TaxTMI 
TaxTMI 
2025 (7) TMI 1918
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.... (in short 'the Act'). Appeal for AY 2019-20 is arising out of assessment order passed u/s 143(3), being year of search. Further, appeal of AY 2020- 21 is also arising out of assessment order passed u/s 143(3). Since the issues involved in all the years under consideration are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by way of this consolidated order. 2. The assessee has raised the following grounds of appeal in all the impugned assessment years: For AY 2016-17 Ground 1 (a) - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowances made in the order u/s 153A in utter disregard of the express provisions of the Act since no incriminating material has been found during the course of search and seizure carried out us 132 of the Act. Ground 1(b) - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in not considering the cardinal principle of law that the scope of assessment u/s 153A in respect of completed/unabated assessment is limited only t....
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....mputing book profit u/s 115JB of the Act. For AY 2017-18 Ground 1 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of the claim of depreciation on goodwill and/ or other intangible assets in computing total income for non-specified business and specified business under the normal provisions of the Act. Ground 2 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of deduction claimed u/s. 35AD of the Act. Ground 3 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the additions of undisclosed income u/s. 69A on account of alleged inflated capital expenditure in computing total income under the normal provisions of the Act. Ground 4 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of deduction claimed u/s. 35AD on alleged inflated capital expenditure. Ground 5 - That on the fac....
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....d in confirming the denial of the claim of depreciation on goodwill and/or other intangible assets while computing total income for non-specified business and specified business under the normal provisions of the Act. Ground 2 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the additions of undisclosed income u/s. 69A on account of alleged inflated capital expenditure in computing total income under the normal provisions of the Act. Ground 3 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of depreciation on alleged inflated capital expenditure under the normal provisions of the Act. Ground 4 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of stock difference under the normal provisions of the Act. Ground 4.1 - That on the facts and in the circumstances of the case, and without prejudice to Ground No. 4.0 taken herein above, necessary directions may please be given to the AO to inc....
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....pak Fertilizers and Petrochemicals Corporation Limited (DFPCL), M/s SCM Fertichem Private Limited (SCMFPL) and M/s Smartchem Technologies Limited (STL), {now Mahadhan Agritech Limited ("MAL") ('the assessee')} have entered into a scheme of arrangement to transfer Technical Ammonium Nitrate (TAN) and fertilizer business verticals to its wholly owned subsidiaries and filed a petition before the NCLT, Mumbai bench. The scheme was sanctioned by NCLT, Mumbai by an order dated 30.03.2017, wherein the appointed date was 01.01.2015. The effective date of the scheme was 01.05.2017. 4. For the periods under consideration, the assessee was engaged in the business of manufacturing and trading of ammonium-nitrate and weak nitric acid. It has its manufacturing facility at Srikakulam in the state of Andhra Pradesh. DFPCL has three prominent verticals namely (i) Industrial Chemicals ("IC"), (ii) Technical Ammonium Nitrate ("TAN") and (iii) Fertilizers. While TAN and fertilizers business have inter-linkages in the form of use of common raw materials and similarity of select manufacturing processes, the IC business is relatively independent of such process commonalities. 5. A Scheme of....
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.... on 01.01.2020. In response to the notice u/s 153A of the Act, the assessee filed return of income on 30.01.2020 declaring the same income as computed in the revised return of income filed on 28.02.2018. During the course of assessment proceedings, Assessing Officer questioned the claim of the depreciation on goodwill and other intangibles which arose pursuant to the scheme of arrangement. Further, based on certain Whatsapp chats found during the course of search and statements on oath, Ld. AO alleged that assessee has inflated capital expenditure during the year. 11. Following additions/disallowances have been made by the ld. AO :- Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.387,99,30,797/- b) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.3,08,64,221/- c) Disallowance of claim of donation of Rs.1,04,37,000/- d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs. 1,99,316/- Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangible....
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....,35,196/-. Further, during the course of assessment proceedings, assessee filed revised computation of income, wherein certain mistakes were rectified. The said revised computation of income was accepted by Ld. AO. On conclusion of assessment proceedings, Ld. AO passed assessment order u/s 153A of the Act on 26.07.2022, thereby assessing total income at Rs.482,84,68,667/- under normal provisions of the Act and book profit at Rs. 134,66, 16,621/- under MAT provisions. 15. Following additions/disallowances have been made by the ld. AO :-: Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs. 133,02,99,940/- while calculating income from non-specified business b) Disallowance of claim of depreciation on goodwill and other intangibles of Rs. 85,21,61,133/- while calculating income from specified business c) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.585,73,130/- d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.71,12,480/- Adjustments to book profits under MAT provisions a) Disallowance of claim of d....
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....f the Act and book profit at Rs. 64,29,67,192/- under MAT provisions. The revised computation furnished by the assessee was taken cognizance of by the ld. CIT (A). 19. Following additions/disallowances have been made by the ld. AO :- Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs. 74,82,93,717/- while calculating income from non-specified business b) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.47,93,40,637/- while calculating income from specified business. c) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.4,88,825/-. d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs. 62, 17,114/- Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.47,54,51,920/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs. 62,90,901/- 20. Aggrieved by the above-mentioned additions/disallowances, the assessee filed appeal before the ld. CIT(A) and challenged the a....
