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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 ..... Jurisdictional Gujarat High Court and Jurisdictional ITAT, wherein it has been held that goodwill is a depreciation asset under Explanation 3(b) to section 32(1) of the Act. It is therefore prayed that depreciation on goodwill may kindly be granted. 2. The Ld.CIT(A), has erred in facts and circumstances of the case and in law, the ld.AO has erred in passing the assessment order in the name of Sara Suppliers Private Limited (SSPL) which was a non-existent entity as on the date of passing the Appellant's reliance on various judicial precedents including that of Hon'ble Supreme Court, Jurisdictional Gujarat High Court and Jurisdictional ITAT. Assessment Order passed by the Ld.AO as well as Appellate Order passed by CIT(A) of non-existing entity is bad in law and liable to be quashed. 3. Your appellant craves liberty to add, to alter, modify, to amend or to withdraw/delete any of the grounds of appeal at any time, on or before the hearing of appeal. 3. The first issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowance of depreciation on goodwill created in the scheme of amalgamation. 4. The necessary facts are that the assessee, a private limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year in part. Likewise, the provisions of explanation 7 to section 43(1) and explanation 6 to section 43(6) of the Act regarding the actual cost and written down value of the assets acquired in the scheme of amalgamation are also not applicable in the present facts as the goodwill on which depreciation claimed is not an asset transferred from the amalgamating company to amalgamated company. As such, the impugned goodwill arises in its books as per the scheme of amalgamation duly approved by the Hon'ble High Court. Therefore, the claim of depreciation by it is justifiable and needs to be allowed as depreciation on intangible assets. 4.2 The AO disagreed with the contention of the assessee. As per the AO, the scheme of amalgamation duly approved by the Hon'ble High Court is not in dispute, but such approval does not give right to claim deduction or allowance in the return of income filed under the Act which is otherwise not allowable under the provision of this Act. The AO also found that the facts of the case of Smifs Securities Ltd (supra) are distinguishable from the facts of the present case. As such, in the case of Smifs Securities Ltd (supra) the question before the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. 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 the scheme of amalgamation should be equal to what was in the books of amalgamating company. Similarly, the provisions of section 55(2)(a)(iii) of the Act provide that the value of an asset which has been acquired without incurring any cost should be taken at NIL. Thus, there would not be any possibility of allowing the deduction for the depreciation on the assets resulting on account of revaluation of assets. 4.7 The AO Further observed that as per AS-14, there are two methods of accounting namely pooling of interest method and purchase method which are applied for recording the transaction arising in the scheme of amalgamation of companies. In case the condition, in a scheme of amalgamation prescribed under para 3(e) of AS 14 are fulfilled, then pooling of interest method of accounting should be applicable. Under the pooling of interest method any difference between purchase consideration and book value of assets & liabilities should be recognized as an amalgamation reserve. As such no concept of goodwill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of taxation is to be taken at NIL. Thus, depreciation on such goodwill is not allowable in the year under consideration and in subsequent years. 5. Aggrieved by the order of the AO, the assessee preferred an appeal before learned CIT (A) who confirmed the disallowance of depreciation on goodwill by observing that the AO has given detailed finding in length highlighting the claim of the assessee which was not allowable. As such, no contrary material was brought on record by the assessee during appeal. 6. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us. 7. The learned AR before u filed a paper book running from pages 1 to 336 and case laws compilation running from pages 1 to 121 along with the summary of the arguments running into 7 pages. It was contended by the ld. AR that the goodwill is arising in the scheme of amalgamation which was approved by the Hon'ble Gujarat High Court and therefore the same should be eligible for depreciation. It was also pointed out by the learned AR that consideration paid by the assessee to the amalgamating company was based on the valuation report which was duly discharged by way of issuing shares. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amalgamated company. The provision of section 2 (1B) of the Act reads as under: (1B) "amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that- (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; (ii) (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) (iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eria referred to in paragraph 3(e) for an amalgamation in the nature of merger. 14.4 Under the pooling 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 the case of purchase method if purchase consideration exceeds net value of assets taken over then such difference is to be as recognized as goodwill or vise-versa as capital reserve. 14.5 Goodwill may be described as the aggregate of those intangible assets of a business which contributes to its superior earning capacity over a normal return on investment. It may arise from such attributes as favourable locations, the ability and skill of its employees and management, quality of its products and services, customer satisfaction etc. 14.6 Para 19 of AS-14 describes goodwill arising in a scheme of amalgamation as extra amount paid in anticipation of future income and suggests treating the same as an asset, 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 futu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of their respective heirs, executors, administrators or other legal representative or other successors in title as may be recognized by the respective Board of Directors in the following manner: 2 (Two) fully paid Equity Shares of Rs. 1Q/- each of Transferee. Company-2 shall be issued and allotted, for every 1 (.One) Equity Shares of Rs. 10/- each held in Transferor Company. