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TMI Blog2021 (8) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of Rs. 14,05,93,564/- under the normal provisions and Rs. 8,11,17,325/- as book loss under section 115JB of the Act. The case of the assessee was selected for scrutiny and statutory notices were duly issued and served upon the assessee. The assessee is a private limited company of Keva Group of Companies. M/s. S.H. Kelkar & Co. Ltd. (hereinafter referred to as SHK) is a 100% holding company of the assessee and also listed on National Stock Exchange of India. Thus the assessee is a 100% subsidiary of a listed company and also a company in which public are substantially interested. During the year under consideration another 100% subsidiary company belonging to Keva Group was amalgamated with the assessee company after obtaining approval of Hon'ble Bombay High Court on the scheme of amalgamation. Prior to amalgamation, the name of the assessee was M/S KV Arochem Pvt. Ltd. which was changed to M/s. Keva Frangrances Pvt. Ltd. post amalgamation. In other words the Keva Fragrances Pvt. Ltd. was amalgamated with the assessee M/s. KV Arochem Pvt. Ltd. and after amalgamation the name of the company was changed to M/S Keva Frangrances Pvt. Ltd. from M/S KV Arochem Pvt. Ltd. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estioned the method of accounting for the amalgamation and held that the said method of accounting for amalgamation has resulted into a huge gap between sale consideration and book value due to which the assessee has claimed huge depreciation on the goodwill to reduce its profits. Accordingly, a show cause notice was issued to the assessee as to why the goodwill and depreciation as calculated by the assessee should not be rejected which was replied by the assessee by written submissions dated 13.12.2018 by submitting that the amalgamation was effected after approval of the scheme of amalgamation by the Hon'ble Bombay High Court which are incorporated in the assessment order. The AO, not being satisfied with the reply of the assessee, came to the conclusion that the claim of the depreciation is totally wrong and against the provisions of the Act and thus rejected the contentions of the assessee to the effect that claim of depreciation was pursuant to the decision of the Apex Court in the case of Smifs Securities Ltd. Consequently, the AO made an addition of Rs. 62,79,73,780/- to the income of the assessee in the assessment framed under section 143(3) dated 29.12.2018. 4. Aggrieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration for transfer of shares of amalgamating company, to be same as the cost of shares of amalgamating company. 4.31 The section 43 of the Income Tax Act provides for the definitions of certain terms, relevant to income from profits and gains of business or profession. In subsection 1 of this section the term "actual cost" has been defined. There are various provisions and explanations to this subsection to provide for various situations. Explanation 7 is one such explanation which provides for the situation involving amalgamation which is material to the case on hand. The explanation is reproduced below: "Explanation 7.-Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business." 4.3.32 Similarly, fifth proviso to section 32(1) of the Act provides that, depreciation allowable in the case of succession, amalgamation or merger, deme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he category of intangible assets as per the provisions of section 32(1) of the Act. The contention before the court was not as to whether difference arising out of amalgamation was goodwill eligible for depreciation. The Court has not delved into the issue in light of provisions of explanation 7 to section 43(1) as well as fifth proviso to section 32(1) of the Act. The issue of the scheme of amalgamation being tax neutral in view of various provisions of the Act, as discussed in earlier paragraph no 4.3.29 of this order, was also not before the Supreme Court in the said case. In view of the above and in view of the rule of 'sub silentio', the judgement of Supreme Court in the case of Smifs Securities Ltd. [Supra) cannot be treated as binding on the issue under discussion in the case of the appellant Reliance is placed on the judgement of Supreme Court in the case of S. Shanmugavel Nadar vs State Of Tamil Nadu, 263 1TR 658. The relevant observations of the hon'ble Supreme Court in that case are reproduced below: "The question posed was: can the decision of an Appellate Court be treated as a binding decision of the Appellate Court on a conclusion of law which was neithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applying fifth proviso to section 32(1] of the IT Act and held that, the amalgamated company cannot claim depreciation on assets acquired under amalgamation, more than the depreciation allowable to amalgamating company. Though, in that case the tangible asset was already valued by the amalgamating company and was existing in the balance sheet of the amalgamating company, the ITAT had made certain observations which are useful while deciding the issue under discussion. The ITAT, has unequivocally held that, the fifth proviso to the section 32(1) of the Act shall prevail while deciding the issue of the issue of depreciation on the assets acquired in the scheme of amalgamation. 