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....that with the alternate structure of splitting the company in different listed companies rather than opting the scheme of arrangement, tax benefits will be lost. (ii) With respect to inflated capital expenditure, Ld. AO stated that certain whatsapp chats supported by modus operandi explained in recorded statements on oath established that assessee was regularly engaged in inflating the capital expenditure recorded in their books of account. Issue No. 2 - Depreciation on goodwill/intangibles (i) On conjoint reading of content of seized email of Mr. Debasish Benarjee and statement on oath, Ld. AO alleged that the scheme of arrangement was a colorable device to evade payment of taxes. (ii) Conditions of demerger as mentioned in Sec. 2(19AA) is not complied. As per provisions of Section 2(19AA), assets are to be recorded in the books of the resulting company at the written down value of transferred assets appearing in the books of demerged company. (iii) As per Explanation 7A to Sec. 43(1) of the Act, where, in a scheme of demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is....
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....s added to the income of assessee u/s 69A of the Act. Issue No. 4 - Depreciation on alleged inflated capital expenditure (i) As discussed in Issue 3 above, Ld. AO held that assessee has recorded inflated capital expenditure incurred with respect to transactions entered into with Ray and Onshore. Further, as the assessee has claimed depreciation on such inflated capital expenditure, the same is now disallowed Issue No. 5 - Donation expenses (i) Assessee had submitted that donation expenses were paid by DFPCL and was debited in Profit and loss account of assessee due to the scheme of arrangement. DFPCL had disallowed the donation expenses in its computation. Thus, assessee had not disallowed it again. However, as donation expenses pertains to assessee's part and has not being incurred wholly and exclusively for the purpose of business, the same is disallowed u/s 37(1) of the Act. Issue No. 6 - Disallowance u/s 115JB on goodwill/ intangibles and inflated capital expenditure (i) As claim of depreciation on goodwill and intangibles were disallowed while calculating income as per normal provisions for various reasons discussed in ....
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.... Debashish Banerjee emphasized on availing tax benefit by way of splitting verticals of DFPCL to unlisted subsidiary company. (iii) Further, various statements on oath were recorded u/s 132(4) and the concerned persons avoided explaining the real intent of the scheme. Alleged inflated capital expenditure (i) WhatsApp messages from mobile of Mr. Pandurang Langde (President Projects) confirmed that he was indulged in handling cash transactions for Deepak group. Further, the modus operandi of cash generation was explained in detail. (ii). Further, statements on oath recorded of Mr. Mahesh Agrahara, Mr. Naresh Mehta and Mr. Sailesh Mehta confirmed the methods of cash generation. Thus, the search action revealed that assessee inflated capital expenditure in its books of accounts and received cash back. Issue No. 2 - Depreciation on goodwill/intangibles (i) DFPCL has adopted two stage of restructuring just to claim huge advantage of depreciation on goodwill/intangibles (ii) The valuation reports obtained from Registered Valuers were instrumental in the process of demerger. He noted that there was a wide gap between the projec....
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....in hands of owner of cash. During the course of search and the statements on oath recorded highlighted that assessee is owner of entire cash transactions. Thus, provisions of Section 69A applies in case of assessee. (v) Mr. Pandurang Langde, in his statement has confirmed that this practice of cash generation is going on since last 2-3 years and hence, despite whatsapp messages pertaining only to a particular period, additions can be made for all years under consideration. Issue No. 4 - Depreciation on alleged inflated capital expenditure (i) The addition on account of cash generation by inflating capital expenditure has been confirmed while deciding Issue 3 above. Hence, depreciation on the alleged inflated capital expenditure is also disallowed. Issue No. 5 - Donation expenses (i) It is clear that donation expenses pertain to assessee. The donation is not incurred wholly and exclusively incurred for the business purpose and hence, the same is disallowed. Issue No. 6 - Disallowance u/s 115JB on goodwill/ intangibles and inflated capital expenditure (i) As per Clause (iia) of Explanation 1 to Sec. 115JB, book profits ne....
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....143(2) was issued initiating assessment proceedings and the due date for issuing notice u/s 143(2) expired on 30.09.2018. The ld. AR submitted that if the notice u/s 143(2) has not been issued for an assessment year within the prescribed time limit, the same shall be considered as unabated assessment. (iii) Therefore, AY 2016-17 is an unabated assessment year since as on the date of search i.e. 18.11.2018, the prescribed time limit to issue notice u/s 143(2) had already passed. Reliance was placed on the CBDT Circular No. 549 dated 31.10.1989 and on the following judicial pronouncements to support the assessee's contentions- - Chintels India Ltd. vs. DCIT (2017) 84 taxmann.com 57 (Delhi HC) - PCIT vs. E-City Projects Lucknow (P) Ltd. (2022) 143 taxmann.com 423 (Orissa HC) - Jai Lokenath Oil Extractions (P) Ltd. vs. DCIT (2017) 83 taxmann.com 369 (Kol. ITAT) (iv) The Ld. AR further relied in the case of PCIT Vs. Abhisar Buildwell (P) Ltd. (2023) 149 taxmann.com 399 (SC) wherein it is held that in case of completed/unabated assessments, no disallowance/addition can be made in the order u/s 153A in the absence of any 'incriminating&....
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....me is to have an efficient business structure, and the tax aids are merely incidental in nature. (xi) In view of the above, it was submitted that in absence of any incriminating material on record with respect to the depreciation claimed on goodwill and intangible assets, no disallowance can be made in order passed under section 153A of the Act. (xii) Regarding the addition made u/s 69A on account of alleged inflated capital expenditure, the ld. AR submitted that AY 2016-17 is an unabated assessment year and any addition made without any incriminating material is bad in law. Further, with specific reference to the WhatsApp messages relied by the ld. AO in the order u/s 153A, the ld. AR submitted that the chats do not pertain to the year under consideration and any addition made in the absence of any incriminating material qua the assessment year under consideration is bad in law. Reliance is placed on the following decisions wherein it has been held that incriminating material must pertain to the assessment year under consideration- - CIT v. Sinhgad Technical Education Society (2017) 84 taxmann.com, 290 (SC) - Sunny Jacob Jewellers Gold Hyper Mar....
