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TMI Blog2024 (11) TMI 762X X X X Extracts X X X X X X X X Extracts X X X X ..... the additions/disallowances made in the hands of the assessee by the AO. Disallowance of depreciation on goodwill generated on amalgamation - HELD THAT:- CIT(A) has dismissed all the contentions raised by the assessee before him in a cryptic manner by simply stating that the AO has rebutted all the submissions of the appellant diligently. CIT(A) has not passed a speaking order pointing out how all the contentions of the assessee are rebutted by the AO. The fact we note is to the contrary. The assessee in his detailed submissions filed to the CIT(A) has countered every basis with the AO for holding the claim of depreciation not allowable as per law. CIT(A) without noting any fallacy in the contention of the assessee has upheld the order of the AO. Assessee has also pointed out that the issue stands covered in favour of the assessee by the decision of Urmin Marketing Pvt. Ltd. [ 2020 (11) TMI 47 - ITAT AHMEDABAD ] wherein ITAT notes that once the scheme of amalgamation is approved by the Hon ble High Court after receiving no objection from the Income Tax Department, the consideration for the value of goodwill cannot be taken as Nil in terms of 6th proviso to Section 32(1), Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ega Industries (Middle East), FZC, UAE ( Vega ME ) as proprietary concern of the assessee? 2. Whether the CIT(A) has erred both on facts and in law in deleting the disallowance of excess claim of depreciation of Rs. 29,19,355/- (revised figure Rs. 12,65,054/- after rectification order u/s 154 dt. 06.02.2020) on electrical fittings u/s 32 of the Act? 3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored . 3. At the outset itself, it was common ground between both the parties that the issues raised by the Department in its appeal were decided in favour of the assessee by the ld. CIT(A) noting identical issues to have been decided in favour of the assessee by the ITAT in several preceding years consistently. 4. It was pointed out that the issue raised in Ground No.1 of the Revenue s appeal pertained to addition made to the income of the assessee on account of an offshore unit in Dubai by the name of Vega Industries (Middle East) F.Z.C. UAE , which was treated as a proprietary concern of the assessee and all its profits w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AYs.2009-10 2010-11, order dated 27/02/2017 for AY 2011-12 and order dated 30/05/2017 in case of the appellant for the immediately preceding Assessment Year i.e. 2012-13 have followed the decision of the jurisdictional Tribunal in the Appellant s own case for AY 2006-07 and has held that Vega ME is a separate company and accordingly its profit cannot be added to the income of the Appellant. In the instant case, the fact is similar to the previous years and no other additional facts on this issue have been put up by the AO. The Hon ble ITAT (supra) has held in concluding para that- It goes to show that Vega UAE is duly incorporated as a body corporate under the law of a country outside India which is a requirement of Section 2(17) of the Income tax Act, 1961, and , therefore, Vega UAE has to be accepted as a company within the definition of Section 2(17) of the Income-tax Act, 1961. Once it is accepted, the addition made by the AO by holding that Vega UAE is a sole proprietorship concern of the assessee company is not sustainable and hence, the addition made by the AO is to be deleted. Therefore, respectfully following the ratio of the Hon ble ITAT s order on the identical issue dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preceding assessment years decided in favour of the assessee by the ITAT, therefore we have no hesitation in confirming the order of the ld. CIT(A) directing deletion of both the additions/disallowances made in the hands of the assessee by the Assessing Officer. Ground of appeal Nos. 1 2 of the Revenue s appeal are accordingly dismissed. Appeal filed by the Revenue is accordingly dismissed. ITA No. 397/Ahd/2024 Assessee s appeal 9. Now we take up the appeal filed by the assessee. The grounds of appeal taken by the assessee read as follows: 1. The Ld. CIT(A) has erred in law and on facts of the case in confirming disallowance of depreciation of Rs. 1,07,97,284/- claimed u/s. 32 of the Act on goodwill generated on amalgamation. 2. The Ld. CIT(A) has erred in law and on facts of the case in not appreciating that depreciation on goodwill has been allowed in the preceding years. It is well settled that no disallowance can be made for depreciation claimed on opening WDV of an asset. 3. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following decisions:- a. CIT Vs. Smifs Securities Ltd., (2012) 348 ITR 302 (SC) b. PCIT Vs. Zydus Wellness Ltd., (2017) 87 taxmann.com 82 (Guj.) c. PCIT Vs. Zydus Wellness Ltd., SLP 29859 of 2018 (SC) d. Urmin Marketing P. Ltd., (2020) 122 taxmann.com 40 (Ahd.) (iv) That, there was a basic fallacy in the approach of the Revenue Authorities for disallowing depreciation on goodwill on the premise that goodwill was transferred from the amalgamating company to the amalgamated company when the fact of the matter was that goodwill was the result of amalgamation and had come into existence only pursuant to the scheme of amalgamation duly approved by the Hon ble High Court of Gujarat. That the provisions of law referred to by the Revenue Authorities, i.e. (i) 6th proviso to Section 32(1), (ii) Explanation 7 to Section 43(1), (iii) Explanation 2(b) to Section 43(6)(c), (iv) Section 55(2)(a)(ii) and (v) Section 49(1)(iii)(e) relied upon by the Assessing Officer for disallowing the claim of depreciation related to assets transferred in the scheme of amalgamation and goodwill being an intangible asset not transferred from the amalgamating company to the amalgamated company but resulting on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction capacity, the Board of the Assessee Company and DCPL had decided for amalgamation of DCPL with the Assessee Company effective from 1 April 2013 under a scheme of amalgamation. 