AI Drafter 
TaxTMI 
TaxTMI 
2025 (7) TMI 1288
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....r appeals are directed against the relief granted 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 u....
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....ate the appeal for Assessment Year 2012-13 as the lead year, inasmuch as it involves the primary issues in dispute, namely, disallowance of depreciation on goodwill and product registration 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. (....
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....bed depreciation, which was held to be available for set off against current year income. The Assessing Officer had restricted the set off by adopting a revised figure of brought forward depreciation, 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. T....
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....uses 6.3.1, 6.3.4 and 6.3.7. The assessee had computed goodwill only on the basis of clause 6.3.4 and ignored the other two mandatory clauses, which if considered, led to negative goodwill. The clause-wise computation as per AO is as 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,....
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....es not apply to a situation where the existence of goodwill is itself fictitious or manufactured. 5.12 The AO also considered various case laws relied upon by the assessee, including decisions in: * Toyo Engineering India Ltd. v. DCIT - Mumbai HC [TS-811-HC-2012] read with Mumbai ITAT [TS-665-ITAT-2014) * Triune Energy Services P. Ltd. v. DCIT - Delhi HC [65 TAXMANN.COM 288] * Areva 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 ....
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....cheme itself, in clause 6.3.1, specifically provided that any difference would be recognized as goodwill. In support of this, the assessee relied upon the ICAI Announcement titled "Disclosures in cases where a Court/Tribunal makes an order sanctioning an accounting treatment which is different from that prescribed by an Accounting Standard", which permits recognition of such items in accordance with the Court-approved scheme, subject to appropriate disclosure. 5.16 The assessee also submitted that 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 simi....
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....intangible business advantage. M/s RBIIPL was only a holding company, and RBHIPL was engaged in the business of OTC and personal health care products, as per the valuation report of M/s KPMG. 5.20 The DR stressed that none of the resources of RBHIPL-physical, commercial, or intellectual-could have been of any utility to RBIIPL, and the two companies were operating independently without any business integration or synergy. The DR submitted that the share exchange under the amalgamation was not backed by 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....
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....lus, including share premium, form part of shareholders' equity and not external liabilities, and hence, the method adopted by the AO to arrive at negative goodwill is not in accordance with standard accounting principles. The AR further pointed out that the scheme of arrangement approved by the Hon'ble High Court was not merely one of amalgamation but also included elements of demerger, and the entire scheme has been disclosed in detail in the financial statements of the assessee under Note No. 36, titled "Scheme 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 ....
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.... the sanctioned scheme specifically provides that the excess of investment value over the book value of share capital shall be debited to goodwill. Accordingly, the assessee recognized goodwill of Rs. 6,61,91,21,210/- in its books and claimed depreciation thereon under section 32(1)(ii). 5.28 The Assessing Officer, however, disallowed the said claim by recording an elaborate set of objections, which may be summarised under ten heads. We shall now address each of those findings and record our conclusions accordingly: (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 confin....
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....hts, brands, and distribution systems. (f) No goodwill arises under AS-14 when using pooling of interest method: While Accounting Standard-14 prescribes pooling of interest method for amalgamations among entities under common control, Clause 6.3.4 of the Court-sanctioned scheme specifically provides for recognition of goodwill where investment value exceeds share capital. ICAI's guidance note clarifies that Court-approved schemes prevail over accounting standards in such cases, subject to appropriate disclosure. In the present case, the goodwill was recorded in accordance with Clause 6.3.4 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 valuatio....
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.... satisfies the conditions prescribed under section 32(1)(ii). 5.29 The reliance placed by the AO on AS-26 and the decision in B.C. Srinivasa Setty is inapplicable in the present context. The accounting treatment adopted by the assessee is not only compliant with the scheme of amalgamation but also with the commercial substance of the transaction. The claim for depreciation is further fortified by the decision of the Hon'ble Supreme Court in Smifs Securities Ltd. (348 ITR 302), and the Gujarat High Court in Zydus Wellness Ltd. [(2017) 87 taxmann.com 82 (Guj.)]. 5.30 We also find no merit in the plea of the learned Departmental Representative that the matter be 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....
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....ccount of brought-forward depreciation was not sustainable and directed its deletion. For Assessment Year 2022-23, the CIT(A) reiterated the same findings and reasoning. He held that the set-off of unabsorbed depreciation of Rs. 1,26,54,00,107/-, being a continuation of the depreciation already allowed in earlier years, could not be disallowed merely because the AO disagreed with the claim in those years. The CIT(A) categorically held that the disallowance was made by the AO without appreciation of the binding nature of earlier appellate orders and without proper factual verification. Consequently, the CIT(A) deleted the said disallowance in full. 6.3 With repetition, we conclude 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 assessme....