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.... ● DFPCL had multiple large business verticals, three prominent verticals being Industrial Chemicals (IC), Technical Ammonium Nitrate (TAN) and Fertilisers (Fertiliser). TAN and Fertiliser business verticals have interlinkages in the form of use of common raw materials and similarity in select manufacturing processes ● Internationally, there are instances of TAN and Fertiliser businesses, being housed together as select production capacities are interchangeable, and TAN can also be potentially used as a fertilizer. The complementary seasonality of the two businesses also helps in maintaining steady level of operations. ● Each of the varied businesses being carried on by DFPCL (either by itself or through strategic investments in subsidiaries) including TAN, Fertiliser, IC, Real Estate and Power have potential for sustainable profitable growth and are also capable of attracting a different set of investors, strategic partners and know-how providers to scale up the size and operations. ● Additionally, in order to attract potential investors and strategic partners in a business of their liking, TAN and Fertilizer division had been ....
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....(Yara') on 28.01.2008 to constitute a joint venture vehicle with a primary purpose to carry on TAN and fertilizer business activities. However, subsequently, the deal fell off. Agreement entered with Yara dated 28.01.2008 was submitted before the Bench during the course of hearing. 30. Further, DFPCL had engaged Morgan Stanley India Company Private Limited for advice and services, inter-alia, for raising of capital for expansion of Ammonia and TAN product business, vide agreement dated 17.07.2020. Thereafter, Morgan Stanley worked on the assignment and approached various potential investors. It also submitted status update reports on regular basis wherein the list of potential investors and the details of progress made was mentioned. Agreement entered with Morgan Stanley dated 17.06.2020 was submitted before the Bench during the course of hearing. 31. In view of the above, it was submitted that the group intended to bring in future investors into a particular line of business. Thus, the restructuring scheme was entered into for commercial reasons. 32. The ld. AR submitted that some of the outside investors were interested only in the TAN business of the Group as agains....
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....ntioned in clause 32.4 shall be recognized as Goodwill in the books of Smartchem. In the event the result is negative, it shall be credited as Capital Reserve in the books of account of Smartchem. 32.6 Smartchem shall record in its books of account, all transactions of the Demerged Undertakings in respect of assets, liabilities, income and expenses, from Appointed Date to the Effective Date. 32.7 ........................ 32.8 The intangible assets recorded, as aforesaid shall be amortized in the books of Smartchem over its useful life. Goodwill (if Any) recorded on demerge, as aforesaid shall be amortized to the income on a systematic basis not exceeding 20 years and as per criteria given in accounting standards, which shall be reviewed by the board of directors periodically." 35. The ld. AR emphasized that from the above, it is clear that even the accounting for the demerger was approved by the NCLT in its order dated 30.03.2017. Therefore, the question of recognition of any asset in books of account arising from the demerger does not arise. 36. It was further submitted that para 23.12 of the scheme of arrangement specifically provides for allowanc....
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....esponse was received from Income Tax Department, resulting in deemed approval under the Companies Act, 2013. The said fact is also mentioned in the order of the NCLT dated 30.03.2017. Relevant extract of the order is reproduced below: " ... 8(e) As per existing practice, the Petitioner Companies are required to serve Notice for Scheme of Amalgamation to the Income Tax Department for their comments. It appears that the company vide separate letters dated 2nd February 2017 has served a copy company scheme petition no. 88 to 90 along with relevant orders etc., Further, this Directorate has also issued reminder letters to the Income Tax Department dated on 14.03.2017. However, as on date, there is no response from income Tax Department." 43. Regional Director (RD) in the report dated 14.03.2017 filed before the NCLT at Para IV(f) has requested that tax implications, if any, arising out of the scheme shall be subject to the final decision of the income tax authorities. In the order, the NCLT has nowhere acceded to the request of the RD. It has only asked the assessee to give an undertaking that it will comply with all the provisions of the Act in giving effect to the scheme ....
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....t, 1956 (now under Sections 230-232 of the Companies Act, 2013). The manner and methodology of the transaction including its valuation were determined in accordance with accepted accounting and valuation principles. 47. In a demerger, all assets are typically valued, often bringing to light self-generated assets that were previously unrecorded but already embedded in the transferor company's existing assets. This results in unlocking of potential intangible assets. Recognizing such assets is a widely accepted in corporate reorganizations. B. Claim of depreciation on goodwill and other intangibles is in accordance with the Scheme and tax benefit is merely incidental to the restructuring 48. The ld. AR submitted that even if there was direct demerger from DFPCL to the assessee company, identical tax result would have been generated. Such direct demerger would have resulted in the assessee company getting listed and would have defeated the objective of this restructuring, which was to bring in the private equity investors having interest in the demerged business. 49. In terms of the rationale, para 23.12 & para 32 of Part IV of the NCLT approved scheme of arrangement, ....
