2009 (11) TMI 85 - AT - Income Tax

Revision u/s 263 - goodwill recognised in the books of account at the time of amalgamation being the excess of actual consideration paid over and above the net assets over liabilities of the erstwhile company - as per CIT AO incorrectly allowed the same goodwil - HELD THAT - All the rights are similar to the rights mentioned in s. 32 of the IT Act is acquired by the assessee in this case. Thus goodwill is a business or commercial right of similar nature and the assessee is benefited by amalgamation by acquiring that commercial value being intangible assets which the assessee has paid on amalgamation i.e., excess consideration over and above the excess of assets over liabilities is a goodwill which is an asset entitled for depreciation u/s 32 of IT Act. As such, AO is justified in granting the depreciation on goodwill while completing the assessment under s. 143(3) of the IT Act and CIT is not justified in invoking of provisions of s. 263 on this issue. Further, the provision of s. 263 could be invoked by the CIT if the circumstances specified therein viz., (1) the order is erroneous (2) by virtue of the order being erroneous, prejudice has been caused to the interest of the Revenue, exist. For invoking the provision s. 263, both the conditions precedent. for exercising the jurisdiction are conjunctive or not disjunctive. In the instant case, the AO followed one course of action which is permitted by law and that resulted in loss to the Revenue, that cannot, be said erroneous so far as prejudicial to interest of the Revenue. We place reliance on the judgment of Hon'ble Supreme Court of India in the case of CIT vs. Green world Corporation 2009 (5) TMI 14 - SUPREME COURT . Penalty proceedings under s. 271(1)(c) - Since CIT himself has no power to initiate the penalty proceedings. If the AO is of the opinion that penalty is to be imposed under this provision, he is at liberty to take the decision and the CIT cannot put his words in the mouth of the AO. Accordingly, we uphold the entire arguments of the learned counsel of the assessee on the first ground raised by the assessee. Allowability of fees paid to the RoC , the assessee already agreed before the disallowance of the same and assessee cannot have any grievance on this issue. Further, the assessee has not lead any evidence regarding the entitlement of deduction under s. 35D. Moreover, this was not incurred in connection with the extension of its industrial undertaking or in connection with setting up new industrial undertaking. Accordingly, this ground of the assessee is dismissed. Reworking of the book profit, after taking into account the revaluation of assets - In this case the CIT has given only direction to verity whether entries have been made to give effect to the revaluation reserve and the AO may verity this aspect and if necessary, revise the book profit to the limited extent of depreciation charged on the revaluation portion of the assets. This direction given by the CIT is in consonance with the s. 115JB and we do not find any infirmity in this direction and same is upheld.

Issues Involved:
1. Depreciation on Goodwill
2. Disallowance of Fee Paid to RoC for Increase in Authorized Share Capital
3. Reworking of Book Profits Under Section 115JB
4. Capital Gain on Sale of Land

Detailed Analysis:

1. Depreciation on Goodwill:
The primary issue in this case was whether the depreciation on goodwill claimed by the assessee was permissible. The assessee argued that the goodwill represented the excess consideration paid over the value of net assets acquired from Coastal Papers Ltd. (CPL) during amalgamation, and thus qualified as an intangible asset under Section 32 of the IT Act. The CIT, however, contended that the recognition of goodwill was erroneous and not in accordance with recognized accounting principles, and that it amounted to a double deduction since the losses of CPL were separately allowed under Section 72A of the Act. The Tribunal, after considering the arguments and accounting standards, concluded that the goodwill resulting from amalgamation represented various intangible assets and business advantages, which are similar to the rights mentioned in Section 32 of the IT Act. Therefore, the Tribunal held that the AO was justified in allowing depreciation on goodwill, and the CIT was not justified in invoking Section 263 on this issue.

2. Disallowance of Fee Paid to RoC for Increase in Authorized Share Capital:
The CIT directed the AO to disallow the fee paid to the Registrar of Companies (RoC) for increasing the authorized share capital, considering it as a capital expenditure. The assessee had included this amount in rates and taxes and charged it to the profit and loss account. The Tribunal upheld the CIT's direction, agreeing that the fee paid to RoC was a capital expenditure and not deductible. The Tribunal dismissed the assessee's ground on this issue.

3. Reworking of Book Profits Under Section 115JB:
The CIT directed the AO to rework the book profits under Section 115JB by taking into account the revaluation reserve credited to the profit and loss account as income. The Tribunal found that the CIT's direction to verify whether entries had been made to give effect to the revaluation reserve and to revise the book profit to the extent of depreciation charged on the revaluation portion of the assets was in consonance with Section 115JB. The Tribunal upheld the CIT's direction on this issue.

4. Capital Gain on Sale of Land:
The CIT noted that the assessee had not computed capital gain on the sale of land relating to the CPL unit. The assessee conceded that by oversight, they had not shown the capital gain in the computation of income, although the sale consideration was recorded as deductions in fixed assets. The assessee requested that the capital gain be set off against the brought forward capital loss. The Tribunal dismissed the assessee's ground on this issue, as the assessee had already conceded before the CIT.

Conclusion:
The Tribunal allowed the appeal of the assessee partly. It upheld the AO's decision to allow depreciation on goodwill and dismissed the CIT's invocation of Section 263 on this issue. However, it upheld the CIT's directions regarding the disallowance of the fee paid to RoC, the reworking of book profits under Section 115JB, and the computation of capital gain on the sale of land.

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