TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 1288
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....nted by the learned CIT(A) in respect of various disallowances made in the assessment orders, primarily relating to depreciation on goodwill, product registration expenditure, deduction under section 80-IC, and set-off of brought forward depreciation. The grounds, as raised before us, are reproduced hereunder for each assessment year: ITA No. 1245/Ahd/2025 - A.Y. 2012-13 a) The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of depreciation on goodwill amounting to Rs. 6,61,91,21,210/- made by AO. b) The Ld. CIT(A) has erred in law and on facts in deleting the disallowance with respect to product-registration expense amounting to Rs. 46,75,857/- as a capital expenditure made by AO. c) The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of deduction claimed under section 80IC of the Act of Rs. 50,91,52,050/- by restricting the deduction under section 80IC of the Act to Rs. 44,59,56,123/- as against Rs. 95,51,08,173/- claimed in the return of income, made by AO. d) The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of deduction under section 80IC on scrap income of Rs. 60,77,133/-, made by AO. e) The Ld. C....
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....on expenses, as well as deduction under section 80-IC. The issues arising in the remaining three appeals for Assessment Years 2013-14, 2020-21, and 2022-23 are either common or consequential in nature. Therefore, the findings rendered in the lead year shall, mutatis mutandis, apply to the other years, subject to variations in facts or figures, wherever applicable. 4. Facts of the Case 4.1 The assessee is engaged in the business of manufacturing and sale of healthcare and personal care products. It operates through two principal undertakings, namely, the Pharmaceutical Undertaking, which includes the Baddi Unit eligible for deduction under section 80-IC of the Act, and the Cosmetic Undertaking, which caters to various personal care products. The corporate structure of the assessee undergone significant changes over the years. Initially, Reckitt Benckiser Investments India Pvt. Ltd. (RBIIPL), a company incorporated in India during FY 2010-11, acquired 100% shares of Paras Pharmaceuticals Ltd. (PPL) from its then shareholders at a consideration of Rs. 3272.80 crores. RBIIPL was funded by Reckitt Benckiser (Singapore) Pte. Ltd. (RB Singapore), which infused approximately Rs. 3274 cro....
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...., whereas the CIT(A), based on the past assessments and records, directed allowance of the full amount as claimed by the assessee. The specific amounts involved in each year are tabulated below: Assessment Year Ground Relating to Depreciation on Goodwill Ground Relating to Brought Forward Depreciation 2012-13 Rs.6,61,91,21,210/- - 2013-14 Rs.4,96,43,40,908/- - 2020-21 Rs.66,26,59,520/- Rs.2,65,61,88,427/- 2022-23 - Rs.1,26,54,00,107/- 5.3 We now take up the Revenue's ground challenging the deletion of disallowance of depreciation on goodwill. 5.4 During the course of assessment proceedings, the AO noted that the assessee had claimed depreciation of Rs. 6,61,91,21,210/- on goodwill. This goodwill was stated to have arisen pursuant to the scheme of amalgamation of Reckitt Benckiser (India) Ltd. (RBIL) with the assessee company. The AO observed that the scheme was approved by the Hon'ble High Court of Gujarat with effect from 01.04.2011. The AO made detailed inquiries into the nature of the goodwill and the manner in which depreciation was claimed. The AO questioned the allowability of depreciation on such goodwill and issued a show-cause notice to the assessee. In ....
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.... under: Clause 6.3.1 - Pooling of Interest Method Particulars Amount (Rs.) Purchase Consideration (90,90,910 x Rs. 186.15) 1,69,22,72,896 Less: Net Assets of RBIPFL (assets - liabilities) 32,74,81,86,758 - 11961532 = 32,73,62,25,226 Goodwill as per Clause 6.3.1 (-) 31,04,39,52,330 Clause 6.3.4 - Book Entry Method in RBHIL Particulars Amount (Rs.) Value of investment of RBIPFL in PPL (as per books of RBHIL) 32,72,80,00,001 Less: Face value of shares of PPL held by RBIPFL (-) 9,05,15,160 Less: Goodwill transferred to Hattie (-) 6,16,10,00,000 Goodwill as per Clause 6.3.4 Rs.32,63,74,84,841 Clause 6.3.7 - Net Asset vs Share Allotment (Valuation Deficit) Particulars Amount (Rs.) Net assets of RBIPFL (as per books) 32,72,81,86,758 Less: Market value of shares allotted (90,90,910 x Rs. 186.15) (-) 1,69,22,72,896 Goodwill as per Clause 6.3.7 (-) 1,59,22,72,896 Clause Amount (Rs.) Clause 6.3.1 (-) 31,04,39,52,330 Clause 6.3.4 32,63,74,84,841 Clause 6.3.7 (-) 1,59,22,72,896 Net Goodwill (-) 12,59,615 Thus, taking a holistic view as per the High Court approved scheme, the AO concluded that no goodwill arose on amalgamation. 5.6 The AO....
