TaxTMI 
TaxTMI 
2026 (7) TMI 541
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....ng heard together and disposed of by this consolidated order. 3. The Assessee was incorporated in 2005 and is a wholly owned subsidiary of Bally Technologies Inc., USA/SG Gaming Inc. (currently known as LNW Gaming Inc.). Since 2005, the assessee is undertaking captive software development services for its group companies. The registered office of the assessee is situated at Chennai and operates through its centres in Chennai and Bangalore. The Assessee filed its return of income for the AY 2017-18 declaring its income as Rs. 36,16,73,020/- and for AY 2018-19 declaring its income as Rs. 42,50,52,540/-. The case was selected for scrutiny under CASS and issued statutory notices accordingly. 4. The Assessee has claimed depreciation on goodwill upon amalgamation which was rejected by the AO and confirmed by the ld.CIT(A). The brief facts relating to this issue is that the Assessee acquired 32,35,187 shares of WMS Gaming Solutions India Private Ltd from Bally Gaming Inc., USA for a cash consideration of Rs. 33.97 crores on 24.03.2016. Post acquisition, the WMS India got amalgamated with the Assessee under the scheme of amalgamation sanctioned by the Hon'ble Madras High Court by the....
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....ntly opposed that the order of the CIT(A) should not be reversed. In response the Ld.AR had also filed their rejoinder. 8. We have heard the rival contentions and various material available on record. At the outset, we wish to acknowledge that the issue on hand is in relation to depreciation on goodwill upon amalgamation whether it is allowable or not? As pointed out by the Ld.AR this issue is no more res integra and we have already decided this issue by considering various contentions as was mentioned by the ld.CIT(A) in the impugned order and after a detailed discussion this Tribunal has decided the issue in favour of Assessee by holding the depreciation on goodwill is allowable and it has also held that even in respect of the 'pooling of interest method' the depreciation on goodwill is allowable. We shall gainfully rely on the said decision and the relevant extract of the same is as under: "12. On merits, we have heard both the parties, perused the material on record and gone through the orders of the authorities below along with the judicial precedents relied on. There is no dispute with regard to the fact that FPIL is a wholly owned subsidiary of the assessee. We f....
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....2(b) to Section 43(6) of the Act, does not affect the right of amalgamated company to claim depreciation, since the provisions of section 43 of the Act is applicable only where an existing block of asset is transferred from the amalgamating company to the amalgamated company. In the instant case, since goodwill comes into existence only for the first time subsequent amalgamation, the aforesaid Explanation do not apply. Explanation 7 to Section 43(1) and Explanation 2(b) to Section 43(6) of the Act do not affect the right of the amalgamated company to claim depreciation, as they would operate where an asset is acquired by amalgamating company, without incurring any financial outlay and such asset is transferred to amalgamated company without incurring any financial outlay. In the instant case, since excess consideration paid while initially acquiring the company prior to amalgamation and post amalgamation the net asset received is lesser than the purchase consideration, the differential consideration will constitute goodwill and as such aforesaid Explanation in provisions of section 43 of the Act are inapplicable. Our above decision is also supported by the Orders of the Tribunal re....
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.... assessee succeeds." 17. Following the aforesaid decision and the judicial principles that an entry in the books of account does not determine taxability, we find force in the arguments of the ld. ld.AR that taxable income and income tax thereon must be computed according to the specific provisions of the Act, irrespective of the method of accounting used for financial statements. Accordingly, in our view, the amalgamation of FPIL with the assessee accounted by way of pooling of interest method, is no ground to deny a bona fide claim of the assessee and tax depreciation on goodwill arising on amalgamation is allowable. We are of the view that irrespective of the method of accounting i.e. pooling of interest method or purchase method is relevant only for the purpose of books/financials. However, as far as tax purposes is concerned, the guiding principle laid down by the Hon'ble Supreme Court in the case of Smifs Securities Ltd. [2012] 24 taxmann.com 222 gains more relevance. For the sake of clarity and ready reference, the relevant paras are reproduced hereunder: "Question No.[b]: "Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act,....
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....ection 32(1) of the Act. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal [`ITAT', for short]. We see no reason to interfere with the factual finding. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in whi....
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....g of capital assets at the price appearing in the books of Target Company. Accordingly, the recognition of goodwill in accordance with Accounting Standard-14 and amortisation of the same in accordance with Accounting Standard-26 may not be of any help in claiming depreciation under the IT Act in view of the express provisions mentioned therein. Thus, the cost of acquisition of existing goodwill in the hands of the acquirer will be the cost/written down value in the hands of Target Company. Further, in case of goodwill arising out of amalgamation, the cost in the hands of target company would be NIL by virtue of section 55(2)(a)(ii) and, accordingly, the cost would be NIL in the hands of acquirer-company. It is pertinent to note that decisions favouring the proposition [CIT v. Smifs Securities Ltd. [2012] 348 ITR 302(SC)] that depreciation is available on goodwill arising out of amalgamation, section, viz., 5th proviso to section 32(1), section 49(1)(iii)(e), Explanation 7 to section 43(1) and/or Explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii) were not referred. 8. Generally, when someone acquires a business and purchase consideration paid for the business is ....
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....erred to in the decision of the Mumbai Tribunal, namely the 5th proviso to section 32(1), section 49(1)(iii)(e), Explanation 7 to section 43(1), Explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii), have any bearing on the issue as to whether depreciation on goodwill arising pursuant to amalgamation is allowable under the Act. 12. On a careful consideration of the said provisions, we find that none of them expressly prohibit the claim of depreciation on goodwill recognised upon amalgamation. The 5th proviso to section 32(1) merely restricts the aggregate quantum of depreciation in cases of succession, amalgamation or demerger, without denying the character of goodwill as a depreciable asset. Similarly, section 49(1)(iii)(e), Explanation 7 to section 43(1) and Explanation 2(b) to section 43(6)(c) are provisions dealing with determination of actual cost and written down value in cases of transfer pursuant to amalgamation, and do not provide that goodwill arising on amalgamation would cease to qualify as an intangible asset eligible for depreciation under section 32(1)(ii). 13. Likewise, section 55(2)(a)(ii), which provides that the cost of self-generated goodwill shall....
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....distinguish the decision in FL Smidth (supra). Respectfully following the aforesaid binding and persuasive precedents, we hold that the assessee is entitled to depreciation on goodwill arising upon amalgamation. Consequently, the ground raised by the assessee for both the AY 2017-18 and 2018-19 stands allowed. 18. Coming to the next issue that the TPO has treated the outstanding receivables from AE as international transaction and attributed notional interest by adopting SBI PLR rate of 13.85% after allowing credit period of 30 days. Accordingly, the TPO has made adjustment by imputing interest of Rs. 9,44,85,190/- and Rs. 12,84,73,044/- for AY 2017-18 and 2018-19 respectively. Against this TP adjustment the Assessee had filed an appeal before the ld.CIT(A) and the ld.CIT(A) has partly allowed this issue by holding that interest should be attributed based on average 6 months and average LIBOR plus 300 BPS. Aggrieved against the same, the Assessee has filed this appeal before us. 19. The ld.AR submitted that the TPO proposed the upward adjustment towards notional interest on outstanding receivables on the basis that trade receivables due from the foreign AE have been delayed b....