TaxTMI 
TaxTMI 
2026 (2) TMI 1362
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....mits that considering the facts and circumstances of its case and the law prevailing on the subject, depreciation is allowable on goodwill and the stand taken by the Assessing Officer is illegal, incorrect, erroneous and misconceived and not in accordance with law and the Commissioner of Income-tax (Appeals) ought to have held as such. 1:3 The Appellant submits that the Assessing Officer be directed to delete the disallowance made by him and to re-compute its total income accordingly. 2:0 Re.: Levying of Buy Back Tax u/s. 1150A of the Income-tax Act, 1961: 2:1 The Commissioner of Income-tax (Appeals) has erred confirming the levy of Buy Back Tax u/s. 115QA of the Income-tax Act, 1961 of Rs. 99,57,776/-. 2:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, tax u/s. 115QA of the Income-tax Act, 1961 is not leviable in the instant case, and the action of the Assessing Officer is illegal, incorrect, erroneous and misconceived and the Commissioner of Income-tax (Appeals) ought to have held as such. 2:3 The Appellant submits that the Assessing Officer be directed to delete th....
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....edings, ld. Assessing Officer observed that there is an amalgamation in the nature of merger with MLPL (Transferor company) and Assessee-ATPL (Transferee company). Hon'ble Bombay High Court vide order dated 19.09.2014 has sanctioned the scheme of amalgamation effective from 01.04.2014 (Appointed date) u/s. 391 to 394 of the Companies Act which has been subsequently filed with the Registrar of Companies on 24.11.2014. As per the scheme of amalgamation, the shareholders of MLPL got 60.72 Equity shares (face value of Rs. 10/- each) in ATPL for every1 Equity share held by the shareholders in MLPL. Ld. Assessing Officer has further observed that as per the merger note through which net assets of the MLPL have been taken over by ATPL, consideration of Rs. 6,07,20,000/- is shown to be due to the shareholder of amalgamating company. Against this outstanding, ATPL has issued 60,72,000 Equity shares to the existing shareholder of MLPL. After the reduction of the face value of the share capital of MLPL, remaining amount of consideration is said to be towards Goodwill amounting to Rs. 5,97,20,000/- and this Goodwill has been shown as Intangible asset in the books of Transferee company and depr....
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.... observed that the purpose of creation of the alleged Goodwill amount is to increase the Fair Market Value of the Equity share. Ld. Assessing Officer further observed that there is no specific advantage which the amalgamating company derived from the merger and hence the claim of Goodwill and depreciation claimed thereon are not sustainable and cannot be allowed and that the company has used colourable device of amalgamation to claim Goodwill which never existed. Ld. Assessing Officer has also observed that since merger was of the two subsidiary companies and no advantage has been created on amalgamation, there is no question of Goodwill. Amortisation claimed on the Goodwill needs to be added back to the income of the company and also company will not be allowed to capitalize the Goodwill in future and therefore cannot claim any depreciation benefit in future. Accordingly, depreciation claimed on Goodwill at Rs. 1,49,30,000/- has been disallowed. 5. Next issue dealt by the Assessing Officer is regarding taxation of buyback of shares. Ld. Assessing Officer observed that Capital Reserve has been credited on the Liability side of the Balance sheet at Rs. 1,27,32,000/- which when as....
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....tailed submissions in support of its contention that impugned addition/action of the Assessing Officer is uncalled for. Ld.CIT(A) has dealt with the arguments of the assessee at length and finally concluded that the creation of Goodwill is a colourable device so as to increase the price of Equity share of the company and thereafter pass on the consideration to the Holding Company for the buyback of Equity shares and also that the transaction has taken place between the related parties just in order to claim depreciation on the Goodwill so created and also to transfer the funds to the Holding Company without paying the tax u/s. 115QA of the Act @20% payable on buyback of Equity shares. 8. Aggrieved assessee is now in appeal before this Tribunal raising the grounds extracted above. 9. Ld. Senior Counsel for the assessee Mr. Percy Pardiwalla representing the assessee first made reference to the following written submissions which have been filed before ld.CIT(A) and before this Tribunal : "A. Facts of the Case 1. The Appellant is a private limited company engaged in the business of providing IT enabled conversion services, including e-learning solutions, imagin....
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....repare a video module with audio and sub-titles, navigating the whole process of filing of return by a tax payer. MLPL would provide services to Aptara Inc. in executing the assignment for the Ministry of Revenue. MLPL was undertaking assignments solely for Aptara Inc. alone. 5. The sector in which the Appellant was operating was facing significant competition from electronic medium and hence, to stay competitive in the market, the Appellant had to diverge into web based medium. Working closely with Aptara Inc. on complicated assignments, MLPL had gained significant technical expertise in providing quality e-learning services to the latter's customers in the USA. Aptara Inc. therefore wanted MLPL to start working independently. However, MLPL did not have any expertise in marketing its products in India. In order to put together the marketing expertise of the Appellant and the technical expertise of MLPL, both of which hitherto were operating in silos, the shareholders decided to merge ML.PL into the Appellant. 6. An application was filed before the Hon'ble High Court of Bombay, to seek its approval for the amalgamation. The amalgamation was approved by the....