4.3.41 The appellant has challenged the applicability of the case of United Breweries (Supra]. It has argued that, in the case of United Breweries (supra), goodwill was already appearing in the books of amalgamating company as an asset. Hence, the question of apportionment of depreciation arises on amalgamation. However, in the case of appellant company, facts are totally distinguishable. Goodwill was never part of financial statements of Keva Fragrances Private Limited (amalgamating company). Goodwill w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod for the valuing the net worth of the amalgamating company. Since the value of the amalgamating company as per NAV method was equal to the book value, there was no question of generation of any goodwill. 4.3.46 The valuation of the amalgamating company KFG was carried out by using Discounted Cash Flow method by employing the services of a private agency by name Kaveri Venkatraman and Associates, which submitted it's report on 04.02.2016. It is seen that the AO has scrutinised the process of valuation and has questioned the validity and integrity of the process of valuation, after examining the concerned valuer on oath and examining the data used by the valuer for the purpose of valuation. It would be pertinent to reproduce the relevant portion of the assessment order. "From the share valuation report and the statement of the valuer, it is clear that the entire valuation was made exclusively on the information given by the assessee and no independent verification was made by the valuers. In fact, the projections of profits were also provided by the management It goes without saying that the projections made by the assessee are not based on any facts or tangible data but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion deserves to be rejected in light of the discussion in the earlier paragraphs. Reliance is placed on the decision of ITAT, Delhi in the case of Agro Portfolio (P.) Ltd. vs. Income Tax Officer, Ward 1 (4), New Delhi, in which it was held that Assessing Officer was justified in rejecting DCF method and adopting Net Asset Value method, because the valuation as per DCF method was carried out depending on data supplied by assessee and no evidence was produced for verifying correctness of data supplied by assessee. I agree with the decision of the AO, to use the Net Asset Value method as per which the value or net worth of the amalgamating company KFG comes to Rs. 130,21,00,000/-. The goodwill generated in such situation would be Nil. 4.3.49 In view of the discussions in the foregoing paragraphs, the ground no B is dismissed." 5. The Ld. A.R. submitted before us that the order of Ld. CIT(A) upholding the order AO on the disallowance of goodwill, merger method of accounting and net asset value method for valuation is completely wrong and against the provisions of the Act. The Ld. A.R. submitted that the assessee accounted for the goodwill in the books of accounts by following purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.R. submitted that the 5th proviso was inserted in order to prevent double claim of the depreciation in respect of the same asset. The Ld. A.R. submitted that the amalgamating company did not claim any depreciation on the goodwill and therefore the same can not be rejected and disallowed. The Ld. A.R. also relied on the decision of Mylane Laboratories Ltd. vs. DCIT (2020) 113 Taxman.com (6)(Hyderabad Tri) to support his contentions. 5.2. The Ld. A.R. also submitted that both the authorities below have grossly erred in questioning the claim of depreciation on goodwill which has resulted from the amalgamation of one company with another due to consideration paid being higher vis-à-vis the net book value of the assets of the amalgamating company. The Ld. A.R. also vehemently argued that once the scheme of amalgamation is approved by the High Court after affording an opportunity to the Revenue to raise any objection, then Revenue can not be allowed to rake up the issue post approval of scheme of amalgamation by the Hon'ble High Court. The Ld. A.R. submitted that the Hon'ble Bombay High Court has passed an order dated 01.07.2016 seeking comments from the revenue within 15 da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed by upholding the order of Ld. CIT(A) and AO. 7. We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee is a private limited company of Keva Group of Companies. M/s. SHK which is a 100% holding company of the assessee company and is listed on National Stock Exchange of India meaning thereby that the assessee is itself a company in which public are substantially interested. During the year under consideration another 100% subsidiary company belonging to Keva Group was amalgamated with the assessee company after the scheme of amalgamation is approved of Hon'ble Bombay High Court. Prior to amalgamation the name of the assessee was M/S KV Arochem Pvt. Ltd. which changed to M/S Keva Frangrances Pvt. Ltd which was the name of amalgamating company till the date it existed. In other words the Keva Fragrances Pvt. Ltd. was amalgamated with the assessee M/S KV Arochem Pvt. Ltd. and after amalgamation the name of the company was changed to M/S Keva Frangrances Pvt. Ltd. from M/S KV Arochem Pvt. Ltd. The assessee company followed the purchase method of accounting to account for amalgamation entries in it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed huge depreciation on the goodwill. Now in this background the issue before us is whether the assessee is entitled to depreciation or not. 8. 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 Rs. 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. The case of the assessee find supports from the several decisions cited by the ld AR which are discussed as under: a) In the case of CIT vs. Smifs Securities Ltd.