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TMI Blog2023 (9) TMI 1439X X X X Extracts X X X X X X X X Extracts X X X X ..... MI 47 - ITAT AHMEDABAD] has already decided the identical issue in favor of assessee on the similar facts and circumstances. Assessment framed u/s 143(3) of the Act is not sustainable. Hence the ground of appeal of the assessee is allowed. Disallowance of depreciation on the intangible assets/goodwill acquired in the scheme of amalgamation - all assets and liabilities of the amalgamating company were transferred to the assessee company at their book value - HELD THAT:- Goodwill generated in the scheme of amalgamation is acquired by the assessee. Thus, in our considered view the assessee has complied with all the conditions provided under section 32 of the Act. Accordingly, we are not convinced by the findings of the authorities below. All the necessary details about the management of 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 observation and comment from ROC, MCA, and official liquidator including the income tax department. Thus, in the given f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, there may not be a justification of depreciation on goodwill. Accordingly, there is no need to provide for depreciation on goodwill of business/profession like other intangible assets or plant machinery. But such an amendment is not applicable for the year under consideration. Thus we reverse the order of the authorities below and direct the AO to allow the claim of the assessee for the depreciation on the impugned goodwill. Decided in favour of assessee. - SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER For the Assessee : Shri Tushar Hemani, Sr. Advocate with Shri Parimalsinh B. Parmar For the Revenue : Dr. Darsi Suman Ratnam, C.I.T., D.R. ORDER PER WASEEM AHMED ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals), Ahmedabad, (in short Ld. CIT(A) ) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act 1961 (here-in-after referred to as the Act ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities. c) KIFS international Pvt Ltd. (KIPL) is a company incorporated on 27th December 2007 under the Companies Act 1956 for the purpose of dealing commodities. (Earlier Known as Dev tradelink Pvt Ltd.). The name of Dev Tradelink Pvt Ltd was changed to KIFS International Pvt Ltd before the date of amalgamation. 4.1 All these companies as mentioned above are part of the same group (KIFS group). All these companies are owned, controlled, and managed by the KIFS family group members. Above mentioned companies entered a composite scheme of arrangement under the provisions of section 391 to 394 of the companies Act 2013. The scheme of arrangement was placed before the Hon ble Gujarat High Court as detailed under: - Slum sale of stock broking business undertaking of KSPL to KTCPL - Amalgamation of other business undertakings of KSPL with KIPL. 4.2 The Hon ble Gujarat High Court approved the above-mentioned scheme vide order dated 21-12-2015 effective from the appointed date 31-03-2015 in respect of Slum sale of stock broking business undertaking of KSPL to KTCPL and 01-04-2015 in respect of Amalgamation of other business undertakings of KSPL with KIPL. 4.3 Subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact about the change in the status of the assessee company. The learned AR in support of his contention has relied on the judgement of Hon ble Gujarat High Court in the case of P.V. DOSHI Vs CIT reported in 113 ITR 22reported in 113 ITR 22. 8. We have heard the rival contentions of both the parties and perused the materials available on record. Regarding the legality of the order framed by the AO under section 143(3) the Act vide dated 30th December 2018, we note that the AO on the first page of his order has mentioned the name of the assessee M/s KIFS International Pvt Ltd. which was erstwhile company. Thus, the assessment order was framed in the name of non-existent entity (M/s. KIFS International Pvt. Ltd.), as M/s KIFS International Pvt Ltd was converted into Limited Liability Partnership w.e.f. 15th March 2016. This fact has been recognized by the AO himself in his order dated 30th December 2018. The relevant finding of the AO is reproduced here-under: The scheme of amalgamation was approved by the Hon ble Gujarat HC vide order dated 21-12-2015 with appointed date as 01.04.2015. Before the amalgamation, the name of the company was converted from Dev Tradelinik P Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt company. The Hon ble Gujarat High Court in the case of P.V. DOSHI Vs CIT reported in 113 ITR 22 has answered the above question in the manner as detailed below: for the simple reason that as one could not confer jurisdiction by consent, similarly one could not by agreement waive exclusive jurisdiction of the rent courts over the buildings in question. It is true that section 254(4) in terms provides that save as provided in section 256 (which provides for the reference to the High Court), orders passed by the Appellate Tribunal on appeal shall be final. That finality or conclusiveness could only arise in respect of orders which are competent orders with jurisdiction and if the proceedings of reassessment are not validly initiated at all, the order would be avoid order as per the settled legal position which could never have any finality or conclusiveness. If the original order is without jurisdiction it would be only a nullity confirmed in further appeals. If the essential distinction is borne in mind in such cases when there is such defect of jurisdiction because the conditions to found jurisdiction