TaxTMI 
TaxTMI 
TaxTMI 
2024 (2) TMI 634
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....on 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. 1st April, 2015 which was approved by the Hon'ble Jurisdictional High Court of Gujarat by and under the order dated 21st 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 discharged by KIPL being shares issued to the shareho....
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....elow, 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 Private Company or unlisted public company to an LLP and the ....
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....dicial 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 21st 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 materials and also case laws relied available on record. 12. We f....
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....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 due to amalgamation, within the purview of Income Tax Act. It is important to understand here that the amalgamation is not questioned by the Department, what is under ....
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....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 may be made to the following: 2. In the case of Smits Securities Ltd (a renowned independent entity) in acquired the business of YSN Shares & Securities (P) Ltd, a well- established indepen....
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....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 relevant to the issue in hand, given the fact that these were not argued before the court, could not be extended on the points which were not argued or evaluated at all. (A detailed discussion on this is made in subsequent paragraphs). 5.2.2. In view of the above, a ....
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....nue 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 arising on account of such scheme of amalgamation also cannot be held to be non-genuine. iii. Neither the Goodwill said to be created artificially to claim depreciation nor the decision of the Hon'ble Court could be questioned. 15. As relied upon the judgment passed by the High Court of Madras in case of CIT vs. Parry and Company Limi....
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.... 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 provisions of section 2(1B) of the Act that in a scheme of amalgamation all the properties & liabilities of the amalgamating company would become the assets and liabilities of the amalgamated company. Similarly, it was also provided that the shareholders holding not less than 75% in value of the shares in the amalgamating company should become the sharehold....
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.... 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, then pooling of interest method should be followed otherwise purchase method of accounting should be applied. The relevant extract of accounting standard reads as under: 7. There are two main methods of accounting for amalgamations: (a) the pooling of interests method; and (b) the purchase method. 8. The use of the pooling of interests method is confined to circumstances which meet....
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....e 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 21st 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 from the scheme of amalgamation. The relevant clause of the scheme of the amalgamation stands as under: 23.1 Upon this Scheme becoming effective, Transferee Company-2 shall without any further application or deed, issue and allot Equity . Shares at par, credited as fully paid up, to the extent indicated below to the shareholders of Transferor company, holding shares in Transferor company and whose name appear in the Register of Members on the Appointed....
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....ically, 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 reserve or goodwill. The relevant portion of the scheme reads as under: The difference (excess or deficit), between the net value of assets over aggregate face value and premium amount for the Equity Shares issued by Transferee Company-2 to the shareholders of Transferor company pursuant to this Scheme and after giving effect to Clause 24.3 be adjusted to Capital Reserve or Goodwill, as the case may be in books of Transferee Company-2. 14.11 At this juncture, it is also important to note that the Hon'ble Gujarat High C....
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....cting 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 15th 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/compromise (under Section 391) or reconstruction / amalgamation (under Section 394) come up before the Court of competent jurisdiction. As the powers of the Central Government have been delegated to the Regional Directors (RDs) who also file representations on behalf of the Government wherever necessary. 2. It is to be noted that the said provisions is in addition to the requirement of the report to be received respectively from the Registrar of Companies and the Official Liquidator under the first and second provisos to Section 394(1). A joint reading of Sections 394 and 394A....
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....ing 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 connection Circular No 1/2014 dated 15.01.2014 has been issued by MCA to Regional Directors which lays down that while furnishing any report regarding reconstruction or amalgamation of companies under the Companies Act, comments and inputs from the Income Tax Department may invariably be obtained so as to ensure that the proposed scheme of reconstruction or amalgamation has not been designed in such a way as to defraud the Revenue and consequently being prejudicial to public interest. It has further been said that the Regional Directors would invite specific comments from the Income Tax Department within 15 days of receipt of notice before filing res....
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....areholders 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 applicable tax liability. Therefore, we are of the considered view that the Bench can sanction/approve the scheme only if it complies with all applicable provisions of the Act, Rules and if the scheme is in the interest of public, shareholder etc. However, the petitioner companies did not provide details with regard to compliance of tax liability raised by the Income Tax Department, their undertaking to pay the huge tax liability as pointed out by the income department etc. 38. From the above analysis of the financials of Gabs, the bench noted that with an equity share capital of only 1,91,100 the promoters/share holders of Gabs who are also the common promoters of APL....
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....d 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 amount of the purchase consideration and the NAV determined between the companies, as available in the scheme of amalgamation, which was approved by the Hon'ble Gujarat High Court as well. However, the lower authorities held the value of goodwill at NIL for the purpose of taxation during the assessment proceedings for the reasons as discussed above in their respective orders. But, in the backdrop of the above discussion, we are not convinced with the orders of the authorities below on this preliminary issue. 15. Now, the next question arises for our consideration whether the value of goodwill should be taken at NIL under the provision of Income Tax Act in the books of amalgamated company as no s....
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....e 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 rights of similar nature. 15.1 The above provision of section 32 of the Act provides allowing the depreciation to the amalgamated company in the same manner which would have been allowed to the amalgamating company in the event had there not been any amalgamation. 15.2 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 amalgamated company in the event, had there not been any 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 requires3....
