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TMI Blog2023 (9) TMI 1600X X X X Extracts X X X X X X X X Extracts X X X X ..... double taxation avoidance agreement is contrary to the decision of the special bench and therefore all those arguments deserves to be rejected which refers to the articles of double taxation avoidance agreement by the assessee i.e. an Indian company. Therefore, Indian company is deprived of referring to the Double Taxation Avoidance Agreement with respect to dividend distribution tax under section 115O of the act. In view of various observations made with respect to the applicability of double taxation avoidance agreement, we dismiss the additional ground raised by the assessee. Disallowance of payments made to Drs in alleged violation of Indian medical Council (professional conduct, adequate and ethics) regulations, 2002 (IMC regulations) - Payment made for customer gifts, brand reminders and medical books etc - Disallowance under section 37 (1) - HELD THAT:- Brand reminder is in the purchase of medical books and journals for the medical professionals are specifically covered under the gift prohibited by the rules of Indian medical Council. Nobody can deny that it is not a free be given by assessee to those doctors. We also find that the decision of the honourable Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee without granting assessing officer and opportunity to consider the submissions made by the assessee during the appellate proceedings - HELD THAT:- We find that it is not the claim of the revenue that the allowance of writeoff of bad that is granted to the assessee by the learned first appellate authority is not sustainable in law. For the 11 s of bad debts the AO was directed to furnish remand report, it was furnished on 8/1/2018 as stated in paragraph number 8.1 of the learned CIT appeal s order. Therefore, it is incorrect to say that no opportunity was available to the assessing officer for verification of the claim. In any case, when there is no grievance that the claim allowed to the assessee by the first appellate authority is easy in accordance with the law, we failed to understand what purpose it would achieve if the learned assessing officer is given and unfortunately once again. In view of this, we dismiss ground number 4 of the appeal. Undisclosed income - difference between the AIR data of the assessee and the income shown by the assessee in its books of accounts - HELD THAT:- No doubt, difference between AIR data and books of account triggers the examinati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the claim of depreciation on goodwill satisfies the provisions of the income tax act, the learned AO may verify the same and decide the issue in accordance with the law. Needless to say, the proper opportunity of hearing is given to the assessee. In the result ground number 3 5 of the appeal of the assessee are allowed. Claim of deduction u/s 35DD - assessee has incurred amalgamation expenditure being 1/5 of the expenditure on amalgamation incurred - HELD THAT:- Assessee has been granted deduction under section 35DD of the act with respect to all the expenditure which assessee supported by producing evidences in the form of invoices/vouchers/men that letter et cetera. However when the assessee has failed to produce the evidence of incurring the expenditure as well as the purpose for which it is incurred, we do not find any infirmity in the order of the lower authorities in denying the deduction to the assessee to that extent under section 35DD of the act. Accordingly ground number 6 of the appeal of the assessee is dismissed. - SHRI PRASHANT MAHARISHI, AM AND SHRI RAHUL CHAUDHARY, JM For the Assessee : Shri P.J. Pardiwala Sr. Advocate Shri Jeet Kamdar, Advocate ARs For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not able to produce copies of bill/invoices vouchers for the said amount which constituted only 1.12% of the total amalgamation expenses of ₹ 128,699,915/ 03. ITA number 2108/M/2018 is filed by The Assistant Commissioner Of Income Tax 14 (2) (2), Mumbai (The Learned AO) raising following grounds of appeal:- 1) Whether on facts and circumstances of the case and in law, the learned CIT (A) erred in a ruling that points (a) and (b) listed below:- (a) IMC (professional conduct, adequate and ethics) regulations, 2000 to which expressly prohibited medical practitioners from accepting any material gifts/benefits and (b) CBDT circular number zero 5 2012, with 6 to support the IMC regulations by disallowing expense deductions claimed by pharmaceutical firms on providing such material gifts/benefits to medical practitioners do not apply to the assessee 2) whether on the facts and in the circumstances of the case and in law, the learned CIT (A) order in not appreciating the fact that the prohibited practice of medical practitioners accepting material gifts/benefits cannot be conducted without assessee is complete consent/involvement, and overlooks judgment supporting the illegality an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in the ITS. Assessee submitted that it has written a letter to the concerned parties asking the nature and other supporting evidence in respect of the transaction, however, Assessee did not receive any reply. The learned assessing officer found that it is for the assessee to prove that the transactions