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....zed as goodwill was no asset at all. (c) Explanation 7 to Section 43(1) provides that the assets acquired under a scheme of amalgamation have to be recorded at the value at which they stood in the books of the amalgamating company. As goodwill was not recorded in the books of MLPL, the cost of acquisition in the hands of the Appellant shall also be Nil. 10. The Appellant's submissions on each of these contentions of the AO are given below B.2. On the facts and circumstances of the case, the Ld. AO erred in disallowing the depreciation claimed on goodwill, on the basis that the Appellant has not followed AS-14, 11. The Ld. AO has held that the Appellant is in violation of the provisions of AS 14, due to the fact that despite following the pooling of interest method, the Appellant has still recognised the excess of purchase consideration paid as Goodwill, and not adjusted the same in the Reserves of the amalgamated company. For holding so, the AO has raised the following two objections, (a) The Ld. AO has noted that the Statutory Auditor of the Appellant had provided a Qualifying Remark regarding the 'Accounting Treatment done on A....
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....d in the scheme of amalgamation, the AS stipulates that the treatment as specified in the scheme shall have to be followed, and appropriate disclosures shall be made regarding the same. Para 23 does not apply to any scheme of amalgamation approved under the Companies Act, 2013. However, the scheme of amalgamation of the Appellant has been approved under the Companies Act, 1956 and hence the treatment of reserves specified in the scheme has to be followed by the Appellant. It is the disclosures made by the Appellant in the Notes to Financial Statements that the Ld. AO has misconstrued as Qualifying Remarks of the Auditor in the Audit Report, leading him to incorrectly believe that the Appellant has not followed AS-14. 15. Thus, the Appellant has followed AS-14 in its entirety, and the accounting treatment of the Appellant cannot be faulted. B.3. On the facts and circumstances of the case, the Ld. AO erred in disallowing the depreciation claimed on goodwill by holding that the value of goodwill cannot merely be a balancing figure. 16. The Ld. AO has noted in his order that there are no specific advantages accruing to ATPL from the amalgamation. He states th....
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.... business contracts, business records, business information, skilled employees etc. The Hon'ble High Court applied the principles of ejusdem generis to include other intangible assets, apart from the six assets that are mentioned in Explanation 3(b) to Section 32 of the IT Act. 21. The Income-tax Tribunal in A.P.Paper Mills Limited v. ACIT [2010] 128 TTJ 496 (Hyd) held that goodwill has no independent existence and that there cannot be any sale of goodwill separately from the sale of business and that goodwill cannot subsist by itself. In the facts of that case, the Hon'ble ITAT highlighted the following factors to conclude that goodwill had existed and that it was entitled for depreciation: a. the market share of assessee company has increased substantially; b. the brands of the amalgamating company have become the brands of the assessee; c. the assessee got the loyal domestic customers of the amalgamating company; d. the assessee got various licenses and registrations on account of amalgamation like factory license, boiler operating license, pollution disposal permission, VAT registration, excise registration, export license an....
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....experiences & providing solutions to support the acquisition of new knowledge & skill b) Graphic Art & Designing, assembling images, Typography or Motion Graphics c) Translation, Localization & Voice over d) Applying principles & practices of software Quality Assurance. e) Images Purchase Production of e-learning Modules g) Process breaking in steps to improve Quality & time Deliver h) Programmer specialized in development of web applications using client server model, Typically HTML, CSS, Java, PHP, Dotnet, Etc i) Resourcing j) Web graphic Design, Authoring, Standardizing Code & search engine optimization. 26. MLPL, over the period of his existence in India, had a pool of 53 resources persons who were highly skilled and training in their specialization (Exhibit B herewith). MLPL took more than half a decade to test, train and create a pool of vendor resources, which were assigned to the Appellant on amalgamation. These personnel were taken on board to also provide training to the existing employees of the Appellant, so as to increase their skill base and provide additional support in the fiel....
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....y skilled employees, increased talent pool, significantly increased revenue, increased client and customer base, additional skills imparted to existing employees, standard templates for providing basic services, etc. apart from the general synergies of amalgamation such as reduced costs, simpler management structure, etc. The observations of the Ld. AO are therefore completely devoid of merit. B.4. On the facts and circumstances of the case, the Ld. AO erred in disallowing the depreciation claimed on goodwill by alleging violation of Explanation 7 to Section 43(1) 30. The Ld. AO has also disallowed the claim of depreciation on goodwill on the basis that the actual cost of goodwill should be taken as Nil, following Explanation 7 to Section 43(1) of the Act. 31. Section 43(1) of the IT Act defines 'actual cost'. Actual cost assumes relevance as depreciation in the first year is allowed on the actual cost to the assessee. Explanation 7 to the said section provides that in case of an amalgamation where the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same....
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....that is recorded at the time of amalgamation is not necessarily the same goodwill that was inherent in the business of the amalgamating entity. For instance, as is in the present case as well, the value of goodwill includes a loyal customer base for the amalgamating company and would include the value of future business prospects because of the amalgamation (which would consider the prospects to the transferee company in benefiting from tapping the additional customers for its existing line of business). Thus, in case of an amalgamation, goodwill arises for the first time and cannot be said to be an asset which is transferred by the amalgamating company to warrant application of Explanation 7 to Section 43(1) or Explanation 2 to Section 43(2). 37. Thus, the application of these Explanations to intangible assets such as goodwill, especially in cases wherein the cost of the asset is not determinable and where such depreciation on such assets has never been claimed by the amalgamated company is not correct. These Explanations are applicable only to tangible assets. To understand the intention of the legislature behind the introduction of these explanations, it would be releva....