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.... T&D India Ltd. v. DCIT - Delhi HC [20 taxmann.com 29] * Commissioner of Income-tax v. RFCI Ltd. - Himachal Pradesh HC - [57 taxmann.com 17] 5.13 The AO held that all these cases were distinguishable on facts, as the genesis of goodwill in those cases was not in dispute, unlike the present one. He observed that mere approval of amalgamation and recording of goodwill in books does not ipso facto entitle the assessee to depreciation. Summarising his findings, the AO recorded the following: a. There was no transfer of customer base or patronage on amalgamation. b. No increase in brand value or client base of amalgamated entity. c. No improvement in financial indicators post-amalgamation. d. RBIPFL had no expertise, operations, or value addition to offer to RBHIL. e. No asset was received by RBHIL pursuant to amalgamation. f. As per AS-14, goodwill does not arise under pooling of interest method. g. Goodwill as computed per the approved scheme was negative. h. Depreciation on non-existent asset or self-generated goodwill is not allowable. i. In absence of asset put to use, depreciation cannot arise. j. Self-generated goodwill is not a depreciable asset under sect....
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....hat full disclosure regarding the recognition of goodwill was made under Note 36 of its audited financial statements for the year ended 31.03.2012, and the same had been duly certified by the statutory auditors, approved in the general meeting of the shareholders, and filed with the Registrar of Companies. The AO had not disputed the audited financials or the compliance with the Companies Act. Relying on the binding judgment of the Hon'ble Supreme Court in the case of CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)], the ld. CIT(A) held that goodwill qualifies as an intangible asset under Explanation 3(b) to section 32(1), being in the nature of "business or commercial rights of similar nature", and hence is eligible for depreciation. 5.17 The CIT(A) observed that once the Hon'ble High Court sanctioned the Scheme of Amalgamation under sections 391-394 of the Companies Act, 1956, it had statutory force and became binding on the companies and their stakeholders, overriding any conflicting provision in Accounting Standards. The ld. CIT(A) relied on the judgment of the Bombay High Court in Sadanand Varde v. State of Maharashtra [(2001) 247 ITR 609 (Bom.)] to affirm that the sche....
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.... actual consideration or acquisition of any commercial rights, and that the so-called "goodwill" arose only on account of book entries, without any real transfer of assets or commercial rights that could justify classification of such amount as depreciable goodwill under section 32(1). It was pointed out that even KPMG's valuation report clearly stated that their approach was to determine only relative fair values of the shares of the merging companies and not the absolute fair value of their underlying assets. The DR also highlighted the findings of the Assessing Officer in para 7 of the order, where it was observed that the goodwill recorded was nothing but a balancing entry, not backed by any real business advantage or identifiable intangible asset. The AO had also noted that Accounting Standard-14 (AS-14), under which the pooling of interest method was followed, does not permit recognition of goodwill in cases of amalgamation where no real consideration or identifiable assets are transferred. 5.21 The DR contended that the learned CIT(A) has failed to appreciate these crucial findings and proceeded to grant relief merely relying on the legal position laid down by the Hon'ble S....