reflected in ITS data as well as form number 26AS data included in the books of account and assessee offers corresponding income for taxation. The AO noted that he has issued notices under section 133 (6) of the Act to the concerned parties, however, he did not receive any replies. Therefore as the assessee has not furnished the necessary evidence, LD AO added to the income Rs. 544,579/ . ii. Assessing officer found that assessee has debited a sum of Rs. 482,612,000/- as advertisement expenses. On examination of the details, he asked assessee to submit the nature and quantum of expenditure incurred that is in the nature of payment mentioned in the Indian medical Council (Professional Misconduct, Etiquette and Ethics) Regulations, 2000. Assessee submitted such details. However, the learned assessing officer after considering all the contentions of the assessee held that brand remi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0/-. 08. Assessee aggrieved with assessment Order, preferred appeal before the learned CIT ( A), who passed an appellate order on 24/1/2018. 09. The learned CIT A dealt with all the issues as under: i. For addition of Rs. 544,579/- after obtaining the remand report, he deleted the addition of Rs. 206,277 that were accepted by the learned assessing officer in the remand report as it was wrongly shown in the name of the assessee by ICICI bank Limited. There was no clarification with respect to the other sum and therefore the balance addition was confirmed. ii. On disallowance of ₹ 87,953,773/ of brand reminders and ₹ 28,080,941 purchase of medical books and journals provided to healthcare professionals, the learned CIT A deleted the disallowance following the decision of the coordinate bench in ITA number 4605/M/2014 dated 12/1/2017 in case of PHI Pharma private limited, wherein it was held that the MCA regulation would be applicable to Drs only and not to pharmaceutical companies. It was further held that the board s circular number 05/2012 and the decision of the honourable Himachal Pradesh High Court in case of Confederation of Indian pharmaceutical industries has cate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents on the issues of disallowance on which the remand report was silent. The second remand report was submitted on 8/1/2018, which was replied to by the assessee on 19/1/2018. The learned CIT A held in paragraph number 7 rejecting the claim of the assessee of depreciation of ₹ 27,163,000 on goodwill arising on amalgamation. iv. Further on the difference of income of 2 companies, the learned CIT A also asked that there is a bad debts written off out of the provision for doubtful debts, inadvertently not claimed in the original return of income filed but same was claimed in the revised return of income filed of ₹ 151,101,570/ . The learned CIT A after obtaining the explanation of the assessee and the remand report of the learned assessing officer along with the rejoinder, considered this issue in paragraph number 8.3 of Appellate Order and held that assessee has produced a statement showing party wise details of Baghdad s return of amounting to ₹ 151,101,570 along with the sample copies of the Ledger accounts of the buyers in the books of account of the assessee, where dues were written off by the assessee in assessment year 2014 15. These bad debts were found in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us and hence are not required to be discussed. 010. Accordingly appellate order was passed on 24/1/2018 with which the AO and the assessee both are aggrieved are in appeal and in CO before us. 011. Assessee has also filed an additional ground of appeal as per letter dated 18 June 2021 with respect to the applicability of Dividend Distribution Tax [ DDT] under section 115O of The Income Tax Act or lower rate of tax in case of Non-Resident Assessee who are eligible for the benefit of Double Taxation Avoidance Agreement [ DTAA] as under:- on the facts and in the circumstances of the case and law, the Dividend Distribution Tax (DDT) paid by the appellant on dividend distribution to its nonresident shareholders ought to have been charged at the rate prescribed under the Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of the respective non-resident shareholders as against the rate as per the provisions of section 115O of The Income Tax Act 1961, i.e. at the rate of 16.995%. 012. In the application of the assessee, it has stated that i. additional ground of appeal raised are purely legal issues, ii. facts are already on record and does not need any ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax on company. vi. issue is not arising from the orders of lower authorities and hence same cannot be raised, The learned departmental representative vehemently supported the claim by relying on the decision of the coordinate bench in case of IT(TP)ANo.525 /Bang/2019 M/s. Texas Instruments (India) Pvt. Ltd., Bangalore wherein identical ground was not admitted by the coordinate bench holding that it does not arise from the orders passed section 143 (3) of the act. 015. In the rejoinder the learned authorized representative pointed out decision of the coordinate bench in case of GE BE private limited versus The Deputy Commissioner Of Income Tax (IT(TP)A number 2615/Bangalore/2019) for assessment year 2015 16 dated 17/05/2022 wherein the above decision