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TMI Blog2024 (3) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... for the year under consideration - thus 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. Assessment framed by the AO is in the name of non-existent assessee - assessee itself has filed the return of income, appeals in the name of non-existent company - HELD THAT:- Mistake committed by the assessee does not empower the Revenue to also commit the same mistake especially in a situation where the fact about the scheme of amalgamation and conversion of the assessee into LLP was known by the AO which is evident from the assessment order discussed above. The department was aware of the complete fact that the company was no longer in existence, yet the AO has framed the assessment in the name of non-existing company. Therefore, contention of the DR fails on this count that the assessee has also made a mistake in filing the returns of income and appeal papers in the name of non-existing company. We also note that this Tribunal in case of Urmin marketing (P) Ltd. [ 2020 (11) TMI 47 - ITAT AHMEDABAD] has already decided the identical issue in favor of assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring Decorative Lamination Sheet and Power Generation through windmill. One company namely, M/s Olympic Lamination Pvt Ltd (here after M/s OLPL) merged with the assessee company with effect from 1st April 2015 in a scheme of amalgamation approved by the Hon ble High Court of Gujarat vide order dated 29-01-2016. Subsequently, the assessee company converted into limited liability partnership with effect from 16-03-2016. On the date of amalgamation, the book value of the net assts (assets - liabilities) of the amalgamating company i.e. M/s OLPL stood at Rs. 56,49,86,034/- only. The entire assets and liabilities of the amalgamating company were transferred to the assessee company at their book value. Further, the amalgamating company M/s OLPL had total issued share capital at 16.5 lakh shares, which was valued at Rs. 1500 per share for the purpose of amalgamation and shares of assessee company valued at Rs. 100 per share. Thus, the purchase consideration was decided at 15 share of assessee company for 1 share of the amalgamating company i.e. M/s OLPL. Accordingly, the assessee company issued 2,47,50,000 equity shares to the shareholders of the amalgamated company at Rs. 100 per share ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will is an intangible asset eligible for depreciation under the provision of section 32(1) of the Act or not. In the case of Smifs Securities Ltd (supra), two independent entities were merged whereas in the case of the present assessee both the company i.e. the amalgamated and the amalgamating have same shareholders and directors/ keyperson. As such, two companies of the same group company merged with a view to synergies the group resources. 4.3 The amalgamated company, (the assessee company) and the amalgamating company i.e. M/s OLPL was not having any business activity since the last 2 financial years. In the books of amalgamating company, the majority assets were in the form of land and building which have no capacity to synergize the business of the group companies in future. 4.4 The scheme of amalgamation was designed in such a way which produces premium and goodwill without the involvement of cash flow. Furthermore, there were certain inconsistency/contradiction in the valuation report prepared by SSPA Co. Chartered Accountant in the determination of fair value of shares of M/s OLPL which suggest that the valuation report was made at the whims of management which is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting. On the contrary, in the event if any of the condition prescribed under para 3(e) is not fulfilled, in such case, the assets and liabilities are transferred at revalued price and any difference between purchase consideration and market value of assets liabilities is to be recognized as goodwill in the books of resultant company. 4.8 Further, para 8 of appendix-C of Ind AS -103 mandates pooling of interest method for amalgamation of commonly control entities. Similarly, para 9 of Ind AS-103 mandates that all the assets and liabilities should be transferred at the carrying amount. Likewise, para 12 of Ind AS-103 mandates that any difference between purchase consideration and book value of assets liabilities should be recognized as capital reserve. The relevant finding of the AO is summarized as under: 1. The transferee company is a paper company with no worthwhile activities. 2. The transferor company is an established company with revenues and assets. 3. The role of the employees benefit expenses, cost of material consumed other expenses, clearly indicating that company was driven by its promoter/Management who is common. 4. Both the companies belong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The learned AR also submitted that all the facts about the scheme of amalgamation relating to the amalgamated and amalgamating companies were available with the revenue authorities but there was no objection raised by the revenue before the approval of the Hon ble Gujarat High Court. 8. On the other hand, the learned DR before us submitted that the amalgamated company was a paper company, and it was not carrying out any activity. Likewise, there was no goodwill in the books of the amalgamating company prior to the amalgamation and therefore it cannot be said that goodwill has been transferred to the assessee in pursuance of the scheme of amalgamation. The learned DR vehemently supported the order of the authorities below. 