2020 (11) TMI 47 - AT - Income Tax

Assessment on non entity - Order framed in the name of non-existent company - entity that ceased to exist pursuant to the order of amalgamation - HELD THAT - Assessment was made by the AO on non-existing entity which is void ab-initio and nullity in the eye of law. The assessment framed against a non-existing entity goes to the root of the matter and it is not a procedural irregularity but a jurisdictional defect and there cannot be any assessment against a non-existing entity or a dead person. Decision of Maruti Suzuki India Ltd. 2019 (7) TMI 1449 - SUPREME COURT squarely applies to the facts of the assessee's case. We hold that the assessment made by the Assessing Officer in the name of the Urmin Marketing Pvt. Ltd. u/s143(3) read with section 144C of the Act vide order dated 27thDecember 2018 for the year under consideration is void ab-initio and bad in law - Decided in favour of assessee. Disallowance of depreciation on the intangible assets/goodwill acquired in the scheme of amalgamation - HELD THAT - The higher profit before tax shown by the UPPL before amalgamation for the year ending 31stMarch 2014 is mainly due to reduction in the purchase price of the materials consumed in comparison to the earlier years which was supplied by the group concern. Reasonableness of cost of purchase is not known. Employee cost in relation to the revenue from operation of UPPL is negligible which suggests that the primary operations were carried out by the directors of the companies who are common. There is no future benefit available to the assessee attributable to the employees. Similarly UPPL was not having any intangible assets such as patents, copyrights or any other unique intellectual property or rights which would yield future benefit. Thus in the circumstances valuation of UPPL at such huge amount is not justifiable. AO was of the opinion that the goodwill is not a difference between purchase consideration and net book value of assets taken over by the assessee rather it (goodwill) represents the difference between purchase consideration and market value of assets acquired. As such the value of the land was not revalued though it keeps on appreciating. If same would have been done then the amount of goodwill would have been low. It accordingly suggests that the entire scheme of generating goodwill in the scheme of amalgamation was based on for tax benefit in a dubious manner. AO was of the opinion that the valuation of UPPL at ₹ 555.75 crores against net assets of ₹ 87,01,43,087/- resulting goodwill of ₹ 468,73,56,913/- has been managed by the directors of the companies which is nothing but a colourable device in order to reduce taxable profit by claim huge depreciation. Depreciation on goodwill emerged due to scheme of amalgamation is not allowable in view of legal provisions - HELD THAT - Revenue was conscious about the fact that there was the possibility of misusing the provisions of the Income Tax Act in the name of the scheme of amalgamation as provided under section 2(1B) causing prejudice to the Revenue. Revenue despite having the opportunity in its hand did not raise any objection within the time allowed by the MCA or subsequently by raising the objection in the impugned scheme of amalgamation. Thus from the conduct of the Revenue, it is revealed that there was no grievance in the impugned scheme of amalgamation. Had there been any grievance of the Revenue, the same could have been brought to the notice of the regional director of the MCA, then the suitable action should have been initiated against the impugned scheme of the amalgamation. We note that recently the Mumbai bench of NCLT in one of the petition for amalgamation in case of Gabs Investment Pvt Ltd (Transferor) and Ajanta Pharma limited (Transfree)in CPS No 995 and 996/2017 has not approved the scheme of amalgamation on the objection raised by the revenue. Income Tax Department, being aggrieved with the scheme of amalgamation, raised the objection which was duly accepted by the NCLT and accordingly, the scheme of amalgamation was disapproved in the above case. Whether the scheme once approved by the Hon ble Gujarat High Court after receiving no objection from the Income Tax Department, the AO/revenue has authority to challenge the same? - Revenue on one hand is issuing circulars to its officers to object the scheme of amalgamation if it is found prejudicial to the interest of revenue but on the other hand it remains silent when such opportunity was afforded to it and raising the same issue during the assessment proceedings which in our considered view is not desirable. No dispute in the amount of the purchase consideration and the NAV determined between the companies, as available in the scheme of amalgamation, which was approved by the Hon ble Gujarat High Court as well - lower authority held the value of goodwill at NIL for the purpose of taxation during the assessment proceedings for the reasons as discussed above in their respective orders. But, in the backdrop of above discussion, we are not convinced with the orders of the authorities below on this preliminary issue. Whether the value of goodwill should be taken at NIL under the provision of Income Tax Act in the books of amalgamated company as no such goodwill was available in the books of amalgamating company prior to amalgamation and such goodwill emerged in the books of amalgamated company? - Section 32 of the Act has limited the amount of depreciation available to the amalgamated company post amalgamation to the extent of the amount of depreciation which would have been available to the amalgamating company, had there not been any amalgamation. Indeed there was no entry in the books of the transferor/amalgamating company for the intangible assets/ goodwill being self-generated assets. However, we note that all the relevant provisions of the Act as discussed above deal with respect to the assets available/recorded in the books of the transferor/amalgamating company. In other words, the assets which have been acquired by the assessee in the scheme of amalgamation would continue at the book value in the books of the amalgamated company. No ambiguity that the goodwill generated in the scheme of amalgamation is acquired by the assessee. Thus, in our considered view the assessee has complied all the conditions provided under section 32 of the Act. Accordingly, we are not convinced with the finding of the authorities below. Contradiction and inconsistency in the valuation report filed by the assessee - Admittedly the valuation report was prepared by the RBSA capital advisors LLP which is the approved valuer. The valuation of the business being a technical matter, in our view, the assistance of the expert is required. The AO himself cannot determine such value. If he was not satisfied with the valuation report, then the only recourse available to the AO is to refer the matter to the technical person. There is no dispute with regard to the fact that property in question is an industrial land which cannot be compared with the residential properties. Admittedly, neither the Assessing Officer nor the Commissioner (Appeals) called for report from the Departmental Valuation Officer and proceeded to make their own estimation. It is incumbent upon the assessing authority to call for report from Departmental Valuation Officer for ascertaining the fair market value of the asset, in the event he is not satisfied about the claim of the assessee. Both the authorities below are not justified in adopting the rate as the assessee had furnished a report from an expert, i.e., Government approved valuer. All the necessary details about the management of the both companies were disclosed in the scheme of amalgamation and nothing was hidden. The scheme contained all the information related to purchase consideration, its valuation, mode of payment and accounting treatment. The Hon ble High Court approved such scheme after inviting comment from ROC, MCA, and official liquidator including the income tax department. Thus in the given fact and circumstances the reasonableness of scheme cannot be doubted. Accordingly, no inference cannot be drawn that the assessee has employed colorable device in order to recordhigh value of purchase considerationwhich is resulting goodwill. Scheme of the amalgamation can be approved under the provisions of section 2(1B) of the Act where shareholders holding not less than 75% in the value of shares of the amalgamating company become the shareholders of the amalgamated company. It is possible only when the shares are issued to the shareholders of the amalgamating company. Not impressed with the finding of the AO that there was no cash payment for the acquisition of the goodwill by the assessee rather it was recognized in the books of accounts by way of accounting entries. Thus we hold that the impugned transaction cannot be regarded as colorable device merely on the reasoning that the assessee claimed the depreciation on the goodwill in the scheme of amalgamation. Direct the AO to allow the claim of the assessee for the depreciation on the impugned goodwill. Hence, the ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of the assessment order framed in the name of a non-existent company.
2. Disallowance of depreciation on goodwill arising from amalgamation.

