TMI Blog2021 (3) TMI 341X X X X Extracts X X X X X X X X Extracts X X X X ..... ng account adjustments and the conclusion does not reflect the outcome of any due diligence procedures. The balancing entry treated as goodwill as per accounting standards is fictional in nature in the present case and does not represent any real intangible and the accounting procedure in double entry accounting system cannot override the provisions of Income Tax Act. We observe that the cost in the hands of transferor company is 'nil' by virtue of section 55(2)(a)(ii) and therefore the cost is 'nil' in the hands of the transferee-assessee also. We are of the opinion that this is a fit case for application of third proviso to section 43(1) because the business transfer agreement is part of a comprehensive international arrangement between two groups and there is no rationale for the fixation of the transfer price. No infirmity in the order of CIT(A) in confirming the disallowance of the claim of depreciation and dismiss the ground Nos. 2 to 6 raised by the assessee on this count. Rectification of mistake u/s 154 - Enhance depreciation - Disallowance of the claim of depreciation by the AO as per order u/s. 154 was ₹ 99,09,96,797/- and not ₹ 44, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals) ought to have considered that the disallowance of the claim of depreciation by the Assessing officer as per order u/s. 154 was ₹ 99,09,96,797/- and not ₹ 44,04,03,000/-. The learned CIT (Appeals) ought to have decided the appeal against disallowance of depreciation of ₹ 99,09,96,797/-. 4. The learned Commissioner of Income-Tax (Appeals) ought to have considered the fact that while acquiring the Industrial packaging unit from ITW India Limited, the appellant acquired the goodwill of the value of ₹ 792.79 crores. by paying consideration. 5. The learned Commissioner of Income-Tax (Appeals) ought to have considered the fact that the appellant acquired the business activity as a going concern and the assets including goodwill were valued by BSR Company and the assets acquired include goodwill valued at ₹ 792.79 crores. 6. The learned Commissioner of Income-Tax (Appeals) ought to have considered various legal precedents on the subject and ought to have held that the appellant acquired goodwill and is entitled for depreciation on the value of goodwill acquired of ₹ 792.79 crores. 2. Brief facts of the case are that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 Vehicles leased 177.47 26.69 INTANGIBLE ASSETS S.No. Description of asset Gross Block Depreciation claimed 1 Goodwill and other intangibles (Note. 36) 79279.74 4404.43 2.2. On verification of the information filed, it is noticed from Note 36 to Audit Report filed by the assessee, that the assessee had purchased the packaging unit of M/s. ITW India Limited, on slump sale and on 'as is where is basis' for a consideration of ₹ 1240 crores, which includes the assets shown in the above tables and capital work-in-progress of ₹ 640,79 lakhs, cash and equivalents, receivables of ₹ 23,657.23 lakhs, inventory of ₹ 10,349.89 lakhs and other current assets of ₹ 5,306.04 lakhs. The purchase consideration also includes trade payables at ₹ 6012.00 lakhs and other liabilities of ₹ 5466.77 lakhs. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the value intrinsic to various fixed assets such as land, buildings and even to plant and machinery is much much higher than the book value of these assets. These assets were notionally depreciated under Income Tax Act and were duly claimed by the earlier concern as part of packing business unit assets of ITW India Limited i.e., mere claim of depreciation would not necessarily brought down the resale value in the market on fair market basis. Further, the value of land shown at ₹ 34 crore is much much lower than the prevailing market value of the land as part of slump sale. Hence, considering the excess value of net assets book value on this analogy by the valuer engaged by your companies without any genuine analysis of its fair market value would lead to skewed assessment of valuation. Further, the following distinguishable facts are notable as per the working submitted/used in the valuation report. (i) As observed at para 5.2.6 it is clear that ITW India Limited recorded goodwill on account of its acquisition of Wintek Flexo Prints Partnership Firm in F.Y. ending 31/03/2012 and on similar analogy it has also recorded intangible assets on account of the same transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no goodwill as a qualified asset in the books of ITW India Limited before its slump sale. In the absence of the same it is not fair and justifiable to conclude purchase value over and above the net asset value as a deemed good will by adopting the assets on the basis of book value as they have got already depreciated in the notional sense as per the Income-Tax Act though they have higher intrinsic value. This can be clearly seen with reference to land value adopted at ₹ 3400.00 lacs as given in the above note. 2.4. In response to the show-cause letter cited above, the assessee filed its reply on 28/12/2016 and the main contention of the assessee is the same of the first reply and it mostly relied upon the valuation report and also on the market share of purchased company. The assessee submitted that the value of land was properly valued by the independent valuer and there cannot be much growth than considered 1 by the assessee. The important submissions made by the assessee are reproduced here under: a) M/s. BSR and Associates have valued the packing division using most accepted valuation methods