are absent, the Tribunal also would be suffering from the same defect and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p w.e.f. 21st March 2016. This fact has been recognized by the AO himself in his order dated 27th December 2018. The relevant finding of the AO is reproduced here under: 3.1. During the year under consideration, the Hon'ble High Court vide order dated 27-7- 2015, has approved the scheme of amalgamation of M/s Unicorn Packers (P.) Ltd. (UPPL) with M/s Urmin Marketing (P.) Ltd. (UMPL). Thereafter M/s Urmin Marketing (P.) Ltd. (UMPL) was amalgamated with another company namely M/s UrminFlavoroma (P.) Ltd. with effect from 1-4-2015. Later on the name of M/s UrminFlavoroma (P.) Ltd. was changed to M/s Unicorn Packaging (P.) Ltd. with effect from 1-3-2015. This company i.e M/s Unicorn Packing (P.) Ltd. later on converted into an LLP in the name of M/s Unicorn Packaging LLP, with effect from 21-3-2016. 3.2. During the year under consideration pursuant to an order passed by the Hon'ble High Court of Gujarat dated 27th July, 2015, M/s Unicorn Packers (P.) Ltd. (UPPL) (engaged in the business of packers) has been amalgamated with M/s Urmin Marketing (P.) Ltd. (UMPL). The appointed date of amalgamation is 1st April 2014. The amalgamated company has issued 4,50,00,000 equity sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L. The copy of the letter is placed on pages 55 to 56 of the papers book. 14. It is undisputed fact that at the time of issue of notice dated 8thApril 2016 under section 143(2) of the Act, the company i.e. M/s Urmin Marketing (P.) Ltd. was not nonexistent which can be verified from the facts as discussed above. But, the assessment order was framed after amalgamation and conversion into LLP in the name of M/s. Urmin Marketing (P.) Ltd. which did not exist at the relevant point of time. 15. We further note that the Department was aware about the amalgamation of the company and further conversion into LLP before framing the assessment order as the assessee intimated to the department as well as Hon'ble High Court also called for the comments from the Department on the proposed scheme of amalgamation. Thus we can say that the provision of section 292B of the Act will not be applicable to the assessee as it is not a curable defect/mistake. 16. In this regard we would like to take a note of the position of law laid down by the Hon'ble Supreme in the case Pr. CIT v. Maruti Suzuki India Ltd. [2019] 107 taxmann.com 375/265 Taxman 515/416 ITR 613. The facts in this case are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer pricing addition of Rs. 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 undertaking, the shareholders of each blending company become substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by the transfer of two or more undertakings to a new company, or by the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 name of M/s Spice which was non existing entity on that day. In such proceedings an assessment order passed in the name of M/s Spice would clearly be void. Such a defect cannot be treated as procedural defect. Mere participation by the appellant would be of no effect as there is no estop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 17. Hon'ble Supreme Court thereafter took the note of the judgment in the case of Sky Light Hospitality LLP v. Asstt. CIT [2018] 92 taxmann.com 93/254 Taxman 390. This judgment was pressed in service by the Revenue to point out that if an order was framed in accordance with law in the name of amalgamating company, then it would amount to mistake, defect or omission which is curable under section 292B of the Income-tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 ITR 288 as well as decision of Hon'ble Delhi High Court in the case of Spice Entertainment Ltd. The ITAT has also made reference to the decision of Hon'ble Karnataka High Court in the case of CIT v. Intel Technology (P.) Ltd. [2015] 57 taxmann.com 159/232 Taxman 279/[2016] 380 ITR 272. The Tribunal has held that action under section 263 is a jurisdictional action against an assessee. In the case of a company, the ld. Commissioner was required to issue a show cause notice against a juridical person contemplated in section 2(31) of the Income-tax Act and if a juridical person ceases to exist then it would not be construed as a person within the meaning of section 2(31) against whom any action can be taken. The Commissioner would not assume proper jurisdiction and such type of defect would not be cured with help of section 292B of the Act, because it is not a procedural irregularity which could be cured. We also note that this Tribunal in the case of Snowhill Agencies (P.) Ltd. v. Pr. CIT [IT Appeal No. 1775 (Ahd.) of 2019, dated 21-1-2020] involving identical facts and circumstances has decided the issue in favour of the assessee. 18.1 In the light of the above discussio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by issuing its two equity shares i.e. amalgamated company for one share of amalgamating Co which was valued @ Rs. 235/-per share having face value of Rs.10 each and premium of Rs. 225 per share. Accordingly, the assessee (KIPL) issued 2,54,54,560 (598,18,21,600.00/235) fresh equity shares to the shareholder of KSPL, resulting in the excess payment of Rs. 308,87,75,944/- (Rs. 598,18,21,600.00 289,30,45,656.00) over the assets and liabilities taken over by it. This excess payment was treated as goodwill by the assessee in the books of accounts. Further, the assessee in return of income filed for the year under consideration claimed depreciation @ 25% on such goodwill. However, the amalgamated company i.e. KIPL converted into LLP on 15-03-2016. Therefore, KIPL has done its business up to 14-03-2016. Thus, only the proportionate depreciation of Rs. 73,84,36,87/- was claimed, treating Goodwill as intangible asset. 