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TMI Blog2024 (11) TMI 1301X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of net assets acquired of the amalgamating company was considered as goodwill arising on account of amalgamation. It is further evident that the AO in the aforesaid decision concluded that no amount was actually paid on account of goodwill. However, in further appeal, the learned CIT(A) concluded that the difference between the cost of an asset and the amount paid constituted goodwill and the taxpayer in the process of amalgamation has acquired a capital right in the form of goodwill because of which the market worth of the taxpayer stood increased. It is evident from the perusal of the aforesaid decision that the aforesaid finding of the learned CIT(A) was upheld by the Tribunal and in further appeal, the Revenue restricted its challenge only qua the question as to whether the goodwill is an asset under section 32 of the Act and whether depreciation on goodwill is allowable under the said section. Therefore, it is evident from the record that the method of calculation of goodwill on which depreciation was claimed in Smifs Securities Ltd. (supra), i.e. the difference between the value of net assets acquired and consideration paid, is similar to the instant case. Thus, at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (supra). Anticipated advantages/benefits/profitability to its business which is attributable to the goodwill - We find that the Hon ble Karnataka High Court in Padmini Products (P.) Ltd. [ 2020 (10) TMI 424 - KARNATAKA HIGH COURT] held that fifth proviso (now sixth proviso) to section 32(1)(ii) of the Act restricts aggregate deduction by the predecessor and successor and if in a particular year there is no aggregate deduction, the provisions of the proviso shall not be applicable. It was further held that until and unless it is the case of aggregate deduction, the proviso has no role to play. Thus, adverting to the facts of the instant case, since the amalgamating company did not have any goodwill recorded in its books of accounts or as part of a block of depreciable assets, prior to amalgamation, therefore the question of claim of depreciation on goodwill by the amalgamating company does not arise in the instant case. Accordingly, we are of the considered view that the provisions of the sixth proviso to section 32(1) of the Act are not applicable to the facts of the present case since the goodwill did not exist in the books of the amalgamating company but has arisen in the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd distributed by the assessee to its non-resident shareholder - We find that this issue is covered in favour of the Revenue by the decision of Total Oil India Private Ltd, [ 2023 (4) TMI 988 - ITAT MUMBAI (SB)] . Accordingly, respectfully following the aforesaid decision of the Special Bench of the Tribunal, ground no.9 is dismissed. - Shri Narendra Kumar Billaiya, Accountant Member And Shri Sandeep Singh Karhail, Judicial Member For the Assessee : Shri Rajan Vora, Shri Pranay Gandhi For the Revenue : Ms. Rajeshwari Menon, Sr. AR/Smt. Sanyogita Nagpal, CIT-DR ORDER PER SANDEEP SINGH KARHAIL, J.M. The present appeals have been filed by the assessee challenging the separate impugned orders dated 25/09/2023 and 14/02/2023, passed under section 250 of the Income Tax Act, 1961 ( the Act ) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [ learned CIT(A) ], for the assessment years 2016-17 and 2018-19, respectively. 2. Since both appeals pertain to the same assessee and involve similar issues arising out of a similar factual matrix, these appeals were heard together for the sake of convenience and are being decided by way of this consolidate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in upholding the disallowance of depreciation of INR 9,89,39,700 on customer relations. 3.2 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the contention of the Assessing Officer that the Appellant has not incurred any cost for acquiring customer relations in the scheme of merger. 4. The issue arising in ground no.1, raised in assessee s appeal, pertains to the disallowance of depreciation claimed on goodwill. 5. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a private company incorporated in India and is engaged in the business of manufacturing and trading in diversified chemicals offering a broad range of products and services in various segments such as water, food and pharmaceuticals to paints, packaging and personal care products. For the year under consideration, the assessee filed its return of income on 30/11/2016 declaring a total income of Rs. 167,20,25,790 as per the normal provisions of the Act. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. Dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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), clause (xiiib) 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. In view of the above proviso, the assessee would not be eligible for depreciation on the value of G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing tangible assets as well as other existing intangible assets and there are no intangible assets shown in the books of accounts of the amalgamating company. It was further held that it may be true that the goodwill is to be recognised in the books of the assessee company as per the prescribed accounting standards, however, this accounting treatment itself does not entitle the assessee to claim depreciation in its books of accounts. Thus, it was held that the claim of depreciation to be allowed under the Act is governed by the provisions of the Act. By referring to the provisions of the sixth proviso to section 32(1)(ii) of the Act, the AO held that the assessee is not eligible for depreciation on goodwill. Further, by referring to the provisions of Explanation (7) to section 43(1) of the Act, the AO held that there is no actual cost of the intangibles in the hands of the amalgamating company as the same is not reflected in the balance sheet since they are self-acquired assets. Therefore, the AO rejected the submissions of the assessee, inter-alia, for the following reasons: 1. The claim of the assessee is untenable as section 32 dealing with allowability of depreciation specifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s covered by the decision of the Bangalore Bench of the Hon'ble ITAT in United Breweries Ltd. Vs. ACIT [ITA No. 722/Bang/2014 and TS-553-ITAT-2016 (Bang). 