TMI Blog2020 (11) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... D THAT:- The higher profit before tax shown by the UPPL before amalgamation for the year ending 31stMarch 2014 is mainly due to reduction in the purchase price of the materials consumed in comparison to the earlier years which was supplied by the group concern. Reasonableness of cost of purchase is not known. Employee cost in relation to the revenue from operation of UPPL is negligible which suggests that the primary operations were carried out by the directors of the companies who are common. There is no future benefit available to the assessee attributable to the employees. Similarly UPPL was not having any intangible assets such as patents, copyrights or any other unique intellectual property or rights which would yield future benefit. Thus in the circumstances valuation of UPPL at such huge amount is not justifiable. AO was of the opinion that the goodwill is not a difference between purchase consideration and net book value of assets taken over by the assessee rather it (goodwill) represents the difference between purchase consideration and market value of assets acquired. As such the value of the land was not revalued though it keeps on appreciating. If same would have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which in our considered view is not desirable. No dispute in the amount of the purchase consideration and the NAV determined between the companies, as available in the scheme of amalgamation, which was approved by the Hon ble Gujarat High Court as well - lower authority held the value of goodwill at NIL for the purpose of taxation during the assessment proceedings for the reasons as discussed above in their respective orders. But, in the backdrop of above discussion, we are not convinced with the orders of the authorities below on this preliminary issue. Whether the value of goodwill should be taken at NIL under the provision of Income Tax Act in the books of amalgamated company as no such goodwill was available in the books of amalgamating company prior to amalgamation and such goodwill emerged in the books of amalgamated company? - Section 32 of the Act has limited the amount of depreciation available to the amalgamated company post amalgamation to the extent of the amount of depreciation which would have been available to the amalgamating company, had there not been any amalgamation. Indeed there was no entry in the books of the transferor/amalgamating company for the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, no inference cannot be drawn that the assessee has employed colorable device in order to recordhigh value of purchase considerationwhich is resulting goodwill. Scheme of the amalgamation can be approved under the provisions of section 2(1B) of the Act where shareholders holding not less than 75% in the value of shares of the amalgamating company become the shareholders of the amalgamated company. It is possible only when the shares are issued to the shareholders of the amalgamating company. Not impressed with the finding of the AO that there was no cash payment for the acquisition of the goodwill by the assessee rather it was recognized in the books of accounts by way of accounting entries. Thus we hold that the impugned transaction cannot be regarded as colorable device merely on the reasoning that the assessee claimed the depreciation on the goodwill in the scheme of amalgamation. Direct the AO to allow the claim of the assessee for the depreciation on the impugned goodwill. Hence, the ground of appeal of the assessee is allowed. - ITA.No.1806/Ahd/2019 - - - Dated:- 21-10-2020 - Shri Rajpal Yadav, Hon ble Vice-President And Shri Waseem Ahmed Hon ble Accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the audited cases which are due in the month of October, 2019. 6. The learned Commissioner of Income Tax (Appeals) has erred in confirming action of the Assessing Officer in passing an order u/s.!44C r.w.s.143(3) of the I.T. Act,1961. 7. The learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Assessing Officer in making disallowance of claim of depreciation on goodwill of ₹ 1,17,18,39,2287- u/s.32(l) r.w.s.43(l) r.w.s.43(6)(c) r.w.s.49(l)(iii)(e) r.w.s.55(2) (a)(ii) of the I. T. Act, 1961 and expressly clarifying that depreciation on goodwill is not allowable in future years also. 8. The learned Commissioner of Income Tax (Appeals) has erred in confirming action of the Assessing Officer in rejecting the goodwill arising on account of amalgamation Merger of two companies when the amalgamation and the scheme thereof has been approved by the Gujarat High Court. 9. The learned Commissioner of Income Tax (Appeals) has erred in confirming action of the Assessing Officer in holding that the cost of goodwill in the case of amalgamating company is Nil as no asset by way of goodwill appears in the Balance Sheet of the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has also raised some additional grounds. They read as under: 1. The assessment order has been passed in the case of an non entity that ceased to exist pursuant to the order of amalgamation of Honourable High Court. The order passed on non entity is a nullity and void ab initio and deserves to be quashed. 