10.2 The AO during the assessment proceeding observed that both the amalgamating and amalgamated company i.e. KSPL and KIPL belong to the same group of companies known as KIFS Group , meaning thereby both the companies were owned, controlled and managed by same promoters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets. Therefore, under the provisions of section 32 of the Act, there is no allowance of depreciation available for any asset created in the books of accounts due to valuation and revaluation of the business and assets. Moreover, an amalgamation is not a transaction of purchase and sale of shares/ assets/ liabilities but to join hands together for the business expediencies. 10.7 The AO in view of the above issued show cause notice dated 14th December 2018 purposing NIL value of Goodwill and denying the claim of the assessee for the depreciation. 10.8 The assessee in reply to such show cause notice submitted that the provision of Explanation 3 to section 32 of the Act provides that the intangible asset includes goodwill. Accordingly, the goodwill is eligible for depreciation as per the applicable rate. 10.9 As far as the provision of section 43(1) and 43(6) of the Act are concerned, these apply in a situation where any capital assets transferred by amalgamating company to the amalgamated company. As such, the goodwill in the books of KSPL (i.e. amalgamating company) did not exist and therefore, the question of transfer of the goodwill as well as the applicability of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany as on 31st March 2015. iv. Subsequent to the amalgamation, the assessee company i.e. amalgamated company was converted into limited liability partnership (LLP) with effect from 15th March 2016. Accordingly, the shareholders become the partners in the LLP in whose accounts huge partner s capital amount was credited in the books of accounts of LLP without involving any cash flow. v. The shareholders/directors were having control over both the companies and accordingly designed the scheme of amalgamation in such a way which resulted huge goodwill in the books of accounts of the assessee (amalgamated company) without involving any cash payout, though there was no goodwill in the books of accounts pre-amalgamation. Thus, the purpose for creation of such goodwill was for evasion of large amount of taxes. II. Contradictory and inconsistent valuation report There were certain inconsistency/contradiction in the valuation report prepared by SSPA Co. Chartered Accountant in the determination of fair value of shares of KSPL which are listed as under: a. The valuation of fair market value of the shares of KSPL has been made using the income/market approach method wherea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the above broad observation, the AO believed the valuation of KSPL at Rs. 598.18 crores against net assets of Rs. 289.30 Crores resulting goodwill of Rs. 308.87/- crores has been managed by the directors of the companies which is nothing but a colorable device to reduce taxable profit by claiming huge depreciation. VI. Depreciation on goodwill emerged due to scheme of amalgamation is not allowable in view of legal provisions. 10.17 The assessee was not entitled for depreciation on the impugned goodwill in pursuance of proviso 5 to section 32(1) of the Act which restricts depreciation on amalgamated assets to the extent it was available to the amalgamating company. Similarly, the provision of explanation 7 to section 43(1) and explanation 2(b) to section 43(6)(c) of the Act mandate that actual cost and WDV of assets transferred in scheme of amalgamation should be equal to what was in the books of amalgamating company. As there was no goodwill available in the books of KSPL prior to amalgamation, accordingly no depreciation allowance is available to the assessee. 10.18 Further, if an asset emerges in the books of amalgamated company which did not exist in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal before us. 12. The learned AR before us submitted that the goodwill is arising in the books of accounts of the assessee on account of the difference between the purchase consideration paid to the amalgamating company over the assets acquired by it from the amalgamating company. The purchase consideration was decided as per the valuation report prepared by the SSPA Co. The learned AR in support of his contention drew our attention on the valuation report placed on pages 7 to 16 of the paper book. The learned AR further submitted that such purchase consideration was part of the amalgamation scheme which was approved by the Hon ble Gujarat High Court. The learned AR drew our attention on the clause 23 of the scheme which is placed on page 69 of the paper book. It was also contended by the learned AR that in the scheme of amalgamation it was clearly mentioned that the difference if any between the purchase consideration and the net value of the assets shall be adjusted to the capital reserve or the goodwill as the case may be which is evident from the clause 24.5 of the scheme, copy of the same is placed on page 70 of the paper book. 12.1 Similarly, the ld. AR also subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value cannot be said as excessive or unreasonable. 