of the Bangalore tribunal of Texas instruments India private limited was considered and it has been held in paragraph number 12.8 that the coordinate bench failed to consider the decision of Robert Bosch engineering and business solutions private limited in IT (TP) A number 608 and 445/Bangalore/2016 dated 2/2/ 2022 wherein the identical ground is admitted. Therefore, the decision cited by the learned departmental representative has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id not question the assessee on this aspect as assessee has paid a dividend distribution tax in accordance with the income tax act. Therefore, there is an assessment order under section 143 (3) of the act based on the return of income by which the assessee is aggrieved, therefore, assessee has a right to raise additional ground of appeal on fact of DDT including Nonresident shareholders contained in the return of income which is against the assessee, provided adequate information is available on record. It is not the case where the assessee has on its own paid lesser amount of tax and assessee is a deemed to be an assessee in default under the provisions of section 115Q of the act. Therefore, adequate information available on the record, we have no hesitation in admitting the additional ground of appeal. Hence, we admit the same. 017. Coming to the merits of the ground of appeal, the learned authorized representative submitted that i. Shareholders of Pfizer Ltd is a resident of Netherlands whereas the shareholders of Wyeth Ltd a resident of United Kingdom. I ii. Netherlands, the Double Taxation Avoidance Agreement entered into by India has Most Favoured Nation [MFN] clause. iii. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rit petition 13241/2019 iv. Union of India versus Tata tea Ltd (CN number 9178 of 2012) (SC) v. Indian oil petronas private limited ITA number 188 /KOL/2019 019. The learned departmental representative vehemently opposed the above argument. It was stated that:- i. Special bench of tribunal has categorically held that dividend distribution tax under section 115O of the act is a tax under distributed profits of the assessee company. Therefore, there is no reason to hold that it is a tax on income of the shareholder. ii. Here non-resident taxpayer have not challenged levy of the tax under section 115O of the act before the tribunal. Assessee is a resident, therefore assessee cannot invoke the provisions of Double Taxation Avoidance Agreement. iii. He submits that as India Netherlands DTAA the claim is barred by limitation as such claim needs to have been raised within three years before competent authorities and not before ITAT by the shareholders and not by the Indian company like assessee. He referred to Protocol where in it is provided that :- Articles 10, 11 and 12 1. Where tax has been levied at source in excess of the amount of tax chargeable under the provisions of Article 10, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned assessment year is 2014 15, even presumably if the refund is allowed to the assessee, it was be an unjust enrichment in the hands of the assessee. Therefore, also this ground deserves to be rejected. viii. There is no evidence placed on record by the assessee that those Netherlands shareholders have not claimed any tax benefit of India Hungary double taxation avoidance agreement and claimed the tax credit of dividend distribution tax. Unless the assessee produces the tax return of those nonresident shareholders, the claim of the assessee deserves to be rejected at the threshold only. ix. Under the scheme of section 115O, the provisions of international tax laws are not attracted. x. As per India Hungary DTAA, if tax resident of that country receives dividend from an Indian company, then dividend distribution tax paid in India would be deemed to be tax paid in the hands of the shareholder. Therefore, the only alternative is that non-resident shareholder resident of Hungary can only claim tax credit in the return of income filed by it in Hungary. There is no tax consequence in India. This applies to Netherland shareholder also. xi. The learned departmental representative veh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tributed Profits) referred to in Sec. 115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115 O of the Act and not at the rate of tax applicable to the nonresident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign's prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Thus, the question before the Special Bench is answered, accordingly. 022. No provisions have been shown by the learned authorized representative wherein the domestic company is entitled to invoke the articles of double taxation avoidance agreement between India and the country of residence of non-resident shareholders. Of course, the non-resident shareholders can take benefit of the double taxation avoidance agreement if it benefits them, however Indian company cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any expenses incurred by the pharmaceutical company which is in violation of such guidelines is disallowable under section 37 (1) of the act. He submitted that there is no overall upper limit of such expenditure. Therefore, now the issue is squarely covered by the decision of the honourable Supreme Court and accordingly now the order of the learned CIT A on this ground is not sustainable. 