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....s not allowed to discharge the purchase consideration through payment of cash. E. Explanation 3 and 7A to Section 43(1) and sixth proviso of Section 32(1) invoked by the ld. AO are not applicable to the assessee's case 53. The ld. AR submitted that Explanation 3 to Sec. 43(1) is not applicable to the case of the assessee since goodwill and intangible assets arising pursuant to the scheme of arrangement were never recorded in the books of the transferor company. Reliance was placed, inter-alia, on the decisions below: - I & B Seeds (P.) Ltd. v. DCIT (ITA No. 3415/Bang/2018) - Padmini Products (P.) Ltd. v. DCIT [2020] 121 taxmann.com 237 (Kar. HC) 54. On similar lines Explanation 7A to Sec. 43(1) is also not applicable in the instant case. Towards this, reliance was placed, on the below decisions: - Aricent Technologies (Holdings) Ltd. v. DCIT (2019) 109 taxmann.com 47 (Delhi ITAT) - A.P. Paper Mills Ltd. vs. ACIT (2010) 33 DTR 148 (Hyd. ITAT) 55. Further, the sixth proviso to Sec. 32(1) does not apply for assets on which depreciation has never been claimed by the transferor company towards which reliance was placed on the following....
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....e doubted upon. 59. To support the above, the ld. AR pointed out the decision of the Delhi ITAT in case of DCIT vs. M/s Global Fairs & Media Pvt. Ltd. (ITA No. 4317/Del/2017) wherein it was held that valuation of goodwill done on the basis of DCF method cannot be rejected merely due to gap between projected and actual figures of revenue since valuation is intrinsically based on projections which can be effected by various factors and hence, it should be left to the consideration and wisdom of experts in the field on accountancy. Further, reliance was also placed on the below decisions where similar principles were upheld: - Akash Ceramics (P.) Ltd. vs. ITO [2024] 168 taxmann.com 407 (Guj.) - PCIT v. Cinestaan Entertainment Pvt Ltd (ITA 1007/2019 & CM Appl. 54134/2019) (Delhi HC) - CIT vs. VVS Hotels (P.) Ltd. [2020] 122 taxmann.com 106 (Mad.) 60. The ld. AR submitted that in the instant case the share price of SCM Fertichem Limited and Smartchem Technologies Limited, which were valued by independent valuers were coming approximately similar and accordingly the shares were issued in the ratio of 1:1. 61. It was pointed out that these valuati....
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....amalgamation was accounted under 'pooling of interest method'. However, in the case of the assessee, demerger was recorded as per 'purchase method'. In fact, the ITAT itself at Para 8, Pg. 8 has held that consideration paid in excess of net assets acquired is to be recognized as Goodwill. 67. It was also pointed out that the decision of Dosti Realty Ltd. (supra) has later been distinguished by the Mumbai ITAT in case of Dow Chemical International (P.) Ltd. v. DCIT (ITA No. 1200/Mum/2023)wherein it has been held that in case of Dosti Realty Ltd. 'pooling of interest' method has been followed to account for amalgamation as compared to 'purchase method' adopted in the instant case. Similarly, the decision of United Breweries (Supra) has also been distinguished. 68. It was also submitted that since the scheme is approved by the shareholders and NCLT, the decision of Killick Nixon Ltd Ltd. [2012] 20 taxmann.com 703 (Bom. HC) does not apply to the present case. In case of Killick Nixon, the issue involved circular share transactions, i.e. buying at inflated prices and selling at nominal values to generate artificial capital losses and offset against ....
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....etween the parties, nor is there any mention of cash receipt or cash payment, etc. in the said messages. 76. The WhatsApp messages do not mention the nature of the transactions with these parties; they merely reflect numbers listed against their names. Such references do not indicate that cash was received/paid from/to the contractors, as the numbers could pertain to various matters such as bills, pending contracts, new agreements, etc. 77. Therefore, in the absence of any specific incriminating evidence indicating that the assessee company is the owner of any money, bullion, jewellery or other valuable article the provisions of Section 69A cannot be invoked. B. Without prejudice, WhatsApp chats cannot be considered as "evidence" in the absence of certificate under section 65B of Indian Evidence Act, 1872. 78. The ld. AR also submitted on a without prejudice basis that the WhatsApp messages found during the course of search were not authenticated in accordance with section 65B of the Indian Evidence Act, 1872 and hence is not even admissible as evidence. The ld. AR placed reliance on the below decisions to support his contentions- - Anwar PV v. B.K. Basheer (Ci....
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....tained unless AO possesses other corroborative evidence. Reliance is placed on the following decisions - - PCIT v. Rohit Karan Jain [2025] 173 taxmann.com 184 (Gauhati HC) - Shree Ganesh Trading Co. v. CIT [2013] 30 taxmann.com 170 (Jhar. HC) - Kailashben Manarlal Choksi v. CIT [2008] 174 Taxmann 466 (Guj. HC) 84. Further, the retraction affidavit filed by all individuals contained just and proper reasons of retraction and were not retracted in a cryptic manner (refer page no. 313 to 329 of paper book filed for AY 2016-17). D. No money, bullion, jewellery or other valuable article was found at the premises of the assessee and hence, addition under Section 69A 85. It was further submitted that Section 69A is not applicable to the case of the assessee. He pointed out that the invocation of Section 69A requires the cumulative fulfilment of three essential conditions. i.e. - The assessee should be found to be the owner of the money; - The money should not be recorded in the books of accounts of the assessee; - Assessee is not able to offer any explanation about the nature and source of the money, and it is not recorded 8....
