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Adani Gas Ltd. Versus Pr. CIT-1, Ahmedabad.

2016 (12) TMI 622 - ITAT AHMEDABAD

Revision u/s 263 - allowance of depreciation on goodwill - Held that:- Assessing Officer has accepted the assessee’s claim of depreciation on goodwill on the reduced w.d.v. as on 1/4/2010 after making enquiries, proper verification and application of mind and therefore, ld. Pr. CIT has wrongly assumed the jurisdiction u/s 263 of the Act and the same is uncalled for and unwarranted and deserves to be quashed. We accordingly set aside the order of ld. Pr. CIT passed u/s 263 of the Act and restore .....

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e IT Act, 1961 (in short the Act) framed on 30.03.2014 by DCIT, Circle-1(1)(1), Ahmedabad. 2. Assessee has raised following grounds of appeal :- 1. In law and in the facts and circumstances of the appellant's case, the impugned order passed by the learned Pr. CIT u/s. 263 of the Incometax Act, 1961 is void and deserves to be cancelled, inter alia, for the reason that it has been passed without jurisdiction as the original assessment order which it sought to revise was neither erroneous nor p .....

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on Goodwill) alone had been correctly allowed in the original assessment order considering that as per the definition of the expression "written down value" contained in clause (G) of Section 43 only such depreciation as had been actually allowed to an assessee was required to be reduced; that, therefore, the assessment order was not erroneous as assumed by the learned Pr. CIT; (b) that his proposal for grant of depreciation on Goodwill this year on the basis of lower written down valu .....

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Act, 1961, aggregate deduction for depreciation cannot exceed the cost of the asset and also considering the provision of Section 32(2) for carry forward of unabsorbed depreciation, even if for the sake of argument only it were assumed that the rationale behind the learned Pr. CIT's action had any basis for regarding the assessment order as erroneous, it cannot, in any case, be regarded as prejudicial to the interests of the Revenue. 2. Without prejudice to the foregoing, in law and in the f .....

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e case are that the assessee is a limited company engaged in the business of trading & transportation of Natural Gas & Manufacturing of compressed Natural Gas (CNG). Return of income was filed on 19.9.2011 declaring total income of ₹ 37.56 crores followed by revised return filed on 25.09.2012 declaring total income at ₹ 26.82 crores. The case was selected for scrutiny assessment. Order u/s 143(3) of the Act was framed on 30.3.2014 assessing the income at ₹ 27,33 crores. .....

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the claim by assessee was found to be correct by Assessing Officer and there was full application of mind by him as he adopted legally correct view. 4. However, ld. Principal CIT did not agree to the contentions of assessee and cancelled the order u/s 143(3) of the Act and directed to make fresh assessment by observing as follows :- 3. I have considered the facts of the case and the submissions made by the assessee. The Goodwill arose due to the demerger of city gas distribution business of Ada .....

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claimed depreciation from A.Y.2010-11 which resulted in excess brought forward of opening WDV of Goodwill in A.Y.2011-12 with consequent excess allowance of depreciation. As depreciation allowable during A.Y.2011-12 was ₹ 3,13,66,865/-, however, the assessee claimed and was allowed depreciation of ₹ 7,43,51,086/- on Goodwill, which resulted into excess allowance of depreciation of ₹ 4,29,84,221/-. Apparently, the AO has failed to apply the provisions of the Act correctly and wi .....

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d that the assessment order passed u/s 143(3) of the Act dated 30.03.2014 was erroneous and prejudicial to the interest of revenue. Hence, the said assessment for A.Y.2011-12 is cancelled and the AO is directed to make fresh assessment of the total income of the assessee after taking into consideration the issues discussed above visa- vis all the relevant facts of the case for the said assessment year after giving proper opportunity to the assessee as per law. He would make necessary verificatio .....

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of depreciation on w.d.v. of the goodwill at ₹ 29.74 crores on account of the judgment of Hon. Supreme Court in the case of Smifs Securities Ltd. (2012) 348 ITR 302 (SC)/24 taxmann.com 222 (SC) wherein claim of assessee for depreciation on the goodwill was allowed. Head note of this judgment of Hon. Apex Court reads as under :- "Section 32 of the income-tax Act, 1961 - Depredation -Allowance/Rate of- Assessment year 2003-04 - Whether 'goodwill' is an asset under Explanation 3( .....

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t assessee-company in process of amalgamation had acquired a capital right in form of goodwill because of which market worth of assessee-company stood increased - Accordingly, assessee's claim was allowed - Whether since revenue could not rebut factual findings recorded by authorities below, impugned order passed by them was to be upheld - Held, yes [Para 8] [In favour of assessee]" 7. On the strength of the judgment of Hon. Supreme Court the assessee revised its return of income on 25. .....