2. The Ld. AO is aware of the subsequent amalgamation of the appellant company with UrminFlavoroma Pvt. Ltd. w.e.f. 01.04.2015 and further name change to Unicorn Packaging Pvt. Ltd. on 01.03.2016 and conversion to LLP by the name of Unicorn Packaging LLP on 20.03.2016 which fact has been acknowledged in the assessment order itself. 3. The appellant craves leave to add, alter, amend or modify all or any of the grounds of appeal before or at the time of hearing. 3.1 The above additional ground of appeal raised by the assessee has already been admitted by this Tribunal vide interim order dated 20.02.2020. The relevant extract of the order is reproduced as under: 20.02.2020 Present: Assessee by : Shri Aseem L Thakkar, AR Revenue by : Shri Virendra Ojha, CIT-DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Second Appellate Authority. Therefore, considering the above aspect, we permit the assessee to raise following additional grounds of appeal:- 1. The assessment order has been passed in the case of an non-entity that ceased to exist pursuant to the order of amalgamation of Hon'ble High Court. The order passed on non-entity is a nullity and void ab initio and deserves to be quashed. 2. The Ld. AO is aware of the subsequent amalgamation of the appellant company with Urmin Flavoroma Pvt Ltd w.e.f. 01.04.2015 and further name change to Unicorn Packaging Pvt Ltd on 01.03.2016 and conversion to LLP by the name of Unicorn Packaging LLP on 20.03.2016 which fact has been acknowledged in the assessment order itself. After permitting the assessee to raise the additional grounds, we have heard the learned Counsel for the assessee on these preliminary issues. Thereafter, he commenced his arguments on the merits; however, after sometime, during the course of hearing it was felt that some of the paper-books filed by the assessee were not available with the learned CIT-DR; therefore, we adjourn the hearing for 17th March 2020. Since we have heard learned Counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of time. The ld. AR has filed a paper book running from pages 1 to 59 and highlighted the chronology of events right from the date of filing the returns, scheme of amalgamation, intimations for change of name and conversion into LLP and the assessment framed under section 143(3) read with section 144C of the Act dated 27th December 2018. 7. On the other hand the Ld. DR submitted that the notice under section 143(2) of the Act was issued on 8-4-2016 in the name of the erstwhile company before the approval of the scheme of amalgamation by the Hon ble High Court. Therefore, the notice issued under section 143(2) of the Act was valid and consequent assessment in the name of the erstwhile company under section 143(3) of the Act was also valid. 8. We have heard both the parties and perused the materials available on record before us, especially the impugned orders and the case law cited therein and also cited by the learned AR of the assessee as discussed aforesaid. 9. Now coming to the legality of order framed by the AO under section 143(3) read with section 144C of the Act vide order dated 27thDecember 2018, in this regard we note that the AO on the first page of his order h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting Pvt Ltd (UMPL or Transferee Company). The excess consideration discharged by UMPL, over book value of UPPL Transferor Company, was recorded as goodwill in the books of UPPL, Transferee Company. In terms of the scheme, All the assets of UPPL transferred to and vested in UMPL pursuant to the Scheme have been recorded at the book value and all the liabilities of UPPL transferred to and vested in UMPL pursuant to the Scheme have been recorded at the book value. The difference of ₹ 4,68,73,56,913/- between net value of assets over consideration has been debited to goodwill account in the books of the company. 10. The AO vide letter dated 25-1-2017 bearing No. ITO/Wd.4(1)(4)/AHD/Advance Tax/2016-17 has also requested to the UPPL for making the advance payment of tax. The copy of the letter is placed on page 51 of the paper book. Similarly, the fact of intimating the non-existence of the company UPPL and its conversion into LLP was brought to the notice to AO vide letter dated 6-2-2017. The copy of the letter is placed on page 52 of the paper book. 11. Likewise, the assessee vide letter dated 13-3-2018 under section 154 of the Act requested the AO for the grant of cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oming into effect, the transferor company was to stand dissolved without winding up. The scheme stipulated that the order of amalgamation will not be construed as an order granted exemption from the payment of stamp duty or taxes, or any other charges, if any payable in accordance with law. The AO has initiated the assessment proceedings by issuance of notice under section 143(2) on 26thSeptember 2013 followed by a notice under section 142(1) of the Act