TaxTMI 
TaxTMI 
2024 (3) TMI 89
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....recedents including that of Hon'ble Supreme Court, Jurisdictional Gujarat High Court and Jurisdictional ITAT, wherein it has been held that goodwill is a depreciation asset under Explanation 3(b) to section 32(1) of the Act. It is therefore prayed that depreciation on goodwill may kindly be granted. 2. The Ld.CIT(A), has erred in facts and circumstances of the case and in law, the ld.AO has erred in passing the assessment order in the name of Sara Suppliers Private Limited (SSPL) which was a non-existent entity as on the date of passing the Appellant's reliance on various judicial precedents including that of Hon'ble Supreme Court, Jurisdictional Gujarat High Court and Jurisdictional ITAT. Assessment Order passed by the Ld.AO as well as Appellate Order passed by CIT(A) of non-existing entity is bad in law and liable to be quashed. 3. Your appellant craves liberty to add, to alter, modify, to amend or to withdraw/delete any of the grounds of appeal at any time, on or before the hearing of appeal. 3. The first issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowance of depreciation on goodwill created in the scheme of amalgamat....
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....h the amalgamating and successor company claim deprecation for part of the year in part. Likewise, the provisions of explanation 7 to section 43(1) and explanation 6 to section 43(6) of the Act regarding the actual cost and written down value of the assets acquired in the scheme of amalgamation are also not applicable in the present facts as the goodwill on which depreciation claimed is not an asset transferred from the amalgamating company to amalgamated company. As such, the impugned goodwill arises in its books as per the scheme of amalgamation duly approved by the Hon'ble High Court. Therefore, the claim of depreciation by it is justifiable and needs to be allowed as depreciation on intangible assets. 4.2 The AO disagreed with the contention of the assessee. As per the AO, the scheme of amalgamation duly approved by the Hon'ble High Court is not in dispute, but such approval does not give right to claim deduction or allowance in the return of income filed under the Act which is otherwise not allowable under the provision of this Act. The AO also found that the facts of the case of Smifs Securities Ltd (supra) are distinguishable from the facts of the present case. As such, i....
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....ation on amalgamated assets to the extent it was available to the amalgamating company. Similarly, the provision of explanation 7 to section 43(1) and explanation 2(b) to section 43(6)(c) of the Act mandate that actual cost and WDV of assets transferred in the scheme of amalgamation should be equal to what was in the books of amalgamating company. Similarly, the provisions of section 55(2)(a)(iii) of the Act provide that the value of an asset which has been acquired without incurring any cost should be taken at NIL. Thus, there would not be any possibility of allowing the deduction for the depreciation on the assets resulting on account of revaluation of assets. 4.7 The AO Further observed that as per AS-14, there are two methods of accounting namely pooling of interest method and purchase method which are applied for recording the transaction arising in the scheme of amalgamation of companies. In case the condition, in a scheme of amalgamation prescribed under para 3(e) of AS 14 are fulfilled, then pooling of interest method of accounting should be applicable. Under the pooling of interest method any difference between purchase consideration and book value of assets & liabiliti....
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....assessee has not incurred any cost to acquire goodwill. Also, such goodwill was not transferred from amalgamating company. Therefore, the value of the same for the purpose of taxation is to be taken at NIL. Thus, depreciation on such goodwill is not allowable in the year under consideration and in subsequent years. 5. Aggrieved by the order of the AO, the assessee preferred an appeal before learned CIT (A) who confirmed the disallowance of depreciation on goodwill by observing that the AO has given detailed finding in length highlighting the claim of the assessee which was not allowable. As such, no contrary material was brought on record by the assessee during appeal. 6. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us. 7. The learned AR before u filed a paper book running from pages 1 to 336 and case laws compilation running from pages 1 to 121 along with the summary of the arguments running into 7 pages. It was contended by the ld. AR that the goodwill is arising in the scheme of amalgamation which was approved by the Hon'ble Gujarat High Court and therefore the same should be eligible for depreciation. It was also pointed out by t....