9. We have heard the rival contentions of both the parties and perused the material available on record. At the outset, we note that the facts of the present case are identical to the facts involved in the case of KIFS International LLP vs. DCIT in ITA 557/AHD/2022 for the AY 2016-17. As such, in the case of KIFS International LLP, the two companies of a group were merged in the scheme of amalgamation approved by the Hon ble High Court. The purchase cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company; 14.1 In the scheme of amalgamation, two or more companies merged and forma new company, or one or more companies merged into an existing company. As a result of amalgamation, the amalgamating company gets dissolved and its business along with assets and liabilities is taken over by the amalgamated company. In return the amalgamated company pays purchase consideration to the shareholder of amalgamating company by way of issuing its equity share, other securities or by paying cash. Normally, the companies opt for amalgamation for numerous reasons/objectives which may include the elimination of the competition, better/effective utilization of the resources, better/effective control over the market etc. 14.2 The purchase consideration paid by the amalgamated company to the shareholders of the amalgamating company may be more than the value of the net assets ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... algamation 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 justified. 14.7 In the case in hand, the assessee company has taken over the business of one of the group companies, namely KSPL, with all the assets, liabilities, and reserves. In return the assessee company issued its 2 shares for one share of KSPL as purchase consideration. Accordingly, the assessee company issued 2,54,54,560 new shares for 1,27,27,280/- shares of KSPL @Rs. 235/- having face value of Rs. 10 each and premium of Rs. 225/- each. Thus, the assessee company paid purchase consideration of Rs. 598.18 crores only (2.54 crore x Rs. 235/-) against the net book value of the assets and liabilities taken over by it at Rs. 298,30,45,656/- only leading to a difference between NAV and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany-2 to the shareholders of Transferor company, as provided in this Scheme. 14.9 Hence, the purchase consideration exceeds the book value of net assets acquired by it by Rs. 308,87,75,944/- as discussed above. The excess amount was recorded as goodwill in the books of the assessee. Admittedly, that the assessee incurred the cost more than the net book value of assets acquired by it in the scheme of amalgamation which has also been approved by the Hon ble Gujarat High Court vide order dated 21st December 2015 w.e.f. 01st April 2015. The relevant portion of the judgment reads as under: The petitioner companies are further directed to lodge a copy of this order, the schedule of immovable assets of the undertaking being transferred under the slump sale to the Transferee-1 and that of the remaining undertaking of the Transferee-2, as on the date of this order and the scheme duly authenticated by the Registrar, High court of Gujarat with concerned superintendent of stamps, for the purpose of adjudication of stamp duty, if any, on the same within 60 days from the date of the order. The Petitioner companies are directed to file a copy of this order along with a copy of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the same, no direction are required to be issued to the petitioner companies in this regard. 14.12 In this connection, we further note that the scheme for the amalgamation was presented before the Hon ble Gujarat High Court for the approval in pursuance to the provisions of section 391 to 394A of the Companies Act. But on perusal of the provisions of section 391 to 394A of the Companies Act, we note that there is a requirement for inviting the objection from the central government about the proposed scheme of amalgamation. The relevant extract of the section reads as under: 394A. NOTICE TO BE GIVEN TO CENTRAL GOVERNMENT FOR APPLICATIONS UNDER SECTIONS 391 AND 394 The 1 [Tribunal] 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. 1. Substituted for `Court' by the Companies (Second Amendment) Act, 2002 (w.e.f. a date yet to be notified) 14.13 Accordingly, we find that there was no requirement to invite objections from the Income Tax Department. However, we fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a like manner. 4. It is also emphasized that it is not for the Regional Director to decide correctness or otherwise of the objections/views of the Income tax Department or other Regulators. While ordinarily such views should be projected by the Regional Director in his representation, if there are compelling reasons for doubting the correctness of such views, the Regional Director must make a reference to this Ministry for taking up the matter with the Ministry concerned before filing the representation under Section 394A. 5. This Circular is effective from the date of issue. 14.14 The above circular issued by the MCA was circulated by the CBDT among its officers vide F. No. 279/MISC./M-171/2013-ITJ, dated 11th April 2014 which reads as under: F.NO.279/MISC./M-171/2013-ITJ, Dated- 11 April, 2014 Government of India, Ministry of Finance, Department of Revenue, C.B.D,T., New Deihl Subject: Merger/Amalgamation/de-merger Objections entertained by High Courts -reg. I am directed to refer to the above mentioned subject. 