to the amalgamating company. MSIL participated in the assessment proceedings of erstwhile amalgamating entity i.e. SPIL through its authorized representative and officers. The assessment was framed. Thereafter during the appellate proceedings before the Tribunal the assessee took an objection that final assessment order was passed on 31.10.2016 in the name of SPIL which was amalgamated with MSIL. The assessee took an objection that the assessment order has been passed in the name of company which ceased to exist and therefore, the assessment order is void ab initio. This plea of the assessee was accepted by the Tribunal. This order of the Tribunal was upheld by the Hon'ble High Court. Ultimately issue travelled upto Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with another, the amalgamating company loses its entity. (iv) Fourthly, upon the amalgamating company ceasing to exist, it cannot be regarded as a person under Section 2(31) of the Act 1961 against whom assessment proceedings can be initiated or an order of assessment passed; (v) Fifthly, a notice under Section 143 (2) was issued on 26 September 2013. To the amalgamating company, SPIL, which was followed by a notice to it under Section 142(1); (vi) Sixthly, prior to the date on which the jurisdictional notice under Section 143 (2) was issued, the scheme of amalgamation had been approved on 29 January 2013 by the High Court of Delhi under the Companies Act 1956 with effect from 1 April 2012; (vii) Seventhly, the assessing officer assumed jurisdiction to make an assessment in pursuance of the notice under Section 143 (2). The notice was issued in the name of the amalgamating company in spite of the fact that on 2 April 2013, the amalgamated company MSIL had addressed a communication to the assessing officer intimating the fact of amalgamation. In the above conspectus of the facts, the initiation of assessment proceedings against an entity which had ceased to exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dated 31 December 2010. The Respondent had amalgamated with another company and thus, ceased to exist from 7 December 2009. The Court rejected the argument of the Revenue that the assessment was in substance and effect in conformity with the Act by reason of the fact that the assessing officer had used correct nomenclature in addressing the Assessee; stated the fact that the company had amalgamated and mentioned the correct address of the amalgamated company. It was the Revenue's contention that the omission on the part of the assessing officer to mention the name of the amalgamated company is a procedural defect. The Delhi High Court rejected this contention. In doing so, it relied on the holding in Spice Entertainment, (supra) where the High Court expressly clarified that the framing of assessment against a non-existing entity/person is a jurisdictional defect. The Division Bench also relied on the holding in Spice Entertainment (supra) that participation by the amalgamated company in proceedings does not cure the defect as there can be no estoppel in law , to affirm the quashing of the assessment order. 22. In Micron Steels, (supra) a notice was issued to Micro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts name. The basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation. Participation in the proceedings by the appellant in the circumstances cannot operate as an estoppel against law. This position now holds the field in view of the judgment of a co-ordinate Bench of two learned judges which dismissed the appeal of the Revenue in Spice Enfotainment (supra) on 2 November 2017. The decision in Spice Enfotainment has been followed in the case of the respondent while dismissing the Special Leave Petition for AY 2011-2012. In doing so, this Court has relied on the decision in Spice Enfotainment (supra). 34. We find no reason to take a different view. There is a value which the court must abide by in promoting the interest of certainty in tax litigation. The view which has been taken by this Court in relation to the respondent for AY 2011- 12 must, in our view be adopted in respect of the present appeal which relates to AY 2012-13. Not doing so will only result in uncertainty and displacement of settled expectations. There is a significant value which must attach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the Urmin Marketing Pvt. Ltd. under section 143(3) read with section 144C of the Act vide order dated 27thDecember 2018 for the year under consideration is void ab-initio and bad in law. Hence the assessment order is a nullity in the eye of law and the same is quashed. The additional ground raised by the assessee is allowed. 19. The grounds raised in the appeal memo are descriptive and argumentative in nature. They are in fact inter-connected to each other, raising to only one issue, that is to say, in ground no.1 to 17, the effective issue involved is that the ld.CIT(A) has erred in confirming the disallowance of depreciation for ₹ 1,17,18,39,228/- on the intangible assets/goodwill acquired in the scheme of amalgamation. 