viz., discounted cash flows method (DCF), comparable compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in comparison to his competitor on other market share business and therefore, the allegation that excess consideration paid over and above the net asset value as attributable to goodwill is completely illogical and without any verifiable evidences. g) The company M/s. ITW India Limited, is having 51% of market share in Contract Packing Segment, 36% market share in the labels division (branded steel strip which is primarily used by jute and cotton industries) etc, and the assessee company had purchased the said unit keeping in view of the market share of the company (M/s. ITW India Ltd.) and because of the ready market share that would be enjoyable by the assessee company. The submissions made by the assessee are carefully considered and found to be not acceptable. As stated supra, it is clear that ITW India Limited recorded goodwill on account of its acquisition of Wintek Flexo Prints, Partnership Firm in F.Y. ending 31/03/2012 and on similar analogy it has also recorded intangible assets on account of the same transaction. The qualifying notes as given in valuation report on acquisition are re-produced for the sake of clarity, as under: 5.2.6. Signode recorded goodw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al right as to do the business with its exclusivity to the market share it occupied. Hence, valuation report on this analogy is neither justifiable nor supported by any factual or legal rights existing or occurring in the true sense to treat them as defined under section 32 (explanation 3) of I.T. Act. Hence, in view of above facts of the case, the depreciation claimed by assessee on 'good will and other intangibles' working out to ₹ 44,04,03,000/- is disallowed and added back to the income returned. 2.1. The assessee preferred an appeal before the CIT(A) and filed written submissions before the CIT(A). After considering the written submissions of the assessee, the CIT(A) dismissed the appeal of the assessee. 3. Aggrieved the assessee is in appeal before the Tribunal. 4. The Ld. AR reiterated the submissions made before the authorities below and further the he Vehemently argued the case of the assessee. He stated that the assessee has paid consideration over and above from tangible assets has been recorded as Goodwill and depreciation was claimed as per the prescribed rate of Depreciation and in support of his argument he has relied on the number of ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions with regard to the sale of the industrial packaging business by ITW globally. The same are as under: ITW Inc., is a US listed company. It was managing industrial packing business globally. ITW India Limited, a subsidiary of ITW Inc., was carrying on such industrial packaging business in India. The ITW Inc., as a part of its enterprise strategy and portfolio management initially decided to exit its industrial packaging business globally. In the process ITW India Limited, transferred its industrial packaging business in India to Signode India Limited and the assessee Signode India Limited was transferred to the management of Carlyle group. In this regard, the following sequence of events are relevant: i) ITW India Limited entered into Business Transfer Agreement with the appellant on 22.11.2013 effective from 30.11.2013. ii) The industrial packaging segment was sold to the Carlyle group and this was announced in a release by ITW in its business review dated 06.02.2014. iii) The transfer of the industrial packaging unit was complete by 01.05.2014 and to this effect the Carlyle group announced in the Press Release wherein it announced that it has acquired S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess rearrangement of ITW group. There was an MoU dated 04/10/2013 which is superseded by the agreement dated 22/11/2013. List of the transferred assets is available at Exhibit B of the agreement (available at pages 104 to 107 of the paper book filed by the assessee. The list contains items like Goodwill - Cost and Accumulated Goodwill Amortization. No values are fixed for individual assets and assumed liabilities as the sale is a going concern. Also in the books of the assessee, the only intangible asset as on 31/03/2013 is license fee. 3. A significant part of clause 2.1 of the agreement which indicates transferred assets contains list of other assets which is available at Exhibit C of the agreement. As per the agreement, these assets would be retained by the transferor. These assets include trade names, logos, Internet addresses and domain names, trade marks and service marks and related registrations and applications used in the Business that consist of or contain ITW , Illinois Tool Works or any derivation thereof. 4. The consideration for transfer of business is also fixed at a lump sum amount of 1240 Cr and no basis for the price is available from the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent of the assessee and the assessee. It is also clearly stated in the terms of the agreement that the valuation is for the purpose of slump sale only and not for the purpose of arriving at a fictional goodwill after the slump sale. 8. At clause 3 of the valuation report which mentions the scope and limitation of the work, it is evident that the report is based and relies solely on the underlying management assumptions and management business plans provided by the management of ITW Inc and the valuer did not carry out independent verification of financial projections and underlying data. The valuer also clearly states that he does not express any opinion on the factual basis of the information and if there were any omissions, inaccuracies or misrepresentation of the information provided by the management of ITW, this may have a material effect on his findings. Therefore, the valuation report is nothing but an arithmetical exercise feeding management given input into a financial model to arrive at mere numbers without much support. 