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....n.com 235 (Bom.) wherein the Hon'ble High Court deleted the disallowance of depreciation on windmill on the contention that there is no documentary evidence on record to substantiate that the assessee has paid excess money for purchase of windmill which has been returned back to the assessee. 94. He further submitted that no addition can be made on the basis of conjectures and surmises. Applying a certain percentage to the total amount debited in the name of the party cannot be the basis for any addition. Thus, the addition made on this aspect suffers from infirmity and ought to be deleted. 95. On issue no. 5 relating to disallowance of donation expense in AY 2016-17, the following contentions were put forth: 96. The ld. AR submitted that in the revised financial statements prepared to give effect to the approved scheme of arrangement, the assessee, inter-alia, has recorded donations of Rs. 1,04,37,000/- attributable to the demerged undertaking under the head 'Interdivisional Overheads' which is clubbed and grouped in Note - 26 [Other Expenses] of the revised audited accounts. In the audited accounts of DFPCL, the amount transferred to the assessee towards dona....
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....n the accounts of the demerged company. 102. Further, Section 115JB provides that every assessee, being a company, shall for the purposes of this section prepare its profit and loss account in accordance with the provisions of Parts II & III of Schedule VI to the Companies Act, 1956 and the AO has to accept the authenticity of accounts prepared in accordance with the provisions of the Companies Act. 103. Reliance was placed on various judicial precedents listed below wherein it is held that the ld. AO has limited power to make any modification to book profits as provided in Explanations to Section 115JB - - Apollo Tyres Limited vs. CIT (2002) 255 ITR 273 (SC) - Mahindra & Mahindra Ltd. vs. CIT (ITA No. 416 of 2003) (Bom) - PCIT vs. Varun Corporation Ltd. (2023) 154 taxmann.com 548 (Bom) - CIT vs. Nuclear Power Corporation of India Ltd. (2021) 132 taxmann.com 100 (Bom)(HC). SLP dismissed by the Hon'ble Supreme Court 104. Therefore, the ld. AR submitted that in view of the limited powers of the AO to modify the book profits, the additions made by him are bad in law and ought to be deleted. 105. On issue no. 7 - Disallowance of deduc....
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....es "production of fertilizer in India". Therefore, both NPK Fertiliser unit and ANP Fertiliser unit are 'specified business' of the assessee. (iv) The aforesaid view is supported by the tax commentary 'The Law and Practice of Income Tax' of Eminent Tax Counsel & Practitioner, Kanga & Palkhivala wherein it is stated that Sec. 35AD(8)(c) while defining "specified business" in sub-clause (i) to (v) starts with the words "setting up and operating", "laying and operating" "building and operating", "developing and operating". But sub-clause (viii) merely reads "for the production of fertilisers in India".The commentary states that "this suggests that the intention of Parliament was to grant wider relief to the fertiliser industry, and that the deduction under section 35AD is permissible so long as the capital expenditure has been incurred "wholly and exclusively" for the purpose of the fertiliser business." (vi) In view of the above, ld. AR respectfully submitted that the assessee has, at all relevant times, utilised the bagging and conveyor belt facilities wholly and exclusively for the production of fertilisers in India i.e. for production of ....
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....essee was in the process of setting up two new bagging units at the existing ANP fertilisers plant, and no deduction under Section 35AD was claimed in the year of capitalization of the related expenditure. This demonstrates that the assessee had no intention of availing any undue tax benefit. Accordingly, the alleged occasional use of bagging unit no. 5 of the NPK fertilisers plant cannot be construed as use of the asset for a non-specified business. (v) In view of the above, it was submitted that an occasional use of an asset for another specified business does not result in violation of provisions of Section 35AD(7B). IV. Conditions specified for Section 35AD(7B) is not satisfied as the condition of "claimed and allowed" is not fulfilled. (i) Deduction u/s 35AD is being claimed for the first time in the instant assessment year. For invoking the provision of Sec. 35AD(7A) & (7B), the basic condition of "claimed and allowed" is not fulfilled in this year as before allowing such claim, the claim itself is disallowed by the Ld. AO in his order u/s 153A. (ii) Without prejudice to the above submissions, a plain reading of Section 35AD(7B) indicates t....
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....hat any asset in respect of which a deduction is claimed and allowed under section 35AD, shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed. If any asset on which a deduction under section 35AD has been allowed, is demolished, destroyed, discarded or transferred, the sum received or receivable for the same is chargeable to tax under clause (vii) of section 28. This does not take into account a case where asset on which deduction under section 35AD has been claimed is used for any purpose other than the specified business by way of a mode other than that specified above. Accordingly, it is proposed to insert sub-section (7B) to provide that if such asset is used for any purpose other than the specified business, the total amount of deduction so claimed and allowed in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the assessee chargeable under the head "Profits and gains of business o....
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....70% of the total inventory of 954.13 metric tonnes, underscores the practical challenges of real-time inventory tracking in high-volume operations. Despite 99.30% of the inventory being accurately accounted for, the ld. AO made an unwarranted addition without appreciating the entire context of the matter. 114. Without prejudice to the above, the excess stock is shown in the credit side of the profit & loss A/c either as sales or closing stock of inventory. In both the scenarios the excess stock has been duly offered to tax. The action of the AO considering such minor difference in stock as cash sales would tantamount to double taxation of the same stock. 115. The Ld. AO has applied an ad-hoc rate of Rs. 17,000/- per tonne while computing disallowance on account of stock difference which is totally unjustified since ad-hoc rates/disallowance cannot be made by the Revenue. 116. Without prejudice to the above, any addition, if at all warranted, should be restricted to the net difference of 6.68 MT (i.e., 954.13 MT - 947.45 MT), amounting to Rs. 1,13,560 (6.68 MT * Rs. 17,000). 117. Further, it was prayed that the amount added should be allowed as the opening stock for Asse....