20. The facts in brief are that M/s Unicorn Packers Private Limited (amalgamating co.) got amalgamated with the assessee company [M/s. Urmin Marketing Pvt Ltd. (amalgamated co.)]w.e.f. 01st April 2014 in a scheme of amalgamation approved by the Hon ble Gujarat High Court vide order dated 27thJuly 2015. All the assets and liabilities of the amalgamating company i.e. M/s Unicorn Packers Private Limited (here-in-after known as UPPL) as on 31stMarch 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inued. 20.4 Similarly the provisions of section 43 (1) (6) of the Act require that the actual cost of the transferred assets and WDV should remain the same as it was there in the books of amalgamating company prior to the amalgamation. Accordingly, the AO was of the opinion that as there was no goodwill in the books of UPPL prior to amalgamation, therefore the value of goodwill in the books of UMPL should also be NIL for the purpose of taxation. 20.5 The AO further observed that in a scheme of amalgamation two or more separate entities join hands together and become one entity. The shareholders of amalgamating company, in consideration for the transfer of the assets and liabilities, receive shares in new resultant company (amalgamated co.). The value of the shares of the amalgamating company is determined after considering various factor i.e. on the basis of valuation of the business and revaluation of assets and liabilities of the amalgamating company which results in the goodwill in the hands the amalgamated company if the purchase consideration is in excess to the net assets acquired by it from the amalgamating company. 20.6 Accordingly, the AO was of the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of accounts. 22.4 The assessee with respect to its claim of depreciation on goodwill acquired in process of amalgamation placed its reliance on the following judgment: I. CIT vs. Smifs Securities Ltd [2012] 348 ITR 302 (SC) II. PCIT vs. Zydus Wellness Ltd [2017 87 taxmann.com 82(Gujarat) III. Vimalachal Print Pack Pvt. Ltd vs. DCIT (2016 tax Pub(DT) 3326 (Guj)) The assessee in view of above judgment claimed that the depreciation on goodwill arising in the scheme of amalgamation is allowable under section 32 of the Act. 22.5. However the AO during the assessment proceedings after considering the detailed submission made by the assessee observed certain facts which can be categorized under the sub-head as detailed under: I. Controlled transaction/ same management :- i. The directors/shareholders in both the companies i.e. UPPL and UMPL before and after the amalgamation were common. Similarly, there was no change in the shareholding pattern of the shareholders pre and post amalgamation. Thus both the companies were managed and controlled by the same group of persons. ii. Likewise, the registered address of both the companies was common and the residenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his fact was also admitted by the valuer in para 6.18 of the valuation report. But the same were taken as comparable on behest of directors. c. Similarly the factors which used for valuation such as market capitalization, beta and risk free premium were also inconsistent. As such market capitalization has been determined onthe basisof one year data, beta determined on average of 5 years and risk free premium were calculated on an average of 10 year data. Thus the assumptions /basis i.e. market capitalization, beta and risk free premium used in the formula adopted for the valuation of shares were not as per the standard practice. d. Based on the above discrepancies in valuation report it emerged that the valuation was done intentionally in such a way whichsuits to the directors/share holder of the assessee company so that it can claim huge depreciation on such goodwill. III. Inflated amount of profit in the books of amalgamated company i.e. UPPL: 23. The higher profit before tax shown by the UPPL before amalgamation for the year ending 31stMarch 2014 is mainly due to reduction in the purchase price of the materials consumed in comparison to the earlier years which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merges in the books of amalgamated company which was not existing in the books of amalgamating company, such an asset emerge only due to revaluation of assets liabilities for which amalgamated company does not incur any cost. Hence as per the provision of section 55(2)(a)(ii) of the Act value of assets which has been acquired without incurring any cost should be taken at NIL. Similarly, there would not be any possibility for allowing the deduction for the assets resulting on account of revaluation of assets. 