3.1.4 The Hon'ble Gujarat High Court, vide order dated 4 April 2014, has approved the scheme of amalgamation of DCPL with the Assessee Company with the appointed date of 1 April 2013. Copy of the scheme of amalgamation and order passed by the Hon'ble High Court is attached herewith as per Annexure 11- and Annexure 12-respectively. 3.1.5 The business of DCPL, was merged with the business of the Assessee Company on a 'going concern basis' along-with all the employees as well as assets, liabilities including the concerned contracts, licenses, permits, consents, approvals with effect from 1 April 2013. 3.1.6 Pursuant to the scheme of amalgamation, the Assessee Company has recorded the goodwill in the financial year 2013-14 as under: Particulars Amounts Liabilities taken over as on 1st April 2013 34,10,72,714 Less: Assets taken over as on 1st April 2013 (27,43,17,031) Excess of liabilities over assets 6,67,55,683 Add: Cancellation of the investment in DCPL 1,00,25,000 Goodwill 7,67,80,683 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55(2)(a)(ii) and (v) Section 49(1)(iii)(e), as noted above, the assessee was not entitled to any depreciation on the same. The contention of the ld. Counsel for the assessee is that goodwill was not acquired on transfer of the same from the amalgamating company to the amalgamated company, but it was a result of the amalgamation taking place. That the Sections referred to by the Assessing Officer, therefore, were not applicable for denying the claim of depreciation. It was also pointed out that this issue had been dealt with by the ITAT in the case of Urmin Marketing Pvt. Ltd. (supra). Ld. Counsel for the assessee pointed out that this fact was brought to the notice of the ld. CIT(A) also during the appellate proceedings and every sections relied upon by the Assessing Officer for denying the claim of depreciation was countered in the written submissions filed by the assessee to point out its inapplicability in the facts and circumstances of the present case. Our attention was drawn to the submissions of the assessee reproduced in the order of the ld. CIT(A) at paragraph Nos. 3.2.1 to 3.9, from page Nos. 18 to 41. 14. We have noted that, as rightly pointed out by the ld. Counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(iii)(e) cannot be applied in such facts situation. The ITAT, therefore, held that depreciation on such goodwill, therefore, was allowable in view of the proposition laid down by the Hon ble Supreme Court in the case of Smifs Securities Ltd. (supra). The relevant paragraphs dealing with the above are at paragraph Nos. 30.15 to 32.7 of the order as under:- 30.15 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 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 the regional director of the MCA as discussed above. Furthermore, had there been any grievance to the revenue, then it should have approached to the Hon'ble High Court through the regional director of the MCA. But it did not do so. As such the revenue on one hand is issuing circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to in clause (xiii) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.] ** ** ** Explanation 2. For the purposes of this [sub-section] written down value of the block of assets shall have the same meaning as in clause *(c) of sub-section (6) of section 43.] [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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.] 32.2 As per section 32(1) of the IT Act 'depreciation' is to be computed on 'actual cost'/'written down value of the block of assets' ascertained in accordance with section 43 of the Act. Further, a reading of the above provision shows that in respect of 'capital assets' transferred by the amalgamating company to the amalgamated company, the cost/written down value of the transferred capital asset to the amalgamated 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. 32.3 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 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired 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 the goodwill. As such, the amount of goodwill as claimed by the assessee represents the difference between the purchase consideration and the NAV acquired by it. The purchase consideration paid by the assessee was based on the valuation report as discussed above after considering the various factors. Thus the assessee has not acquired 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. 32.5 Normally, the issue/question of the 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/capital reserve as the case may be. The succeedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 holding as under: One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner (Appeals) has come to the conclusion that the assessee had filed copies of the orders of the High Court ordering amalgamation of the above two companies; that the assets and liabilities of 'Y' Ltd. were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased. This finding has also been upheld by Tribunal. There is no reason to interfere with the factual finding. (Para 6) From the above, there remains no ambiguity th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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