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.... - Redington (India) Ltd. vs. ACIT [2017] 392 ITR 633 (Mad.) - Kamat Hotels (India) Ltd. vs. DCIT [ITA No. 7083(Mum) of 2014] - PCIT vs. IL & FS Energy Development Company Ltd. [2017] 297 CTR 452 (Del. HC) 125. Before us ld. DR on each and every additions/disallowances qua each of the issues has referred to various observations of the ld. AO and the ld. CIT(A) wherein the issue has been decided against the assessee. His arguments shall be dealt by deciding each and every issue. 126. Ld. CIT DR has summarized her entire arguments in her written submissions which for the same of ready reference is reproduced hereunder :- 1 The above appeals are filed by the assessee company against the orders of the CIT(A) confirming the various additions/ disallowances made by the AO in the orders passed u/s 143(3) rwis 153A of the IT Act, 1961 in the above-mentioned AYs. As directed by the Bench, written submissions on the various grounds of appeals are discussed AY-wise in the ensuing paragraphs 2. AY 2015-16 2.1 Ground of appeal no 10 (sub-ground nos 1(a) to 1(e)) is that since it is a completed/unabated assessment and disallowances have been ....
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....tutional investors Further, the said arrangement as compared to alternate structure of splitting DFPCL also offered the tax benefit to DFPCL group entities. This tax benefit by way of depreciation on intangibles has been analysed in detail by the CIT(A) in the table given on pages 17 & 18 of his appellate order. While the TAN business in DFPCL was highly profitable, when the said unit was transferred to the assessee company, the profits were wiped out from its books due to the claim of depreciation on intangibles. The tax benefit to assessee company for AYs 2015-16 to 2022-23 comes to Rs 518 crores. Thus, it was found during the search that the process of slump sale and demerger for transfer of TAN business and fertilizer business from DFPCL to the assessee company served twin goals of conversion of taxable profits to loss while retaining the real control in the hands of DFPCL 2.4 The above-mentioned scheme was confronted to Shri Shailesh Mehta while recording his statement u/s 132(4) of the Act and he was asked to explain the rationale behind the two stages of transfer of business ie slump sale and demerger. He provided evasive replies that the main purpose of the scheme ....
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....ed u/s 132(4) of the Act that the assessee was in the practice of inflating capital expenses and receiving cash back from vendors which was not recorded in its regular books. The A.O has reproduced relevant extracts from the statements of Shri Pandurang R Landge, Shri Shailesh Mehta, Promoter and Group CMD, Shri Mahesh Kumar Agrahara, Associate Vice-President of Projects, Shri Deepak Desai, consultant of DFPCL and Shri Naresh Mehta, relative of Shri Shailesh Mehta acting as conduit in receipt of cash from vendors. All the above persons have separately confirmed the generation of cash by booking inflated capital expenditure in the books of the assessee. They have confirmed the names of the vendors, the modus operandi, the use of code words in their communication and the role of the others in the process. Shri Landge has confirmed that the said practice has been followed since the last 2 to 3 years. All the above persons have confirmed that they carry out the cash transactions on the instructions of Shri Shailesh Mehta. Shri Shailesh Mehta in his statement has confirmed that the contents of the statements given by the above- mentioned persons are correct. The relevant paras of the CI....
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.... normal provisions of the Act. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant para of the assessment order wherein the A.O has given his analysis and findings is para 7. The relevant para of the CIT(A)'s order which contain his adjudication is para 13.4. 2.12 Ground of appeal no 5.0 is on the merits of disallowance of notional interest on investments made in subsidiary company while computing income under normal provisions of the Act. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant para of the assessment order wherein the A.O has given his analysis and findings is para 8. The relevant para of the CIT(A)'s order which contain his adjudication is para 15.3. 2.13 Ground of appeal no 6.0 is on the addition of depreciation on goodwill while computing book profit u/s 115JB of the Act. Relying on the order of the CIT(A), the relevant para of the CIT(A)'s order which contain his adjudication is para 16.3.4 wherein it is stated that only allowable depreciation needs to be adjusted for computing book profit. S....
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....ablished with documentary evidences that the said expenditure has been incurred wholly and exclusively for business purpose with commercial expediency 3.6 Ground of appeal no 6.0 is similar to ground no 6.0 raised for AY 2015-16 Hence, the comments are already offered thereon in the above paragraphs 3.7 Ground of appeal no 7.0 is similar to ground no 7.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs 3.8 Ground of appeal no 8.0 is general and no comments are required. 4. AY 2017-18 4.1 Ground of appeal no 1.0 is similar to ground no 2.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs. 4.2 Ground of appeal no 2.0 is against the confirming of the disallowance of deduction claimed u/s 35AD of the Act. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant paras of the assessment order wherein the A.O has given his analysis and findings are para 5 (sub-paras 5.1 to 5.16). The A.O has found from analysis of the statements of key employees recorded during search and from t....
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.... 4.8 Ground of appeal no 8.0 is general and no comments are required 5. AY 2018-19 5.1 Ground of appeal no 10 is similar to ground no 2.0 raised for AY 2015-16 Hence, the comments are already offered thereon in the above paragraphs 5.2 Ground of appeal no 2.0 is similar to ground no 3.0 raised for AY 2015-16 Hence, the comments are already offered thereon in the above paragraphs. 5.3 Ground of appeal no 3.0 is similar to ground no 5.0 raised for AY 20157-18 Hence, the comments are already offered thereon in the above paragraphs 5.4 Ground of appeal no 4.0 is similar to ground no 6.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs. 5.5 Ground of appeal no 5.0 is similar to ground no 27.0 raised for AY 2015-16 Hence, the comments are already offered thereon in the above paragraphs 5.6 Ground of appeal no 6.0 is general and no comments are required. DECISION 127. We have heard both the parties, perused the relevant finding given in the impugned orders as well as material referred to before us including the judicial precedents relied upon. 128. We will take up t....