23.6 The AO Further observed that as per AS-14 there are two methods of accounting namely pooling of interest method and purchase method which are applied for recording the transaction arising in the scheme of amalgamation of companies. In case the conditions, in a scheme of amalgamation prescribed under para 3(e) of AS 14 are fulfilled, then pooling of interest method of accounting should be applicable. Under pooling of interest method any difference between purchase consideration and book value of assets liabilities should be recognized as amalgamation reserve. As such no concept of goodwill is available in this method of accounting. Whereas any of the condition prescr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be adjusted to the capital reserve or the goodwill as the case may be which is evident from the clause 6.4 of the scheme, copy of the same is placed on page 255 of the paper book. 25.1 Similarly, the Hon ble Gujarat High Court has also invited objection from the central government if any in the scheme of amalgamation, but there was no objection of any type raised despite having the specific opportunity. Accordingly the learned AR claimed that the AO had no jurisdiction for disturbing the impugned amount of goodwill as there was not any violation in the implementation of the scheme which is approved by the Hon ble Gujarat High Court. 25.2 It was also pointed out that all the details about the management / ownership/ shareholding patterns /control pre and post amalgamation about both the companies were available in the public domain and nothing was concealed in the impugned scheme of amalgamation. Furthermore, the reasons and the rationale behind the impugned scheme of amalgamation was duly explained in the scheme of amalgamation. Therefore, the common ownership/control/management cannot be a reason for not allowing the claim of goodwill on the assumption of that the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee despite the fact that it (the valuation report) was furnished during the course of the assessment proceedings. The learned AR further submitted that report has been prepared by the qualified and renowned valuer firm which has a rich experience of nearly 48 years in the field and registered with the SEBI. In case, the AO was dissatisfied with the valuation report, then he should have sought clarification directly from the valuer by issuing notice under section 133(6) of the Act. As such the valuation of the business requires distinct technical expertise and the AO does not possess such technical expertise. Therefore the AO was under the obligation to take the assistance of the valuer in the event of being dissatisfied with valuation. The learned AR in support of his contention referred to the orders of this tribunal in case of Synbiotics Ltd. vs. ACIT reported in 48 ITR (T) 210 (Ahd) and order of Delhi tribunal in case Cinestaan Entertainment Pvt. Ltd. vs. ITO reported in 177 ITD 809. 25.7 The learned AR for the ready reference has also filed the copy of the valuation report which is placed on pages 306 to 344 of the paper book. 25.8 The learned AR further conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was no written down value for the block of assets in the books of amalgamating company. As such the goodwill first time came into existence in the books of the amalgamated company. 26.3 It was also pointed out by the learned AR for the assessee that there was no transfer of the capital assets by the holding company to the subsidiary and vice versa and therefore the provisions as specified under section 47(iv) (v) are not applicable in the given facts and circumstances. Likewise, the provisions of section 47(vi) are not applicable to the present facts of the case for the simple reason that there was no goodwill appearing in the balancesheet/ block of assets of the amalgamating company. Similarly the other provisions as specified under section 47 (iva), 47(ivaa), 47(ivab), 47(ivb), 47(ivc), 47(ivca), 47(ivcb) , 47(ivcc, 47(xiii) and 47(xiv) are not applicable in the case of the assessee on account of goodwill shown by it in the books of accounts. In view of the above, the assessee claimed that the property being goodwill has not become its property in the mode as specified under section 47 of the Act. Accordingly the provisions of section 49(1)(iii)(e) of the Act cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gujarat High Court and therefore its existence cannot be doubted. 26.8 The learned AR further submitted that the pre amalgamation earning per share of the amalgamated company stands at ₹ 8,672.34 as evident from the audited financial statements. Thus it was sufficient to pay high purchase consideration to the amalgamating company. In view of the above the learned AR submitted that claim of the assessee for the depreciation on the goodwill being intangible assets should be allowed under the provisions of section 32 of the Act. 27. On the other hand the learned DR submitted that the scheme of amalgamation is tax neutral exercise and therefore there cannot be any question of goodwill arising in such a scheme. 