12.4 Moreover, it was the decision of the companies to go for amalgamation and the revenue has no role to play in such a decision-making process. The learned AR in support of claim relied on the judgment of Hon ble Gujarat High Court in case of Voltap Transformers (P) Ltd. vs. CIT reported in 129 ITR 105. 12.5 Similarly, the learned AR also contended that it was the decision of the amalgamated company to issue the shares at a premium to the amalgamating company which was based on commercial expediency. The revenue cannot direct the assessee to carry out operation as per its opinion. The learned AR in support of his contention relied on the judgment of Hon ble Supreme Court in the case of PCIT vs. Rohtak Chain Co. (P) Ltd. reported in 110 taxmann.com 59 12.6 Regarding the valuation report in connection with the purchase consideration paid by the assessee, the learned AR submitted that there were two reports of two different chartered accountants firm for the valuations of the shares of the assessee company and valuation of the shares of the transferor company which were available before the AO. In the event of any doubt on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll was not shown in the books of the amalgamating company. As such the explanation 3 to section 43 (1) of the Act comes into play where an asset exists in the books of amalgamating company. 12.10 Correspondingly, the explanation (7) to section 43 (1) does not have any application in the present facts of the case as it deals with respect to the assets which were therein the books of accounts of the amalgamating company, whereas admittedly there was no goodwill shown by the amalgamated company in the books of accounts. Similarly, the provisions of section 43 (6) of the Act do not have any application to the present facts of the case as the same goes with respect to the assets existing in the books of accounts of the amalgamating company. Admittedly, there was no written down value for the block of assets in the books of amalgamating company. As such, the goodwill 1st time came into existence in the books of the amalgamated company. 12.11 The learned AR also submitted that the assessee has adopted purchase method for recording the transactions in the scheme of amalgamation which requires recording all the assets and liabilities of the amalgamated company at book value. Furthermo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that purchase consideration was based on the valuation report of an expert valuer which resulted goodwill on account of excess payment over the net value of assets acquired in the scheme of amalgamation. Moreover, the valuation report was admitted by the AO in the assessment proceedings and no-show cause notice was issued by him either to the assessee or to the independent valuer highlighting any defect in such report. The purpose of the above scheme was to streamline the current organizational structure and usage of the commercial energies which has resulted huge profit to the assessee as evident from the financial statements. 14. We have heard the rival contentions of both the parties and perused the materials available on record. It is provided under the provisions of section 2(1B) of the Act that in a scheme of amalgamation all the properties liabilities of the amalgamating company would become the assets and liabilities of the amalgamated company. Similarly, it was also provided that the shareholders holding not less than 75% in value of the shares in the amalgamating company should become the shareholders of the amalgamated company. The provision of section 2 (1B) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to be paid to the amalgamating company by the amalgamated company is determined after considering various internal and external factors which may affect future profitability and growth. Such factors include previous earnings, future possible earnings, location, technical know-how, customer base, marketing network etc. Thus, it leads to a difference between the net value of assets taken over and purchase consideration paid. 14.3 Accounting standard-14, issued by the ICAI prescribes two methods of accounting for the transaction carried out in the scheme of amalgamation namely pooling of interest method and purchase method. If the scheme of the amalgamation fulfills the conditions of para 3(e) of the Accounting Standard-14, then pooling of interest method should be followed otherwise purchase method of accounting should be applied. The relevant extract of accounting standard reads as under: 7. There are two main methods of accounting for amalgamations: (a) the pooling of interests method; and (b) the purchase method. 8. The use of the pooling of interests method is confined to circumstances which meet the criteria referred to in paragraph 3(e) for an amalgamation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting as prescribed under AS-14 recognized such difference as Goodwill in the books of account. The scheme of amalgamation was approved by the Hon ble Gujarat High Court vide order dated 21st December 2015 which was effective from 1-4-2015. Subsequently, the assessee at the time of filing return of income claimed depreciation on such goodwill by treating the same as intangible asset which was disallowed by the AO and confirmed by the learned CIT (A) by holding it at NIL value for the purpose of taxation. 