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TMI Blog2021 (11) TMI 763X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 1271.90 crores. Accordingly excess amount recorded as goodwill. Admittedly all these information was part of scheme of amalgamation which was approved the jurisdictional High Court as discussed above. Thus the finding of the learned principal CIT to this extent that the scheme of amalgamation is in the nature of merger is based on wrong assumption of facts. Depreciation on goodwill generated in the scheme of amalgamation is not allowable under the provision of the Act - Section 32 of the Act requires allowing the depreciation to the amalgamated company in the same manner which would have been allowed to the amalgamating company in the event had there not been any amalgamation.Similarly, the actual cost of the assets acquired in the scheme of amalgamation in the hands of the amalgamated company will continue to be the same as it would have been in the hands of the amalgamating company in the event, had there not been any amalgamation. WDV of the assets acquired in the scheme of amalgamation in the hands of the amalgamated company will remain to be the same as it would have been in the hands of the amalgamating company in the event, had there not been any amalgama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue : Shri Mohd Usman, CIT.D.R ORDER PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeals have been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax, Ahmedabad, dated 31/03/2021 arising in the matter of assessment order passed under s. 263 of the Income Tax Act, 1961 (here-in-after referred to as the Act ) relevant to the Assessment Years 2016-2017 2017-18. 2. The assessee has raised the following grounds of appeal: 1. The order u/s.263 of the Act has been passed beyond the period of limitation prescribed u/s.263(2) of the Act and is thus illegal and bad in law. 2. The subject order u/s. 263 of the Act is absolutely erroneous and bad in law as notice u/s. 263 was issued for the assessment order passed in erstwhile Suzlon Global Services Limited (PAN AAJCS0174R) whereas the order u/s. 263 has been passed with direction to do afresh assessment in case of appellant which is having PAN AAICS1406R and therefore the subject order is null and void and needs to be set aside in the interest of natural justice and equity. 3. The Id. PCIT has grossly erred in law and on facts in not appre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncrete conclusion and without conducting any inquiry or investigating the issue, merely directed the AO to frame the assessment order afresh. Without there being any positive finding about order being erroneous and prejudicial to the interest of the revenue, the action of the Id. PCIT is without jurisdiction and illegal and hence deserves to be deleted. 10. The Id. PCIT has erred in not considering various facts and in not appreciating the facts and law in their proper perspective. 11. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal. 3. The solitary issue raised by the assessee is that the learned Principal CIT under section 263 of the Act erred in holding that the assessment framed under section 143(3) of the Act as erroneous insofar prejudicial to the interest of revenue. 4. Before we touch the issue raised by the assessee, it is pertinent to take a brief note on the history of the facts of the case which goes like this. M/s Suzlon Global Services Limited (PAN: AAJCS0174R) has acquired a division of its holding company namely Operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation for one day of ₹ 0.50 crores on said unabsorbed deprecation. 4.3 The above facts relates to SGSL which was acquired by the M/s SSL by virtue of the judgment of Hon ble Gujarat High Court dated 14th October 2016 with effect from 31st March 2016. 4.4 Moving further, M/s SSL as a result of amalgamation has created goodwill in the books of accounts for ₹ 1427.90 crores only. 4.5 As the amalgamation has taken place by virtue of the Judgment of Hon ble Gujarat High Court dated 14th October 2016 effective from 31st March 2016, M/s SGSL prepared its financial statements till 30th March 2016. Likewise M/s SSL prepared its financial statement as on 31st March 2016 after incorporating the net assets acquired on amalgamation which were held only for one day by it. In other words, M/s SGSL claimed the depreciation on its assets in its financial statement prepared on 30th March 2016 which were transferred to M/s SSL and thereafter M/s SSL claimed depreciation on the assets acquired from M/s SGSL only for one day in the year ending as on 31-3-2016. As such the depreciation on the assets acquired by M/s SSL from M/s SGSL were claimed proportionately on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act dated 29th October 2018 in the case of M/s SGSL is erroneous insofar prejudicial to the interest of revenue. It was pointed out by the learned Principal CIT that the assessee is not eligible for claiming depreciation on the goodwill arising out of amalgamation in view of 6th proviso to section 32(1), section 49(1)(iii)(e), explanation 7 to section 43(1), explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii) of the Act. 4.12 Likewise, the Principal CIT also pointed out that the amalgamation between M/s SGSL and M/s SSL was in the nature of merger as provided under accounting standard 14 issued by ICAI which prohibits to record the goodwill in such scheme of amalgamation i.e. amalgamation in the nature of merger. As per the learned Principal CIT the above facts were not verified by the AO during the assessment proceedings. 