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....sed upon the amalgamating company. Thus, the aforesaid explanations were added to the Act. 42. The aforesaid explanations were first inserted vide Finance (No.2) Act, 1967 w.e.f. 01.04.1967. The relevant extract from the Memorandum to Finance (No.2) Bill, 1967 (Annexure-2 of Paper book-II), explaining the rationale for the amendment extracted below: "36. 'Under the present law, certain tax liabilities are attracted in the case of a company merging with another company under a scheme of amalgamation and also, in the case of amalgamating company who receives shares in the amalgamated company in lieu of their shareholdings in the amalgamating company. Some of these tax liabilities discourage amalgamations. For the purpose of facilitating the amalgamation of uneconomic company units with financially sound Indian companies in the interests of increased efficiency and productivity, it is proposed to make the following provisions in law: (i) There will be no computation of any profit under Section 41(2) of the Income Tax Act in case of amalgamating company with reference to the consideration receivable by it in respect of any building, machinery, plant or Se....
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....tion, the term sold is defined to exclude transfer of assets in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company. 45. As explained in the Memorandum which is extracted above, the intention to bring in Explanation 7 to Section 43(1) and Explanation 2A (corresponding to Explanation 2 to Section 43(6) as it stands presently) to Section 43(6) was to ensure that the benefit that ensues to the amalgamating company by virtue of non-application of Section 41(2) does not result in loss of revenue to the Government by allowing depreciation on increased values to the amalgamated company. 46. The amendments made in Section 43(1) and Section 43(6) vide Finance (No 2) Act, 1967 is reproduced below for reference. It may be noted that amendment proposed in the Finance Bill was verbatim incorporated in the Finance (No 2) Act, 1967. Explanation 7 to Section 43(1): Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred ....
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....Explanation 7. Explanation 3 provides that if the Assessing Officer is satisfied that the main purpose of the transfer of assets is the reduction of liability to income tax by claiming depreciation on the enhanced cost, then the actual cost to the assessee shall be determined by the Assessing Officer. It is submitted that the instant case is not a case where the Ld. AO has expressed satisfaction that the transfer of assets is for the purpose of claiming excessive depreciation, and thereby reduction in income-tax liability. 51. As far as applicability of Explanation 3 to Section 43(1) of the IT Act is concerned, it may be noted that the onus is on the Ld. AO to establish that value of goodwill is lower than the actually recognized amount. The Ld. AO cannot ignore the valuation report furnished by the Assessee in support of its claim [CIT v. Sandvik Chokshi Ltd. 230 Taxman 319 (Guj)). It has been already submitted earlier as well as before the Ld. AO that the value of goodwill arrived at is as per the certified valuation report issued by a Chartered Accountant obtained by the Appellant. The valuation report is enclosed as Annexure-7 of Paper book -1. Nowhere has the L.d. AO ....
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....ner as may be prescribed. 55. Explanation to the Section defines distributed income to mean the consideration paid by the company as reduced by the amount received by it for the issue of shares. The calculation would thus depend upon these two amounts. As for the first part, i.e., consideration paid by the company on buyback of shares, it is undisputed that the amount paid in buyback of shares by the Appellant to Aptara Inc. is Rs 39.27 per share. The value has been calculated based on Discounted Cash Flow Method as certified by a Chartered Accountant in a valuation report of shares to be bought back. A copy of the valuation report for buyback is enclosed as Annexure-9 of Paper book - II. 56. For the second part, ie., amount received by the Appellant for issue of shares, the Appellant had issued shares to the shareholders of MLPL against purchase consideration to be discharged to them pursuant to the scheme of amalgamation between the two companies. Therefore, the Appellant has received consideration in the form of net worth of MLPL against the issue of shares. As per the valuation report obtained at the time of amalgamation of the companies, the value of MLPL was....
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....latter been filled in by incorporation of Rule 40BB of the IT Rules. Sub-rule (5) of the Rules specifically provides that, where shares are received by a shareholders in a scheme of amalgamation, the amount received by the amalgamating company on issuance of its shares will be regarded as amount received as contemplated in Section 115QA of the Act. Evidently, the Rule is effective from 01 June, 2016 and is not applicable to shares bought back by the Appellant on 26th December, 2014. 61. It is a settled legal principle that a lacuna existing in a statute can be cured by the Legislature only and not be a means of interpretation by the Judiciary. A 'casus omissus' cannot be substituted by anyone other than the Parliament, as held by the Supreme Court in ACIT v. Velliappa Textiles Ltd [2003] 263 ITR 550 (SC). It is therefore submitted that, in the absence of a computing mechanism during the subject period, the Appellant could not have been regarded as having received any 'amount' for 'issue of such shares". Consequentially, the levy would not be applicable in the facts of the Appellant. 62. The Ld. AO, in his order, has held that the amount receive....