025. The learned authorized representative vehemently submitted that the decision of the honourable Supreme Court does not apply to the facts of the case for the reason that assessee has merely given brand reminder and customer gifts and purchase of medical books and journals. It was submitted that nominal value of the such gifts are very low and therefore those expenditure amounting to ₹ 87,953,773 does not violate the guidelines of Indian medical Council. With respect to the purchase of medical books and journals it was submitted that these are provided to the Drs with a view to disseminate knowledge and education and does not fall within the prohibited expenditure. It was further submitted that in the case of Apex Laboratories (P) Ltd [2022) 442 ITR I (SC), the Hon'ble Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free be by the other parties. The similarly, there is no bar in attending the conference and seminar purchasing books et cetera by the Drs, but footing of those bills defrayed by pharmaceutical companies is prohibited. Therefore, allowance of such expenditure in the hands of pharmaceutical company, which is required to be incurred by the Drs for their continuing professional education, is against the letter and spirit of the law as well as against decision of the honourable Supreme Court. It would always be unfair , improper to find escape routes from the decision of the honourable Supreme Court when it covers extensively all the possible outcomes. Undoubtedly, the decision of the honourable Supreme Court in case of Apex laboratories has strong binding precedent and serves as an authority on the facts with respect to the payment of freebies by the pharmaceutical companies and on all the legal issues arising out of such payment and its allowability in the hence of pharmaceutical companies. In view of this, we reverse the order of the learned and CIT A deleting the disallowance of ₹ 87,953,773 on account of brand reminders and customer gifts and ₹ 28,080,940 of purchase o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, no response was received. The learned assessing officer also issued notices under section 133 (6) of the act to those nine parties, however no response was received. Therefore, the AO made an addition of the above amount. Before the CIT A1 of the parties ICICI bank admitted that it had inadvertently reported the transaction in the annual information return of the assessee amounting to ₹ 206,227. The learned CIT A deleting the same. Therefore, the assessee is in appeal before us. 033. The learned authorized representative explained the relevant extracts of AI are statement of the assessee placed at page number 99 123 of the paper book as well as the copies of the letter is dated 20 December 2016, 21 December 2016 and 22 December 2016 return to all those nine parties which are placed at page number 124 134 of the paper book. He further submitted that that the learned assessing officer himself is issued notices under section 133 (6) of the act which is not been responded by those parties. He submitted that as the TAN of all the parties are available with the assessing officer, the learned assessing officer should have enquired from those parties by looking at their TDS re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase also, but unless the information is received contrary to what assessee has stated, the addition cannot be made in the hence of the assessee. In view of this we set-aside ground number 1 of the appeal to the file of the learned assessing officer to examine if the response to those 133 (6) notices are showing any evidence contrary to what assessee has stated, assessee must be confronted with that, after hearing the assessee, the learned AO may decide the issue afresh. Accordingly, ground number 1 and 2 of the appeal are allowed with above direction. 036. Ground number 3 5 of the appeal is with respect to the disallowance of the claim of depreciation on goodwill arising on amalgamation of Wyeth laboratories Ltd with the assessee. The fact shows that there was a scheme approved by the honourable High Court of amalgamation between the assessee company Pfizer Ltd and Wyeth Ltd having an appointed date of 1 April 2013 whereby all the assets and liabilities of Wyeth Ltd were transferred and vested in the Pfizer Ltd at the fair value is from the appointed date. The above scheme received the approval of the honourable Bombay High Court on 31 October 2014. The fair valuation of the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goodwill are:- i. In paragraph number five of the remand report dated 6/12/2017 submitted by the learned assessing officer wherein it was stated that that there was not sufficient material available on record for the quantification of goodwill. ii. Further proviso 6 to section 32 (1) of the act prohibits the deduction. iii. The decision of the coordinate bench in ITA number 722/Bangalore/2014 (United breweries versus ACIT) on identical facts and circumstances covers the issue against the assessee. The learned CIT A tabulated the similarities between the decision of United breweries Ltd and the case of the assessee and found that there is no material difference. iv. The decision of the honourable Supreme Court in case of Smiffs securities Ltd has been considered by the coordinate