9. It is also humbly submitted that as seen from clause 5.2.6 of the report of the valuer, Signode recorded goodwill of. 14.32 Cr. in Calendar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is same. Allowing depreciation on fictional good will in such a case would be a case of one making profit/loss out of oneself (at the cost of Revenue, which is not permissible). Reliance on the point that one cannot make loss out of oneself is placed on the decision of Hon'ble supreme Court in the case of Sir Kikabhai Premchand 24 ITR 506 (SC) where in it was held that It is well recognized that in revenue cases regard must be had to the Substance of the transaction other than to its mere form. In the instant case disregarding technicalities it was Impossible to get away from the fact that the business was owned and run by the assessee himself. In such circumstances it was wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and one reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income-tax law . 12. The val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT, Bengaluru in the case of Sanyo BPL. Ltd. [2016] 75 taxmann.com 253 (Bangalore - Trib.), wherein it was held that right to use distribution network did not result in creation of any intangible asset. In the said case, the Hon'ble ITAT also held that explanation (3) to section 43(1) is applicable to cases of inflated valuation of assets purchased from a related party. 15. It is also submitted that clauses 10.2.7 and 10.2.8 of the valuation report clearly indicate that the amount is only a balancing entry and may exclude certain closing account adjustments and the conclusion does not reflect the outcome of any due diligence procedures. It is also submitted that the balancing entry treated as goodwill as per accounting standards is fictional in nature in the present case and does not represent any real intangible and the accounting procedure in double entry accounting system cannot override the provisions of Income Tax Act. 16. It is also submitted that the cost in the hands of transferor company is 'nil' by virtue of section 55(2)(a)(ii) and therefore the cost is 'nil' in the hands of the transferee-assessee also. It is also humbly submitted that fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny factual finding that the difference between the transfer price and the value of the assets in the books of the transferor is the value of goodwill. The Supreme Court only felt that there was no need to interfere with the factual finding of the lower authorities. As Supreme Court only decides question of law, the decision cannot be seen as a stamp of approval for the valuation of the good will as difference between transfer price and value of fixed assets. 5.1. Relying on the above submissions, the Ld. DR submitted that the appeal of the assessee may be dismissed. 6. In the rejoinder, the Ld. AR submitted in written form as under which is placed on record: In Para No. 1, the Ld. CIT-DR mentions that the appellant acquired the industrial packaging unit from Wintek Flexo Prints of ITW India Ltd. This is factually incorrect. ITW India Limited earlier on Feb. 2, 2012, acquired a unit of Wintek Flexo Prints, a partnership firm. The said unit is only a supplemental part of the total business activity of the Industrial Packaging unit held by ITW India Limited. It is a small part of the Industrial Packaging unit held by ITW India Limited. The unit acquired by the appellant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred to the transferee and those relating to the other businesses as mentioned in para 6(4) above were not transferred. 23. According to the agreement, the assets referred to above relate to other businesses of ITW India Limited and do not relate to the Industrial Packaging Unit. Only Such other assets are retained by ITW and none of the assets relating to the Industrial packaging unit are retained by ITW India Ltd. 24. The learned CIT-DR at paragraph 4 of his submissions mentioned that lump sum amount of ₹ 1240 crores was fixed as per the agreement and that there is no basis for fixing the price. This is not correct. The valuation of various assets was entrusted to independent valuer BSR Co. The said valuer valued the consideration based on three different acceptable methods and taken the average. In fact, during the course of hearing, the Hon'ble ITAT required the appellant to file copies of the values fixed for the lands by the respective Sub Registrar. A verification of the values fixed would clearly indicate that the land value fixed by the valuer BSR Co., is more than the value fixed by the Sub Registrar. This clearly shows that the values are quite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to say that there is any loss to the revenue. 28. At paragraph 7, the learned CIT-DR mentions that the valuer BSR Co., was appointed by ITW Inc. It can be seen that the reference was on 30.8.2013, i.e. about two months earlier to the date of agreement. At the relevant point of time, ITW was the owner and it can only refer for the valuation. In such circumstances, there is no reason to doubt the valuation simply because a reference was made by ITW as it was the company which owned the unit. In fact after the agreement, the appellant referred the matter of valuation of independent assets to the valuer. Therefore, no adverse inference can be drawn. 