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2021 (8) TMI 286 - AT - Income TaxDisallowance on account of depreciation on goodwill - Scheme of Amalagamation adopted - method of accounting for the amalgamation - merger method for accounting the amalgamation and net asset value method instead of discounted cash flow method to compute the goodwill by the AO - HELD THAT - We note that in accounting for the assets of the amalgamating company in the books of the assessee the assessee followed the purchase method in pursuance of accounting standard-14 and accounted for the cost of acquisition at fair value resulting into goodwill of ₹ 251.50 Cr and then claimed depreciation thereon @25%. After taking into account the facts of the case and the provisions of section 32 of the Act , we are of the opinion that assessee has rightly claimed the depreciation on goodwill. We also find merit in the contentions of the ld AR that the scheme of amalgamation is approved by the High Court after giving notice to the stakeholders including the Revenue to state its objections, if any, to the proposed amalgamation scheme. However revenue has raised no objection to the scheme of amalgamation. Therefore the principle of estoppel prevents the revenue from challenging the validity of the scheme at the subsequent date - See ELECTROCAST SALES INDIA LTD. VERSUS DCIT, CC-XXI, KOLKATA 2018 (3) TMI 473 - ITAT KOLKATA In view of the decision of United Breweries Ltd Vs ACIT 2016 (9) TMI 1527 - ITAT BANGALORE is not a good law as the Hon ble High Court has held that 5th proviso to section 32(1) is only applicable in the circumstances where the predecessor and successor both claimed depreciation in respect of the same asset. We find that the 5th proviso was inserted in order to prevent double claim of the depreciation in respect of the same asset. But these are not the facts in the present case before us as the amalgamating company did not claim any depreciation on the goodwill and therefore the same can not be disallowed. - Decided in favour of assessee. Addition u/s 56(2)(viib) - excess issue price of shares over fair market value of the shares - Appeal of the assessee was allowed by Ld. CIT(A) by holding that the assessee is a subsidiary company of holding company which is a listed company and therefore the assessee is also a company in which the public are substantially interested and as a result, the provisions of section 56(2)viib) of the Act are not applicable - HELD THAT - The undisputed facts are that the assessee is a subsidiary company of a company SHK which is listed on the stock exchange and therefore is a company in which public are substantially interested. Since the assessee is a subsidiary company of a company which is listed and therefore assessee is also a company in which public are substantially interested and therefore provisions of section 56(2)(viib) are not applicable to the assessee company as the said section is not applicable to the company in which public are substantially interested. We have perused the order of Ld. CIT(A) and observed that while allowing the appeal of the assessee on this issue, Ld. CIT(A) has also held that provisions of section 56(2)(viib) of the Act are not applicable to the assessee for the reason that assessee company is a subsidiary company of holding company which is listed and therefore the assessee also becomes a company in which public are substantially interested. We are of the view that Ld. CIT(A) has correctly allowed the appeal of the assessee. Benefit of brought forward losses denied - CIT(A) allowed the appeal of the assessee on this issue by observing that as per provisions of section 72A of the Act, even if amalgamation was done the other way around, benefit of brought forward losses would have been available to the amalgamated entity - HELD THAT - As perused the provisions of section 72A of the Act minutely and observe that the section allows benefit of losses incurred by amalgamating company to the amalgamated company. Therefore, there is merit in the arguments of the ld. AR that even if the amalgamation was done the other way around, benefit of brought forward losses would have been available to the amalgamated company. Under these facts and circumstances we do not find any infirmity in the appellate order so far as this issue is concerned. The ld. CIT(A) rightly reversed the order of AO denying the benefit of brought forward losses and unabsorbed depreciation to the appellant assessee - Assessee appeal allowed.
Issues Involved:
1. Confirmation of disallowance of ?62,79,73,780/- on account of depreciation on goodwill. 2. Method of accounting for amalgamation (purchase method vs. merger method). 3. Valuation method for computing goodwill (discounted cash flow method vs. net asset value method). 4. Applicability of Section 56(2)(viib) of the Income Tax Act regarding excess issue price of shares over fair market value. 5. Allowance of benefit of brought forward losses and unabsorbed depreciation. Issue-Wise Detailed Analysis: 1. Confirmation of Disallowance of ?62,79,73,780/- on Account of Depreciation on Goodwill: The assessee claimed depreciation on goodwill resulting from the amalgamation of two companies. The AO disallowed this claim, arguing that the discounted cash flow (DCF) method used for valuing the goodwill was misleading and that the net asset value (NAV) method should have been used instead. The CIT(A) upheld this disallowance, stating that the intent of the legislature was to keep amalgamation tax-neutral and that goodwill should be valued at nil for tax purposes. The CIT(A) also referenced various sections of the Income Tax Act, such as Section 43(1) and Section 32(1), to support this view. The assessee argued that their method was consistent with the Supreme Court's decision in CIT vs. Smifs Securities Ltd., which allowed depreciation on goodwill. The ITAT ultimately sided with the assessee, finding that the claim for depreciation on goodwill was valid and supported by multiple judicial precedents. 2. Method of Accounting for Amalgamation: The assessee used the purchase method for accounting the amalgamation, resulting in the creation of goodwill. The AO and CIT(A) argued that the merger method should have been used, which would not have created goodwill. The ITAT found that the purchase method was appropriate and consistent with Accounting Standard 14, and thus the creation of goodwill was justified. 3. Valuation Method for Computing Goodwill: The AO rejected the DCF method used by the assessee for valuing goodwill, arguing that it was based on misleading projections and lacked independent verification. Instead, the AO used the NAV method, which resulted in no goodwill being generated. The CIT(A) supported this view, citing the lack of rigor in the DCF valuation process. However, the ITAT found that the DCF method was valid and that the assessee had rightly claimed depreciation on the goodwill calculated using this method. 4. Applicability of Section 56(2)(viib) of the Income Tax Act: The AO added ?251,18,95,121/- to the assessee's income under Section 56(2)(viib), arguing that the share valuation was flawed. The CIT(A) deleted this addition, stating that the assessee was a subsidiary of a listed company and thus a company in which the public are substantially interested, making Section 56(2)(viib) inapplicable. The ITAT upheld the CIT(A)'s decision, agreeing that the provisions of Section 56(2)(viib) did not apply to the assessee. 5. Allowance of Benefit of Brought Forward Losses and Unabsorbed Depreciation: The AO denied the benefit of brought forward losses and unabsorbed depreciation, arguing that the amalgamation was designed to evade taxes. The CIT(A) reversed this decision, stating that even if the amalgamation had been done the other way around, the benefit would still be available under Section 72A of the Income Tax Act. The ITAT upheld the CIT(A)'s decision, finding no merit in the AO's arguments and allowing the benefit of brought forward losses and unabsorbed depreciation to the assessee. Conclusion: The ITAT allowed the assessee's appeal on all issues, including the claim for depreciation on goodwill, the use of the purchase method for accounting the amalgamation, the DCF method for valuing goodwill, and the applicability of Section 56(2)(viib). The ITAT also upheld the CIT(A)'s decision to allow the benefit of brought forward losses and unabsorbed depreciation. The Revenue's appeal was dismissed in its entirety.
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