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....hnologies Private Limited Authorised Signatory." 10. Ld. Senior Counsel for the assessee also stated that the amalgamation has taken place with the purpose of taking over the running business of MLPL and pursuant to the same the Revenue and the profitability of the assessee company has increased substantially. He also submitted that by way of amalgamation the assessee has gained significantly in the form of high skilled employees, increased talent pool, significantly increased revenue, increased client and customer base along with the reduced costs, simpler management structure. He also submitted that the claim has been approved by the Hon'ble Bombay High Court and the assessee had duly complied with as per the scheme and the creation of Goodwill is also made in light of judgment of Hon'ble Apex court in the case of CIT Vs. Smifs Securities Ltd. 348 ITR 302 (SC) and there are plethora of decisions which support such creation of Goodwill by the assessee in its books. Since the consideration paid over and above the net asset of the Transferor company is Goodwill actually paid by the Transferee company, the same deserved to be created as Intangible asset and depreciation o....
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....ce on the following decisions : 1. Urmin Marketing (P) Ltd. (2020) 122 taxmann.com 40 (Ahmedabad-Trib.) 2. Disney Broadcasting (India) (P) Ltd. Vs. PCIT (2024) 163 taxmann.com 40 (Mumbai-Trib.) 3. Dow Chemical International (P) Ltd. VS. DCIT (2024) 169 taxmann.com 250 (Mumbai-Trib.) 4. Trivitron Healthcare (P) Ltd. Vs. PCIT (2023) 146 taxmann.com (Chennai-Trib.) 5. Padmini Products (P) Ltd. Vs. DCIT (2020) 121 taxmann.com 327 (Karnataka) 6. Altimetrik India (P) Ltd. Vs. DCIT (2022) 137 taxmann.com 9 (Bangalore-Trib.) 7. Geodis Overseas Pvt. Ltd. Vs. DCIT - ITA No.2305/Del/2015 dated 18.05.2020 8. Goldman Sachs (India) Securities (P) Ltd. Vs. ITO (2016) 70 taxmann.com (Mumbai-Trib.) 9. Capgemini India (P) Ltd. In re (2016) 67 taxmann.com 1 (Bombay) 12. Ld. Departmental Representative vehemently argued referring to the following written submissions : "Brief facts of the case: o The assessee is a domestic company (in which public is not substantially interested) engaged in the field of providing IT enabled conversion services. o During the A.Y. under consideration there was a....
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....method. 2. From the para 4.4 page no. 11-12 of the Assessment Order, it can be observed that there is a Qualification remark put by the auditors of the assessee regarding accounting treatment done for amalgamation. The remark states that, "Had the provisions of paragraph 16 and 35 of AS-14 Accounting for Amalgamation issued by the Institute of Chartered Accountants of India been followed, the difference would have been adjusted from the reserves. The reserves would have been lower by Rs. 4,97,66,667 and profit for the period 1 April 2014 to 31 March 2015 would have been higher by Rs. 1,19,44,000." The above remark clearly states that the provisions of paragraph 16 and 35 of AS 14 have not been followed by the assessee in accounting for amalgamation despite the auditor's deviation note. Despite the approval by the Hon'ble Bombay High Court of the scheme of amalgamation on the basis of affidavit filed by the appellant on 26.08.2014, the auditor has still given a qualification remark regarding the accounting for amalgamation emphasizing on the AS 14 issued by the ICAI. The relevant para of the affidavit is reproduced below for ready reference: ....
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....pany. Thus, for example, the General Reserve of the transferor company becomes the General Reserve of the transferee company, the Capital Reserve of the transferor company becomes the Capital Reserve of the transferee company and the Revaluation Reserve of the transferor company becomes the Revaluation Reserve of the transferee company. As a result of preserving the identity, reserves which are available for distribution as dividend before the amalgamation would also be available for distribution as dividend after the amalgamation. The difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company is adjusted in reserves in the financial statements of the transferee company........ The Pooling of Interests Method 35. The difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company should be adjusted in reserves." The above paragraphs of AS-14 make it very clear that the difference between amount re....
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....e as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business." The above explanation states that if the amalgamating company is holding capital asset then after amalgamation the cost of capital asset should be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. 7. In the present case, the amalgamating company i.e Maximize Learning Pvt. Ltd. did not have any goodwill in its books of accounts before amalgamation. As there was no goodwill existed in amalgamating company, the same shall not form part of the amalgamated company i.e. Aptara Technologies Pvt. Ltd. Due to recognition of goodwill, there is an extra asset which is being created and which is not allowed as per the above explanation 7 to Section 43(1) of the Act. 8. The Ld. AO has referred various case laws for the definition of the term "Goodwill" (Para 4.6 page 14-16 of the Assessment Order) as it is not defined anywhere in the Act. The common underlying principle reiterates that "Goodwill" purchased represents certain specific business....
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....mpanies were intended to be continued by the transferee company. Accordingly, only minimal changes are made in aggregating the individual financial statements of the amalgamating companies." Further, as mentioned in para 4, page 2 of the assessee's paper book dated 13 June 2022 the assessee has tried to draw an analogy by stating about providing digitalised services to tax payers by updating annual amendments in the Income tax Act. 10. Further, as per para 4.6.3 page no. 17-18 of the Assessment Order, it can be observed that page 4, para 8 of the High Court Order states that, the Regional Director filed an affidavit on 26th August 2014. The main point of the same is as follows: "8. The Regional Director has filed an Affidavit on 26th August, 2014 stating therein, save and except as stated in paragraph 6, it appears that the Scheme is not prejudicial to the interest of shareholders and public. In paragraph 6 of the said Affidavit, it is stated as under: "6. That the Deponent further submits that:- b) It is respectfully submitted that the tax implication, if any, arising out of the Scheme is subject to final decision of Income Tax Auth....