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....plied with in as much as, as per provisions of said Section, assets are recorded in the books of the resulting company at the written down value of transferred assets appearing in the books of demerged company. AO further noted, in terms of Explanation 7A to Sec. 43(1) of the Act, where, under a scheme of demerger, any capital asset is transferred by the demerged company to the resulting company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purposes of its own business. In the present case, goodwill and intangibles were not recorded in the books of SCMFPL and therefore, it could not have been recorded at a higher value in the books of assessee. AO further referred to Explanation 3 to 43(1) of the Act, which provides that actual cost of goodwill and other intangible assets in the hands of assessee is liable to be held to be NIL where such assets were not purchased and thus, depreciation claimed on such goodwill is to be disallowed. 132. AO further held that as per the sixth Proviso to Section 32(1) of the Act, the total claim of ....
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....s were raised by the department at that stage. The accounting treatment for goodwill and intangibles has been explicitly stated in the scheme and was given effect in the audited books of account as already noted above. As discussed in the earlier part of the order while dealing with the submissions of the ld. AR, in the present case the net value of the asset transferred in demerger was Rs. 743 crores, whereas, the total consideration of the demerger was Rs. 2,517 crores. The excess of consideration paid over the net value of assets resulted in goodwill and other intangible assets. We have already elaborated upon the rationale of the restructuring which has been discussed in the foregoing paragraphs. The said rationale has been also disclosed before the NCLT, which thereafter approved the scheme of agreement vide its order dated 30/03/2017. 136. It has further been brought to our notice that re- structuring was undertaken primarily to attract future investors into specific line of business. It was submitted that the investors were only interested in TAN business of the group, as opposed to the other business run by DFPCL. Accordingly, the TAN business was first demerged from the....
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....ent approved by the NCLT, specific reference was made to para 32 of the scheme which has also been incorporated in preceding paras. The said clause provided that, even in the event of any excess of the consideration determined as the fair value of the equity shares issued over the net value of assets of the demerger undertaking taken (after making appropriate adjustments for the inter- company loans etc.) such excess shall be recognized as goodwill in the books of Smartchem. Conversely, if the result of such computation is negative, the same shall be credited as Capital Reserve in the books of account of Smartchem. Thus, the accounting treatment adopted pursuant to the demerger was in accordance with scheme duly approved by the NCLT. Therefore, the question of recognition of any assets in the books of accounts arising from the demerger cannot be questioned in isolation or treated as a device to evade tax. 139. Further para 23.12 of the scheme of arrangement specifically provides for allowance of depreciation on goodwill and other intangible assets acquired but not recorded in the books of the demerged company. Once the NCLT has approved the scheme and held that proposed scheme o....
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.... generally determined by the Valuer based on the prospective business potential of the company. In the present case, it has been brought on record that the TAN and fertilizer business were expected to generate significant profits in the future and had attracted substantial investor interest. Therefore, the valuation was carried out taking into account the company's future prospects, which is a recognised and accepted approach in determining the fair value in a demerger scenario. Here in this case, the Registered Valuer has adopted DCF method relying upon financial that was subsequently justified by actual performance. The assessee has also obtained valuation reports from two independent Registered Valuers (i) adopting DCF method and other market multiple approach, both being globally accepted valuation methodologies. The allegation of the learned Assessing Officer that the projections under the DCF method did not align with the actual results is misplaced. 143. A suitable explanation was furnished by the assessee, and it is further noted that in the subsequent periods, the actual share value far exceeded the projected figures. The fact that actual results may have deviated f....
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....ion made by the learned Assessing Officer under Section 69A of the Act on the allegation that the assessee had inflated its capital expenditure by recording bogus construction expenses, allegedly resulting in the generation and return of unaccounted cash. The foundation of this addition rests primarily on certain WhatsApp chats unearthed during the course of search, and the statement recorded under Section 132(4) of the Act. 150. The brief facts, as noted by the learned AO, pertain to a search action conducted at various premises of the Deepak Group. No Money and jewellery was seized from residential premises. Statements of various important persons were recorded. One of the allegations made by the Department was that the assessee-company was engaged in the practice of inflating capital expenditure and subsequently receiving the inflated amount back in cash from vendors. During the search, digital data of one Mr. Pandurang Langde was seized, and in a statement recorded from him, he was confronted with suspicious WhatsApp communications wherein certain words such as "contribution" and "drawings" were used, which purportedly referred to cash transactions connoting crores and lakhs....
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....nditure booked with the said parties, even though no incriminating material was found for any assessment year other than A.Y. 2018-19. 154. Before us, learned Counsel for the assessee raised a preliminary objection regarding the absence of incriminating material for the assessment years under consideration. He further contended that capital expenditure cannot be disallowed on an ad-hoc basis by disallowing 10% thereof. He relied upon the judgment of the Hon'ble Supreme Court in CIT v. Sinhgad Technical Education Society [(2017) 84 taxmann.com 290 (SC)], and decisions of various High Courts, including Sunny Jacob Jewellers Gold Hyper Market v. CIT (2024) (Ker. HC) and PCIT v. Saumya Construction (P.) Ltd. [(2017) 81 taxmann.com 292 (Guj. HC)]. 155. As noted above, the main reliance of the Revenue is upon certain WhatsApp messages dated 20th, 21st, and 23rd March 2018, which allegedly referred to civil contractors, specifically Ray Constructions Ltd. and Onshore Construction Co. Pvt. Ltd. and purportedly indicated cash circulation through inflated billing. On this basis, an ad-hoc addition of Rs.4,52,35,800/-, being 10% of the civil construction payments made to these parti....
