimed in A. Y. 2006-07 which worked out to Rs 2,53,45,655/-. The Closing WDV of such assets as on 31st March 2006 was Rs 7,60,36,965/- and depreciation of Rs 1,90,09,241 was claimed on such WDV in A.Y. 2007-08 which was disallowed by AO while passing the assessment order of A. Y. 2007-08. The above disallowance was upheld by then CIT(A) and matter was challenged before Hon'ble Ahmedabad ITAT in ITA No. 1439/Ahd/2011. The quantum of depreciation disallowed in A.Y. 2007-08 was mentioned at para 4 of appellate order. While adjudicating such addition, Hon'ble ITAT vide its order....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... support and guidance from the judgment of Hon'ble Supreme Court in the case of CIT versus Excel Industries Ltd reported in 358 ITR 295 wherein it was held as under: "28. Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the Revenue. 29. In Radhasoami Satsang Saomi Bagh v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same "fundamental aspect" permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v. Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said: "Parties are not permitted to begin fresh litigation because....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 shall be created as the Amalgamation Reserve and the same shall be treated as the Free Reserve of the Transferee Company available for the distribution of dividend." Similarly, there is also no dispute in the amount of the purchase consideration and the NAV determined between the companies, as available in the order of the AO, which was also approved by the Hon'ble Gujarat High Court as well. 11. Now, to resolve the controversy whether the assessee is entitled for the depreciation under the provisions of section 32 of the Act on the goodwill acquired by it in the scheme of amalgamation, we need to refer certain provisions of law as detailed under: "Depreciation 32. (1) 20[In respect of depreciation of-- (i) XXXXXX XXXXXXXX 64 Document 16 TERMATIONAL LLP AAQFK2892L (i) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....event had there not been any amalgamation. Similarly, the actual cost of the assets acquired in the scheme of amalgamation in the hands of the amalgamated company will continue to be the same as it would have been in the hands of the amalgamating company in the event, had there not been any 65 Document 17 INTERMATIONAL LLP AAQFK2892L amalgamation. The relevant extract of the explanation 7 to section 43(1) reads as under: "Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires 3- (1) "actual cost" means the actual cost 3 of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met3 directly or indirectly by any other person or authority: XXXXXX XXXXXXXXXX XXXXX XXXXXXXXXXXX XXXXXXX X [Explanation 7.--Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he hands of the amalgamating company on the transfer of capital assets in the scheme of amalgamation under the provisions of section 47(vi) of the Act. ii. The cost of stock-in -trade in the hands of amalgamated company shall remain the same as in the hands of amalgamating company either as capital asset or stock in trade as provided under section 43C of the Act. iii. Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc under the provisions of section 72A of the Act. iv. Exemption of capital gains in the hands of shareholders of amalgamating company on transfer of shares of amalgamating company in the scheme of amalgamation under the provisions of section 47 (vii) of the Act. v. Cost of capital assets to be the same as in the hands of previous owner where capital assets became the assets of the successor as a result of transfer under section 47(vi) r.w.s. 49(1)()(e) of the Act. vi. Cost of shares of amalgamated company in the hands of shareholders, received as consideration for transfer of shares of amalgamating company, to be same as th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essment years. Therefore, the view of the Tribunal in allowing the respondent's appeal on the principle of consistency cannot in the present facts be faulted with, as it is in accord with the Apex Court decision in Bharat Sanchar Nigam Ltd. v. Union of India [2006] 282 ITR 273. [Para 91" In view of the above, the assessee succeeds on the principle of consistency. Accordingly we set aside the order of the learned CIT (A) and direct the AO to allow the depreciation to the assessee. Hence the ground of appeal of the assessee is allowed. 14. As, we have decided the main ground of appeal in favour of the assessee, we are not inclined to adjudicate the issue raised in ground 3 as alternate claim for the valuation of the goodwill. Hence, we dismiss the same. 15. In the result, the appeal of the assessee is partly allowed." It is seen from above referred order of Hon'ble Ahmedabad ITAT in appellant's own case for A.Y. 2007-08 wherein disallowance of depreciation on Goodwill on merits was confirmed. On the date when Hon'ble ITAT has given its decision, decision of Hon'ble Supreme 68 Document 20 S INTERMATIONAL LLP AAQFK2892L ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... P iv. Bharatbhai J. Vyan v. ITO, Baroda (2005) 97 ITD 248 (Ahd.) R. G. Keshwani v. ACIT, Mumbai 12009) 116 ITD 133 (Mum Guruji Entertainment Network Ltd. v. ACIT (2007) 14 SOT 556 CIT V. Mangalore Ganesh Beadi Works [2003) 264 ITR 142 (Kar) In the sight of the statutory provisions contained in section 32(1)(ii), the goodwill acquired by the assessee does not come under the expression of any other business or commercial rights of the nature similar to know-how. patens, copyrights, etc. Therefore, the undersigned has reason to believe that the income chargeable to tax for the year under consideration has escaped assessment as per the provisions of section 147 of the 1.T. Act. Therefore, a notice u 148 of the T Act is being issued for re-assessment ue. 147 of the 1.T. Act. (SHAILENDRA SHARMA) Dy. Commissioner of Income-tax Circle-1. Ahmedabad Dele: 11/06/2000 On perusal of reasons recorded, it is relevant that reassessment notice had been issued for escapement of income relatable to claim of depreciation on Goodwill. Against the notice of reopening for the reasons of disallowance of depreciation on goodwill, the appella....