29. In paragraph 8, the CIT-DR mentions that the valuer did not carry out independent verification of the financial projections and underlying data. There is no basis for making such a comment by the learned CIT-DR. To the extent of information furnished by the ITW India Ltd., the valuer examined the same and also examined the basis for such data. The assessee on perusal has come to a conclusion that the valuation made by BSR Co., is justified. When the valuer has mentioned that if there is any failure on the part of ITW, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se consideration is for acquisition of 100% equity and to acquire control over Management. For this purpose, the CIT-DR refers to the word equity used at Clause No. 10.2 of the second valuation report. The CIT-DR is under a mistaken impression that the word equity was used to denote share capital. The meaning of the word equity may kindly be analyzed. According to the Black's Law Dictionary 6th Edition the meaning of the word equity also or an enterprise over and above the indebtedness against it . The word equity in the valuation report is used to denote the value of the property over and above the indebtedness of the unit acquired. Therefore, the other observations made by the CIT IDR are not relevant to the facts of the appellant's case. It is submitted that there is no such intention for the appellant to acquire any equity of ITW India Limited. In fact, the appellant did not acquire shares but it acquired the Industrial Packaging unit which would mean that the appellant had no intention to participate in the management of the ITW India Limited. The observations made by the CIT JOR are, therefore, not relevant to the facts of the case. 34. In paragraph 12, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain offered to tax by the seller. The method of valuation of goodwill as is done by the appellant is recognized by various judicial authorities as mentioned in the earlier paragraphs. 38. In paragraph No. 16, the CIT-DR mentioned that fifth proviso to section 32(1) is also attracted in the present case being a case of succession. Firstly, it is submitted that there is no succession either as per Sec. 170 or as per Section 47 of the I.T. Act. The vendor ITW India Limited has paid capital gain tax and did not claim any exemption in view of Sec. 47. It was considered as a transfer and was not claimed as exempt under any of the clauses of Section 47 of the I.T. Act. In so far as Section 170 is concerned, the said section has no application to the facts of the appellant's case. The entire business activity was not taken over by the appellant from ITW India Limited. Only a part of the business activity i.e. the industrial packaging unit alone was taken over. Further, a reading of Sec. 170 refers to assessment of the person who has transferred the assets and not the person who acquired the asset. Therefore, fifth proviso to Sec. 32(1) has no application to the facts of the case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not treated either as amalgamation or succession by either the Assessing Officer or by the Commissioner of Income-tax (appeals). 41. In paragraph No. 19, the CIT-DR mentioned as to how the decision of Supreme Court in the case of Smifs Securities is not applicable to the facts of the appellant's case. In this regard, it is submitted that the Hon'ble Supreme Court did not merely dismiss the SLP but expressly held that the goodwill is entitled for depreciation and that the difference between purchase value and the value of the assets as reduced by the liabilities represents goodwill. The said decision is, in all force, applicable to the facts of the appellant's case. It is further submitted that the Calcutta High Court allowed the appeal of the appellant by recording a reasoned order. The said order is confirmed by the Apex Court after discussing the issue. There are various other judicial pronouncements to this effect as listed. 42. The decisions relied upon by the CIT DR are not applicable to the facts of the case. They are discussed hereunder: a) The decision of the Supreme Court in the case of Sir Kikabhai Premchand Vs. CIT reported in 24 ITR 506 is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich Depreciation on tangible assets is ₹ 407.88 lakhs and on intangible assets of 4404.43 lakhs. In detail, the assessee has purchased a packaging unit of M/s. ITW India Limited for a consideration of ₹ 1240 crores on slump sale and on as is where is which includes various assets and capital work-in-progress, cash and equivalents, receivables, inventory etc., the value of which was based on the valuation done by independent valuers M/s. B.S.R. Co. -Whereas, M/s. ITW India Limited did not record any goodwill in its books of account but the assessee has determined the same on the pretext that the same is having a sizeable market share in the packaging activities and clientele basis, which was not acceptable to the AO. The AO further stated that M/s. ITW India Limited recorded goodwill on account of its acquisition of Wintek Flexo Prints, partnership firm, in the financial year ending 31.03.2012 and on similar analogy, it has recorded intangible assets on account of same transaction. He has also pointed out that prior to slump sale, M/s. ITW India Limited did not have any goodwill or intangible asset in its books. The AO opined that the goodwill existing in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have gone through the valuation made by an independent valuer named M/s. BSR Co. We are reproducing from the reports of the said independent valuer, are as under: 2. Terms of engagement 2.1 BSR and Associates Chartered Accountants ( BSR ) has been appointed by Illinois Tool Works Inc. ( ITW or the Client ) to act as financial advisor in relation to proposed slump sale of Signode India by ITW India Limited to Signode India Limited ( Project Total ). 