28. The learned DR also argued that the assessment proceedings and the amalgamation proceedings are different exercises. In the amalgamation proceedings, there was no question raised about the allowability of the depreciation on such goodwill. Accordingly issue of allowability of the depreciation under the provisions of section 32(1) of the Act was verified during the assessment proceedings. Thus, no objection filed by the revenue in the amalgamation proceedings ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsi-diary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company; A bare perusal of the above provisions of the Act would indicate that in a scheme of amalgamation all the properties liabilities of the amalgamating company would become the assets and liabilities of the amalgamated company. Similarly it was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amated company to the shareholders of the amalgamating company may be in excess of the value of the net assets taken over or some time it may be lower than the net assets taken over. As such purchase consideration to be paid to the amalgamating company by the amalgamated company is determined after considering various internal and external factors which may affect future profitability and growth. Such factors includes previous earnings, future possible earnings, location, technical knowhow, customer base, marketing network etc.Thus it leads to difference between net value of assets taken over and purchase consideration paid. 31.3 Accounting standard-14, issued by the ICAI prescribes two method of accounting for the transaction carried out in the scheme of amalgamation namely pooling of interest method and purchase method. If scheme of the amalgamation fulfills the condition of para 3(e) of the Accounting standard- 14 then pooling of interest method should be followed otherwise purchase method of accounting should be applied. The relevant extract of accounting standard reads as under: 7. There are two main methods of accounting for amalgamations: (a) the pooling of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken over by it at ₹ 87,01,43,087/- only leading to a difference between NAV and purchase consideration of ₹ 486,73,56,913/- only. The assessee by following the pooling of interest method of accounting as prescribed under AS-14 recognized such difference as Goodwill in the books of account. The scheme of amalgamation was approved by the Hon ble Gujarat High Court vide order dated 24thJuly 2015 which was effective from 1-4-2014. Subsequently the assessee at the time of filing return of income claimed depreciation on such goodwill by treating the same as intangible assetswhich was disallowed by the AO and confirmed by the learned CIT (A) by holding it at NIL value for the purpose of taxation. 31.8 Undeniably, the purchase consideration paid by the assessee to the shareholders of the transferor/ amalgamating company stands at ₹ 555.75 crores as evident from the scheme of amalgamation. The relevant clause of the scheme of the amalgamation stands as under: 500 (five hundered) fully paid Equity Shares of ₹ 10/- each of Transferee Company shall be issued and allotted for every 1(one) Equity share of ₹ 10/- each held in Transferor company. XXXXXX ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Department to invite objection if any in the scheme of amalgamation. But the Income Tax Department did not reply within the time limit of 15 days, hence it was assumed that the Income Tax Department has no objection in connection with the impugned scheme of amalgamation. This fact can be verified from the order of the Hon ble High Court,the relevant finding is reproduced as under: i. It has been pointed out that paragraph 2(a) and 2(b) contain statements of fact and do not require any response. ii. The only observation of the Regional Director made vide paragraph 29c0 pertains to the letter dated 8.5.2015 sent by the Regional Director to the Income Tax Department to invite their objections, is any. It has been submitted on behalf of the petitioner that since the statutory period of 15 days as envisaged by the relevant circular of the Ministy of Corporate Affairs is over, it can be presumed that the Income Tax Department has no objection to the proposed scheme of arrangement. The petitioner companies have agreed to comply with the applicable provisions of the Income Tax Act and Rules. In view of the same, no further directions are required to be issued to the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to the requirement of the report to be received respectively from the Registrar of Companies and the Official Liquidator under the first and second provisos to Section 394(1). A joint reading of Sections 394 and 394A makes it clear that the duties to be performed by the Registrar and Official Liquidator under Section 394 and of the Regional Director concerned acting on behalf of the Central Government under Section 394A are quite different. 