6. Mere accounting entries do not give rise to the assessee to claim depreciation on goodwill (intangible asset) contrary to the provisions of law. Under the Income-tax Act the total income of a company is chargeable to tax under section 4. The total income has to be computed in accordance with the provisions of the Act. The standard accounting practices might have taken some other view but such accounting practices were not necessarily a good law, these practices cannot override the specific provisions contained in the scheme of the Income-tax Act with respect to the actual cost for allowing depreciation to the assessee. 7. In view of the matter that there being no goodwill (intangible asset) on which depreciation could be said to have been allowed to the undertaking in the scheme of demerger nor any actual cost having been incurred by the demerging company as well as by demerged company, the claim made by the assessee in the return of income for the year under consideration with regard to goodwill (intangible asset) which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave a common operating platform and an opportunity to leverage combined assets to build a stronger sustainable business for the amalgamated entity. The Hon ble Bombay High Court vide order dated 22/01/2016 approved the Scheme of Amalgamation of Rohm and Hass (India) Pvt. Ltd. with the assessee under section 391 - 394 of the Companies Act, 1956 with the appointed date being 01/04/2015. The following clauses of the Scheme of Amalgamation throw some light on the various assets and liabilities transferred from the amalgamating company to the assessee company: - 5.2 - The entire business of the Transferor Company as going concems and all the properties whether movable or immovable, real or personal, corporeal or incorporeal, present or contingent including but without being limited to all assets, authorized capital, fixed assets, capital work-in-progress, current assets and debtors, investments, rights, claims and powers, authorities, allotments, approvals and consents, reserves, provisions, permits, ownerships rights, lease, tenancy rights, occupancy rights, incentives, clains, rehabilitation schemes, funds, quota rights, import quotas, licenses, registrations, contracts, guarantees, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... local and other authorities and bodies, the Transferee Company may, at any time after the coming into effect of this Scheme in accordance with the provisions hereof, if so required; under any law or otherwise, give notice in such form as it may deem fit and proper to each person, debtor or depositor, as the case may be, that pursuant to the High Court having sanctioned the Scheme, the said debts, loans, advances or deposits be paid or made good or held on account of the Transferee Company as the person entitled thereto to the end and intent that the right of the Transferor Company to recover or realize all such debts, deposits and advances including the debts payable by such persons, debtor or deposit to the Transferor Company) stands transferred and assigned to the Transferee Company and that appropriate entries should be passed in their respective books to record the aforesaid changes. 5.3 With effect from the Appointed Date, all the debts, unsecured debts, liabilities, duties and obligations of every kind, nature and description of the Transferor Company shall also under the provision of Sections 391 to 394 of the Act, without any further act or deed be transferred to or be dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment or carry out all such formalities or compliance referred to above on the part of the Transferor Company to be carried out or performed. 5.7 With effect from the Appointed Date and upon the Scheme becoming effective all development rights, statutory licenses, permissions, approvals or consents to carry on the operations and business of the Transferor Company shall stand vested in or transferred to the Transferee Company without any further act or deed and shall be appropriately mutated by the statutory authorities concerned in favour of the Transferee Company. The benefit of all statutory and regulatory permissions, environmental approvals and consents, registrations or other licenses and consents shall vest in and become available to the Transferee Company pursuant to this Scheme. In so far as the various incentives, subsidies, rehabilitation Schemes, special-status and other benefits or privileges enjoyed, granted by any Government body, local authority or by any other person, or availed of by the Transferor Company, are concerned, the same shall vest with and be available to the Transferee Company on the same terms and conditions. 10. Further from the perusal of the Scheme o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany shall be accounted for in the books of account of the Transferee Company in accordance with 'Purchase Method' in compliance with the Accounting Standard 14 notified under the provisions of the Companies Act 1956 read with the relevant provisions of the Companies Act 2013. 14.4 Any excess of the fair value of shares issued by the Transferee Company as consideration over the value of net assets of the Transferor Company acquired by the Transferee Company on amalgamation shall represent goodwill and be treated as such in the Transferee Company's financial statement prepared consequent upon such amalgamation. If the fair value of shares issued by the Transferee Company is lower than the value of net assets acquired, the difference shall be treated as capital reserve. 11. Since the parties to the amalgamation agreed that the assessee shall account for the amalgamation in its books in accordance with the Purchase Method , the relevant provisions of the Accounting Standard-14 pertaining to the Purchase Method are reproduced as follows: - 12. Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising on revaluation) of the transferor company, other than the statutory reserves, should not be included in the financial statements of the transferee company except as stated in paragraph 39. 