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXX 23.5 Upon Scheme being effective and on allotment of new Equity Shares by Transaction Company-2, the share certificate representing shares held in Transferor Company shall stand automatically cancelled. The new Equity Shares shall be issued by Transferee Company-2 to the shareholders of Transferor Company at a premium of Rupees two hundred and twenty five per share. Approval of this Scheme by the shareholders of transferee company2 shall be deemed to be the due compliance of the provisions of Section 62 and Section 42 of the Companies Act, 2013 and other relevant and applicable provisions of the Act for the issue and allotment of Equity Shares by Transferee Company-2 to the shareholders of Transferor company, as provided in this Scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lgamation while approving has also observed that the Regional Director, Ministry of Corporate affairs vide letter dated 3rd December 2015, has invited objections from the Income Tax Department if any in the scheme of amalgamation. But the Income Tax Department did not reply within the time limit of 15 days, hence it was assumed that the Income Tax Department has no objection in connection with the impugned scheme of amalgamation. This fact can be verified from the order of the Hon'ble High Court, the relevant finding is reproduced as under: The next observation of the Regional Director vide paragraph 2(e), pertains to the letter dated 3 rd December 2015 sent by the Regional Director to the Income Tax Department to inviting their objections, if any. Since the statutory period of 15 days, as envisaged by the relevant circular of the Ministry of Corporate Affairs is over, it can be presumed that the Income Tax Department has no objection to the proposed Scheme of arrangement. The petitioner companies have agreed to comply with the applicable provisions of the Income Tax Act and rules. In view of the same, no direction are required to be issued to the petitioner companies in this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rformed by the Registrar and Official Liquidator under Section 394 and of the Regional Director concerned acting on behalf of the Central Government under Section 394A are quite different. 3. An instance has recently come to light wherein a Regional Director did not project the objections of the Income Tax Department in a case under Section 394. The matter has been examined and it is decided that while responding to notices on behalf of the Central Government under Section 394A, the Regional Director concerned shall invite specific comments from Income Tax Department within 15 days of receipt of notice before filing his response to the Court. If no response from the Income Tax Department is forthcoming, it may be presumed that the Income Tax Department has no objection to the action proposed under Section 391 or 394 as the case may be. The Regional Directors must also see if in a particular case feedback from any other sectoral Regulator is to be obtained and if it appears necessary for him to obtain such feedback, it will also be dealt with in a like manner. 4. It is also emphasized that it is not for the Regional Director to decide correctness or otherwise of the objections/v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is the only opportunity with the Department to object to the scheme of amalgamation if the some is found prejudicial to the interest of Revenue and therefore, it is desired that the comments/objections of the Department are sent by the concerned CIT to Regional Director, MCA for incorporating them in its response to the Court, immediately after receiving information about any scheme of amalgamation or reconstruction etc. 4. This issues with approval of Member (A&J). 14.15 From the above circular, it is transpired that the Revenue was conscious about the fact that there was the possibility of misusing the provisions of the income tax Act in the name of the scheme of amalgamation as provided under section 2(1B) causing prejudice to the Revenue. But the Revenue, despite having the opportunity in its hand did not raise any objection within the time allowed by the MCA or subsequently by raising the objection in the impugned scheme of amalgamation. Thus, from the conduct of the Revenue, it is revealed that there was no grievance in the impugned scheme of amalgamation. Had there been any grievance to the Revenue, the same could have been brought to the notice of the regional direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d arrangement would get the shares of APL worth? 1477.50 Crores (market value as on 31.03.2017 ) and that too without paying any Income Tax, Stamp Duty etc. for which the bench is of the considered view that the same is not in the public interest, thousands of shareholders of Transferee company especially retail shareholders. The market value of the same number of shares as at 31.03.2016 was 1,182.59 Crores. 39. Since Income Tax department (IT) has raised strong objections about tax benefit, tax avoidance, tax loss as discussed above, we are of the opinion that it would be www.taxguru.in advisable to settle the important/crucial issue of huge tax liability before sanctioning the scheme by the Tribunal rather than disputing the same at a later stage after the scheme is sanctioned by the Tribunal. It is mandatory as per section 230 (5) of the Companies Act, 2013, a notice under sub section (3) along with all the documents in such form shall also be sent to central government, Income Tax Authorities, 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng company prior to amalgamation and such goodwill emerged in the books of amalgamated company on account of valuation and revaluation of business as no cost incurred by the amalgamated company for such goodwill. In this connection, we are inclined to refer certain provisions of the Act in the context of the scheme of amalgamation as provided under section 2(1B) of the Act as detailed under: Depreciation. 