TMI Blog2021 (8) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... tion scheme. However revenue has raised no objection to the scheme of amalgamation. Therefore the principle of estoppel prevents the revenue from challenging the validity of the scheme at the subsequent date - See ELECTROCAST SALES INDIA LTD. VERSUS DCIT, CC-XXI, KOLKATA [ 2018 (3) TMI 473 - ITAT KOLKATA] In view of the decision of United Breweries Ltd Vs ACIT [ 2016 (9) TMI 1527 - ITAT BANGALORE] is not a good law as the Hon ble High Court has held that 5th proviso to section 32(1) is only applicable in the circumstances where the predecessor and successor both claimed depreciation in respect of the same asset. We find that the 5th proviso was inserted in order to prevent double claim of the depreciation in respect of the same asset. But these are not the facts in the present case before us as the amalgamating company did not claim any depreciation on the goodwill and therefore the same can not be disallowed. - Decided in favour of assessee. Addition u/s 56(2)(viib) - excess issue price of shares over fair market value of the shares - Appeal of the assessee was allowed by Ld. CIT(A) by holding that the assessee is a subsidiary company of holding company which is a listed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee : Shri Saurabh Bhat, A.R. For the Revenue : Shri Sandeep Raj, D.R. ORDER PER RAJESH KUMAR, ACCOUNTANT MEMBER: The above titled cross appeals have been preferred by the assessee as well as by Revenue against the order dated 20.11.2019 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2016-17. 2. The only issue raised in the various grounds of appeal is against the confirmation of disallowance of ₹ 62,79,73,780/- by Ld. CIT(A) as made by the AO on account of depreciation on goodwill and also upholding the merger method for accounting the amalgamation and net asset value method instead of discounted cash flow method to compute the goodwill by the AO. 3. The facts in brief are that the assessee filed e-return of income on 30.11.2016 declaring a total loss of ₹ 14,05,93,564/- under the normal provisions and ₹ 8,11,17,325/- as book loss under section 115JB of the Act. The case of the assessee was selected for scrutiny and statutory notices were duly issued and served upon the assessee. The assessee is a private limited company of Keva Group of Companies. M/s. S.H. Ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing purchase method in terms of AS 14 thereby booking the assets and liabilities at fair market value and the difference of ₹ 236.28 crores was accounted for its goodwill which was calculated by reducing the fair market value of ₹ 145.44 crores from the sale consideration of ₹ 381.72 crores. However, the asset and liabilities were booked at book value for the income tax purposes and difference of ₹ 251.50 crores is accounted for as its goodwill under the head intangible assets which were calculated by reducing the book value of ₹ 130.21 crores from sales consideration of ₹ 381.20 crores and accordingly a depreciation of ₹ 62,79,73,780/- was claimed on the goodwill @ 25%. The AO noted that the amalgamated company KVAPL was a loss making company and has huge unabsorbed losses and unabsorbed depreciation whereas the amalgamating company KFAL was a profit making company. The AO questioned the method of accounting for the amalgamation and held that the said method of accounting for amalgamation has resulted into a huge gap between sale consideration and book value due to which the assessee has claimed huge depreciation on the goodwill to red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 'actual cost' of capital asset in the hands of amalgamating company prior to amalgamation v) Section 43C(1): 'Cost' of stock-in-trade in the hands of amalgamated company to be taken the same as in the hands of amalgamating company held either as capital asset or stock-in-trade vi) Section 72A: Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc vii) Section 47 (vii): Exemption of capital gains in the hands of shareholders of amalgamating company on transfer of shares of amalgamating company in the scheme of amalgamation. viii) Section 49(1) (Hi) (e): 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). ix) Section 49(2): 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. 4 .31 The section 43 of the Income Tax Act provides for the definitions of certain terms, relevant to income from profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. Whether, the cost of the goodwill was recorded in the books of account of the amalgamating company, is not a material fact here. What is material is, the cost to the amalgamated company for such asset. The goodwill being a self-generated asset, there was no cost to the amalgamating company, i.e. KFG. In such situation the cost of the goodwill for the amalgamated company should also be Nil. 4.3.35 The appellant has mainly relied upon the decision of Supreme Court in the case of CIT v. Smifs Securities Ltd.