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....lgamating 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 intention of the legislature is also reflecting from the following provisions: i. There is no capital gain in the 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 the amalgamated company shall remain the same as in the hands of the 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. ....
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.... 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 acquired by another company. In other words, when one company transfers its business to another company against the consideration, the difference between the net value of the assets acquired and the purchase consideration paid by the transferee is regarded as goodwill. The succeeding question arises whether such goodwill acquired by the assessee is eligible for depreciation under the provisions of section 32 of the Act. In this connection, we are inclined to refer to the provisions of section 32(1) of the Act which reads as under: 32. (1) In respect of depreciation of- (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession....
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....nies; 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 goodwill and that the assessee-company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased. This finding has also been upheld by Tribunal. There is no reason to interfere with the factual finding. (Para 6) 15.11 We also find that the Hon'ble Delhi High Court, involving identical facts and circumstances, in the case of CIT Vs. M/s Eltek SGS Pvt. Ltd. in ITA No. 475-476/2022 has decided the issue in favour of the assessee by observing as under: 7. Before us, learned counsel appearing in support of the appeal contended that it would be the provisions of Section 49 of the Act which would apply and that both the CIT (Appeals) as well as the ITAT have clearly erred in holding otherwise. Learned counsel referred to the definition of "cost of acquisition" as spelt out in Section 55(2) of the Act and which had defined that expression to also include goodwill of a business or profession or a ....
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.... 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 industrial land which cannot be compared with the residential properties. Admittedly, neither the Assessing Officer nor the Commissioner (Appeals) called for report from the Departmental Valuation Officer and proceeded to make their own estimation. It is incumbent upon the assessing authority to call for report from Departmental Valuation Officer for ascertaining the fair market value of the asset, in the event he is not satisfied about the claim of the assessee. Both the authorities below are not justified in adopting the rate as the assessee had furnished a report from an expert, i.e., Government approved valuer. 16.1 The subsequent allegation of the AO is that both the companies i.e. amalgamated and the amalgamating companies were controlled and managed by the same group of person pre and post amalgamation. Thus, the issue arises whether it was a colourable device adopted by the assessee to create goodwill in the books of accounts and claim such huge amount of depreciation. In this regard we note that both the companies, na....
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....business of the amalgamating company was based on the approved valuation report. c) The fact of the common control and management of both the amalgamated and amalgamating companies were disclosed in the scheme of amalgamation which was also noted by the Hon'ble Gujarat High Court and this fact was also in the knowledge of Revenue. Thus, we are of the view no facts were concealed or hidden. (ii) Whether it could be a normal business practice: Ans: In today's time the activity of amalgamation is very common and prevailing in the corporate world for synergizing resources, control, eliminate the competition etc. (iii) Even where individual transactions of the device are legal/ legitimate, whether combination of these steps creates an effect which is abnormal in the business world and could not have been otherwise undertaken in normal circumstances: Ans. In the present case there was no reference made by the authorities below suggesting that the transaction is carried out illegally. As the transactions in the instant case were within the ambit of the law as per the provision of section 2(1B) of the Act. (iv) These individual transactions create an effect which is contr....
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.... amalgamation can be approved under the provisions of section 2(1B) of the Act where shareholders holding not less than 75% in the value of shares of the amalgamating company become the shareholders of the amalgamated company. It is possible only when the shares are issued to the shareholders of the amalgamating company. Accordingly, we are not impressed with the finding of the AO that there was no cash payment for the acquisition of the goodwill by the assessee, rather it was recognized in the books of accounts by way of accounting entries. Thus, we hold that the impugned transaction cannot be regarded as colorable device merely on the reasoning that the assessee claimed the depreciation on the goodwill in the scheme of amalgamation. 16.8 We also note that this Tribunal in case of Urmin marketing (P) Ltd. Vs. DCIT reported in 122 taxmann.com 40 has already decided the issue in favor of assessee on the similar facts and circumstances. 16.9 It is important to note that there was an amendment to section 32, section 2(11) of the Act and other relevant sections of the Income Tax Act from the Finance Act 2021, effective from AY 2021-22. The amendment was brought into section 32 of....
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....in form of issue of equity shares to the shareholders of KSPL. In order to determine the consideration, the enterprise value of the business undertaking of KSPL was arrived at Rs. 289.30 crores on the basis of the valuation report obtained from SSPA & Co. Chartered Accountants, which represents the fair value to be paid for acquiring the business undertaking as a whole Including all tangible assets and intangible assets. KSPL was engaged in stock broking business as well as other business relating to depository participant. The company had a strong customer base. Furthermore, the company also had a wide network and efficient technological process & systems. These benefits represent 'any other business or commercial rights of similar nature being intangible assets' as referred to in section 32(1) of the Act which is eligible for depreciation under the Act. The amount of consideration (in form of issue of shares) paid in excess of net assets of KSPL is attributable to such intangible benefits which is nothing but represents payment towards goodwill. The excess consideration discharged by KIPL over net assets of KSPL represents the amount paid by KIPL towards acquisition of bundle of ....