2025 (2) TMI 240 - HC - Income Tax

Disallowance of depreciation on goodwill accounted from the amalgamating company - HELD THAT - Tribunal took note of the various decisions and held that once the scheme of amalgamation is approved by the High Court after giving notice to the stakeholders including the Income tax Department to state its objections if any to the proposed amalgamation scheme and if the revenue has not raised any objection they would be estopped from challenging the validity of the scheme subsequently. As on perusal of the affidavit filed by the Regional Director where it has been specifically stated that as per the instruction of the Ministry of Corporate Affairs New Delhi a copy of the scheme was forwarded to the Income tax Department on 8th July 2015 with a request to forward their comments/observations/objections if any on the proposed scheme of amalgamation within fifteen days but till the date of filing of the affidavit before the High Court that is on 26th August 2015 no comments/observations/objections were received from the Income tax Department. That apart we note that the share exchange ratio was very much part of the scheme as could be seen from paragraph 11.1 of the scheme of amalgamation which was presented for approval. Tribunal partly took note of the submissions made on behalf of the assessee for the assessment year 2013-14 which was the first year the claim for depreciation of goodwill was allowed by the Department and the matter attained finality. Though for the assessment year 2014-15 the same was allowed initially but subsequently the assessment has been reopened and the matter is stated to be pending. Thus this is already a very relevant factor which weighed in the mind of the Tribunal. Thus we find that the issue was considered when the scheme was approved and the learned Tribunal was right in holding that the order passed by the CIT affirming the order of the AO is erroneous. Thus we find no grounds to interfere with the order passed by the learned Tribunal. Decided against the revenue.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

i) Whether the Tribunal correctly deleted the disallowance of depreciation on goodwill accounted from the amalgamating company.

ii) Whether the Tribunal correctly applied the law of amalgamation given that full disclosure into assets of the amalgamating company was allegedly not made, and the goodwill was not accounted for in the swap ratio of shares, purportedly violating accounting standard AS-14.

iii) Whether the Tribunal correctly held that post-amalgamation, after the scheme was approved by the High Court, the revenue has no jurisdiction to examine the financials and tax avoidance under the scheme, particularly when the assessee failed to disclose goodwill in the amalgamation scheme.

ISSUE-WISE DETAILED ANALYSIS

Depreciation on Goodwill

The relevant legal framework involves the Income Tax Act, 1961, particularly concerning depreciation claims on goodwill post-amalgamation. The Tribunal's interpretation was based on the principle that once a scheme of amalgamation is sanctioned by a High Court, it is binding on all stakeholders, including statutory authorities. The Tribunal referenced precedents such as Marshall Sons & Co. (India) Ltd. vs. ITO, which established that sanctioned schemes are binding.

The Tribunal noted that the Income Tax Department had an opportunity to object to the amalgamation scheme but did not do so. This lack of objection was crucial in the Tribunal's reasoning, leading to the conclusion that the revenue is estopped from challenging the scheme's validity later. The Tribunal cited the decision in Electrocast Sales India Ltd. Vs. DCIT, which supported the view that post-sanction, tax authorities cannot reopen valuation issues.

The key evidence included the scheme's approval process, where the Regional Director of Company Affairs raised valuation issues, which the assessee addressed. The Income Tax Department's failure to object was pivotal. The Tribunal applied the law to these facts, concluding that the revenue's attempt to deny depreciation was unjustified.

Application of Amalgamation Law and Accounting Standards

The Tribunal considered whether the amalgamation complied with accounting standard AS-14, focusing on the swap ratio and disclosure of goodwill. The Tribunal found that the revenue's argument about non-compliance was not sustainable because the scheme was approved by the High Court after due process, including stakeholder notifications.

Competing arguments centered on whether the scheme was a device for tax avoidance. The Tribunal, referencing the Gujarat High Court's decision in Vodafone Essar Gujarat Ltd., found that even if a scheme results in tax avoidance, it does not imply that tax avoidance was the sole objective. The Tribunal concluded that the scheme had legitimate business purposes beyond tax considerations.

Jurisdiction Post-Amalgamation Approval

The Tribunal addressed whether the revenue could examine financials and tax avoidance after the scheme's approval. The Tribunal emphasized that the High Court's sanction, following stakeholder notifications, limits the revenue's jurisdiction to reopen such matters. The Tribunal noted that the valuation issue was specifically addressed during the approval process, and the revenue's subsequent challenge was unfounded.

The Tribunal's conclusion was that the revenue's lack of objection during the approval process precluded it from later contesting the scheme's validity or the associated depreciation claims.

SIGNIFICANT HOLDINGS

The Tribunal's significant holdings include:

- The principle that once a scheme of amalgamation is sanctioned by a High Court, it is binding on all stakeholders, including statutory authorities, as supported by Marshall Sons & Co. (India) Ltd. vs. ITO.

- The Tribunal's rejection of the revenue's challenge based on alleged non-compliance with accounting standards, given the High Court's approval process and the absence of objections.

- The Tribunal's determination that post-approval, the revenue cannot reopen issues related to valuation and depreciation claims, as evidenced by the lack of objections during the scheme's approval process.

Final determinations on each issue were against the revenue, affirming the Tribunal's decision to allow the depreciation claim on goodwill and dismissing the revenue's appeal.

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