bench in case of united breweries Ltd. 037. The learned authorized representative explained the facts of the case he referred to the copy of the scheme of amalgamation approved by the honourable Bombay High Court placed at page number 135 153 of the paper book. He also explained that how goodwill has arise in India books of the assessee company on amalgamation as assessee has paid higher price than the fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... number 3279/M/2008 dated 13/10/2014 ii. Cosmos cooperative bank Ltd 64 SOT 90 iii. Shri Krishna drugs limited ITA number 198/Hyderabad/2011 iv. AP paper Mills Ltd 33 DTR 148 v. Mylan laboratories Ltd 180 ITD 558 vi. Arricent technologies Holdings Ltd ITA number 19/del/2013 vii. Urmin marketing private limited ITA number 1806/Ahmedabad /2019 viii. JX Nippon lubricants private limited 4985/Del/ 2019 ix. classic strips private limited versus DCIT ITA number 2378/M/2017 x. ACIT versus Lafarge aggregates and concrete India private limited ITA number 4476/M/2018 xi. DHL Logistics private limited versus DCIT ITA number 1030/M/2015 039. On the issue of claim of depreciation on goodwill arising out of the amalgamation, the learned departmental representative submitted as under:- Depreciation on goodwill created during amalgamation is not allowable. 1.1 Strategic acquisition of a target, by an acquirer paying more than its book net worth, is common in merger and acquisition deals. The acquisition price is generally based on the fair market value of business. The excess price is paid on account of various factors such as brand, clientele, combined synergies, etc., which may not be recorded in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 2 of section 32(1) written down value of the block of assets shall have the same meaning as in section 43 (6) (c). This section lays down the meaning of the term written down value , as under: 43(6) written down value means- (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force: Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, depreciation actually allowed shall not include depreciation allowed under sub- clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi); (c) in the case of any block of assets,- (i) in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low: 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. 1.7 In the case before us, goodwill was transferred by the amalgamating company (S Co) to amalgamated company (P Co). According to this explanation, the 'actual cost' of goodwill to the amalgamated company (P Co) shall be same as it would have been if the amalgamating company (S Co) had continued to hold the capital asset for the purpose of its own business. Since the actual cost of goodwill in the case of amalgamating company (5 Co) is zero, the actual cost in the case of amalgamated company (P Co) shall also be zero (and not the amount it paid to acquire the goodwill). 1.8 To clarify further, Explanation 2 to clause 43(6)(c) reads as under Explanation 2.-Where in any previous year, any block of assets is transferred,- (a) by a holding company to its su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 1.12 Thus even if the intangible block of asset has some value (which is denied as it has been explained above that it has zero value) the depreciation under this proviso is to be restricted to the value considering that amalgamation has not taken place. Since in the hand of the amalgamating company the depreciation would have been zero, there cannot be depreciation in the hand of the amalgamated company. This issue was also dealt by ITAT Bangalore vide its order dated 30 Sept 2016, in the case of United Breweries Limited in I.T. A. No.722, 801 1065/Bang/2014. The relevant discussion in the ITAT order is produced below: 11 ......The assessee is in the business of production and sale of Beer. During the previous year relevant to assessment year under consideration, the assessee's subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f cost of building, plant and machinery and higher value of land is taken to the books, there would not be any goodwill. The Assessing Officer concluded that differential amount being shown as goodwill cannot be considered as amount paid for brewing license as the assessee has not got the valuation of the license. Accordingly, the Assessing Officer has disallowed the depreciation on the goodwill on the ground that there is no goodwill if proper valuation is assigned to the tangible asset and land. On appeal, the CIT (Appeals) has concurred with the decision of the Assessing Officer by considering the fact that the value of the goodwill in the books of the KBDL is only Rs. 7.45 Crores which has been shown by the assessee at Rs. 62.30 Crores. The CIT (Appeals) was of the view that when the financial results of the KBDL shows that there was a profit of Rs. 2.14 Crores for the Assessment Year 200405 and loss of Rs. 1.89 Crores for the Assessment Year 2005-06 then the assessee has failed to justify the valuation of goodwill estimated at Rs. 62.30 Crores with reference to the average profit. Thus the CIT (Appeals) held that there is no justification for adopting the balance figure of exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowed in the hand of the assessee more than the depreciation which would have been allowed in the hand of KBDL as per the 5th proviso to Section 32(1) of the IT Act. He has referred to the assessment order and submitted that the Assessing Officer has considered the said proviso while disallowing the claim of depreciation. The CIT (Appeals) has confirmed the action of the Assessing Officer and therefore the claim of depreciation is not allowable as per the 5th proviso to Section 13(2)(1) of the Act. The Id. DR has also referred to the Expln. 