3. An instance has recently come to light wherein a Regional Director did not project the objections of the Income Tax Department in a case under Section 394. The matter has been examined and it is decided that while responding to notices on behalf of the Central Government under Section 394A, the Regional Director concerned shall invite specific comments from Income Tax Department within 15 days of receipt of notice before filing his response to the Court. If no response from the Income Tax Department is forthcoming, it may be presumed that the Income Tax Department has no objection to the action proposed under Section 391 or 394 as the case may be. The Regional Directors must also see if in a particular case feedback from any other s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as to defraud the Revenue and consequently being prejudicial to public interest. It has further been said that the Regional Directors would invite specific comments from the Income Tax Department within 15 days of receipt of notice before filing response to the Court. It is emphasised that this is the only opportunity with the Department to object to the scheme of amalgamation if the some is found prejudicial to the interest of Revenue and therefore, it is desired that the comments/objections of the Department are sent by the concerned CIT to Regional Director, MCA for incorporating them in its response to the Court, immediately after receiving information about any scheme of amalgamation or reconstruction etc. 4. This issues with approval of Member (A J). 31.14 From the above circular, it is transpired that the Revenue was conscious about the fact that there was the possibility of misusing the provisions of the Income Tax Act in the name of the scheme of amalgamation as provided under section 2(1B) causing prejudice to the Revenue. But the Revenue despite having the opportunity in its hand did not raise any objection within the time allowed by the MCA or subsequently by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax liability as pointed out by the income department etc. 38. From the above analysis of the financials of Gabs, the bench noted that with an equity share capital of only 1,91,100 the promoters/share holders of Gabs who are also the common promoters of APL, by way of this proposed scheme of amalgamation and arrangement would get the shares of APL worth ?1477.50 Crores (market value as on 31.03.2017 ) and that too without paying any Income Tax, Stamp Duty etc. for which the bench is of the considered view that the same is not in the public interest, thousands of shareholders of Transferee company especially retail shareholders. The market value of the same number of shares as at 31.03.2016 was 1,182.59 Crores. 39. Since Income Tax department (IT) has raised strong objections about tax benefit, tax avoidance, tax loss as discussed above, we are of the opinion that it would be www.taxguru.in advisable to settle the important/crucial issue of huge tax liability before sanctioning the scheme by the Tribunal rather than disputing the same at a later stage after the scheme is sanctioned by the Tribunal. It is mandatory as per section 230 (5) of the Companies Act, 2013, a notice under sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies below on this preliminary issue. 32. Now, the next question arises for our consideration whether the value of goodwill should be taken at NIL under the provision of Income Tax Act in the books of amalgamated company as no such goodwill was available in the books of amalgamating company prior to amalgamation and such goodwill emerged in the books of amalgamated company were on account of valuation and revaluation of business as no cost incurred by the amalgamated company for such goodwill. In this connection, we are inclined to refer certain provisions of law in the context of the scheme of amalgamation as provided under section 2(1B) of the Act as detailed under: Depreciation. 19 32. (1) 20 [In respect of depreciation of- (i) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (ii) know-how, patents, copyrights, trademarks, 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 21 , wholly or partly, by the assessee 21 and used for the purposes of the business 21 or profession, the following deductions shall be allowed-] 22 [(i) XXXXXXXXXXXXXX ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the event, had there not been any amalgamation. The relevant extract of the explanation 7 to section 43(1) reads as under: Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires 3- 4 (1) actual cost means the actual cost 3 of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met3 directly or indirectly by any other person or authority: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 14 [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.] 33.2 We further note that the WDV of the assets acquired in the scheme of amalgamation in the hands of the amalgamated company will continue to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc under the provisions of section 72A of the Act. iv. Exemption of capital gains in the hands of shareholders of amalgamating company on transfer of shares of amalgamating company in the scheme of amalgamation under the provisions of section 47 (vii) of the Act. v. Cost of capital assets to be the same as in the hands of previous owner where capital assets became the assets of the successor as a result of transfer under section 47(vi) r.w.s. 49(1)(iii)(e) of the Act. vi. Cost of shares of amalgamated company in the hands of shareholders, received as consideration for transfer of shares of