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....he absence of registration in those countries, the assessee would not be legally permitted to sell its products therein. The assessee clarified that the registration expenses did not result in acquisition of any proprietary or enduring asset and were merely incurred to comply with statutory norms to facilitate sales. The assessee placed reliance on the decision of the Coordinate Bench of the Ahmedabad ITAT in the case of Cadila Healthcare Ltd. (ITA No. 3140/Ahd/2010), where it was held that product registration expenditure is allowable as revenue expenditure. The assessee also relied on the affirmation of the said decision by the Hon'ble Gujarat High Court in CIT v. Cadila Healthcare Ltd. (Tax 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. ....
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....s issue is fully covered in favour of the assessee by a series of orders passed by the Co-ordinate Bench in assessee's own case for earlier years. It was submitted that the CIT(A) had consistently allowed such expenditure for A.Ys. 2008- 09 to 2011-12, and the Department's appeals against the CIT(A)'s orders for A.Ys. 2008-09 to 2010-11 were dismissed by the Coordinate Bench. The AR placed on record copies of the Tribunal's orders in ITA Nos. 3098/Ahd/2013, 126/Ahd/2014, and 1272, 1547, 1366 & 1780/Ahd/2015, wherein identical disallowances were deleted. In these decisions, the Co-ordinate Bench accepted the assessee's submission that product registration is a regulatory requirement imposed by foreign 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 re....
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.... 81,22,91,862/- 33,07,09,509/- 48,15,82,353/- 8.2 The facts are such that the assessee filed a revised return declaring a lower income. In the revised computation, the assessee enhanced its claim for deduction under section 80-IC in respect of the profits of its Baddi Unit (situated in the tax-exempt notified area of Himachal Pradesh). The AO noted that in the original return, the deduction claimed under section 80- IC was significantly lower. The AO observed that the assessee did not maintain independent books of accounts for each unit or division. Instead, consolidated books were maintained at the corporate level, from which the unit-wise results were extracted based on internal workings and management estimates. The 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....
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....upported by documentary evidence, arguing that the entire profits derived from the eligible industrial undertaking at Baddi were fully eligible for deduction under section 80-IC. The core contention raised by the assessee was that the disallowance made by the Assessing Officer (AO) lacked any sound basis and was not in consonance with statutory provisions or binding judicial precedents. The CIT(A) observed that the issue regarding the allowability of deduction under section 80-IC in respect of the Baddi unit had been a matter of dispute in earlier assessment years as well. Specifically, for A.Ys. 2008-09 to 2011-12, the CIT(A) had, after detailed appreciation of facts and law, already allowed the assessee's claim in full. These appellate 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 Dep....
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....s passed in the assessee's own case for earlier assessment years, deleted the disallowance. It was noted that in A.Ys. 2008-09 to 2010- 11, the CIT(A) had accepted the assessee's explanation and allowed full deduction under section 80-IC. The Revenue's appeals against such relief were dismissed by the Coordinate Bench in a common order dated 06.09.2019 in ITA Nos. 3098/Ahd/2013, 126/Ahd/2014, 1272/Ahd/2015, 1547/Ahd/2015, 1366/Ahd/2015 & 1780/Ahd/2015. Therein, the Coordinate Bench had observed that there was no assertion by the Revenue that the impugned expenses were incurred wholly and exclusively for the purposes of the head office, or that the Baddi Unit was devoid of independent operations. On the contrary, the assessee had furnished 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 un....
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.... fresh material or distinguishing facts that would warrant a deviation from the settled position adopted in the preceding years. The alleged central expenses, in absence of direct or proximate nexus with the eligible unit, cannot be forcibly loaded upon its profit merely because such expenses were incurred at a corporate level. Respectfully following the binding coordinate bench decision in assessee's own case and maintaining judicial consistency, we do not find any infirmity in the orders of the learned CIT(A) allowing the full deduction under section 80-IC as claimed. We accordingly uphold the orders of the CIT(A) for both the assessment years under appeal. 9. Grounds relating to Disallowance of Deduction under Section 80- IC in Respect of Scrap 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. 2012-1....
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....e scrap income was derived from the industrial undertaking and eligible for deduction under section 80-IC. 9.3 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. 1366& 1780/Ahd/2015. 9.4 We have carefully considered the rival submissions, perused the assessment order, the appellate orders passed by the learned CIT(A) for both years, and the material placed before us including judicial precedents relied upon by the parties. The issue in dispute pertains to the allowability of deduction under section 80-IC on income arising from sale of scrap generated in the eligible unit at Baddi. 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 a....
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....as to why deduction under section 80- IC should not be disallowed on the disallowance of Rs. 19,34,672/- made under section 40(a)(ia). In response, the assessee vide its letter dated 12.02.2016 submitted that the disallowance made under section 40(a)(ia) pertains to the business expenditure incurred by the Baddi unit and, therefore, forms part of the business profits of the eligible undertaking. It was submitted that deduction under section 80-IC is available on the increased profits of the eligible unit, including the disallowance made under section 40(a)(ia), which is only a statutory adjustment. However, the Assessing Officer did not accept the assessee's contentions and restricted the deduction under section 80-IC to the amount of profits computed before making the 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) tha....