3 to Section 43(1) and submitted that the Assessing Officer has the power to examine the valuation of the assets acquired by the assessee if these assets were already in use for business purpose and if the Assessing Officer is satisfied that the main purpose of transfer of such assets was the reduction of the liability to Income-tax then the actual cost of the asset to the assessee shall be such an amount as the Assessing Officer determines. Therefore the Assessing Officer has rightly determined the valuation of the goodwill at NIL and the assessee has failed to substantiate the valuation of the goodwill. The Id. DR has relied upon the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t if the Assessing Officer is satisfied that the main purpose of the transfer of such assets was the reduction of liability to income tax by claiming depreciation on the enhanced cost then the actual cost to the assessee shall be determined by the Assessing Officer. In the case on hand, since there is an amalgamation of the subsidiary with the assessee therefore all the assets which came to the assessee are already in use by the subsidiary and consequently the valuation of all the assets are subjected to the verification of the Assessing Officer as per Expl.3 of Section 43(1) of the Act. However, the Assessing Officer chose to examine the valuation of goodwill alone in order to disallow the claim of depreciation on the enhanced value of goodwill. We find that the Assessing Officer has not adopted any prescribed or well accepted method for valuation or actual cost of the goodwill in the hands of the assessee but he has doubted the valuation of the tangible assets and was of the view that the assessee has deflated the valuation of the tangible assets by the method of cost of replacement instead of FMV. The scope and objective of the Expl.3 of Section 43(1) of the Act is to check the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial rights of similar nature, being intangible assets acquisition by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-(1) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed; (i) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or knowhow, 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 (xillb) 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 prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset eligible for depreciation. If amalgamation is not considered, there would not be any deduction of depreciation on goodwill. Therefore, under this provision also, the assessee is not eligible for depreciation on goodwill. However the Assessing Officer has proceeded to hold the value of the goodwill as shown by the assessee is not justified. It is pertinent to note that once the claim of depreciation is restricted under the 5th proviso to section 32(1)(i) then the valuation issue become irrelevant. The CIT (Appeals) has also concurred with the view of the Assessing Officer regarding the applicability of the 5th proviso to Section 32(1) of the Act in para 5.4 as under:- 5.4 It is also highlighted both in the assessment order and remand report that no depreciation on goodwill was claimed by KBDL before amalgamation. Therefore, as per the 5th proviso to Section 32(1)(i), the appellant is not entitled to depreciation. This is a valid and relevant argument and appellant has not offered any rebuttal to this contention of the A.0. It is not the case of the assessee that the subsidiary has claimed any depreciation of goodwill. Therefore by virtue of 5th proviso to Section 32(1), the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the trailing paragraphs. 2.1. In this case the assessee, 'Smiffs Securities Ltd., entered into the scheme of amalgamation with YSN Shares Securities P Ltd. ('Amalgamating company'). The scheme was duly sanctioned by High courts with retrospective effect from April, 1st 1998. The assets and liabilities of amalgamating company were transferred and vested in the assessee. The assessee treated the difference between the consideration and the net value of assets of the amalgamating company, as goodwill and claimed depreciation on it. The depreciation on goodwill was claimed treating the same as an intangible asset u/s 32 of the IT Act. Explanation 3 to Sec 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. The AO rejected the claim on the basis that goodwill was not an intangible asset as defined in Explanation 3 to Sec 32(1) and the assessee had not paid anything for the same. The CIT (A) and ITAT ruled in favour of the assessee, that the difference between the cost of the assets and the amount paid in the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowable in the light of aforesaid provisions of the Act. 2.3. In this regard we would like to quote from Earl of Halsbury LC in the case of Quinn v. Leather [1901] AC 495 (HL), wherein it was held that A case is only an authority for what it actually decides. I entirely deny that it