[2012] 348 ITR 302/210 Taxman 428/24 taxmann.com 222 (SC). It has also quoted various judgements in which reliance is placed on the aforesaid decision of the Supreme Court. 4.3.36 I have carefully read the said judgement. I find that the hon'ble Supreme Court has mainly decided the question of considering the goodwill in the category of intangible assets as per the provisions of section 32(1) of the Act. The contention before the court was not as to whether difference arising out of amalgamation was goodwill eligible for depreciation. The Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 70. 4.3.39 I find that, there are express provisions in the section 55(2)(a)(ii) of the Act to determine the cost of acquisition of existing goodwill in the hands of the amalgamated company. As per the said provisions, the cost of acquisition of existing goodwill in the hands of the amalgamated company will be the cost/written down value in the hands of amalgamating company. Further, in case of goodwill arising out of amalgamation, the cost in the hands of amalgamating company would be NIL by virtue of section 55(2)(a)(ii] and, accordingly, the cost would be NIL in the hands of amalgamated company. 4.3.40 I find that, the issue under discussion with most of it's facets has been considered by the ITAT, Banglore in the case of United Breweries Ltd. v. Addl. CIT I.T.A. Nos.722,801 1065/Bang/2014. The ITAT, in it's decision, restricted amalgamated company's claim of depreciation in the year of amalgamation on goodwill arising on amalgamation, by applying fifth proviso to section 32(1] of the IT Act and held that, the amalgamated company cannot claim depreciation on assets acquired under amalgamation, more than the depreciation allowable to amalgamating company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamation, such as 5th proviso to section 32 (1), section 49(l)(iii)(e), and/or Explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii) which clearly radiate the intent of legislature to keep the scheme of amalgamation tax neutral. 4.3.44 To conclude, without prejudice to my finding on the earlier ground that, the amalgamation was in the nature of merger, even if the amalgamation is considered to be in the nature of purchase, it is held that the value of the goodwill in the books of the appellant company should be Nil in view of the express provisions of explanation 7 to section 43(1) of the Act, which shall prevail over all other reasonings, and in view of the intent of the legislature to keep the provisions related to the scheme of amalgamation to be tax neutral. 4.3.45 C) Nullification of goodwill and disallowance of depreciation by revising the valuation of KFG as a going concern: The AO rejected the DCF method of valuation and adopted Net Asset Value method for the valuing the net worth of the amalgamating company. Since the value of the amalgamating company as per NAV method was equal to the book value, there was no question of generation of any goodwill. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant also referred to a letter issued by the valuer stating the methodology adopted by her in conducting the valuation. I have read the letter dated 13.12.2018 written by the valuer to the appellant company. The letter is cautiously worded and broadly states that the data provided by the appellant was reviewed for consistency and reasonableness. Neither the valuer, nor the appellant has provided any evidences to support this contention. I would rather rely on the information given by the valuer on oath in the statement recorded by the AO on 13.12.2018, rather than the broad statement made in the letter written to the appellant, who is interested party in the matter. 1 agree with the opinion of the AO that, the process of valuation lacked due rigour and was carried out in a manner, amenable to the appellant company. 