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....icit Account" in some cases). * Hence, no goodwill can be recorded in books under common control transactions under Ind AS 103. Hence, in such intra group mergers, assets and liabilities shall be recorded at their carrying amounts and not the fair values meaning that no goodwill can be recognized pursuant to such mergers. Hence, the law has been evolved to mitigate the artificial recognition of goodwill. Though for the year under appeal the Ind AS is not applicable, the intention of law should be understood. 12. From para 7.1.8 page 21 of the CIT(A) order, it can be observed that, the notes to accounts to the financials of both the companies disclose that, 100% of sales of Maximize Learning Pvt. Ltd. are effected to its related parties, majority being to its Holding Company Aptara Inc. USA. On the other hand, sales of Aptara Technologies Pvt. Ltd. are to various customers in India. All the sales are to unrelated customers in India. Hence, there is no advantage arising with respect to any increase in customer base to the transferee company. Instead, the transferor company is getting the advantage of the huge customer base, infrastructure and the brand name....
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....verrides all the provisions of the Act. The provisions are stated as follows: "SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED INCOME OF DOMESTIC COMPANY FOR BUY-BACK OF SHARES Tax on distributed income to shareholders. 115QA. (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares 90[***] from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income: Explanation. For the purposes of this section,- (i) "buy-back" means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies: (ii) "distributed income" means the consideration paid by the company on buy-back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed" As evident from above sec 115QA is a specia....
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....mount received for issue of such shares except the face value of Rs. 10 each. The assessee with intention to avoid the tax liability is inflating the hypothetical amount received. Using this share value, the shares of Holding company were purchased which is akin to distribution of dividend but without paying tax on the same. 8. Hence, the Ld. AO calculated a proportionate amount received for issue of such shares as follows: 1273200 *10,00,000 = Rs. 2,09,683.8/- =6072000 Hence, effectively the amount received on issue of such shares is Rs. 2,09,684/-. Distributed Income can be calculated as follows: Particulars Amount (Rs.) Consideration paid for buy back 4,99,98,564 Less : Amount received on issue of such shares 2,09,684 Distributed Income 4,97,88,880 Hence, tax @ 20% on Rs. 4,97,88,880 is Rs. 99,57,776/-. 9. It was only a issue of extra shares and no consideration was received by ATPL on the issue of such shares resulting in issuance of 60,72,000 new shares totaling to 61,72,000 share of ATPL. In December 2014, the company bought back 12,73,000 shares @ Rs. 39.27/- each and ....
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....the amalgamation of MLPL with ATPL the total amount due to the shareholders of MLPL is the face value of the share capital, i.e. Rs. 10.00 lakh and the value of Goodwill at Rs,5,97,20,000/-. In lieu thereof, ATPL has not passed on any consideration through banking channel but has merely issued 60.72 Equity shares in lieu of 1 Equity share held by the shareholders in MLPL. The assessee has booked the Goodwill for the year under consideration in the books at Rs. 5,97,20,000/- and has also claimed depreciation thereon @25% amounting to Rs. 1,49,30,000/-. Ld. Assessing Officer on going through the chronology of facts came to the conclusion that the assesssee has adopted a colourable device by inflating the net assets of MLPL by way of inclusion of Goodwill even when no such asset existed in the books of the Transferor company-MLPL. Ld. Assessing Officer has also observed that the assessee ought to have applied Accounting Standard-14 issued by ICAI and should have reduced the excess consideration from Capital Reserve rather than creating Goodwill. Ld. Assessing Officer has also observed that the intention of the assessee is to create Artificial Goodwill and then claim 25% depreciation o....
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....ommercial rights of similar nature. Hon'ble Court also observed that in scheme of amalgamation of YSN Shares and Securities Private Limited with Smifs Securities Ltd. Assets and Liabilities of YSN Shares and Securities Private Limited were transferred and in the process Goodwill has arisen in the books of the company and that such excess consideration paid by the assessee over the value of net assets acquired by YSN Shares and Securities Private Limited should be considered as Goodwill arising on amalgamation. The assessee has also contended before ld.CIT(A) quoting various decisions that such type of excess consideration paid over and above the net assets is nothing but Goodwill which is paid for enjoying the profitability and future growth in the business based on the amalgamation with the Transferor company. It has also been demonstrated that post amalgamation there is a all-round growth in the business of the assessee company. Based on these contentions it has been claimed by the assessee that a genuine Goodwill has arisen in the process of amalgamation and that valuation of Equity shares has been carried out under the DCF method. Therefore, the distributable income for the pur....