37. Any excess of the amount of the consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognised in the transferee company s financial statements as goodwill arising on amalgamation. If the amount of the consideration is lower than the value of the net assets acquired, the difference should be treated as Capital Reserve. 12. We find that following the provisions of the Accounting Standard-14 pertaining to the Purchase Method , the assessee sought another valuation report dated 04/07/2016 to estimate the fair value of identified intangible assets, i.e. Dealer Network and Customer Relationships ( Identified Intangible Assets ) and major tangible fixed assets i.e. land, buildings and plant and machinery ( Specified Tangible Fixed Assets ) as per the Indian Accounting Standards for the purpose of purchase price allocation exercise as at 31/03/2015, i.e. the valuation date. Further, the excess amount of consideration over the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perusal of the decision in Smifs Securities Ltd. (supra), we find that the following question, inter-alia, came up for consideration before the Hon ble Supreme Court: - Question No.[b]: Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on 'goodwill' is allowable under the said Section? 17. While answering the question in favour of the assessee, the Hon ble Supreme Court in Smifs Securities Ltd. (supra), observed as follows: 2. It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. 3. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 ['Act', for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: Explanation 3.-- For the purposes of this sub-section, the expressions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above. 8. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee. 18. Thus, from the perusal of the aforesaid findings of the Hon ble Supreme Court, we find that in the facts of Smifs Securities Ltd. (supra), the excess consideration paid by the taxpayer over the value of net assets acquired of the amalgamating company was considered as goodwill arising on account of amalgamation. It is further evident that the AO in the aforesaid decision concluded that no amount was actually paid on account of goodwill. However, in further appeal, the learned CIT(A) concluded that the difference between the cost of an asset and the amount paid constituted goodwill and the taxpayer in the process of amalgamation has acquired a capital right in the form of goodwill because of which the market worth of the taxpayer stood increased. It is evident from the perusal of the aforesaid decision that the aforesaid finding of the learned CIT(A) was upheld by the Tribunal and in further appeal, the Revenue restricted its challenge only qua the question as to whether the goodwill is an asset under section 32 of the Act and whether depreciation on goodwill is allowable under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamating company acquired by the amalgamated company should be recognised in the amalgamated company s financial statements as goodwill on amalgamation. Therefore, even though there is no intangible asset under the head goodwill in the books of the amalgamating company on the date of acquisition by the assessee and the goodwill was not already recorded in the books of the amalgamating company which was valued by the independent merchant banker, it is pertinent to note that the value of the goodwill arose in light of the principles of Accounting Standard-14 followed by the assessee to account for the amalgamation in its accounts. Further, it is reiterated that in the Scheme of Amalgamation, approved by the Hon ble High Court, both parties agreed that any excess of the fair value of shares issued by the assessee company as consideration over the value of net assets of the amalgamating company shall represent goodwill and be treated as such in the assessee s financial statement prepared consequent upon such amalgamation. Thus, once goodwill has been recognised by the assessee in its financial statement, pursuant to the amalgamation, we are of the considered view that it is entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is the case of aggregate deduction, the proviso has no role to play. Thus, adverting to the facts of the instant case, since the amalgamating company did not have any goodwill recorded in its books of accounts or as part of a block of depreciable assets, prior to amalgamation, therefore the question of claim of depreciation on goodwill by the amalgamating company does not arise in the instant case. Accordingly, we are of the considered view that the provisions of the sixth proviso to section 32(1) of the Act are not applicable to the facts of the present case since the goodwill did not exist in the books of the amalgamating company but has arisen in the process of amalgamation. 23. Further, the Revenue has placed reliance upon the provisions of Explanation 7 to section 43(1) of the Act which provides that when a capital asset is transferred by an amalgamating company to the amalgamated company, the actual cost of the transferred capital asset in the hands of the amalgamated company is to be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purpose of its own business. Further, reliance has also been placed upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... malgamation. 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 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/transfero ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the value of net assets acquired by it. Therefore, the coordinate bench vide order dated 30/10/2023 concluded that there was no scope for the purchase of goodwill by excess payment of purchase consideration. Thus, it is clearly evident that the facts of the aforesaid case are completely different from the facts under consideration before us. (d) The decision in the case of Dosti Reality Ltd., in ITA No. 2043/Mum/2022, dated 13/04/2023, is also distinguishable on facts as the pooling of interest method was followed to account for the amalgamation in the books of the amalgamated entity as compared to Purchase Method adopted in the present case. (e) Lastly, the decision in the case of United Breweries Ltd. v/s Addl. CIT, reported in [2016] 76 taxmann.com 103 (Bang.), relied upon by the lower authorities, the value of goodwill in the books of the amalgamating company was only Rs. 7.45 crore which has been shown by the taxpayer at Rs. 62.30 crore and accordingly, it was held that the taxpayer has failed to justify the valuation of goodwill at Rs. 62.30 crore. However, there is no dispute regarding the value of goodwill in the present case. We find that for a similar reason the coordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... algamating company. The learned CIT(A) further held that just like goodwill , the two intangible assets on which depreciation is being claimed by the assessee are actually the balancing figures while merging the accounts of the amalgamating company. Accordingly, the learned CIT(A) upheld the denial of depreciation claimed on customer relationship and distribution network . 