4.3.48 I do not find it necessary to compare the projections of the value with the actual results while evaluating the soundness of the process of valuation. The valuation deserves to be rejected in light of the discussion in the earlier paragraphs. Reliance is placed on the decision of ITAT, Delhi in the case of Agro Portfolio (P.) Ltd. vs. Income Tax Officer, Wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of United Breweries Ltd. vs. Add.CIT ITA No.722, 801 1065/Bang/2014. The Ld. A.R. submitted that in the said decision, the goodwill was already appearing in the books of amalgamating company and after acquisition by the amalgamated company, it was revalued by the amalgamated company. The Ld. A.R. submitted that the said decision has been distinguished by the co-ordinate bench of the Tribunal in the case of Aricent Technologies (Holdings) Ltd. vs. DCIT ITA No.90/Del/2013. The Ld. A.R. also submitted that the decision of Bangalore tribunal in the case of United Breweries Ltd. vs. Add. CIT (supra) is no more good law in view of the decision of Hon ble Karnataka High Court in the case of Padmini Products Pvt. Ltd. vs. DCIT 2020-TIOL-1797-HC-Kar-IT. The Ld. A.R. submitted that in the said decision the Hon ble High Court has held that 5th proviso to section 32(1) is only applicable in the circumstances where the predecessor and successor both have claimed depreciation in respect of the same asset. The Ld. A.R. submitted that the 5th proviso was inserted in order to prevent double claim of the depreciation in respect of the same asset. The Ld. A.R. submitted that the amalg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Ld. D.R. submitted that the scheme of amalgamation becomes suspicious as the amalgamation was carried out between two 100% owned subsidiaries one of which is assessee by the same holding company. The Ld. D.R. submitted that the amalgamation was a colourable device intended to defraud the Revenue by claiming depreciation on the amount of goodwill created as a result amalgamation by making excess payment of consideration by one subsidiary to the another subsidiary. The Ld. D.R. submitted that even the name of the assessee was changed to one after amalgamation to that of amalgamating company in the next year. The Ld. D.R. submitted that the assessee should have taken the merger method of amalgamation and not the purchase method to create artificial goodwill by paying higher consideration for the assets of amalgamating company. The Ld. D.R. relied heavily on the order of AO and Ld. CIT(A) so far as the rejection of depreciation on goodwill is concerned and submitted that the appeal of the assessee may kindly be dismissed by upholding the order of Ld. CIT(A) and AO. 7. We have heard the rival submissions of both the parties and perused the material on record. The undisputed fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... air market value and the difference of ₹ 236.28 crores was accounted for as goodwill which was calculated by reducing the fair market value of assets over liabilities of ₹ 145.44 crores from the sale consideration of ₹ 381.72 crores. However, the asset and liabilities were booked at book value for the income tax purposes and difference of ₹ 251.50 crore was accounted for as goodwill under the head intangible assets which were calculated by reducing the book value of ₹ 130.21 crores from sales consideration of ₹ 381.72 crores and consequently a depreciation of ₹ 62.80 Crores was claimed on the goodwill @ 25%. The AO noted that the amalgamated company KVAPL was a loss making company and has huge unabsorbed losses and unabsorbed depreciation whereas the amalgamating company KFAL was a profit making company. The AO questioned the method of accounting for the amalgamation and held that the said method of accounting for amalgamation has resulted into a huge gap between sale consideration and book value due to which the assessee has claimed huge depreciation on the goodwill. Now in this background the issue before us is whether the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of similar nature in clause (b) of Explanation 3 to section 32 indicates that goodwill would fall under the expression any other business or commercial right of a similar nature . The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation (b). In the circumstances, we are of the view that Goodwill is an asset under Explanation 3(b) to section 32(1) of the Act . 8. Considering the above settled position, the issue of allowability of depreciation on goodwill should be decided in favour of the assessee. As such, Revenue has not bought any contrary material to suggest that the claim of depreciation on goodwill is not genuine and the same is not eligible for depreciation. Accordingly ground no.1 raised by the Revenue is dismissed. Ground nos. 2, 3a, 3b and 4 need no specific adjudication as they were already adjudicated and decided by the Tribunal in the first round vide its order dated 25th May, 2012 (supra). c) In the case of M/s. MTANDT Rentals Ltd. vs. ITO (Supra), the coordinate bench decided the issue of depreciation on goodwill in favour of the assessee by holding and observing as under: In our opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be the arithmetic sum of depreciation claimed by the two merging companies prior to amalgamation and cannot be more consequent to merger; and (ii) that, the introduction of the balancing figure of excess of liabilities over the assets