Detailed Analysis:

Issue 1: Validity of the Assessment Order
The primary issue raised by the assessee was the validity of the assessment order framed by the Assessing Officer (AO) in the name of a non-existent company. The assessee argued that the assessment order dated 27th December 2018 was framed on M/s Urmin Marketing Pvt. Ltd., which had ceased to exist due to amalgamation with M/s Urmin Flavoroma Pvt. Ltd. effective from 1st April 2015. The amalgamation was approved by the Gujarat High Court on 5th January 2016, and the resulting entity was later converted into a Limited Liability Partnership (LLP).

The Tribunal noted that the AO was aware of the amalgamation and subsequent changes, as evidenced by the assessment order itself and various correspondences between the assessee and the tax authorities. The Tribunal cited the Supreme Court's decision in PCIT Vs. Maruti Suzuki India Ltd., which held that an assessment order passed in the name of a non-existent entity is void ab initio and a nullity in the eye of law.

The Tribunal concluded that the assessment order was invalid because it was framed in the name of a non-existent entity. Therefore, the additional ground raised by the assessee was allowed, and the assessment order was quashed.

Issue 2: Disallowance of Depreciation on Goodwill
The second substantive issue involved the disallowance of depreciation on goodwill amounting to ?1,17,18,39,228/- claimed by the assessee. The goodwill arose from the amalgamation of M/s Unicorn Packers Private Limited (UPPL) with M/s Urmin Marketing Pvt. Ltd. (UMPL). The assessee argued that the goodwill was a result of the excess consideration paid over the net value of assets acquired in the amalgamation, and therefore, it should be eligible for depreciation under section 32 of the Income Tax Act.

The AO disallowed the depreciation, arguing that the goodwill was not a tangible asset transferred from the amalgamating company and was created due to revaluation of assets. The AO also contended that the amalgamation was a controlled transaction designed to evade taxes.

The Tribunal examined the facts and legal provisions, including section 32, section 43, and relevant accounting standards. It noted that the purchase consideration was based on a valuation report from a qualified valuer and was approved by the Gujarat High Court. The Tribunal also referred to the Supreme Court's decision in CIT vs. Smifs Securities Ltd., which held that goodwill falls under the category of "any other business or commercial rights of similar nature" and is eligible for depreciation.

The Tribunal rejected the AO's argument that the goodwill was self-generated and not acquired, noting that the excess consideration paid over the net value of assets represented the cost of acquiring goodwill. The Tribunal also dismissed the AO's contention that the amalgamation was a colorable device, pointing out that the scheme was approved by the High Court after inviting objections from the Income Tax Department, which did not raise any objections.

The Tribunal concluded that the assessee was entitled to claim depreciation on the goodwill arising from the amalgamation. It directed the AO to allow the depreciation claim and set aside the order of the CIT(A).

Conclusion:
The Tribunal allowed the appeal of the assessee, quashing the assessment order framed on a non-existent entity and directing the AO to allow the claim of depreciation on goodwill arising from the amalgamation. The judgment emphasized the importance of adhering to legal principles and procedural fairness in tax assessments, particularly in cases involving corporate restructuring and amalgamation.