31. As per the assessee, the amalgamating company had a strong distribution network and had established relationships with the distributors who had a nationwide presence. The distributor network is critical to ensure the widespread geographical presence of products and access to retailers and end customers, without whom the assessee could not have established a direct relationship. As per the assessee, the amalgamating company has contractual relationships with the distributors in the form of yearly renewable and mutually terminable contracts and these contracts were in existence over a fairly long period of time. 32. As noted above, following the provisions of the Accounting Standard- 14 pertaining to the Purchase Method , the assessee sought a valuation report dated 04/07/2016 to estimate, inter-alia, the fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of the assessee. As noted elsewhere, Accounting Standard-14 provides that the identifiable assets and liabilities may include assets and liabilities not recorded in the financial statement of the transferor company. Thus, similar to our findings rendered in respect of the claim of depreciation on goodwill, we find no merits in the findings of the lower authorities that no separate asset under the head of assets by the name of customer relationship or distribution network was existing in the books of the amalgamating company. Further, we also do not find any merits in the findings of the learned CIT(A) that the aforementioned two intangible assets are actually the balancing figures while merging the accounts of the amalgamating company, as the fair value of these assets was specifically computed by the independent valuer vide valuation report dated 04/07/2016. 34. We find that while explaining the meaning of the phrase any other business or commercial rights of similar nature in section 32(1)(ii) of the Act, the Hon ble Delhi High Court in Areva T D India Ltd. v/s DCIT, reported in (2012) 345 ITR 421 (Del.), observed as follows: 13. The fact that after the specified intangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in SKS Micro Finance Ltd. v/s DCIT, reported in [2013] 37 taxmann.com 192 (Hyd. - Trib.) held that where the taxpayer was engaged in the business of micro-financial lending services and it had acquired entire microfinance business of another company 'S', which included the acquisition of rights over more than 1.10 lakhs existing clients of 'S', the amount paid by the taxpayer to 'S' for acquisition of its aforesaid clients was for an intangible asset eligible for depreciation. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as follows: 11. .. It is not disputed that the assessee has acquired the entire business and commercial asset of SKS on payment of lumpsum consideration which included the cost of acquisition of the existing customer base of SKS Society. It is also a fact that, the customer base acquired by the assessee has provided an impetus to the business of the assessee as the customers acquired are with proven track record since they have already been trained, motivated, credit checked and risk filtered. They are source of assured economic benefit to the assessee and certainly are tools of the trade whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case of Gurgaon Realtech Limited W.P.(C) 5849/20211. 2. Denial of natural justice On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating that the Assessing Officer passed an assessment order without providing reasonable and adequate opportunity to furnish detailed submission against show cause notice dated 01 April 2021, thereby, violating the principles of natural justice 3. Disallowance of depreciation of INR 9,49,59,444 on goodwill 3.1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of depreciation of INR 9,49,59,444 on goodwill. 3.2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of depreciation of INR 9,49,59,444 on goodwill made by the Assessing Officer holding that goodwill does not fall within the any other business or commercial rights of similar nature* used in section 32 of the Act contrary to the decision of Supreme Court in the case of Smifs Securities Ltd (2012) (348 ITR 302) 3.3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the contention of the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law, the CIT(A) erred in rejecting the claim of the appellant that the dividend paid by the appellant to Dow Chemical Pacific Singapore Private Limited, a non-resident shareholder ought to be charged at the rate of 10% prescribed under Article 10 of the Double Taxation Avoidance Agreement ('DTAA') between India and Singapore as against the rate as per the provisions of section 115-0 of the Act and thereby rejecting the claim of refund of excess tax paid on dividend distribution. 9.2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting the claim of the appellant that the dividend paid by the appellant to Dow Chemical Singapore Holding Private Limited, a non-resident shareholder ought to be charged at the rate of 15% prescribed under Article 10 of the DTAA between India and Singapore as against the rate as per the provisions of section 115-0 of the Act and thereby rejecting the claim of refund of excess tax paid on dividend distribution. 9.3 On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting the claim of the appellant that the dividend paid by the appellant to Rohm and Haas India Investments Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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