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....ation on Goodwill has relied on Explanation 7 of sec 43(1) of the IT Act wherein it has been stated that the cost of capital in the amalgamating company before amalgamation should be taken to be the same in the amalgamated company as it would be if the amalgamating company continued to hold the capital asset for its own purpose. The AO has also relied on the decision of the Bangalore ITAT in the case of United Breweries (supra) wherein the claim of depreciation on Goodwill was challenged on the ground that in the year of depreciation, the amalgamated company would not be entitled to depreciation on Goodwill, if the amalgamating company were not claiming depreciation on the same. Furthermore, in Para 4.6 of the assessment order, the AO has challenged the very recognition of Goodwill in the books of amalgamated company on the ground that the goodwill recognized does not qualify to be termed as 'goodwill' in true sense and thereby it just being the balancing figure. Therefore, focusing on the ground that there was no such advantage which the amalgamating company enjoyed in order to compensate the amalgamated company, the AO was of the opinion that depreciation claim on goodwil....
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....the name of the amalgamated company is 'Apatra Technologies Private Limited' (ATPL). Therefore, undoubtedly, the acquirer company enjoyed the reputation of 'brand name' and that seems to be one of the reasons why the company with the same name as holding company has taken over another company with different name, since it enjoys the reputation of the brand name of Holding Company. Therefore, the brand name in fact, of the amalgamated company has been retained. 7.1.6 Intention of Amalgamation The Ld AR has submitted that the primary intention of the amalgamation is cost savings, simplified corporate structure and improved management focus and centralizing the activities of the companies resulting in operational and cost efficiency. This is supported by the High Court order, the relevant portion at Para 3 Page 129 is reproduced as under: "Learned Counsel for the Petitioners states that the transferor company and the transferee company are business of providing IT enabled conversion services. The proposed scheme of amalgamation will have the benefit that the integration of the operations of transferor company and transferee company would have....
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....under: "6 That the Deponent further submits that: (a) Clause 14.2 of the Scheme states that the difference if any, of the net value of assets inabilities and reserves of the Transferor Company acquired and recorded by the Transferee Company and the Face Value of the new equity shares on merger, issued and allotted pursuant to Clause 12.1 of the Scheme, shall be adjusted in Reserves in accordance with the provisions of Paragraph 16 and 35 of the Accounting Standard 14 'Accounting for Amalgamation' issued by the Institute of Chartered Accountants of India, in this regard, it is submitted that the surplus if any arising out of the scheme shall be transferred to Capital Reserve account of the Transferee Company, if there is a deficit, the same shall be debited in Goodwill Account of the Transferee Company." Thus, it is undisputed that the recognition of Reserves is as per AS 14 as held by the High Court Order. Though it is agreed that the order states that the reserves be transferred as it is from the transferor company to the transferee company after amalgamation, it is only restricted to the nature of reserve i.e. Free Reserve, Capital Reserve, Revaluation R....
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....gs on verification of books of accounts of the appellant company it was seen that a Capital reserve was created on the Liabilities side of the balance sheet of Rs. 1,27,32,000/-. The Ld.AO noted that the appellant's AR was asked to produce the details of the Capital reserve. The Ld.AR of the company filed written submission dated 23.11.2017 in which he submitted that there has been a Capital Redemption by the appellant company during the year. The Ld.AO noted that from the above submission, it was clear that the company had bought back 12,73,299 equity shares having face value of Rs 10 each. The shares has been bought back at Rs 39.27 each, thereby resulting in the aggregate value of buy back of shares of Rs. 4,99,98,564/-. 9.2 The submission of the appellant was not acceptable to the Ld.AO due to the following reasons : "1. The assessee has mainly relied on the valuation report of the Chartered Accountants prepared as per DCF method to arrive at the amount received by the company at issue of shares value of Rs 39.76 per share. This is hypothetical amount based on some future projections and moreover, this is not as per the section. Actually there was no amoun....
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....% of shares in MLPL. It was only a issue of extra shares and no consideration was received by ATPL on issue of such shares. Hence, there was issue of new 60,72,000 shares of ATPL. Hence, post amalgamation, there were a total of 61,72,000 shares of ATPL of which again 99.99% were held by the Holding Company Aptara Inc. On 26.12.2014, the company decided to buy back 12,73,200 shares @ Rs 39.27 per share. Thus, ATPL paid Rs. 4,99,98,564/ on buy back shares to its Holding Company -Aptara Inc. and balance 49,98,800 shares were held in the Balance Sheet of ATPL as on 31.03.2015. 9.4 The Ld.AO noted that the appellant there was colorable device used by the appellant since the company though having surplus reserves was buying back shares, instead of declaring dividend/ in a manner that shareholders paid nil/lower tax. Further, as there was no separate section under which the assessment of such Buyback tax was to be made, hence it is made in the order itself. Hence, in the light of above discussion, the Ld.AO calculated the tax@ 20% on Rs. 4,97,88,880/ by the company as buy back tax u/s. 115Q of the Income tax Act, 1961. 9.5 During the course of the appellate proceedings, ....
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....ceived consideration in the form of net worth of MLPL against the issue of shares. As per the valuation report obtained at the time of amalgamation of the companies, the value of MLPL was determined at Rs. 24,14,23,000/. The swap ratio of shares was determined at 60.72 shares of the Appellant per share of MLPL, which had issued 1,00,000 equity shares. Thus, the total number of shares issued by the Appellant is 60,72,000. Accordingly, amount received by the Appellant for the issue of shares is worked out as under: Amount received per share= Value of business of MLPL Number of shares issued by the Appellant =24,14,23,000 60,72,000 = 39.76 18. It is thus clear that in the instant case, where the amount received by the Appellant for the issue of shares exceeds the amount paid by it for the buyback of shares, there can be no distributed income, and hence the provisions of Section 115QA cannot be applied." C.3 Without prejudice to the ground that there is no distributed income on facts, the computation mechanism would fail, as there is no 'amount' received by 'the company' on issuance of the shares 19. As noted earlier, the pro....