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....eme of Amalgamation and Arrangement", forming part of the audited accounts. The AR placed on record the copy of the approved scheme and particularly referred to Para 6.3 and 6.3.4 thereof, which explicitly state that the difference between the value of investment in the equity shares of PPL (i.e., RBHIPL) in the books of RBIIPL and the aggregate value of face value of share capital of PPL held by RBIIPL shall be debited to goodwill in the balance sheet of PPL. 5.24 Thus, it was contended that the recognition of goodwill in the books of the amalgamated company was not arbitrary or self-generated, but was backed by a specific clause of the court-approved scheme and based on actual investment made by RBIIPL, which had resulted in identifiable goodwill representing excess consideration paid for acquisition of commercial/business rights, brands, customer base, and other intangibles. The AR also submitted that the AO had overstepped his jurisdiction by substituting the expert valuation made by a qualified valuer with his own computation without referring the matter to the Department Valuation Officer (DVO) or seeking any expert rebuttal. It was submitted that if the AO had any doubt on ....
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.... (a) No transfer of customer base or patronage: The Assessing Officer concluded that no goodwill could arise in the absence of a direct transfer of customers. This reasoning is misconceived. Goodwill in commercial parlance encompasses reputation, brand recognition, market penetration, distribution reach, and operational synergies. The acquisition of PPL by RBIIPL was a comprehensive takeover of its business ecosystem, and the subsequent amalgamation vested all its business attributes in the assessee. As held by the Hon'ble Supreme Court in CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)], goodwill is a recognized intangible asset and not confined to customer contracts. Therefore, the AO's approach is overly narrow and legally untenable. (b) No increase in brand value or client base post-merger: The AO's observation that there was no measurable increase in brand value or clientele post-merger is irrelevant to the question of depreciation. Depreciation is allowable on the acquisition cost of qualifying assets-not based on post-facto performance or enhancement. In this case, the consideration paid by RBIIPL factored in the embedded brand value and business potential of PPL....
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.....3.4 and disclosed under Note 36 of the audited accounts. Therefore, the accounting treatment adopted by the assessee is valid. (g) Goodwill computation results in negative figure: The AO computed negative goodwill of Rs. (1,59,22,72,896)/- by reducing share premium from net assets. This methodology is fundamentally flawed. Share premium is part of shareholders' equity, not a liability. Treating it as a liability for computing net assets is contrary to accounting principles. The assessee's valuation, as per the report of M/s KPMG, adopts a standard relative valuation approach to determine fair share exchange ratio and embedded goodwill. The AO has not referred the matter to a Valuation Officer nor has he produced a contrary expert opinion. His computation is thus unreliable and contrary to accepted norms. (h) Goodwill is self-generated and hence not eligible for depreciation: This finding of the AO is factually incorrect. The goodwill in question arises from identifiable consideration paid by RBIIPL for acquiring PPL and is therefore not self-generated. The cost of acquisition is determinable and reflected in the books. The Supreme Court in Smifs Securities Ltd. (supra) has....
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....e restored to the CIT(A) for fresh adjudication. The CIT(A) has rendered a reasoned decision after due consideration of all material, and there is no procedural infirmity or denial of natural justice warranting remand. 5.31 Further, the claim having been made through a revised return filed within the prescribed time under section 139(5), it constitutes a valid claim in law. The AO has examined the claim on merits during assessment proceedings. Therefore, the objection that the claim was made in a revised return is of no consequence. 5.32 In view of the foregoing, we hold that the depreciation claimed by the assessee on goodwill is legally allowable under section 32(1)(ii). The action of the CIT(A) in allowing the claim is upheld. The grounds raised by the Revenue on this issue are dismissed. 6. On the grounds relating to brought-forward unabsorbed depreciation 6.1 In the assessment proceedings for Assessment Year 2020-21, the Assessing Officer disallowed the set-off of brought-forward unabsorbed depreciation amounting to Rs. 2,65,61,88,427/-, on the ground that the depreciation on goodwill claimed in the relevant preceding assessment years was itself not allowable. The Assessin....
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....onclude that the disallowance of brought-forward unabsorbed depreciation of Rs. 2,65,61,88,427/- for A.Y. 2020-21 and Rs. 1,26,54,00,107/- for A.Y. 2022-23 is both factually and legally untenable. The material on record demonstrates that the assessee has consistently claimed depreciation on goodwill since A.Y. 2012-13, arising out of a High Court-sanctioned Scheme of Amalgamation. The said depreciation claim, though initially disallowed by the Assessing Officer, was allowed by the CIT(A) in the earlier assessment years, and forms the basis of the unabsorbed depreciation now sought to be set off under section 32(2) of the Act. It is a well-settled principle that once a claim of depreciation is accepted in the initial year, the carry-forward of the unabsorbed portion becomes a vested right, and the same cannot be denied in subsequent years unless the foundational allowance itself is reversed by a competent appellate forum. In the present case, the Assessing Officer, without any fresh examination or verification of past appellate records, has proceeded to disallow the set-off of carried forward depreciation by simply reiterating his original position, ignoring the binding appellate fi....