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. Pl. explain the reason for this treatment during the year. In reply to the same assessee submitted letter dated 25.12.2013 filed with the assessing authority on 27th December, 2013 placed at page 98 of the paper book with a specific reply on treatment of amortization of goodwill in para 9 of this letter. Further assessee vide its reply dated 1st March, 2014 gave complete details about the calculation of depreciation on the goodwill in para 13 to 15 of this letter dated 1st March, 2014. Ld. AR .....

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n in the final assessment order u/s 143(3) of the Act. Therefore, ld. Pr.CIT has erred in invoking the jurisdiction u/s 263 of the Act. Ld. AR referred and relied the judgment of Hon. Supreme Court in the case of Malabar Industrial Company Ltd. vs. CIT 243 ITR 83 and also the judgment of Hon. Jurisdictional High Court in the case of Pr.CIT vs. Shree Prakash Bhagchand Khatri in TAX Appeal Nos.177 & 178 of 2016 dated 29.6.2016. 9. On the other hand, ld. DR vehemently argued and supported the o .....

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(a wholly owned subsidiary of Adani Enterprise Ltd.) be demerged and the same be vested in the company. For this purpose a scheme of arrangement u/s 391 to 394 of the Companies Act, 1956 was prepared and submitted to Hon. Gujarat High Court. The same was approved by Hon. High Court on 19th November 2009 and the copy of the same was filed with Registrar of Companies on 10th December, 2009, the effective date. The scheme of arrangement provides for transfer with effect from January 1, 2007, being .....

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separately but was not amortized in the current financial year as the economic benefits there from are expected to accrue over a period of time based on the foreseeable life of the business. From the appointed date i.e. 1st January, 2007, Adani Energy Ltd. (demerged company) conducted the business of CGD in trust for Adani Gas Ltd. (resulting company) as per the scheme and accordingly balances from the appointed date to the effective date were transferred in the resulting company and the figure .....

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ill arose due to the demerger of city gas distribution business of Adani Energy Ltd. demerged in Adani Gas Ltd. (UP) Pvt. Ltd. As a result of demerger, the resultant company i.e. Adani Gas Ltd. paid consideration to the demerged company and the difference (Rs.33,98,9-0,680/-) between the cost of assets and the amount paid constituted Goodwill. The assessee started claiming depreciation on Goodwill amounting to ₹ 33,98,90,680/- from A.Y.2010-11 (1/2 of 25%) and opening WDV in A.Y.2011-12 wa .....

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ble during A.Y.2011-12 was ₹ 3,13,66,865/-, however, the assessee claimed and was allowed depreciation of ₹ 7,43,51,086/- on Goodwill, it resulted into excess allowance of depreciation ofRs.4,29,84,221/-.From the above mentioned show cause notice we observe that ld. Pr. CIT was of the view that pursuant to the demerger by Hon. Jurisdictional High Court the appointed date was 1.1.2007. Depreciation on goodwill was required to be allowed from Asst. Year 2007-08 whereas assessee started .....

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n of Pr.CIT/Commissioner - (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; . (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section, or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case .....

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examination of the facts narrated by the ld. AR we observe that following events took place :- a) Original return of income was filed on 19.9.2011 claiming depreciation at ₹ 54.74 crores. b) Revised return of income was filed on 25.9.2012 claiming depreciation of ₹ 62.18 crores which included depreciation of ₹ 7,43,51,086/- claimed @ 25% on the wdv of goodwill of ₹ 29.74 crores. c) Case was selected for scrutiny assessment and notice u/s 143(2) of the Act was issued on 1 .....

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reason for treatment of amortization of goodwill as no such treatment was given in the last year. At the outset, we would like to bring to the notice of your honour that during the year under 2009-10 the city gas distribution business of Adani Energy Limited was demerged in Adani Energy (UP) Pvt. Ltd and there after name of Adani Energy (UP) Pvt. Ltd. was changed to Adani Gas Limited. The order under section 394 of the Companies Act 1956 was passed by the Hon'ble Gujarat High Court on 9th De .....

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ties Ltd. [2012] 24 taxmann.com 222 (SC) it was held as under- I. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of - Assessment year 2003-04 - Whether 'goodwill' is an asset under Explanation 3(b) to section 32(1) - Held, yes - During relevant assessment year, one 'V Ltd. amalgamated with assesseecompany - According to assessee, excess consideration paid by it over value of net assets acquired of 'Y' ltd. amounted to goodwill on which depreciation was .....