can be quoted for a proposition that may seem to logically follow from it. Such a mode of reasoning assumes that the law is necessarily a logical code, whereas every lawyer must acknowledge that the law is not always logical at all. 2.4. This decision of House of Lords was quoted with approval by the Constitution Bench of Supreme Court in the case of State of Orissa v. Sudhansu Sekhar Misra, (1968) 2 SCR 154(SC) wherein It stated that a decision is only an authority for what it actually decides. Thus we must appreciate that Hon'ble SC in Smiff Securities only decided that goodwill is depreciable. Whether other sections of the Act restrict depreciation in case of goodwill acquired during amalgamation, was not an issue before Hon'ble SC and therefore the decision of Hon'ble SC should not be extended to such issues which it never decided. 2.5. Further, it is submitted that in the case of Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6)(c). Further, it has also been submitted that even if it is assumed(not admitted) that there is some cost of acquisition of goodwill, no depreciation is allowable due to provision of sixth proviso (earlier fifth proviso) to section 32(1). 3.1. Ld. CIT(A) has dealt with this issue in detail vide paras 7.1 to 7.6 of order. In view of the above submission it is humbly submitted that the appeal of the assessee on this ground may be dismissed. 040. The learned departmental representative vehementally submitted that there is no question of granting depreciation to the assessee over and above the assets acquired by the assessee from the target company. He submitted that as per section 32(1) of the income tax Act 'depreciation' is to be computed on 'actual cost'/'written down value of the block of assets'. Such returned down value of the block of assets is required to be ascertained in accordance with section 43. In respect of 'capital assets' transferred by the target company to the successor company, the cost/written down value of the transferred capital asset to the successor company shall be taken to be the same as it would have been had the target com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores were taken resulting into the net assets taken over of ₹ 22,727 crores. Assessee accounted the amalgamation under the purchase accounting method as per accounting standard 14 accounting for amalgamation issued by ICAI. The assessee recorded in its books of account fixed assets and other assets amounting to ₹ 1630 crores. As assessee has paid market value of the shares of ₹ 12,810 crores, balance sum of ₹ 11,180 crores was treated as same is located to the intangible asset. Out of the above sum of 11,180 crores assessee has identified value of intangible assets in the form of various brands/trademark et cetera of ₹ 4272 crores. The balance sum of ₹ 6908 crores was accounted for as Goodwill. This is supported by a report of Deloitte Touch and Tomastu India private limited dated 9 March 2015 placed at paper book page number 246 and relevant data. Page number 277 of the paper book. When the value of goodwill was put at ₹ 6908 crores, apparently it is a balancing figure, for which the report says that goodwill is also an intangible asset of the business and we have been informed by the management that the same represents the value of variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had taken place and thereafter depreciation so computed shall be apportioned between the amalgamating company and the amalgamated company in the ratio of number of days for which the assets were used by both the entities. This has been answered by the honourable Karnataka High Court in paragraph number 9 of the decision in case of Padmini Products Pvt Ltd V DCIT [2020] 121 taxmann.com 237 (Karnataka)/[2021] wherein fifth proviso to section 32 was discussed as under:- 9. Thus, it is evident that 5th proviso to section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. Accordingly, the third substantial question of law is answered in favour of the assessee and against the revenue. 044. Further that proviso applies in the case of the appointed date being in between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamated company had continued to hold the capital assets for the purposes of its own businesses. Further, reference to page number 277 being page number 33 of the valuation report clearly shows that the difference in the purchase price and the fair value of other identified assets and identified intangible assets the presence goodwill. Therefore it is apparent that the surplus price paid by the purchaser is towards buying the goodwill of the business which is self generated. The valuation report also suggest that a sum of ₹ 6908 crores though classified as a goodwill is also including valuation of workforce, synergies, customer relationships, distribution network, vendor relationships, contacts et cetera. It also says that goodwill is primarily arise in also due to the future earning capacity of the business to generate profits and returns to the shareholders. Therefore it is not clear whether in the valuation of goodwill of ₹ 6908 crores there are any other intangible assets or it is purely goodwill. Though assessee has accounted for in the books of account ₹ 6908 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X
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