1932. (1) 20[In respect of depreciation of- (i) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (ii) know-how, patents, copyrights, trademarks, 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 21, wholly or partly, by the assessee 21 and used for the purposes of the business 21 or profession, the following deductions shall be allowed-] 22[(i) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (ii) 24[in the case of any block of assets, 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 furnitur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual cost 3 of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met3 directly or indirectly by any other person or authority: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 14[Explanation 7.-Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business.] 15.3 We further note that the WDV 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. 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. v. Cost of capital assets to be the same as in the hands of previous owner where capital assets became the assets of the successor as a result of transfer under section 47(vi) r.w.s. 49(1)(iii)(e) of the Act. vi. Cost of shares of amalgamated company in the hands of shareholders, received as consideration for transfer of shares of amalgamating company, to be same as the cost of shares of amalgamating company under section 49(2) of the Act. 15.6 From the above, the intent of the Legislature is to make amalgamation a tax neutral scheme for companies as well as for the shareholders and not to provide a tax planning mechanism to either of them. However, a conjoint reading of the above provisions reveals that the assets which were transferred by the amalgamating company to the amalgamated company in the process of amalgamation 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, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofession, the following deductions shall be allowed- 15.8 On perusal of the above provisions, we note that the word goodwill has nowhere been mentioned. However, we note that, the Hon'ble Supreme Court in the case of CIT vs. Smifs Securities Ltd reported in 348 ITR 302 has held that the goodwill falls within the definition of the assets under the category of any other business or commercial rights of similar nature. The relevant extract reads asunder: Explanation 3 to section 32(1) states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emark or brand name associated with the business or profession or any other intangible asset. It is in the aforesaid context that learned counsel for the appellant had sought to rely upon Section 49 and more particularly Section 49(1)(e) thereof. 8. The aforesaid submission, however, clearly loses sight of the fact that Section 47 in express terms excludes the transfer of a capital asset in terms of a scheme of amalgamation. We further find that the provisions of the Act referred to by learned counsel for the appellant are placed in a Chapter dealing with the "Capital Gains". That Chapter itself pertains to profits or gains arising from the transfer of a capital asset. However, it is well settled that a transfer in terms of a scheme of amalgamation which is sanctioned is accomplished by 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 appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd KIPL were registered on 27th January 1995 and 27th December 2007 respectively with the Ministry of corporate affairs. These 2 companies were filing separate income tax returns. Both the companies being body corporate have a separate legal identity. All these details were duly disclosed in the scheme of amalgamation which was duly approved by the Hon'ble Gujarat High Court vide order dated 21st December 2015. 16.2 We also note that vide letter dated 3rd December 2015 the regional director of ministry of corporate affair (MCA) has also invited comment or objection from the Income Tax Department, but the department did not raise any objection with respect to scheme of amalgamation. This fact can be verified from para 7(III) of the order of the Hon'ble High Court which is 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 obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies: Ans. The transactions carried out by the parties were very much normal transaction. (v) Whether actions of the parties finally are at variance with the terms of the agreement: Ans. There was no variance in the impugned transaction with regard to the terms of the agreement. 16.5 It is also important to highlight the fact that there is no prohibition under the Act for disallowing the depreciation on the goodwill generated in the scheme of amalgamation. There are certain kinds of transactions, prejudicial to the interest of Revenue, which may fall under the purview of the provisions of General Anti-Avoidance rule (GAAR), POEM, and BEPS provided under section 95 to 102, section 6(3) of the Act respectively under 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 guida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciable assets. The relevant portion of the amendments in section 32 is reproduced as under : 32. (1) 97[In respect of depreciation of- (i) xxxxxxxx (ii)know-how, patents, copyrights, trademarks, 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, [not being goodwill of a business or profession,] Explanation 3.-For the purposes of this sub-section, 23 [the expression "assets"] shall mean- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate limited company to LLP was very much known to the AO which is evident from the assessment order. 13. On the other hand, the learned DR vehemently supported the order of the authorities below. 14. 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 27th December 2018, we note that the AO on the first page of his order has mentioned the name of the assessee M/s SSPL which was erstwhile company. Thus, the assessment order was framed in the name of non-existent entity (M/s. SSPL), as M/s SSPL was converted into Limited Liability 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee on the subsequent date revised form 36 i.e. memo of appeal with the name of existing LLP. Apparently, the assessee was at fault for filing the return of income and the appeal papers before the respective authorities in the name of the erstwhile company. Thus, the question arises whether the assessment order can be held as null and void as it was made in the name of non-existent company in a situation where the assessee itself has filed the return of income, appeals in the name of non-existent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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