2.2 BSR is to undertake a valuation of the Division ( the Valuation ) as at 30 June 2013 ( Valuation Date ). The Valuation is to be used for the proposed slump sale only. 2.3 ........................ 2.4 ........................ 2.5 ......................... 2.6 This Report is based on the information provided by the Client and has been confirmed by the Client. We have not independently verified or checked the accuracy or timeliness of the same. 7.5. The scope and limitation of work is as under: 3.2 This Report is based on and relies solely on the Management Business Plan provided by the Management of ITW for the period 01 July 2013 to 31 December 2019 ( Management Business Plan ). BSR ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company. 7.9. 8.1.14 From the tangible assets valuation perspective, the market approach measures the value of an asset through an analysis of recent sales or offerings of comparable assets. When applied to the valuation of an asset, consideration is given to the financial condition and operating performance of the company that owns the asset. 8.1.15 We have used market approach for valuation of land and commercial/office space. Cost Approach: 8.1.17 From the tangible assets valuation perspective, the cost approach measures the value of an asset based on the cost to replace it new with an identical or similar unit of equal utility. Under this approach, replacement cost new or reproduction cost new of the asset is determined first and then fair value is determined by adjusting the replacement cost new or reproduction cost new by the loss in value due to physical deterioration and functional and economic obsolescence. 7.10. 8.1.19 Land - Market approach (Sales comparison method)/Sales comparison method establishes value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs have a clear and marketable title and are transferable, without any independent verification from our side. We have not carried out the title search with respect to the specified land and the information as provided by the Management has been considered as the basis for our valuation. The valuation is carried out on the assumption that specified land and buildings are free from any litigation, encumbrances, encroachments, etc. and are transferable. No input of any kind of liabilities has been considered in the valuation. We have not carried out any legal technical due-diligence with respect to the specified tangible assets as it was not part of our scope of work. As part of the PPA, we have carried out fair valuation of specified land and buildings. Other assets group such as plant machinery, office equipments, furniture fixtures, motor vehicles etc. have been considered at respective net book value as at Valuation Date as per the information provided by the Management. We have not verified any regulatory approvals related to operation of specified tangible fixed assets, including the clearance from other regulatory authority as it was beyond our scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buildings and civil infrastructure works as per the details provided by the Management has been taken as the base year for estimation of age of the buildings and civil infrastructure works used for depreciation calculation. All these assumptions and presumptions made by the Valuer has rightly been negated by the authorities below as well as Ld. CIT-DR. In this case, there is a transfer of all fixed assets including lands and buildings as well as current assets. The lands value has not been accepted by the AO, the plant and machineries have been transferred at the book value as was done in the former unit of ITW India Ltd. We note from the valuer's report that the assets have been recorded at their fair value, the fair value has not been defined anywhere in the report of the Valuer. The book value of the depreciable assets are not fair value. It is just a notional depreciated value provided by the assessee in its books of account. Certainly the fair value would be different from the recorded value as noted infra. In case of lands, the authorities below have rightly dealt this issue. The financial growth is constant for 2015, 2016 2017 and thereafter, it is going down which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iving undue benefit out of oneself at the cost of Revenue. 7.14. We observe that the two valuation reports of BSR Associates which are available at pages 111 to 191 of the first paper book filed by the assessee has limited relevance in the above context. The first valuation report is dated 28/10/2013 with valuation date 30/06/2013 as per statement of work assigned by ITW Inc on 30/08/2013. From the terms of engagement available at clause 2 of the note of the valuers (at page 117 of the paper book filed by the assessee), it is evident that BSR Associates was appointed by Illinois Tool Works Inc [ITW] which is mentioned as client by the valuer to act as financial advisor to the proposed slump sale. From the fact that it is the parent company which appointed the valuer and not the assessee, it is apparent there is unfair fixation of transfer price to benefit the transferor at the cost of the assessee, the matter being an affair between parent of the assessee and the assessee. It is also clearly stated in the terms of the agreement that the valuation is for the purpose of slump sale only and not for the purpose of arriving at a fictional goodwill after the slump sale. 7.15. We ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purposes of his business or profession and depreciation allowance has been claimed in respect of such assets in the case of the second mentioned person and such person acquires on lease, hire or otherwise assets from the first mentioned person, then, notwithstanding anything contained in Explanation 3, the actual cost of the transferred assets, in the case of first mentioned person, shall be the some as the written down value of the said assets at the time of transfer thereof by the second mentioned person . 