4.13 In view of the above, the learned Principal CIT sought an explanation from the assessee by issuing a show cause notice dated 22nd March 2021 proposing to disallow the depreciation claimed by the assessee on the goodwill as discussed above. 4.14 In response to such show cause notice, the assessee vide letter dated 30th March 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of merger and if any difference arises between the purchase consideration viz a viz the net assets acquired by the amalgamated company, the same has to be treated/adjusted against the reserves. In holding so the learned principal CIT, placed reliance on various judgments which are incorporated in his order. 5.1 The learned Principal CIT further observed that even if the goodwill is created in the scheme of amalgamation in the books of the amalgamated company, then also the same is not eligible for deduction under the provisions of Income Tax Act. In this connection the learned Principal CIT has made references to the various provisions of section as detailed below: i. 6th Proviso to section 32(1) of the Act ii. Section 49(1)(iii)(e) of the Act iii. Explanation 7 to section 43(1) and explanation 2(b) to section 43(6)(c) of the Act iv. Section 55(2)(a)(ii) of the Act 5.2 In view of the above, the learned Principal CIT concluded that the facts as discussed in details above have not been considered by the AO during the assessment proceedings. Therefore, the order passed by the AO under section 143(3) of the Act is erroneous insofar prejudicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the learned principal CIT, the assessee is in appeal before us. 7. The learned AR before us filed a paper book running from pages 1 to 330 and assailed the order of the learned Principal CIT on various grounds. It was contended by the learned AR that the erstwhile company namely SGSL bearing PAN AAJCS 0174 R has not claimed any depreciation which is in dispute. As such the goodwill which was generated in the hands of SSL as a result of amalgamation after getting the approval from the Hon ble Gujarat High Court, the erstwhile SGSL did not claim any depreciation on such goodwill. Thus the question of disallowing the same in the revisionary proceedings does not arise. The erstwhile company SGSL has claimed the depreciation on the goodwill which was brought in its books from the earlier years pertaining to the acquisition of a division under a slum sale scheme. 7.1 The learned AR further submitted that the successor company has claimed the depreciation arising in the scheme of amalgamation which was also allowed by the Revenue in the intimation issued under section 143(1) of the Act vide dated 30 December 2016. The copy of intimation is placed on pages 51-58 of the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive orders which we have already adverted to in the preceding paragraph. Therefore we are not repeating the same for the sake of brevity. 8. We have heard both the parties and perused the materials available on record before us, especially the impugned orders and the case law cited therein and also cited by the learned AR of the assessee. The facts of the case are not in dispute which have already been elaborated in detail in the preceding paragraph. Therefore, we are not inclined to repeat the same for the sake of brevity, repetition and convenience. In the present case, the learned principal CIT has revised the order of the assessment framed in the case of M/s SGSL dated 29th October 2018. Admittedly, M/s SGSL got amalgamated with M/s SSL with effect from 31st March 2016 by virtue of the order of Hon ble Gujarat High Court dated 14th October 2016. Once, a company is amalgamated with another company, it remains no longer in existence. The amalgamating company namely M/s SGSL prepared its balance sheet as on 30th March 2016 showing all its assets and liabilities which were transferred to the amalgamated company namely M/s SSL with effect from 31st March 2016. As a result of am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned principal CIT has proceeded to verify the depreciation of the successor company on the wrong assumption of facts. In fact, if at all the learned principal CIT was to proceed with the revisionary proceedings, he could have done it by initiating such proceedings against the intimation generated under section 143(1) of the Act dated 30-12-2016 in the case of successor company namely M/s SSL. It is for the reason that it was the successor company which claimed the depreciation for ₹ 179.85 crores with respect to the goodwill generated to it in the scheme of amalgamation as discussed above subject to the time limit as specified under section 263 of the Act. The time as specified under section 263(2) of the Act is for 2 years from the end of financial year in which intimation under section 143(1) of the Act was issued i.e. 2 years from 31st March 2017 was issued. Admittedly, the intimation was issued under section 143(1) of the Act dated 30th December 2016 and the time limit of revising the same has expired on 31st March 2019 which is much before the relevant time i.e. notice issued under section 22-3-2021. In holding so we draw support and guidance from the judgment of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act dated 23rd August 2017 in the name of M/s SGSL. Finally the assessment was framed in the name of the erstwhile company by the AO vide order dated 29th October 2018. The fact about the scheme of amalgamation was duly communicated by the assessee vide letter dated 16-02-2018. The relevant extract of the communication is placed on pages 233 of the paper book which reads as under: Amalgamation or Demerger during the year During the year under consideration Assessee Company is amalgamated with effect from 31.03.2016 with company namely Suzlon Structures Limited {'SSL') pursuant to order of Hon'ble High Court of Gujarat dated 14.10.2016. Accordingly assesses company had filed its return of income after giving effect to the subject scheme of amalgamation. The said fact has already been intimated to your good office vide our letter dated: 06.01.2017 copy of letter is enclosed herewith as Annexure-7. 