TMI Blog2011 (1) TMI 1226X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 46,05,90,029 is neither bona fide nor tenable and thus the learned CIT(A) was justified in his conclusion in rejecting the appellant's claim. The appellant has also raised an alternative plea to allow deduction for capital loss. Considering the entire material on record and no specific argument having been made at the time of hearing of this appeal, we find that the assessee has incurred loss in acquisition of an undertaking which is a capital loss to it. The same, therefore, cannot be allowed as deduction and as such the alternative plea so made being devoid of any merit, stands rejected. In the overall conspectus we find no merit in the grounds raised in appeal by the assessee. The same stands rejected and the appeal stands dismissed. In the result, the appeal stands dismissed. - Order The order of the Bench was delivered by B. R. Jain (Accountant Member).-This appeal by the assessee against the order dated December 26, 2008 of the learned Commissioner of Income-tax (Appeals), Panaji, Goa raises the following grounds in appeal. "(1) The Commissioner of Income-tax has erred in law and on facts in upholding the disallowance made by the Assessing Officer on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,355. The assessee also claimed set-off of Rs. 1,33,83,53,529 on account of brought forward business losses and unabsorbed depreciation of the amalgamating company. The Assessing Officer found that the goodwill is self-generated by the assessee and not acquired on amalgamation. As per section 32(1)(ii) of the Act, goodwill is not an asset on which depreciation can be allowed. He therefore, disallowed the claim of depreciation of Rs. 11,51,47,507 being 25 per cent. of Rs. 46,05,90,029. The aforesaid decision was taken after requiring the assessee to show as to why the goodwill or depreciation on goodwill should not be disallowed. In response to the questionnaire dated June 5, 2007, the assessee furnished a reply vide letter dated June 7, 2007, including a note on goodwill and depreciation on goodwill as reproduced below : "The company has shown the goodwill of Rs. 46,05,90,029 in its annual accounts and the same has been written off entirely in the profit and loss account. However, in the computation of income the write off of goodwill is not considered as an allowable expenditure but the same has been treated as addition to fixed assets and the depreciation there on has been cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L the option either to receive each of Rs. 10 per share of MPL held by them or to receive one preference share of CCPL of the face value of Rs. 10 each carrying dividend coupon of 8 per cent. for every share of MPL held by them. Thus, it may be noted that the CCPL has offered to buy out the shareholders in consideration paid by CCPL to the shareholders of MPL on the above basis far exceeded the revalued figures of the tangible fixed assets of MPL as taken over by CCPL. The excess as aforesaid over the tangible fixed assets of MPL as paid for by CCPL towards the goodwill representing intangible assets in the nature of know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. Accordingly this actual payout by way of payment as well as issue of preference shares has not been treated as revenue expenditure but has been capitalised in the income-tax computation and depreciation has been claimed thereon. It may be noted that CCPL has acquired the right to all the process know-how and technology for manufacture of pellet and the brand Mandovi pellet which is now used by CCPL. Accordingly, the goodwill representing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f MPL, technical know-how as a separate asset does not exist. The fixed assets of MPL were used for the production of pellets and hence the technology inherently comes with the assets. This holds good for all manufacturing concerns. Further MPL is a chronically loss making company and had stopped operations in June 2002 and resumed in the financial year 2004-05 and the assessee's claim that brand Mandovi is of value is doubtful. Obviously the "goodwill" as expressed in the willingness of shareholders to purchase shares of CCPL or sell those of MPL indicates their faith in CCPL and not the brand "Mandovi". The Assessing Officer made reference to clause (ii) of section 32(1) of the Act introduced by the Finance (No. 2) Act, 1998, with effect from April 1, 1999, that reads as under : "In respect of depreciation of know-how, patents, copyrights, trade marks, 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, wholly or partly, by the assessee and used for the purpose of the business or profession, the following deductions shall be allowed in the case of any block of assets, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also made reference to the opinion given by the Internal Revenue Service, USA, on the code of Federal Regulations Washington vide title 26 Volume 2 Part 1, (26 CFR1.167(a)-3) which reads as under : "If an intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. Examples are patents and copyrights. An intangible asset, the useful life of which is not limited, is not subject to the allowance for depreciation. No allowance will be permitted merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life. No deduction for depreciation is allowable with respect to goodwill." He has also made reference to the Federal Court in the case of "Morning Ledger" a Michigin News Paper publishing firm, while discussing the admissibility of depreciation on the "subscribers list" observed that though subscribers list is an intangible asset, it is not eligible for depreciation as it is similar to goodwill (26 CFR1.167(a)-3). Thus th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... domestic as well as international market. During the previous year relevant to the assessment year 2005-06, the appellant acquired by way of amalgamation the entire business of Mandovi Pellets Ltd. (MPL). The amalgamation of MPL with the appellant was approved by the Bombay High Court, Goa Bench. Consequently the appellant started the business of manufacture of pellets. MPL had substantial accumulated losses in its books and the business was carried on with intermittent stoppages. Therefore there could not be any goodwill attached to the