14.8 Undeniably, the purchase consideration paid by the assessee to the shareholders of the transferor/ amalgamating company stands at Rs. 598.18 crores as evident from the scheme of amalgamation. The relevant clause of the scheme of the amalgamation stands as under: 23.1 Upon this Scheme becoming effective, Transferee Company-2 shall without any further application or deed, issue and allot Equity . Shares at par, credited as fully paid up, to the extent indicated below to the shareholders of Transferor company, holding shares in Transferor company and whose name appear in the Register of Members on the Appointed Date or to such of their respective heirs, executors, administr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant provisions of the Act. Filing and issuance of drawn up order is hereby dispensed with. All concerned authorities to act on a copy of this order along with the Scheme duly authenticated by the Registrar, High Court of Gujarat. The Registrar, High Court of Gujarat shall issue the authenticated copy of this order along with the Scheme of expeditiously as possible. 14.10 Furthermore, it was mentioned in the scheme of amalgamation that the difference if any between the value of the assets acquired by the amalgamated company and the consideration paid shall be recorded either as capital reserve or goodwill. The relevant portion of the scheme reads as under: The difference (excess or deficit), between the net value of assets over aggregate face value and premium amount for the Equity Shares issued by Transferee Company-2 to the shareholders of Transferor company pursuant to this Scheme and after giving effect to Clause 24.3 be adjusted to Capital Reserve or Goodwill, as the case may be in books of Transferee Company-2. 14.11 At this juncture, it is also important to note that the Hon ble Gujarat High Court in the impugned scheme of amalgamation while approving has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comments and inputs from the Income Tax Department as well as from other regulatory department before the amalgamation. The relevant copy of the circular recess under: General Circular No 1/2014 F.No 2/1/2014 Dated 15th January 2014 Subject: Report u/s 394A of the Companies Act, 1956- Taking accounts of comments/inputs from Income Tax Department and other sectoral Regulators while filing reports by RDs. Section 394A of the Companie Act, 1956 requires service of a notice on the Central Government wherever cases involving arrangement/compromise (under Section 391) or reconstruction / amalgamation (under Section 394) come up before the Court of competent jurisdiction. As the powers of the Central Government have been delegated to the Regional Directors (RDs) who also file representations on behalf of the Government wherever necessary. 2. It is to be noted that the said provisions is in addition to the requirement of the report to be received respectively from the Registrar of Companies and the Official Liquidator under the first and second provisos to Section 394(1). A joint reading of Sections 394 and 394A makes it clear that the duties to be performed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adversely the much needed public revenue. This fact of proposed amalgamation was not brought to the notice of Income Tax Department either by the Ministry of Corporate Affairs (MCA) or Registrar of Companies (ROC). The Deportment had to file an intervention application opposing such amalgamation before the High Court which was rejected on the ground that the Department had no locus standi in the matter and that Regional Director, MCA has been delegated power in this regard. 3. In this connection Circular No 1/2014 dated 15.01.2014 has been issued by MCA to Regional Directors which lays down that while furnishing any report regarding reconstruction or amalgamation of companies under the Companies Act, comments and inputs from the Income Tax Department may invariably be obtained so as to ensure that the proposed scheme of reconstruction or amalgamation has not been designed in such a way as to defraud the Revenue and consequently being prejudicial to public interest. It has further been said that the Regional Directors would invite specific comments from the Income Tax Department within 15 days of receipt of notice before filing response to the Court. It is emphasised that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity which is strenuously objected by the Income Tax Department as discussed Supra. Any transfer of property from one entity to other has to be treated as sale/transfer and the same has to comply with applicable provisions of law including applicable tax liability, stamp duty. In the instant case, the transferor is a private Ltd. company which is a separate legal entity and any transfer of shares to other entity including individuals from the legal entity would attract applicable tax liability. Therefore, we are of the considered view that the Bench can sanction/approve the scheme only if it complies with all applicable provisions of the Act, Rules and if the scheme is in the interest of public, shareholder etc. However, the petitioner companies did not provide details with regard to compliance of tax liability raised by the Income Tax Department, their undertaking to pay the huge tax liability as pointed out by the income department etc. 38. From the above analysis of the financials of Gabs, the bench noted that with an equity share capital of only 1,91,100 the promoters/share holders of Gabs who are also the common promoters of APL, by way of this proposed scheme of amalgamati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al director of the MCA. But it did not do so. As such the 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. 14.18 Moving ahead, there is also 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. However, the lower authorities 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 the above discussion, we are not convinced with the orders of the authorities below on this preliminary issue. 