8.5 However we find that, the assessment has been framed by the AO in the name of erstwhile company dated 29th October 2018 which was not in existence. In other words, the assessment has been framed in the name of the person who was not in existence at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vert to certain significant facets of the present case: (i) Firstly, the income which is sought to be subjected to the charge of tax for AY 2012-13 is the income of the erstwhile entity (SPIL) prior to amalgamation. This is on account of a transfer pricing addition of ₹ 78.97 crores; (ii) Secondly, under the approved scheme of amalgamation, the transferee has assumed the liabilities of the transferor company, including tax liabilities; (iii) Thirdly, the consequence of the scheme of amalgamation approved under Section 394 of the Companies Act 1956 is that the amalgamating company ceased to exist. In Saraswati Industrial Syndicate Ltd., (supra) the principle has been formulated by this Court in the following observations: 5. Generally, where only one company is involved in change and the rights of the shareholders and creditors are varied, it amounts to reconstruction or reorganisation of scheme of arrangement. In amalgamation two or more companies are fused into one by merger or by taking over by another. Reconstruction or 'amalgamation' has no precise legal meaning. The amalgamation is a blending of two or more existing undertakings into one und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an assessment in the name of such company is merely a procedural defect which can be cured. The High Court held that upon a notice under Section 143 (2) being addressed, the amalgamated company had brought the fact of the amalgamation to the notice of the assessing officer. Despite this, the assessing officer did not substitute the name of the amalgamated company and proceeded to make an assessment in the name of a non-existent company which renders it void. This, in the view of the High Court, was not merely a procedural defect. Moreover, the participation by the amalgamated company would have no effect since there could be no estoppel against law : 11. After the sanction of the scheme on 11th April, 2004, the Spice ceases to exit w.e.f. 1st July, 2003. Even if Spice had filed the returns, it became incumbent upon the Income tax authorities to substitute the successor in place of the said 'dead person'. When notice under Section 143 (2) was sent, the appellant/amalgamated company appeared and brought this fact to the knowledge of the AO. He, however, did not substitute the name of the appellant on record. Instead, the Assessing Officer made the assessment in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that completion of assessment in respect of a non-existent company due to the amalgamation order, would render the assessment a nullity. 23. In Micra India, (supra) the original assessee Micra India Pvt. Ltd had amalgamated with Dynamic Buildmart (P) Ltd. Notice was issued to the original assessee by the Revenue after the fact of amalgamation had been communicated to it. The Court noted that though the assessee had participated in the assessment, the original assessee was no longer in existence and the assessment officer did not the take the remedial measure of transposing the transferee as the company which had to be assessed. Instead, the original assessee was described as one in existence and the order mentioned the transferee's name below that of the original assessee. The Division Bench adverted to the judgment in Dimension Apparels (supra) wherein the High Court had discussed the ruling in Spice Entertainment (supra). It was held that this was a case where the assessment was contrary to law, having been completed against a non-existent company. 8.6 Hon'ble Supreme Court thereafter took note of the judgment in the case of Sky Light Hospitality vs. ACI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expedient nor desirable. 8.7 Thus in view of the above we hold that the assessment in itself is not valid under the eyes of law as it was made in the name of non-existent company. Consequently, such assessment cannot be made subject to revision under section 263 of the Act. In holding so we draw support and guidance from the judgment of Hon ble Gujarat High Court in case of Pr. CIT vs. Kaizen Products (P.) Ltd. reported in [2018] 406 ITR 311 (Delhi) where it was held as under: 14. In the present case, it is not in dispute that KPPL ceased to exist as a result of the order dated 8th October, 2010 passed by this Court whereby its merger with Ventura stood approved. Ventura was later renamed as ARSPL. These facts were known to the AO in the course of the assessment proceedings. The statement of the Director of KPPL formed part of the assessment record. Consequently, the issuance of the notice dated 23rd March, 2016 by the PCIT under Section 263 of Act and consequential order dated 31st March, 2016 were in respect of a non-existent entity and were clearly void ab initio, as correctly held by the ITAT. This, by itself, was sufficient for the ITAT to set aside the impugned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of interest method the difference between purchase considerations and the net assets taken over by the amalgamated company is adjusted with reserve. On the other hand in case of purchase method if purchase consideration surpasses net value of assets taken over then such difference is to be as recognized as goodwill or vise-versa as capital reserve. 