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not reversed till date by higher appellate forum. When on merits of the case issue is already decided by Hon'ble ITAT in appellant's own case, the finding given by Hon'ble Ahmedabad ITAT in the case of Urmin Marketing(supra) as relied upon by appellant cannot be made applicable because facts of assessee's case was already considered in detail by Hon'ble ITAT in their finding referred supra. In view of detailed observations made herein above, finding given in appellate order of A.Y. 2006-07 by my predecessor CIT(A) cannot be applied in current year due to finding of facts given by Hon'ble ITAT on merits in assessee's own case for A.Y. 2007-08 and 2008-09. Further, since Hon'ble ITAT had given the final judgement in favour of appellant on technical ground as discussed above, and on merits, the findings were in favour of department, the plea of the appellant to follow the decision of Hon'ble ITAT for AY 2007-08 & 2008- 08 cannot be adhered to in the current AY 71 Document 23 INTERMATIONAL LLP AAQFK2892L 7.7 Considering detailed finding given by Hon'ble Ahmedabad ITAT in appellant's own case and other factual & legal matrix of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icences, 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 (xiib) 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 72 Document 24 EFS INTERMATIONAL LLP AAQFK2892L 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 doduction 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 7.23. We are of the opinion that this is a fit case for application of third proviso to section 43(1) because the business transfer agreement is part of a comprehensive i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e scope and objective of the Explanation 3 of section 43(1) is to check the excess claim of depreciation by enhancing cost of assets acquired which were already in use by other person. Therefore in case of valuation of goodwill the Assessing Officer ought to have examined the valuation of all the assets taken over by the assessee under the amalgamation and thereby to determine the actual cost to the assessee for the purpose of claim of depreciation. In this case there is no doubt that the value of the goodwill was shown in the books of the KBDL at 7.45 crores which has been enhanced in the books of account of the assessee to 62.30 crores. The assessee has forcefully contended that the valuation of the goodwill is nothing but only the differential value between the consideration and FMV of the tangible assets. Thus the assessee has contended that Assessing Officer cannot disturb the valuation of the goodwill when it is a differential amount between the consideration and the FMV of the tangible assets. If such claim of goodwill and depreciation is allowed then it would render the provisions of Explanation 3 to section 43(1) redundant, othe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ciation on any tangible or intangible assets allowable to amalgamating company and the amalgamated company shall not exceed the deduction calculated at the prescribed rates as if the amalgamation had not taken place and such deduction shall be apportioned between these companies in the ratio of period of usage of assets. In view of this explanation, KBDL was not claiming any goodwill as an asset eligible for depreciation. If amalgamation is not considered, there would not he any deduction of depreciation on goodwill. Therefore, under this provision also, the assessee is not eligible for depreciation on goodwill. However the Assessing Officer has proceeded to hold the value of the goodwill as shown by the assessee is not justified. 11 is pertinent to note that once the claim of depreciation is restricted under the 5th proviso to section 32(1)(ii) then the valuation issue become irrelevant. The Commissioner (Appeals) has also concurred with the view of the Assessing Officer regarding the applicability of the 5th proviso to section 32(1). It is not the case of the assessee that the subsidiary has claimed any depreciation of goodwill. Theref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gamated but not claimed any depreciation on goodwill. The decision of Hon'ble Supreme court in the case of Smifs Securities is not applicable to facts of the case as the decision in Smifs Securities was only on the limited issue of whether goodwill was entitled to depreciation and whether it fell within the provisions of Section 32. Other aspects such as Section 43 were never dealt by the Hon'ble Court. The valuation of goodwill was a finding of fact and which was accepted by both CIT(A) and ITAT. It was never a subject matter of appeal before the High Court or Supreme Court, as stated earlier. It is further observed that in the case of Smifs Securities Ltd (a renowned independent entity) it acquired the business of YSN Shares & Securities (P) Ltd, a well-established 75 Document 27 (iv) (A) INTERMATIONAL LLP AAQFK2892L independent entity, there was cash outflow to generate goodwill, the amalgamation was between two well established companies and the share holding pattern has changed after amalgamation and due to amalgamation the management and control of the amalgamated company change into third parties. However, in the ....