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....amated 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 shareholders of the amalgamated company. The provision of section 2 (1B) of the Act reads as under: (1B) "amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that- (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; (ii) (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) (iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (othe....
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....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 the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger. 14.4 Under the pooling of interest method the difference between purchase considerations and the net assets taken over by the amalgamated company is adjusted with reserve. On the other hand, in the case of purchase method if purchase consideration exceeds net value of assets taken over then such difference is to be as recognized as goodwill or vise-versa as capital reserve. 14.5 Goodwill may be described as the aggregate of those intangible assets of a business which contributes to its superior earning capacity over a normal return on investment. It may arise from such attributes as favourable locations, the ability and skill of its employees and management, quality of its products and services, customer satisfaction etc. 14.6 Para 19 of AS-14 describes goodwill arising in a scheme of amalgamation as extra amount pai....
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....mpany-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 Date or to such of their respective heirs, executors, administrators or other legal representative or other successors in title as may be recognized by the respective Board of Directors in the following manner: 2 (Two) fully paid Equity Shares of Rs. 1Q/- each of Transferee. Company-2 shall be issued and allotted, for every 1 (.One) Equity Shares of Rs. 10/- each held in Transferor Company. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXX 23.5 Upon Scheme being effective and on allotment of new Equity Shares by Transaction Company-2, the share certificate representing shares held in Transferor Company shall stand automatically cancelled. The new Equity Shares shall be issued by Transferee Company-2 to the shareholders of Transferor Company at a premium of Rupees two hundred and twenty five per share. Approval of this Scheme by the shareholde....
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....e 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 Court in the impugned scheme of amalgamation while approving has also observed that the Regional Director, Ministry of Corporate affairs vide letter dated 3rd December 2015, has invited objections from the Income Tax Department if any in the scheme of amalgamation. But the Income Tax Department did not reply within the time limit of 15 days, hence it was assumed that the Income Tax Department has no objection in connection with the impugned scheme of amalgamation. This fact can be verified from the order of the Hon'ble High Court, the relevant finding is reproduced as under: The next observation of the Regional Director vide paragraph 2(e), pertains to the letter dated 3 rd December 2015 sent by the Regional Director to the Income Tax Department to inviting their objections, if any. Since the statutory period of 15 days, as envisaged by ....
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....he 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 makes it clear that the duties to be performed by the Registrar and Official Liquidator under Section 394 and of the Regional Director concerned acting on behalf of the Central Government under Section 394A are quite different. 3. An instance has recently come to light wherein a Regional Director did not project the objections of the Income Tax Department in a case under Section 394. The matter has been examined and it is decided that while responding to notices on behalf of the Central Government under Section 394A, the Regional Director concerned shall invite specific comments from Income Tax Department within 15 days of receipt of notice before filing his response to the Court. If no response from the Income Tax Department is forthcoming, it may be presumed that the Income Tax Departm....
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....s 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 response to the Court. It is emphasised that this is the only opportunity with the Department to object to the scheme of amalgamation if the some is found prejudicial to the interest of Revenue and therefore, it is desired that the comments/objections of the Department are sent by the concerned CIT to Regional Director, MCA for incorporating them in its response to the Court, immediately after receiving information about any scheme of amalgamation or reconstruction etc. 4. This issues with approval of Member (A&J). 14.15 From the above circular, it is transpired that the Revenue was conscious about the fact that there was the possibility of misusing the provisions of the income tax Act in the name of the scheme....
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....e 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/shareholders of Gabs who are also the common promoters of APL, by way of this proposed scheme of amalgamation and arrangement would get the shares of APL worth? 1477.50 Crores (market value as on 31.03.2017 ) and that too without paying any Income Tax, Stamp Duty etc. for which the bench is of the considered view that the same is not in the public interest, thousands of shareholders of Transferee company especially retail shareholders. The market value of the same number of shares as at 31.03.2016 was 1,182.59 Crores. 39. Since Income Tax department (IT) has raised strong objections about tax benefit, tax avoidance, tax loss as discussed above, we are of the opinion that it would be www.taxguru.in advisable to settle the important/crucial issue of h....