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....x Appeal No. 752 of 2012). In addition, reference was made to appellate orders of the CIT(A) in the assessee's own case for A.Ys. 2008-09 to 2010-11, wherein the product registration expenses were consistently held to be revenue in nature. The Assessing Officer, however, did not accept the assessee's explanation. He noted that in the pharmaceutical and healthcare industry, product registration with the authorities of respective countries is a pre-condition for marketing and exporting products. The process involves detailed testing, bio-equivalence studies, and clinical evaluations to the satisfaction of the approving bodies. The AO concluded that such registration grants the assessee a right to market its products in those jurisdictions over an extended period of time, thereby conferring upon it a benefit of enduring nature. He therefore held that the registration process creates marketing intangibles akin to an intangible asset within the meaning of section 32(1)(ii), and that the expenditure incurred for obtaining such rights falls squarely within the capital field. The Assessing Officer further recorded that the fact that the registration enhances the product's market accept....
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....gn governments and does not result in creation of a proprietary or enduring asset. We have also noted the decision of the Coordinate Bench in the case of Cadila Healthcare Ltd. (ITA No. 3140/Ahd/2010), wherein the issue of allowability of product registration expenses under section 37(1) came up for consideration. The Co-ordinate Bench in that case held that such expenditure, being incurred solely to comply with regulatory formalities for marketing products in foreign jurisdictions, is revenue in nature and does not result in acquisition of any capital asset. The said decision was affirmed by the Hon'ble Gujarat High Court in CIT v. Cadila Healthcare Ltd., Tax Appeal No. 752 of 2012, by declining to admit the Revenue's appeal, thereby upholding the Tribunal's view. 7.6 We find merit in the submissions made on behalf of the assessee. The expenditure incurred for product registration is a prerequisite to legally market the assessee's healthcare and pharmaceutical products in various foreign countries. Such expenditure is a statutory and regulatory compliance cost and cannot be construed to result in acquisition of any capital asset. The purpose of the expenditure is not to create or....
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.... unit-level profit and loss accounts, including that for the Baddi Unit, were thus prepared by allocation and apportionment, and not supported by independently verifiable financial records. In particular, the AO noted that a wide range of common expenses incurred by the Head Office, including expenditures on human resources (HR), information technology (IT), finance, legal and regulatory affairs, marketing and branding, treasury, corporate communication, and secretarial functions, had not been allocated to the Baddi Unit. These expenses had been debited to the general profit and loss account of the company, and were not proportionately distributed across operational units. The AO observed that all such functions performed at the corporate office were integral to the operations of every unit of the company, including the Baddi Unit. In the absence of a rational or scientific basis for apportioning these costs, the assessee's computation of profit for the Baddi Unit was found to be artificially inflated, resulting in a correspondingly inflated claim for deduction under section 80-IC. Upon deeper analysis of the comparative profitability, the AO observed that the net profit margin....
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....pellate orders were further challenged by the Revenue before the Hon'ble ITAT, which in turn dismissed the Revenue's appeals for A.Ys. 2008-09 to 2010-11, thereby confirming the relief granted to the assessee. Taking note of this consistent appellate history, the CIT(A) in the impugned years (2012-13 and 2013-14) concluded that there was no material change in the facts or legal position so as to warrant a deviation from the earlier view. 8.4 The Departmental Representative (DR) relied on the orders of AO. Whereas the Authorsied Representative (AR) of the assessee placed reliance on the decision of Co-ordinate Bench in assessee's own case for earlier years in ITA Nos. 3098/Ahd/2013, 126/Ahd/2014, 1272,1547,1366& 1780/Ahd/2015. The AR further submitted that the AO had fundamentally erred in treating the corporate office as a separate and independent "undertaking" for the purposes of computing the deduction allowable under section 80-IC. The AR contended that the AO had erroneously apportioned common corporate expenses and attempted to recharacterize a portion of the profits of the Baddi Unit as attributable to branding, marketing and other head-office activities, thereby artific....