2. In a recant case of proposed amalgamation, it was noted that the scheme of amalgamation was designed seeking amalgamatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was no grievance in the impugned scheme of amalgamation. Had there been any grievance to the Revenue, the same could have been brought to the notice of the regional director of the MCA, then suitable action should have been initiated against the impugned scheme of the amalgamation. In this regard, we note that recently the Mumbai bench of NCLT in one of the petitions for amalgamation in case of Gabs Investment Pvt Ltd (Transferor) and Ajanta Pharma limited (Transferee) in CPS No. 995 and 996/2017 has not approved the scheme of amalgamation on the objection raised by the revenue. The relevant extract of the order reads as under: 36. The rationale given in the scheme among others things are the proposed amalgamation of the transferor company into Transferee Company by the scheme, as a result of which the shareholders of the transferor company viz. the promoters of the transferor company (who are also the promoters of the transferee company)shall directly hold shares in the transferee company and the promoters would continue to hold the same percentage of shares in the Transferee company pre and post merger. 37. The above rationale presented by the petitioner company is w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI, SEBI, ROC, stock exchanges, OL, CCI and other Sectoral regulators or Authorities for their representations. In response to the notice received as per above section the Income Tax Department has raised valid observation/objections as detailed above, we find merit in the objections raised by Income Tax Department and we are also inclined to agree with the objections raised. 14.16 From the above, it is inferred that the Income Tax Department, being aggrieved with the scheme of amalgamation, raised the objection, which was duly accepted by the NCLT and accordingly, the scheme of amalgamation was disapproved in the above case. 14.17 Now, the question arises whether the scheme once approved by the Hon ble Gujarat High Court after receiving no objection from the Income Tax Department, the AO/revenue has authority to challenge the same. What is the inference that flows from a cumulative consideration of all the aforesaid contending facts is that the revenue cannot object to the impugned scheme of amalgamation. It is because, it is implied that the revenue has given its consent in the impugned scheme of amalgamation by raising no objection in response to the letter issued by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such percentage on the written down value thereof as may be prescribed 25 :] 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng company in the event, had there not been any amalgamation. The relevant 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.] 15.4 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 accorda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... algamation were not made subject to the capital gain tax. Furthermore, the 6th proviso to section 32 of the Act has limited the amount of depreciation available to the amalgamated company post amalgamation to the extent of the amount of depreciation which would have been available to the amalgamating company, had there not been any amalgamation. Indeed, there was no entry in the books of the transferor/amalgamating company for the intangible assets/ goodwill being self-generated assets. However, we note that all the relevant provisions of the Act as discussed above deal with respect to the assets available/recorded in the books of the transferor/amalgamating company. In other words, the assets which have been acquired by the assessee in the scheme of amalgamation would continue at the book value in the books of the amalgamated company. The question arises whether the goodwill shown by the assessee as discussed above was acquired in the scheme of amalgamation from the amalgamating company. The answer stands in negative. It is because there was no entry in the books of accounts of the amalgamating/transferor company reflecting the value of goodwill. As such, the amount of goodwill as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 3 indicates that goodwill would fall under the expression' any other business or commercial rights of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3 (b). (Para 4) In view of the above, it is opined that 'Goodwill' is an asset under Explanation 3(b)to section 32(1). (Para 5) 15.9 In view of the above judgment, there remains no ambiguity that goodwill is part and parcel of intangible assets. Hence, the assessee is eligible for depreciation on goodwill. 15.10 Moving further, we note that for claiming the depreciation, among other conditions as provided under section 32 of the Act, one of the conditions is that the assessee can claim depreciation on the goodwill being in tangible asset if acquired on or after 1st day of April 1998. In other words, the assessee can claim depreciation on the goodwill acquired by it. Thus, the controversy arises whether the goodwill generated in the scheme of amalgamation is acquired by the transferee company. Such controversy has been answered by the Hon ble Supreme Court in the case of Smifs securities Ltd (supra) by hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operation of law as opposed to an act of parties. It is in that backdrop that the decision in Smifs assumes significance. The judgment rendered by the Supreme Court in Smifs clearly recognises goodwill to be an intangible asset and on which depreciation can clearly be claimed in terms of Section 32(1) of the Act. 9. Accordingly and for all the aforesaid reasons, we find no merit in the instant appeals. They shall consequently stand dismissed. 