TaxTMI 
TaxTMI 
2025 (8) TMI 619
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....t the Ld. CIT(A) erred in law and in the facts of the case in confirming the order of the AO in disallowing depreciation on goodwill of Rs. 5,53,12,761/-u/s 32 of the act. 3. The assessee, a private limited company, filed its return of income for the year under consideration i.e. Asst. Year 2017-18 on 10-10-2017 declaring a loss of Rs. 2,78,32,804/-. The return was processed under section 143(1) of the Act. The case was thereafter selected for scrutiny under CASS to examine the issue of large increase in share capital during the year. Thereafter, notice under section 143(2) of the Act was issued to the assessee on 20.8.2018. The contents of the said notice are reproduced hereunder: "Notice under section 143(2) of the Income Tax Act, 1961 Limited scrutiny ( Computer Aided Scrutiny Selection) Sir/Madam/M/s, This is for your kind information that the return of income filed by you for Assessment Year 2017-18 vide ack. No. 2374714611011017 on 10/10/2017 has been selected for Limited Scrutiny and following issue(s) have been identified for examination: i. Share capital/Capital 2. In this regard, an opportunity is being given to you to produce ....
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....entangle from issue of share capital and they form part of same transaction of take-over. Accordingly, the disallowance of\n account of incorrect depreciation claimed on self-claimed goodwill created by virtue of takeover of proprietorship concern is done in the hands of the assessee company. The same is discussed in ensuing paragraphs:" 5. The Assessing Officer, thereafter, proceeded to examine the issue of claim of depreciation and observed that the assessee company had purchased a proprietorship concern in the name and style of "M/s. Sagar Laxmi Seeds whose proprietor was Shri Dilipbhai Majumdar. He further noticed that even the share-holding of the assessee-company was also vested with the said Shri Dilipbhai Majumdar and his family members. He observed that the said sole proprietorship concern revalued its business at Rs. 23,66,00,000/- which included goodwill of Rs. 22,12,51,045/-. The said business was taken over by the assessee-company and in lieu of that, the shares of the assessee-company were issued to the proprietor of the proprietary concern Shri Dilipbhai Majumdar and his daughter. The assessee-company claimed depreciation on the said purchased goodwill. The AO, af....
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....id firm since over two decades. It was therefore, contended that in view of established brands and dealers' network, the said proprietorship concern commanded a premium in form of goodwill which was self -generated. That since the assessee company was to take over the said business in its running condition, a valuation report was obtained by said concern. Based on the valuation report, the assessee-company by an agreement dt. 1st April 2016 took over the said business. The consideration was fixed at Rs. 23.66 crores. Entire consideration of Rs. 236600000 was paid by way of issue of shares of the assessee-company. The consideration was determined based on the approved valuer's report dt. 01/03/2016. The valuers' report valued the business at Rs. 23.66 crores. The consideration inter alia included a sum of Rs. 221251045 towards goodwill of erstwhile proprietors' business. It was t6herefore, contended that the AO was not justified in disallowing the claim of depreciation on Goodwill purchased by the assessee. 7. The ld. CIT(A), however, observed that though, the case of the assessee was selected for limited scrutiny to examine the increase in capital and on examination, the AO, how....
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....l that in a scheme of amalgamation, if any capital asset is transferred by the Amalgamating Company to the Amalgamated Company, the actual cost of transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purpose of its own business. He further observed that the WDV (Written Down Value) of the assets acquired in the scheme of takeover in the hands of the assessee company would continue to be the same as it were in the accounts of the proprietorship concern. He further referred to the proviso to section 32(1) of the Act and observed that the aggregate deduction in respect of tangible and intangible assets in the case of succession shall not exceed the deduction available to the predecessor company before succession and will be calculated in the hands of the successor company at the rates as if the succession had not taken place, and that such deduction shall be apportioned between the predecessor and the successor in ratio of the number of days for which the assets were used by them. He, accordingly, held that depreciation to the assessee company on the assets a....