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.... of such shares. Consequentially, the levy would not be applicable in the facts of the Appellant. 23. The Ld. AO, in his order, has held that the amount received by the Appellant Company for issue of the shares is Nil, and hence the Appellant is liable to pay tax on the buyback of the shares, on the entire value of the amount paid to the shareholders on the buyback of such shares. 24. It is respectfully submitted that the Ld. AO has grossly erred in law while interpreting the provisions of Section 115QA of the IT Act. Distributed income, as defined by the Explanation, is the difference between the consideration paid on the buyback of shares as reduced by the amount received by the company on the issue of the shares. 25. The term 'amount received' is not defined anywhere in the Act. The meaning of the word 'amount', as per the Oxford English Dictionary is 'the total number, size or value of something' Black's Law Dictionary defines the term as: "The effect, substance, or result, the total or aggregate sum' Thus, the term amount would mean the total or aggregate sum/value of something. Appl....
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....dwill was a colorable device in order to avoid the payment of taxes. Hence, I agree with the contention of the AO that purchase of shares of Holding Company by the appellant was akin to distribution of dividend but without paying any tax on the same. Sec 115QA is a charging section and Explanation to of sub section (1) contains computation provisions and according to which the distributed income "means the consideration paid by the company on buy back of shares as reduced by the amount" which was received by the company for issue of such shares. Hence the tax is payable on the difference between the buyback price and its issue price. The intention of the legislature is clear as the words 'amount which was received' entails taxing of those transactions where shares were issued for cash and the same do not postulate a situation where shares were issued for consideration other than cash. Hence, the Ld AO was justified in rejecting that amount of Rs. 39.76/ received per share was nothing but a hypothetical amount. 10.1.2 The provisions of sec 115QA was inserted by the Finance Act, 2013 w.e.f. 01.06.2013 and before insertion of this section, buy back of shares was taxab....
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....eserve of the Transferee company as provided under Accounting Standard-14 but if the scheme of amalgamation provides and there being genuine transaction, then Hon'ble Courts have consistently held that such deficit is to be considered as Goodwill and eligible for depreciation. So far as this ratio of creation of Goodwill in genuine transaction of Amalgamation is concerned, we truly concur and in support there are plethora of decisions out of which some of them have also been referred and relied on by the ld. Counsel for the assessee which are as follows : 1. Disney Broadcasting (India) (P) Ltd. Vs. PCIT (2024) 163 taxmann.com 40 (Mumbai-Trib.) 2. Dow Chemical International (P) Ltd. VS. DCIT (2024) 169 taxmann.com 250 (Mumbai-Trib.) 3. Padmini Products (P) Ltd. Vs. DCIT (2020) 121 taxmann.com 327 (Karnataka) 4. Altimetrik India (P) Ltd. Vs. DCIT (2022) 137 taxmann.com 9 (Bangalore-Trib.) 5. Geodis Overseas Pvt. Ltd. Vs. DCIT - ITA No.2305/Del/2015 dated 18.05.2020 19. However, in the instant case, the facts are different and peculiar. It is not the case of some independent transaction of amalgamation a company 'A' with Company 'B' for ....
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....mpany, is also a fellow subsidiary of the assessee-company. Therefore, it is necessary for us to examine the issue of 'goodwill on account of amalgamation of assessee-company and subsidiary, in light of intra group transactions. Admittedly, Invesco Hyderabad Private Limited amalgamated with the assessee-company under the Scheme of approved by the NCLT vide order dated 15.05.2017 and the appointed date for amalgamation was w.ef of amalgamating company as on 01.04.2016, which has been worked-out at Rs. 102,86,02,342/- and the same has been supported by the valuation report dated 11.03.2017 submitted by an Independent Valuer. Further, the assessee-company had acquired 12,600 equity shares of Invesco Hyderabad Private Limited, a wholly owned subsidiary of the assessee-company from IVZ Mauritius Private Limited which is a fellow subsidiary of the parent company of the assessee on 01.08.2016 @ Rs. 1,93,723/- per share. The assessee claimed that, purchase of shares on 01.08.2016 is on the basis of valuation report dated 16.06.2016 prepared on the basis of Discounted Cash Flow method and as per the said valuation report, fair value of share of the amalgamating company as on 31.03.2016 ....
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....ed with a view to create goodwill by adopting different valuation methods for investment and recording the value of assets for amalgamation. Further, the amalgamating company was fully owned subsidiary of the assessee-company and IVZ Mauritius Private Limited from whom shares were acquired, is also a subsidiary of parent company of the assessee. These are intra-group transactions. Although, the assessee claims to have reported related party transaction in TP study report and it was subjected to analysis by the TPO and further, the purchase of shares from IVZ Mauritius Private Limited is also subjected to approvals from NCLT and RBI, in our considered view, the said facts does not alter the position that, the assessee has inflated enterprise value of the subsidiary, while purchasing the shares from it's related party and at the same time, while recording goodwill in terms of amalgamation, has considered real value of the company which resulted in an artificial excess consideration in the nature of goodwill. Therefore, in our considered view, the arguments of the assessee that, it has always recognized two methods for the purpose of valuation of enterprise value, ie, one for the ....