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....ey and the value ... may be deemed to be the income of the assessee for such financial year." 159. Ergo, to invoke the deeming fiction of this provision, it must be shown that the assessee was found to be the owner of unrecorded money or valuables. In the present case, not only were all capital expenditure transactions duly recorded in the books, but no physical or financial evidence of unaccounted cash was found. A deeming provision must be construed strictly, and cannot be invoked merely on the basis of suspicion or inference. Even assuming argued that certain cash was received back, it has not been shown to have reached the assessee's office, or to have been utilized by the assessee. At most, it might point to possible embezzlement by certain individuals, but such presumption cannot be extended to implicate the assessee- company unless the benefit of such income is directly traced to it. Notably, the search did not unearth any such documentary evidence or material indicating such a flow of cash. 160. It is well-settled that in income-tax proceedings, especially in search assessments, the burden of proof lies squarely on the Revenue to establish that the assessee is the....
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....rded asset or money, the essential jurisdictional facts necessary to trigger the deeming fiction under Section 69A are not fulfilled. Possession, or its absence, is a critical indicator of ownership in matters involving alleged unaccounted assets. The law mandates that the Revenue must establish a clear and substantive linkage between the unaccounted asset and the assessee. Such linkage is wholly lacking in the present case. 164. Further, the addition has been made on an ad-hoc basis at 10% of the civil construction cost incurred with two vendors, without any tangible nexus to actual inflation or cash reversal. The learned AO has not identified any concrete evidence or cash trail suggesting that payments made were inflated or that any part of the payment was returned to the assessee. Such estimations, made in vacuum and unsupported by primary evidence, are legally unsustainable. The law does not permit ad- hoc or estimated additions under Section 69A without first satisfying the jurisdictional prerequisite that unexplained money or asset is found in the possession or ownership of the assessee. In ACIT v. Harsukhlal Dhirajlal Doshi [1999] 102 Taxman 297 (Rajkot), it was held that....
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.... Accordingly, this issue is decided in favour of the assessee. Issue relating to disallowance under Section 115JB for depreciation on goodwill and alleged inflated capital expenditure 169. Coming to the issue of disallowance under Section 115JB of the Act, we note that the learned AO has reiterated the disallowance made under the normal provisions, specifically in respect of depreciation on goodwill/intangible assets and alleged inflated capital expenditure, while computing the book profits under Section 115JB. The learned AO has invoked Clause (iia) of Explanation 1 to Section 115JB, which is applicable only in cases where there is a revaluation of assets. However, this is not a case involving revaluation. The goodwill and intangible assets were recorded as on 01.01.2015, pursuant to a scheme of demerger, and the adjustments were not made at the instance of the assessee. Therefore, Clause (iia) has no application, and the disallowance made under Section 115JB is accordingly directed to be deleted. Issue relating to disallowance under Section 35AD for the NPK Fertiliser Unit 170. We now turn to the issue relating to the disallowance of deduction under Section 35AD in re....
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....174. The phrase "used for any purpose other than the specified business" under Section 35AD(7B) is intended to address cases of systematic diversion of assets to non-specified domains. In the present case, there is no such diversion. The inference drawn is based solely on a single entry in a logbook recording isolated usage. This does not meet the evidentiary threshold required for invoking Sections 35AD(7), (7A), or (7B). 175. The cost attributable to Bagging Unit No. 5 and the conveyor belt, as per the assessee's submission, aggregates to Rs.13,50,87,173/- (i.e., Rs.6,60,60,070/- for the bagging unit and Rs.6,90,27,103/- for the conveyor belt). Even if disallowance were warranted, it should have been restricted to the deduction relatable to these components alone. However, since the business of the assessee pertains exclusively to fertilizers, the claim under Section 35AD is held to be allowable in full. 176. A further legal infirmity arises from the fact that the deduction under Section 35AD was claimed for the first time in A.Y. 2017-18. Subsections (7A) and (7B) are applicable only where deduction has already been claimed and allowed in earlier years, and the asset i....
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....ng the stock difference was treated as sales or inventory, the same has already been factored into the computation of taxable income. The learned AO, however, proceeded to apply an ad-hoc rate of Rs.17 per kilogram for computing the disallowance, which is wholly unjustified. Even if we were to accept the alleged difference of 6.68 MT and apply a much higher rate of Rs.70,000 per MT (as suggested in some parts of the record), the resultant disallowance would not exceed Rs.1,13,560/-. In the broader context of the total stock, such an inconsequential difference cannot form the basis of an addition. Accordingly, the disallowance made by the learned AO is deleted. 181. The Revenue has also reiterated the same stock difference while computing the book profit under Section 115JB for A.Y. 2019-20. Since we have held that the alleged difference in stock does not warrant any addition under the normal provisions, the consequential adjustment under Section 115JB also stands deleted. 182. In so far as the issue raised in ground No.1 that additions made by the ld. AO are beyond the scope of Section 153A as there were no incriminating materials found in the course of search which has been ....