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....as introduction of the own income of the assessee, the source of which was not explained. The AO, having noted that it was not a case of increase in share capital by way of sale of shares by assessee company at exorbitant price or at a premium which was not justified and that it was not a fit case for making addition on account of increase in share capital, the Jurisdiction of the AO had ceased at that point. The issue of depreciation on goodwill was altogether different which was to be considered in terms of s. 32 of the Act. If the AO wanted to further examine the issue of claim of depreciation of Goodwill, in our view, he should have taken the permission to enlarge the scope of limited scrutiny from the Jurisdictional Commissioner as per the law. Merely because the issue of claim of depreciation was germane to the issue of purchase of assets/Goodwill, that itself, in our view, will not confer jurisdiction upon the AO to suo moto to enlarge his jurisdiction from limited scrutiny to full scrutiny and entitle him to make the addition by disallowing depreciation on goodwill, which issue was neither the subject nor within the scope of the limited scrutiny issue of increase in share c....
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.... (a) there exists credible material or information available on record for forming such view; (b) this reasonable view should not be based on mere suspicion, conjecture or unreliable source; and (c) there must be a direct nexus between the available material and formation of such view. 4. It is further clarified that in cases under 'Limited Scrutiny', the scrutiny assessment proceedings would initially be confined only to issues under 'Limited Scrutiny and questionnaires, enquiry, investigation etc. would be restricted to such issues. Only upon conversion of case to 'Complete Scrutiny' after following the procedure outlined above, the AO may examine the additional issues besides the issue(s) involved in 'Limited Scrutiny'. The AO shall also expeditiously intimate the taxpayer concerned regarding conducting 'Complete Scrutiny' in such cases. 5. It is also clarified that once a case has been converted to 'Complete Scrutiny, the AO can deal with any issue emerging from ongoing scrutiny proceedings notwithstanding the fact that the reason for such issue have not been included in the Note. 6. To ensure ....
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....PCIT for conversion of the limited scrutiny case to a complete scrutiny case and the order sheet was maintained very perfunctorily. This gave rise to a very strong suspicion of mala fide intentions. The Officer concerned has been placed under suspension. In view of discussion in the preceding paragraphs it is once again reiterated that the Assessing Officers should abide by the instructions of CBDT while completing limited scrutiny assessments and should be scrupulous about maintenance of note sheets in assessment folders. (Rakesh Gupta) ADG (V) HQ-I New Delhi" 10. Admittedly, in this case the ld. AO did not seek any permission of the competent authority for converting the limited scrutiny to a full scrutiny. As observed above, neither the AO nor the Ld. CIT(A) had jurisdiction to go into the said issue of depreciation on Goodwill as it was a case of limited scrutiny on the issue of increase in share capital, the scope of which could not have been enlarged to a new issue of claim of depreciation that too by further going into the issue of correctness of the valuation amount of the assets of the Proprietorship Concern and that too without joining or summoning th....
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....recognized as an intangible asset in accounting in the successor company. Having held so, the Ld. CIT(A) proceeded on wrong footing treating it as a case of amalgamation or merger of the companies. The finding of both the lower authorities on this issue is thus, not sustainable in law. 12. So far as the issue relating to the genuineness of the a valuation amount of the goodwill or the correctness of the valuation report is concerned, we note that both the lower authorities have not much deliberated upon it and proceeded with the observation that the exorbitant value of Goodwill has been mentioned in the valuation report. 13. The Ld. Counsel for the assessee has, in this respect, placed reliance upon on the decision of the hon'ble Gujarat High Court in the case of Ashwin Vanaspati Industries (255 ITR 26) to contend that the hon'ble High Court has held that where the enhanced cost was supported by valuation report by a registered value, it was incumbent upon the Income tax authority to dislodge the same by bringing adequate material on record in the form of departmental valuation report, because in absence of the same a technical expert's opinion (registered valuer's report) ca....