8.10 Further Para 19 of AS-14 describes that goodwill arising in a scheme of amalgamation is an extra amount paid in anticipation of future income and recommend to treat the same as an assets, hence provide for systematic amortization of same over the period of useful life. The para 19 of AS-14 reads as under: 19. Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it is considered appropriate to amortise goodwill over a period not exceeding five years unless a somewhat longer period can be ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 38 [Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant extract of the explanation 2 to section 43(6)(c) of the Act reads as under: (6) written down value means- XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 42 [Explanation 2.-Where in any previous year, any block of assets is transferred,- (a) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.] 8.17 As per section 32(1) of the IT Act 'depreciation' is to be computed on 'actual cost'/'written down value of the block of assets' ascertained in accordance with the provision section 43 of the Act. Further, a reading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable to the amalgamating company, had there not been any amalgamation. However, we note that all these 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. As such, these provision are not related to the goodwill arising in the hands of amalgamated company in the scheme of amalgamation which rises due to the difference between the purchase consideration and the NAV acquired by it. Thus the provisions of the Act i.e. 6 proviso to section 32, explanation 7 to section 43(1), explanation 2 to section 43(6)(c)of the Act cannot be applied to the goodwill emerged in the scheme of amalgamation approved by the Jurisdictional High Court. 8.20 The succeeding question arises whether such goodwill acquired by the assessee is eligible for depreciation under the provisions of section 32 of the Act. In this connection, we are inclined to refer to the provisions of section 32(1) of the Act which reads as under: 32. (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nswered by the Hon ble Supreme Court in the case of Smifs securities Ltd (supra) by holding as under: One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner (Appeals) has come to the conclusion that the assessee had filed copies of the orders of the High Court ordering amalgamation of the above two companies; that the assets and liabilities of 'Y' Ltd. were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased. This finding has also been upheld by Tribunal. There is no reason to interfere with the factual finding. (Para 6) 8.24 From the above, there remains no ambiguity that the goodwill created in the scheme of amalgamation is acquired by the assessee. Thus, in our considered view the assessee has complied all the conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. Under the circumstances, the very assumption of power u/s.263 of the Act is unjustified and bad in law and therefore, order u/s.263 of the Act deserves to be quashed. 6. The Id. PCIT ought to have appreciated that the said goodwill represents actual consideration paid over the value of assets taken over from amalgamating company, and is an intangible asset which comes within the definition provided u/s.32 r.w.s. 43(1) of the Act and therefore there was no error on the part of Id. AO while allowing the depreciation thereon. The Id. PCIT further erred in law in holding that the appellant followed the pooling of interest method and not purchase method. 7. The subject order u/s.263 passed by the Id. PCTT is illegal and bad in law in absence of any finding of the Id. PCIT how the alleged error of the AO has resulted in loss of revenue particularly when depreciation on goodwill is allowable u/s.32 of the Act and claim of depreciation in in accordance with provisions of law and judicial pronouncements of higher appellate authorities. 8. The Id. PCIT has further erred in law in not coming to any concrete conclusion and without conducting any inquiry or investi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the 1st year has attained finality. Admittedly the 1st year is the base assessment year from where the issue of depreciation is emanating. 13. The question arises once the depreciation has been allowed in the 1st year then the same can be disturbed in the subsequent year without having any change in the facts and circumstances. In our considered view, in such a case the principles of consistency shall be applied as held by the Hon'ble Bombay High Court in the case of Pr. CIT v. Quest Investment Advisors Ltd. [2018] 96 taxmann.com 157/257 Taxman 211/409 ITR 545 wherein it was held as under: Once this principle was accepted and consistently applied and followed, the revenue was bound by it. Unless of course it wanted to change the practice without any change in law or change in facts therein, the basis for the change in practice should have been mentioned either in the assessment order or atleast pointed out to the Tribunal when it passed the impugned order. None of this has happened. In fact, all have proceeded on the basis that there is no change in the principle which has been consistently applied for the earlier assessment years and also for the subsequent a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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