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..... 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 such goodwill was available in the books of amalgamating company prior to amalgamation and such goodwill emerged in the books of amalgamated company on account of valuation and revaluation of business as no cost incurred by the amalgamated company for such goodwill. In this connection, we are inclined to refer certain provisions of the Act in the context of the scheme of amalgamation as provided under section 2(1B) of the Act as detailed under: Depreciation. ^1932. (1) ^20[In respect of depreciation of- (i) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business....
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.... 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 requires ^3- ^4(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: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX ^14[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 ....
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.... 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 section43Cofthe 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 section47(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)(iii)(e) of the Act. vi. Cost of shares of amalgamated company in the hands of shareholders, received as consideration for transfer of shares of amalga....
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....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, the following deductions shall be allowed- 15.8 On perusal of the above provisions, we note that the word goodwill has nowhere been mentioned. However, we note that, the Hon'ble Supreme Court in the case of CIT vs. Smifs Securities Ltd reported in 348 ITR 302 has held that the goodwill falls....
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....uired 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 ITANo. 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 trademark or brand name associated with the business or profession or any other intangible asset. It is in the aforesaid context that learned counsel for the appellant had sought to rely upon Section 49 and more particularly Section 49(1)(e) thereof. 8. The af....
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....her 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, namely KSPL and KIPL were registered on 27th January 1995 and 27th December 2007 respectively with the Ministry of corporate affairs. These 2 companies were filing separate income tax returns. Both the companies being body corporate have a s....
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....closed 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 contrary to human probabilities: Ans. The transactions carried out by the parties were very much normal transaction. (v) Whether actions of ....
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.... 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 the Act to exclude goodwill from depreciable assets. The relevant portion of the amendments ....
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....e is hereby allowed. 10. The second issue raised by the assessee is that the assessment framed by the AO is in the name of non-existent assessee, therefore the same needs to be quashed as invalid. 11. The necessary facts are that M/s OLPL was amalgamated with the group company namely Sara Suppliers Pvt Ltd (hereafter M/s SSPL) with effect from 1st April 2015 in a scheme approved by the Hon'ble High Court of Gujarat vide order dated 29-01-2016. Subsequently, M/s SSPL after amalgamation converted into limited liability partnership namely Sara Supplier LLP with effect from 16-03-2016. The assessee, however, was subject to scrutiny assessment under section 143(3) of the Act. The AO framed the assessment vide order dated 27-12-2018 in the name of erstwhile company namely M/s SSPL. 12. The Ld. AR for the assessee before us has challenged the validity of the assessment order framed by the AO under section 143(3) of the Act dated 27th December 2018 on the reasoning that it was framed in the name of erstwhile company which was a non-existent entity at that point of time. It was also pointed out by the learned AR that the fact about the conversion of the status of the assessee from ....
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.... Hon'ble Apex court observed that once the amalgamation is sanctioned, the amalgamating company is dissolved without winding up, in terms of Section 394 of the Companies Act, 1956. The amalgamating company ceases to exist in the eyes of law, thus becomes non-existent. Since it does not exist in the eyes of law, it cannot be regarded as a 'person' under Section 2(31) of the Act against whom assessment proceedings can be initiated or an order passed. Therefore, the assessing officer does not have jurisdiction to issue such notice or pass any order against a non-existent entity. The rationale can also be applied to a dead individual. Since a deceased would not be considered as a 'person' under the Act, thus any such notice/ order issued in that name will be invalid or void. 14.3 Before parting, it is important to note that the assessee undeniably has filed the return of income in the name of erstwhile company only and not in the name of the LLP even though such erstwhile company was not in existence. Likewise, the appeal was also preferred by the assessee before the learned CIT-A and the ITAT against the assessment order and learned CIT-A order in the name of non-ex....