(supra), the Hon'ble Apex Court has held that depreciation is allowable on the amount of goodwill which has come into being as a result of amalgamation of two companies. b) In the case of Toyo Engineering Ltd. (supra), the coordinate bench after following the decision of Apex Court in the case of CIT Vs Smifs Securities Ltd (supra) and also the Hon'ble Bombay High Court in Toyo Engin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation on goodwill in favour of the assessee by holding and observing as under: "In our opinion observation of the ld. Commissioner of Income Tax (Appeals) that goodwill shown by the assessee in its books was an unreal and artificially inflated one is incorrect. Assessee had worked out the share swap ratio considering net worth of the rental division of M/s.Mtandt Ltd transferred to it and divided such net worth with value of its own share as on 31.12.2011. The valuation of the rental division was supported by a certificate issued by a competent Chartered Accountant and Revenue has not placed anything on record to prove that the valuation was unfair or incorrectly done. Thus, in our opinion goodwill which came into the books of the assessee on account of rounding off of the decimal in share swap ratio was not an artificial one. Issue of equity shares by the assessee to M/s. Mtandt Ltd was not artificial but real. Even in the case of Smifs Securities Ltd (supra) considered by Hon'ble Apex Court, goodwill was result of an scheme of amalgamation which is not much different from a scheme of demerger. In the circumstances, we are of the opinion that the lower authorities fell in er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets shall be inter alia apportioned between the amalgamating company and the amalgamated company in the ratio of the number of days for which the assets were used by them. In our considered view, in the case before us the 'goodwill' had arisen in the books of the assessee company in the course of the process of the scheme of amalgamation of M/s Premier Finance Trading Company Private Limited with the assessee company, that was approved by the Hon'ble High Court of judicature at Bombay, vide its order dated 20.09.2013, pursuant whereto the assets and liabilities of the amalgamating company were transferred to and vested with the assessee company from the appointed date i.e. 01.04.2013. In our considered view, the aforesaid claim of depreciation raised by the assessee on the value of 'goodwill' is in conformity with the judgment of the Hon'ble Supreme Court in the case of M/s Smifs Securities Ltd. (supra). Also, we are unable to comprehend as to how the aforesaid claim of depreciation raised by the assessee is found to be in violation of 'Proviso 5' to Sec. 32(1) of the Act. Further, we find that the claim of the assessee towards depreciation on 'goodwill' which was acquired in pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectrocast Sales India Ltd. Vs DCIT (Supra) wherein the coordinate bench has held as under: "4.4. We find that the scheme of amalgamation would be approved by the Hon'ble High Court only after ensuring that the same is not prejudicial to the interests of its members or to public interest. Hence the merger scheme approved by the Hon'ble High Court having in mind the larger public interest, cannot be disturbed by the revenue merely because the assessee is not entitled for benefits u/s 72A of the Act. The expression 'Public interest' was discussed by the Hon'ble Gujarat High Court in the case of Wood Polymer Ltd reported in 109 ITR 177 (Guj) wherein the Hon'ble Court refused to sanction the scheme of amalgamation formulated solely for the purpose of avoiding taxes. It was held that : "The court is charged with a duty, before it finally permits dissolution of the transferor company by dissolving it without winding up, to ascertain whether its affairs have been carried on, not only in a manner not prejudicial to its members but in even public interest. The expression "public interest" must take its colour and content from the context in which it is used. The context in which the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously xray the same." 4.4.1. Further we find that the provisions of section 394A of the Companies Act, 1956 reads as under:- Notice to be given to Central Government for applications under sections 391 and 394 - The court shall give notice of every application made to it under section 391 or 394 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing any order under any of these sections. Hence if there be any objections for the income tax department , they could raise the same at that stage i.e. prior to sanction of scheme by the court. Once the scheme is approved, it implies that the same has been done after duly considering the representations from the Government / revenue. Similar view was expressed by the Co-ordinate bench of this Tribunal in the case of ITO vs Purbanchaal Power Co. Ltd in ITA No. 201/Kol/2010 dated 17.7.2014 wherein it was held that :- From the above provisions of section 394A of the Companies Act, 1956, legal position enunciated in the decisions of Hon'ble Gujarat High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme , the Income tax department will be bound by the same, including the appointed date and cannot review the same, has been held by the Hon'ble Bombay High Court in the case of Casby CFS (P) Ltd reported in 231 Taxman 89 (Bom) dated 19.3.2015 (underlining provided by us) 4.5.1. We also find that the Hon'ble Supreme Court in the case of J.K.(Bombay) (P) Ltd vs New Kaiser -I-Hind Spg.