amalgamating company, to be same as the cost of shares of amalgamating company under section 49(2) of the Act. 33.5 From the above, it would appear that the intent of the Legislature is to make amalgamation a tax neutral scheme for companies as well as for the shareholdersand not to provide a tax planning mechanism to either of them.However, a conjoint reading of the above provisions reveal that the assets which were transferred by the amalgamating company to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(1) of the Act which reads as under: 32. (1) In respect of depreciation of- (i) buildings, machinery, plant or furniture, being tangible assets; (ii) 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 purposes of the business or profession, the following deductions shall be allowed- 33.7 On perusal of the above provisions, we note that the word goodwill has nowhere been mentioned. However we note that, the Hon ble Supreme Court in the case of CIT vs. Smifs Securities Ltd reported in 348 ITR 302 has held that the goodwill falls within the definition of the assets under the category of any other business or commercial rights of similar nature. The relevant extract reads as under: Explanation 3 to section 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. A reading of the words 'any other bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 32 of the Act. Accordingly, we are not convinced with the finding of the authorities below. 34. The next allegation of the AO is that there was contradiction and inconsistency in the valuation report filed by the assessee. Admittedly the valuation report was prepared by the RBSA capital advisors LLP which is the approved valuer. The valuation of the business being a technical matter, in our view, the assistance of the expert is required. The AO himself cannot determine such value. If he was not satisfied with the valuation report, then the only recourse available to the AO is to refer the matter to the technical person. In holding so we draw support and guidance from the judgment this tribunal in case of Synbiotics Ltd vs. ACIT reported in [2016] 48 ITR(T) 210 (Ahd) where it was held as under: Assessing Officer has adopted the value of ₹ 250 per sq. mtr. On the basis of the sale instances related to residential areas situated 2 to 3 kms. away from the property in question. There is no dispute with regard to the fact that property in question is an industrial land which cannot be compared with the residential properties. Admittedly, neither the Assessing Officer nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to recordhigh value of purchase considerationwhich is resulting goodwill. 34.4 Without prejudice to the above, we also note that the Revenue has to consider certain facts before arriving at a finding whether a particular series of the transactions is a colourable device or not as the primary onus is on the AO to find out: (i) Whether the parties to the transactions have concealed or hidden any fact and/or whether what is shown to be done could have actually happened in different time or at different place; Ans: Regarding the facts of the transactions, we note that all the necessary facts were duly disclosed by the assessee in the scheme of amalgamation. The following facts were duly disclosed: a) The purchase consideration by the amalgamated company to the shareholders of the amalgamating company was duly disclosed in the scheme of amalgamation. b) The valuation of the business of the amalgamating company was based on the approved valuation report. c) The fact of the common control and management of the both the amalgamated and amalgamating companies were disclosed in the scheme of amalgamation which was also noted by the Hon ble Gujarat High Court and this fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cars. The cars were not acquired and the respondent assessee was not owner of the motor cars prior to the said date. On merger of the three concerns with the respondent assessee, shares were issued as consideration to the proprietors of the business concerns. The shares issued were consideration for the transfer of the assets. It is immaterial, whether there was transfer of an undertaking, including the block of assets, which also included the imported motor cars. [Para 15] It is clear that the respondent assessee had acquired the asset, i.e., imported cars, after the cut off date, i.e., 1-4-2001 and, therefore, is entitled to depreciation and the bar/prohibition in clause (a) to proviso to section 32(1) would not apply. The Tribunal has rightly decided the issue in favour of the respondent assessee and against the revenue. [Para 16] 34.7 It is also pertinent to note that scheme of the amalgamation can be approved under the provisions of section 2(1B) of the Act where shareholders holding not less than 75% in the value of shares of the amalgamating company become the shareholders of the amalgamated company. It is possible only when the shares are issued to the shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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