7.18. Clause 10.2 of the second valuation report clearly indicate that the purchase consideration is for acquisition of 100% equity. Therefore, the price is paid for 100% control of equity and more in the nature of premium for acquisition of 100% equity control and therefore the balancing charge is not in the nature of goodwill. We find that during the relevant Previous year, just one day before the business transfer, the ownership;' of the assessee changed by way of transfer of share capital from the transferor (Inn India Ltd] to Strapex Holdings Ltd., UK. Therefore, the transfer of the packaging unit is part of a comprehensive business arrangement within Inn In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve that when there is no transfer of the asset as well as there is no valuation of the asset, there cannot be any claim of ownership or claim of depreciation. With regard to non-compete agreement, there is no such agreement on record and even if it exists, the amount paid for non-compete agreement is capital payment and not eligible for depreciation. 7.21. We notice that clauses 10.2.7 and 10.2.8 of the valuation report clearly indicate that the amount is only a balancing entry and may exclude certain closing account adjustments and the conclusion does not reflect the outcome of any due diligence procedures. The balancing entry treated as goodwill as per accounting standards is fictional in nature in the present case and does not represent any real intangible and the accounting procedure in double entry accounting system cannot override the provisions of Income Tax Act. 7.22. We observe that the cost in the hands of transferor company is 'nil' by virtue of section 55(2)(a)(ii) and therefore the cost is 'nil' in the hands of the transferee-assessee also. Fifth proviso to section 32(1) is also attracted in the present case being a case of succession in an ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and power to examine the valuation of the assets as per Explanation 3 to section 43(1). It is clear from the Explanation 3 to section 43(1) that 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 Explanation 3 of section 43(1). 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. It is found 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 tangib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation allowable had the succession not taken place. In other words, the allowance of depreciation to the successor/amalgamated company in the year of amalgamation would be on the written down value of the assets in the books of the amalgamating company and not on the cost as recorded in the books of amalgamated company. The case of amalgamation is not regarded as transfer for the purpose of capital gain as provided under section 47(vi) and therefore such cases are exempted from capital gain which is otherwise chargeable to tax on transfer of assets. In the case on hand the business of the subsidiary was transferred to the assessee by way of amalgamation therefore it would not be regarded as transfer of asset for the purpose of capital gain. Hence the claim of depreciation on the assets acquired under the scheme of amalgamation is restricted only to the extent if such amalgamation has not taken place. The Assessing Officer made a reference to 5th proviso to section 32 and held that as per 5th proviso under section 32(1)(ii), the aggregate deduction in respect of depreciation on any tangible or intangible assets allowable to amalgamating company and the amalgamated company sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e authorities below. 7.26. The assessee contended in the grounds of appeal that the CIT(A) ought to have considered that the disallowance of the claim of depreciation by the AO as per order u/s. 154 was ₹ 99,09,96,797/- and not ₹ 44,04,03,000/-, therefore, the CIT(A) ought to have decided the appeal against disallowance of depreciation of ₹ 99,09,96,797/-. 7.27. On perusal of record, we find that the assessment order was passed on 30/12/2016 u/s. 143(3) of the Act by making disallowance of depreciation at ₹ 44,04,43,000/-. The AO enhanced the addition to ₹ 99,09,96,797/- by issuing notice u/s. 154 dated 21/24/04/2017 and passed order u/s. 154 on 24th August, 2017 enhancing the disallowance to 99,09,96,797/- instead of ₹ 44,04,43,000/- made u/s. 143(3) order. On perusal of grounds raised by the assessee before the CIT(A), which were mentioned at page 2 of CIT(A)'s order, in ground No. 2 the assessee mentioned disallowance of depreciation of ₹ 99,09,96,797/- and nowhere in the grounds mentioned the appeal is against 154 order. The CIT(A) nowhere discussed about the enhancement of disallowance u/s. 154 order. The CIT(A) decided the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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