& Wvg.Co. reported in 1970 AIR 1041 (SC) dated 22.11.1968 had held : The Principle is that a scheme sanctioned by the court does not operate as a mere agreement between the parties ; it becomes binding on the company, the creditors and the shareholders and has statutory force , and therefore the joint-debtor could not invoke the principle of accord and satisfaction. By virtue of the provisions of sec. 391 of the Act, a scheme is statutorily binding even on creditors , and shareholders who dissented from or opposed to its being sanctioned. It has statutory force in that sense and therefore cannot be altered except with the sanction of the Court even if the shareholders and the creditors acquiesce in such alteration. (underlining provided by us) 4.5.2. We find that the aforesaid observations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t could only be deemed to have been heard and decided." We find that in the instant case, the income tax department had the opportunity to controvert the specific clause mentioned in para 10(iii) in the scheme of amalgamation , when the scheme was presented before the Hon'ble High Court for approval. Thus applying the principles of res judicata as explained by the Hon'ble Apex Court in the aforesaid case, the issue can be deemed to be heard and decided . Accordingly, the argument that the same cannot be agitated in appeal u/s 391(7) of the Companies Act, 1956 deserves attention and merit. The English Court of Chancery in case of Henderson vs Henderson reported in (1843-60) All ER Rep 378 while construing Explanation IV to Section 11 of Code of Civil Procedure quoted hereunder:- The plea of res judicata applies, except in special case (sic), not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a Judgement, but to every point which properly belonged to the subject of litigation and which the parties, exercising reasonable diligence, might have brought forward at the time". 4.7. It would be relevant to note that the scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld the view of Trial Court wherein it was held that " the present appellants / applicants had knowledge about the passing of order of winding up. They had knowledge or have had occasion to come before this Court earlier, and did not come because they have accepted legality and validity of amalgamation". Applying the Doctrine of Acquiescence and Estoppel the Hon'ble Court held that "It appears to us all the appellants have accepted the scheme of amalgamation and now these companies against whom relief is sought for are no longer in existence and they cannot be reverted back to their earlier position as by this time third parties right have been created by reallocation or reallotment of shareholding for there may be fresh subscribing. In true sense there has been sea change in the shareholding pattern of these companies. Therefore we dismiss the appeal." 4.8. In view of the aforesaid observations and findings in the facts and circumstances of the case, we hold that the accumulated losses of amalgamating companies, comprising of unabsorbed short term capital loss of Rs. 10,26,44,123/- ; unabsorbed long term capital loss of Rs. 6,34,784/- and unabsorbed business loss of Rs. 6, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case and in law, the Ld.CIT(A) erred in deleting the addition made u/s.56(2)(viib) of the I.T. Act, without appreciating the fact that the entire valuation was made exclusively on the information given by the assessee and no independent verification was made by the Valuer. In fact, the projections of the profit was also provided by the management". "2. On the facts and circumstances of the case and in law, the Ld.CIT(A) failed to appreciate the fact that the projections made by the assessee was not based on any facts or tangible data but suppositions made for the purpose of valuation so as to suit the assessee". "3. On the facts and circumstances of the case and in law, the Ld.CIT(A) failed to appreciate the fact that there was great difference between the projections and the actuals made in the share valuation report". "4. On the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate the fact that the method (DCF method) deployed by the assessee for valuation of shares is deeply flawed and the consideration received for the share premium does not stand the test of law". "5. On the facts and circumstances of the case and in law, the Ld.CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 130.21 Crores. The AO on the basis of this valuation calculated the issue price over fair value of shares at Rs. 251.18 Crores and added the same u/s 56(2)(viib) of the Act to the income of the assessee. 15. In the appellate proceedings, the 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 to the appellant by observing and holding as under:. "4.1 I find that the arguments made by the appellant about the applicability of provisions of section 56(2)(viib) have force considering the fact that, the appellant company was wholly owned subsidiary of a listed public limited company, i.e. SHK. The provisions of section are not applicable to a company, in which public are substantially interested as expressly mentioned in the clause viib of subsection 2 of section 56 of the Act. The term "company in which public is substantially interested" is defined in the section 2(18) of the Act. As per the clause b of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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. In view of these facts, we are of the view that Ld. CIT(A) has correctly allowed the appeal of the assessee on this issue and therefore uphold the same on this issue by dismissing the ground Nos.1 to 4 of the Revenue. 17. The issue raised in ground No.5 to 9 is against the order of Ld. CIT(A) allowing the benefit of brought forward losses to the assessee which was rejected by the AO. 18. The AO noticed that M/s. Keva Fragrances Private Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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