as goodwill and treating it as tangible assets and claiming depreciation on the same under the Income Tax Act was in violation of Proviso 5 to Sec. 32(1). In our considered view, the aforesaid observations of the Pr.CIT are absolutely misconceived and in contradiction of the judgment of the Hon ble Supreme Court of in the case of Smifs Securities Ltd. (supra). On a perusal of Proviso 5 to Sec. 32(1), we find that the same is only in the nature of a rider which inter alia disentitles the amalgamating company and the amalgamated company in the case of amalgamation to claim depreciation on tangible assets or intangible assets, the aggregate of which would exceed the claim of such deduction as per the prescribed rates in case the amalgamation had not taken place. Apart therefrom, it is therein envisaged that the claim for such deduction for depreciation on assets shall be inter alia apportioned between the amalgamating company and the amalgamated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Ltd (1993)203 ITR 108 (Bom). Accordingly, not being able to persuade ourselves to subscribe to the view taken by the Pr.CIT that the order passed by the A.O under Sec. 143(3), dated 23.12.2016 was erroneous insofar it was prejudicial to the interest of the revenue, we set aside his order and restore the order passed by the A.O. 11. The appeal filed by the assessee is allowed in terms of our aforesaid observations. e) In the case of M/S Cosmos Coop Bank Ltd. vs. DCIT (Supra), the coordinate bench has taken the same view on depreciation on goodwill. 9. Further we also find merit in the contentions of the ld AR that the scheme of amalgamation is approved by the High Court after giving notice to the stakeholders including the Revenue to state its objections, if any, to the proposed amalgamation scheme. However revenue has raised no objection to the scheme of amalgamation. Therefore the principle of estoppel prevents the revenue from challenging the validity of the scheme at the subsequent date. The case of the assessee is squarely covered by the decision of the coordinate bench in Electrocast Sales India Ltd. Vs DCIT (Supra) wherein the coordinate bench has held as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence it could be safely inferred that the Court would exercise due diligence and would conduct detailed enquiries before sanctioning the scheme. A scheme formulated for the purposes of tax evasion cannot be held to be in public interest and hence the same cannot be sanctioned under the provisions of Companies Act, 1956. The fact that the Hon ble Calcutta High Court had accorded its sanction to the scheme of amalgamation in the assessee s case implies that the same had been done by considering representations from the various fields and by duly considering the tax evasion point for income tax purposes. In this regard, we would like to place reliance on the functions, powers and discretions of the court that had been noted by Shri A .Ramaiya in the Companies Act, Part 2 at pages 2499 and 2500 in Point No. 6 incorporated hereunder: That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including the statutory authorities. It further held that having regard to the law declared by the Hon ble Apex Court as to the effect of the scheme sanctioned by the Court, the only course open to the revenue would be to act as per the scheme sanctioned effective from 1st Jan 2004, which means that the tax authorities are bound to take note of the state of affairs of the applicant as on 1st Jan 2004 and a return filed regarding the same cannot be ignored on the strength of section 139(5) of the IT Act. The merits or otherwise on the returns filed , however, is a matter of assessment for the authorities to consider and pass order in accordance with law. It was further held that when the claim of the assessee in the appeal had already been granted, on a mere circumstance that the Department had not accepted the same and gone before the appellate forum does not mean that the scheme sanctioned would be of no consequence to the respondent. The respondent cannot ignore the order of this Court approving the scheme giving the effective date as 1st Jan, 2004. Similar view, that once the court sanctions the scheme , the Income tax department will be bound by the same, including the appoint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of Union of India, had not filed any appeal u/s 391(7) of the Companies Act, 1956 against the order of amalgamation sanctioned by the Hon ble High Court. This fact was not controverted by the ld DR before us. 4.6. The ld AR further argued that the scheme of amalgamation, as sanctioned by the Hon ble Calcutta High Court, was effective from 1.4.2010 and the parties had acted according to the said scheme and cannot