15. Now, the next question arises for our consideration 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have the same meaning as in clause *(c) of sub-section (6) of section 43.] 41 [Explanation 3. For the purposes of this sub-section, the expressions assets and block of assets shall mean (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. 15.1 The above provision of section 32 of the Act provides 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. 15.2 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 amalgamated company in the event, had there not been any amalgamation. The relevant extract of the explanation 7 to section 43(1) reads as under: Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... malgamated company shall be taken to be the same as it would have been had the amalgamating company continued to hold the capital asset for the purposes of its own business. 15.5 A combined reading of the above provisions reveals that the intention of the legislature behind the introduction of the amalgamation scheme was to achieve tax neutrality. Besides the above, the intention of the legislature is also reflecting from the following provisions: i. There is no capital gain in the hands of the amalgamating company on the transfer of capital assets in the scheme of amalgamation under the provisions of section 47(vi) of the Act. ii. The cost of stock-in trade in the hands of the amalgamated company shall remain the same as in the hands of the amalgamating company either as capital asset or stock in trade as provided under section 43C of the Act. iii. Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc under the provisions of section 72A of the Act. iv. Exemption of capital gains in the hands of shareholders of amalgamating company on transfer of shares of amalgamating company in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any goodwill from the amalgamating/transferor company as alleged, accordingly 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 case on hand. 15.7 Normally, the issue/question of goodwill arises when one company is acquired by another company. In other words, when one company transfers its business to another company against the consideration, the difference between the net value of the assets acquired and the purchase consideration paid by the transferee is regarded as goodwill. 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) In respect of depreciation of (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 15.11 We also find that the Hon ble Delhi High Court, involving identical facts and circumstances, in the case of CIT Vs. M/s Eltek SGS Pvt. Ltd. in ITA No. 475- 476/2022 has decided the issue in favour of the assessee by observing as under: 7. Before us, learned counsel appearing in support of the appeal contended that it would be the provisions of Section 49 of the Act which would apply and that both the CIT (Appeals) as well as the ITAT have clearly erred in holding otherwise. Learned counsel referred to the definition of cost of acquisition as spelt out in Section 55(2) of the Act and which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has adopted the value of Rs. 250 per sq. mtr. On the basis of the sale instances related to residential areas situated 2 to 3 kms. away from the property in question. 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. 16.1 The subsequent allegation of the AO is that both the companies i.e. amalgamated and the amalgamating companies were controlled and managed by the same group of person pre and post amalgamation. Thus, the issue arises whether it was a colourable device adopted by the assessee to create goodwill in the books of accounts and cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng company was duly disclosed in the scheme of amalgamation. b) The valuation of the business of the amalgamating company was based on the approved valuation report. c) The fact of the common control and management of both the amalgamated and amalgamating companies were disclosed in the scheme of amalgamation which was also noted by the Hon ble Gujarat High Court and this fact was also in the knowledge of Revenue. Thus, we are of the view no facts were concealed or hidden. (ii) Whether it could be a normal business practice: Ans: In today s time the activity of amalgamation is very common and prevailing in the corporate world for synergizing resources, control, eliminate the competition etc. (iii) Even where individual transactions of the device are legal/ legitimate, whether combination of these steps creates an effect which is abnormal in the business world and could not have been otherwise undertaken in normal circumstances: Ans. In the present case there was no reference made by the authorities below suggesting that the transaction is carried out illegally. As the transactions in the instant case were within the ambit of the law as per the provision of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the revenue. [Para 16] 16.7 It is also pertinent to note that 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. Accordingly, we are 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. 16.8 We also note that this Tribunal in case of Urmin marketing (P) Ltd. Vs. DCIT reported in 122 taxmann.com 40 has already decided the issue in favor of assessee on the similar facts and circumstances. 16.9 It is important to note that there was an amendment to section 32, section 2(11) of the Act and other relevant sections of the Income Tax Act from the Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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