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....annot be accepted. In our considered view, whether assessee follows DCF method or NAV method, an enterprise value of any entity cannot be so much difference as explained by the assessee, which is evident from the fact that, although, the enterprise value of amalgamated company was at Rs. 102,86,02,342/-, but, the assessee has paid an amount of Rs 244,09,03,945/- for acquiring 12,600 equity shares at Rs. 1,93,725/- per share, even though, it was fully aware that, the fair market value of the share as on 31.03.2016 was at Rs. 81,635/- per share. 20.3. Therefore, we reject the arguments of the Counsel for the Assessee. Further, amalgamation between two companies is, for the furtherance of their business or consolidation of business for smooth operation for business. In the present case, going by the reasons given by the assessee for amalgamation of companies, in our considered view, it is only a self-serving document, but, in reality, there is no furtherance of business between the two companies and because of amalgamation, the assessee failed to prove the benefit derived by the assessee-company by creating goodwill in the books of accounts on account of amalgamation. Further....
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....(supra); S & P Capital IQ (India) (P) Ltd. (supra), decision of ITAT, Mumbai in the case of Disney Broadcasting (India) (P) Ltd. (supra) and ITAT, Ahmedabad Bench decision in the case of Urmin Marketing (P) Ltd. (supra), in our considered view, in all the cases the Co-ordinate Benches of the Tribunal has considered the issue of 'goodwill' in light of decision of Hon'ble Supreme Court in the case of Smifs Securities Ltd. (supra) and held that, 'goodwill' arising on account of amalgamation is an intangible asset and eligible for depreciation under section 32(1)(if) of the Act. In our considered view, since in the present case, we held that, 'goodwill' created by the assessee, is not a real one or genuine one, the question of considering the ratio laid down by the Hon'ble Supreme Court and various Benches of the Tribunal for the purpose of allowing depreciation does not arise and thus, we reject the various case laws relied upon by the Learned Counsel for the Assessee. 20.5. In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that, the assessee is not entitled for depreciation on ....
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....ted parties. We therefore hold that claim of creation of Goodwill of Rs. 5,97,20,000/- is only an Artificial creation and is classic case of lifting the corporate wheel as rightly observed by the ld.CIT(A). Therefore, in our considered view, no Intangible asset in the form of Goodwill is created at Rs. 5,97,20,000/-. Further, since no Intangible asset has been created in the process of amalgamation, depreciation claimed at Rs. 1,49,30,000/- also deserves to be disallowed. Ground No. 1 raised by the assessee is dismissed. 22. Apropos to Ground No.2 relating to levy of buyback tax u/s. 115QA of the Act, we note that the Holding Company was having 100% of Equity shares of ATPL of Rs. 10/- each. During the year, there is buyback of 12,73,200 Equity shares @39.27 per share. We note that in pursuance to amalgamation between MLPL and ATPL 60.72 Equity shares have been issued in lieu of 1 Equity share of MLPL. Further, since 100% holding of MLPL was with Aptara Inc. USA therefore 60,72,000 Equity shares were received by Aptara Inc. USA being the Holding Company of MLPL. Now out of the holding of Equity shares, assessee company has buyback 12,73,200 Equity shares u/s. 115QA of the Act fo....
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....ub-section (1). (4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon." 23. On going through the above provision, we find that assessee is liable to pay additional income tax @20% on the distributable income. Further, distributable income is defined and the same is the consideration paid by the company on the buyback of shares as reduced by the amount which was received by the company for issue of such shares determined in the manner as may be prescribed. Now assessee in order to compute the distributable income has claimed that the amount which were received by the company for issue of such shares is 39.76 per share and when the same is reduced from the buyback rate per share of 39.27 resulted the distributable income in negative figure, i.e. (-) 0.49 per share. Asse....
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....SA) (Holding Company) Maximize Learning Aptara Technologies Pvt. Ltd. (Amalgamating company) Pvt. Ltd. (Amalgamated company) ATPL was having 100000 shares of Rs 10 each and MLPL was also having 100000 shares of Rs 10 each before amalgamation. Both ATPL and MLPL were subsidiary companies of Holding company - Aptara Inc. (USA) and the holding company held 100% of the shares in both the subsidiaries. On amalgamation, through the swap ratio, it was decided that shareholders in MLPL would get 60.72 shares of ATPL for 1 share held in MLPL. The major beneficiary of these shares was the Holding Company - Aptara Inc as it held 100% of shares in MLPL. It was only a issue of extra shares and no consideration was received by ATPL on issue of such shares. Hence, there was issue of new 60,72,000 shares of ATPL. Hence, post amalgamation, there were a total of 61,72,000 shares of ATPL of which again 99.99% were held by the Holding Company - Aptara Inc. 4. On 26.12.2014, the company decided to buy back 12,73,200 shares @ Rs 39.27 per share. Thus, ATPL paid Rs 4,99,98,564/- on buy back shares to its Holding Company - Aptara Inc. and balance 49,98,800 shares were held in the Bala....