15.12 From the above, there remains no ambiguity that the goodwill generated in the scheme of amalgamation is acquired by the assessee. Thus, in our considered view the assessee has complied with all the conditions provided under section 32 of the Act. Accordingly, we are not convinced by the findings of the authorities below. 16. The next allegation of the AO is that there was contradiction and inconsistency in the valuation report filed by the assessee. Admittedly the valuation report was prepared by the SSPA CO, a firm of chartered accountants. The valuation of the business being a technical matter, in our view, the assistance of the expert is required. The AO himself cannot determine such value. If he was not satisfied with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s placed on record and discussed above. 16.3 It is also pertinent to mention here that 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 fact and circumstances the reasonableness of the scheme cannot be doubted. Accordingly, no inference can be drawn that the assessee has employed colorable device in order to record high value of purchase consideration which is resulting goodwill. 16.4 Without prejudice to the above, we also note that the Revenue has to consider certain facts before arriving at a finding whether a particular series of the transactions is a colourable device or not as the primary onus is on the AO to find out: (i) Whether the parties to the transactions have concealed or hidden any fact and/or whether what is shown to be done could have actually happened in differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the impugned transaction (depreciation on the goodwill in a scheme of amalgamation) can be denied. But such provisions are not applicable for the year under consideration. 16.6 There is no dispute about the fact that the payment was made by the assessee to the shareholders of the amalgamating company in the form of shares and not through the cash payment. But the payment through the shares is a valid mode of payment. In this regard we draw support and guidance from the judgment of Hon ble Delhi High Court in the case of CIT vs. Mira Exim Ltd reported in 359 ITR 70 wherein it was held as under: In terms of the order passed under section 394 of the Companies Act, 1956 the respondent company acquired the imported motor cars. The cars were not acquired and the respondent assessee was not owner of the motor cars prior to the said date. On merger of the three concerns with the respondent assessee, shares were issued as consideration to the proprietors of the business concerns. The shares issued were consideration for the transfer of the assets. It is immaterial, whether there was transfer of an undertaking, including the block of assets, which also included the imported m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess or commercial rights of similar nature2425 [, not being goodwill of a business or profession]. 16.10 Therefore, no depreciation is allowable on goodwill from the AY 2021-22 onwards. However, goodwill is not excluded from capital assets. The purpose of exclusion of goodwill from the depreciable assets is that it is seen that Goodwill, in general, is not a depreciable asset and in fact 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. 16.11 In view of the above and after considering the facts in totality, 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. Hence, the ground of appeal of the assessee is allowed. 9.1 Before us, no material has been placed on record by the Revenue to demonstrate that the decision of Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability Partnership w.e.f. 16th 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: After amalgamation the amalgamated company was coverted in to Limited Liability Partnership(LLP) with effect from 16.03.2016 and shareholders were converted in to partners. The share capital and reserve and surplus has been divided on the basis of shareholding patter into the partners capital account. From the books of the partnership firm manifold due to conversion of company into LLP, but the actual cash flow is Nil to create such a huge capital creation in the books of company converted into LLP. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX It is interesting to see that after amalgamation of OLPL with SSPL, the company was converted into Limited Liability Partnership. While conversion of company in to LLP the assessee has credited the entire security premium in the ratio of profit share ratio in the capital account of partners of LLP and such capital is created only on account of amalgamation. Hence the story of the assessee company that goodwill was genuine and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low: 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 could not confer any jurisdiction on the Income-tax Officer by making the remand order, because of the settled legal principle that consent could not confer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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