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.... documentary evidence to substantiate that the Baddi Unit operated with sufficient functional and operational autonomy. In the absence of any specific material brought on record to establish a proximate nexus between the head office expenses and the activities of the Baddi Unit, the Co-ordinate Bench had held that the disallowance made by the Assessing Officer could not be sustained in law. The relevant para of the same decision is reproduced as under - 17. We have heard the rival contentions and perused the material on record on this issue. The Baddi unit has derived profit from the selling of the product manufactured by it. The profit cannot be derived of only manufacturing activities unless the manufactured goods are sold. It is required to complete the whole cycle consisting of different components i.e. production, marketing and selling of product etc. It is undisputed facts that in most of the cases the manufacturing unit and its sale and marketing units are situated at different places in order to capture the market of the product on different geographical locations. We observe that assessee has carried all its business activities as a whole business and the same cannot be ....
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....p Income 9.1 During the scrutiny proceedings for A.Ys. 2012-13 and 2013-14, the Assessing Officer noticed that the assessee had claimed deduction under section 80-IC of the Income Tax Act, 1961 in respect of the profits of its Baddi Unit, including income arising from sale of scrap. It was seen from the segmental profit and loss accounts of the Baddi Unit that the assessee had shown scrap sales income of Rs. 38,00,723/- in A.Y. 2012-13 and Rs. 42,78,435/- in A.Y. 2013-14. The Assessing Officer questioned the allowability of deduction on such income and called upon the assessee to justify its inclusion in the eligible profits for the purpose of deduction under section 80-IC. In response, the assessee submitted that the scrap represented waste and by-products generated during the regular manufacturing process carried out at the eligible unit. It was further submitted that the said scrap was directly and inextricably linked with the manufacturing activity, and therefore, any income realised from its sale formed part of the business receipts of the undertaking. Relying on the commercial and operational realities, it was contended that since the scrap was generated in the course of pro....
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....addi. The Assessing Officer had disallowed the claim on the ground that such income is not "derived from" the manufacturing activity, holding that the same is incidental and does not have a direct nexus with the core operations of the industrial undertaking. It is noted that the assessee had duly explained that the scrap was a byproduct arising directly from the manufacturing process undertaken at the Baddi unit, and thus forms an integral part of its business receipts. The assessee had consistently included such scrap income as part of the eligible profits for deduction under section 80-IC in preceding years. The learned CIT(A) has rightly appreciated the factual and legal matrix of the case and referred to the decisions in the assessee's own case for earlier assessment years. It is seen that the Co-ordinate Bench has already upheld the CIT(A)'s view in A.Ys. 2009-10 to 2011-12, thereby allowing similar deduction. The relevant para from the said decision is reproduced here - 14. We have heard the rival contentions and perused the material on record. We observed that the Calcutta High Court in the case of Reckitt Benckiser Healthcare (I) Ltd. reported in 56 taxmann.com 415 has he....
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....disallowance under section 40(a)(ia), and did not allow any deduction under section 80-IC on the enhanced profits resulting from the said disallowance. Accordingly, the total income was assessed after disallowing Rs. 19,34,672/- under section 40(a)(ia) and denying the corresponding deduction under section 80-IC on the said amount. 10.2 During the appellate proceedings it was brought to the notice of the CIT(A) that in the assessee's own case for earlier assessment years, i.e., A.Ys. 2008-09 to 2011-12, the identical issue had arisen. In those years, the then CIT(A) had allowed the assessee's claim and directed the Assessing Officer to grant deduction under section 80-IC on the disallowance made under section 40(a)(ia). The CIT(A) noted that the Co-ordinate Bench ITAT had passed consolidated orders for A.Ys. 2008-09 to 2010-11 in favour of the assessee, dismissing the Revenue's appeals and upholding the direction to allow the deduction under section 80-IC on the enhanced profits. Relying on the binding precedent of the Co-ordinate Bench in the assessee's own case (ITA No. 1366 & 1780/Ahd/2018 and ITA No.1225/Ahd/2018), the CIT(A) held that the disallowance under section 40(a)(ia) f....