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gs recorded by authorities below, impugned order passed by them was to be upheld - Held, yes [Para 8] [In favour of assessee] II. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of - Whether stock exchange membership card is an asset eligible for depreciation under section 32 - Held, yes [Para 1] [In favour of assessee] In view of the above decision, it has to be held that goodwill is an asset within the meaning of section 32 and depreciation on 'goodwill1 is allowable .....

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to provide reason for difference between intangible assets as per Audit Report and as per Revised Return. In this regard, we would like to submit that the difference is on account of intangible asset being Goodwill. Your good self will observe that gross block of goodwill appears at ₹ 33.99 Crore in Schedule 5 of Audited Financial Statements. As per revised return of income, opening W.D.V. is shown at ₹ 29.74 Crore. As stated in point no.15 below, goodwill V pertains to AY 2010-11 in .....

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) Your good self has sought details of Fixed Asset serial No. 605 alongwith explanation as to why the same is eligible to claim depreciation under the block of assets "Furniture & Fixtures". In this regard, we would like to submit herewith details of Fixed Asset serial No. 605 i.e. Canopy. The assessee company is engaged in the business of trading and transportation of natural gas & manufacturing of Compressed Natural Gas (CNG). At CNG ^ stations built up by the assessee compan .....

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istrict Regulating Station) at Vadaj area in Ahmedabad. The said asset includes capital expenditure relating to permission and licences expenses for laying pipeline in vadaj area, DRS cost, pipeline laying and commissioning of gas connection to industrial, commercial and residential customers of Vadaj area, expenditure during construction period and interest allocation. As data runs into number of pages, we are submitting herewith the same in soft copy vide Annexure-8. 15. Your good self has sou .....

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sment Year 2010-11 the city gas distribution business of Adani Energy Limited was demerged in Adani Energy (UP) Pvt. Ltd and there after name of Adani Energy (UP) Pvt. Ltd. was changed to Adani Gas Limited. The order under section 394 of the Companies Act 1956 was passed by the Hon'ble Gujarat High Court on 9th December, 2009 while appointed date of order was 1st January, 2007. As result of the demerger the resultant company i.e. Adani Gas Ltd paid consideration to the demerged company and t .....

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, 1961 - Depreciation - Allowance/Rate of -Assessment year 2003-04 - Whether 'goodwill' is an asset under Explanation 3(b) to section 32(1) Held, yes - During relevant assessment year, one 'Y' Ltd. amalgamated with assesseecompany - According to assessee, excess consideration paid by it over value of net assets acquired of 'Y' ltd. amounted to goodwill on which depreciation was to be allowed -Authorities below recorded a finding that assets and liabilities of 'Y' .....

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a 8] [In favour of assessee]" In view of stated. facts and case law, claim of depreciation on goodwill should be allowed. f) Assessment order u/s 143(3) was passed on 30th March, 2014. 14. From going through the above series of events from point (a) to (f) para-13 above starting from filing of return till completion of assessment proceedings u/s 143(3) of the Act, we observe that assessee on the strength of the judgment of Hon. Apex Court in the case of CIT vs. Smifs Securities Ltd. (supra) .....

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epreciation on goodwill on the WDV calculated by notionally allowing depreciation for Asst. Year 2010-11 because scheme of demerger was approved by Hon. Jurisdictional High Court on 19th November, 2009 whereas Pr. CIT was of the view that the scheme of arrangement for transfer of assets was w.e.f. 1.1.2007 and, therefore, WDV of goodwill as on 1.4.2011 should have been calculated after deducting notional depreciation for Asst. Year 2007-08 to Asst. Year 2010-11 which has resulted in excess broug .....

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would not have affected the Revenue adversely. We, therefore, find that after having extensive communication on this aspect of claiming depreciation on goodwill. Ld. Assessing Officer applied his mind and accepted one of the legally possible views which was adopted up by assessee and certainly one cannot say that the Assessing Officer passed the order without making enquiries or verification. 15. At this juncture we find it relevant to cite the following ratio of Hon. Supreme Court in the case o .....

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he Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue- recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneou .....

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herein Hon. High Court upheld the decision of the Tribunal quashing the order u/s 263 of the Act by observing as follows :- 6. It can thus be seen that though final order assessment was silent on this aspect, the Assessing Office had carried out inquiries about the nature of sale of land and about the validity of the assessee's claim of deduction under section 54F of the Act. Learned counsel for the Revenue however submitted that these inquiries were confined to the claim of deduction under .....

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