business of MPL. However the order of the hon'ble High Court stated that whatever amount the appellant paid in excess of assets taken over from MPL less liabilities acquired should be treated as `goodwill' in the books of the appellant. Thus the term `goodwill' has arisen out of the order of the hon'ble High Court and hence the same does not represent any goodwill as such attached to the business of MPL. The manufacture of pellets is a specialised business and needs considerable process know-how. Again Mandovi Pellets brand is also an established brand in both domestic and international market. It is for this benefit that the appellant p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carefully perused the entire material on record with reference to the case law cited at bar. The Assessing Officer has recorded a finding of fact that the assessee did not acquire goodwill on amalgamation of MPL with the assessee-company, viz., M/s. Chowgule and Co. Ltd. The goodwill has been self-generated on amalgamation by the assessee. These findings of fact reached by the Assessing Officer are not shown to be perverse nor has any credible evidence or material been laid on record to show that the assessee incurred any cost for acquiring goodwill in the scheme of amalgamation. The record reveals that the appellant itself in the first instance had written off the entire amount of Rs. 46,05,90,029 accounted for as its goodwill in its accounts. This decision taken by the appellant is consistent with standard accounting practices followed in respect of fictitious assets. The return of income for the year under consideration is found accompanied by a tax audit report under section 44AB of the Income-tax Act, 1961, made by M/s. S. B. Billimoria and Co., chartered accountants. Under the Income-tax Act, the auditors have to express their opinion on the truthfulness and correctness o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the standard practices recommended by the Institute of Chartered Accountant of India. (b) The transferee-company shall record all the liabilities and reserves recorded in the books of account of the transferor-company and transferred to and vested in the transferee-company pursuant to the scheme in accordance with any of the standard practices recommended by the Institute of Chartered Accountants of India. (c) The difference being the excess of the net assets of the transferor-company recorded in the books of the transferee company as per clauses (a) and (b) above over the books value as on the effective date at which the investment in the shares of the transferor-company is recorded by the transferee company shall be credited by the transferee company to capital reserve account. In case of the being a shortfall, the same shall be debited to goodwill account." From the above accounting treatment, it is clear that the assessee made accounting entries to the goodwill account after the scheme became effective and not on account of the order of the High Court to make any payment for goodwill (intangible assets) specifically. As per standard accounting practices, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion by this court of the scheme under sections 391 to 394 of the Act, the said debt, loan, advance or deposit be paid, made good or held on account of the transferee company as the person entitled thereto in place of the transferor company and the appropriate entry should be passed in its books to record the aforesaid change and without prejudice to the generality of the scheme, all assets, properties, estate, right, title, interest, licences and authorities, permits, fuel, linkages, quotas, approvals, permissions, incentives, sales tax deferrals, loans or benefits, subsides, concessions, grants, claims, leases, tenancy rights, liberties and other assets, special status and other benefits or privileges enjoyed or conferred upon or held or availed of by the transferor company and/or all rights and benefits that have been acquired or that have arisen or accrued or which may arise or accrue to the transferor company after the appointed date and prior to the effective date in connection or in relation to the operation of the undertaking shall, pursuant to section 394(2) of the Act, without any further act, instrument or deed, be and stand transferred to and vested in or be deemed to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset) in the amount of Rs. 46.05 crores even though the appellant might have taken a business decision by considering the future potentials and tax benefit available to it due to the mounted losses of the amalgamating company, i.e., MPL that were available to it for set-off under section 72A of the Income-tax Act, 1961 and thus took the decision to pay the aforesaid amount towards fictitious account accounted for in its account as goodwill. There was thus no cost of acquisition on account of goodwill (intangible asset) to the assessee. The learned Departmental representative has rightly pointed out that the appellant has been making contrary claims in various proceedings before the income-tax authorities and has not laid any credible material or evidence to prove that there was any goodwill (intangible asset). In his return of income he claims that there is goodwill acquired by him at a cost of Rs. 46.05 crores whereas in the penalty proceedings his explanation runs counter to his claim as is evident from the reply filed vide letter dated February 16, 2009 in penalty proceedings initiated under section 271(1)(c) for the year under consideration, as extracted below : "the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." In making the assessment of the amalgamated company namely the appellant, it could be allowed depreciation on the depreciable assets of the amalgamating company namely MPL or on the assets on which it has incurred actual cost. No such asset under the head "Goodwill (intangible asset)" on which the amalgamating company has ever claimed any depreciation or held as an asset is shown to have vested in the appellant nor any actual cost shown to have been incurred subsequently by the assessee. 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, 1961, the total income of a company is chargeable to tax under section 4. The total income has to be computed in accordance with the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