be subjected to reversal after a period of 7 years by virtue of the principle of res judicata , constructive res judicata and acquiescence . In this regard, the ld AR placed reliance on the decision of Hon ble Supreme Court in the case of Forward Construction Co. and Others vs Prabhat Mandal reported in 1986 AIR 391 (SC) wherein it was held that : The principle underlying Explanation IV is that where the parties have had an opportunity of controverting a matter that should be taken to be the same thing as if the matter had been actually controverted and decided. It is true that where a matter has been constructively in issue it cannot be said to have been actually heard and decided . It could only be deemed to have been heard and decided. We find that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e set off of accumulated losses taken over from the amalgamating companies and accordingly the share exchange ratio (as approved under the scheme) was acted upon assuming acceptance from the income tax department. Thus by applying the Doctrine of acquiescence, the department would be now barred from raising an objection to the scheme. Further a claim of estoppel arises when one party gives legal notice to a second party of a fact or claim, and the second party fails to challenge or refute that claim within a reasonable time. The second party may be said to have acquiesced to the claim, and thus to be estopped from later challenging it or making a counterclaim based upon the actions of the other party. In the instant case also, the fact of amalgamation was intimated to the income tax department 7 years back against which no appeal was preferred by them. Accordingly the claim of estoppel applies. These Doctrines of Estoppel and Acquiescence had been approved by the Hon ble Calcutta High Court in the case of Suresh Kumar Rungta and Ors vs Roadco India Pvt Ltd dated 22.9.2011 wherein the Hon ble Calcutta High Court upheld the view of Trial Court wherein it was held that the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ataka High Court in the case of Padmini Products Pvt. Ltd. vs. DCIT 2020-TIOL-1797-HC-Kar-IT, the decision in United Breweries Ltd Vs ACIT is not a good law as the Hon ble High Court has held that 5th proviso to section 32(1) is only applicable in the circumstances where the predecessor and successor both claimed depreciation in respect of the same asset. We find that the 5th proviso was inserted in order to prevent double claim of the depreciation in respect of the same asset. But these are not the facts in the present case before us as the amalgamating company did not claim any depreciation on the goodwill and therefore the same can not be disallowed. 11. In view of the above facts and circumstances and the various decisions as discussed above, the order of the ld CIT(A) upholding the order of AO on this issue can not be sustained. Accordingly we set aside the order of ld CIT(A) on this issue and direct the AO to allow the depreciation on goodwill. The appeal of the assessee is allowed. ITA No.1051/M/2020(Revenue s Appeal) 12. The Revenue has taken the following grounds in its appeal: 1. On the facts and circumstances of the case and in law, the Ld.CIT(A) erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture profits and to evade tax . 9. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of Assessing Officer be restored. 10. The appellant craves leave to amend or alter any ground or add new ground which may be necessary 13. The only effective issue raised in ground No.1 to 4 is against the deletion of addition of ₹ 251,18,95,121/- as made by the AO under section 56(2)(viib) of the Act towards excess issue price of shares over fair market value of the shares. 14. The facts qua the amalgamation, fair market value and consideration etc. have been discussed in the assessee s appeal hereinabove and hence are not being reiterated for the sake of brevity. The total consideration fixed for the amalgamating company was discharged by the assessee by issuing 6,21,029 equity shares at issue price of ₹ 6,146.50 per equity share. The toal value of shares issued was ₹ 381.72 Crores. According to the AO, the valuation done by the assessee using discounted cash flow method for valuing the shares is not correct and calculated the value per share using net asset value method and the total valuation was done at ₹ 130.21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such subsidiary company has been held by the parent company or by its nominees throughout the previous year. 4.4.2 SHK qualifies to be treated as a 'company in which public is substantially interested' as per the item (A) of the clause b of section 2(18) of the Act and by virtue of SHK, the holding company of the appellant, being a 'company in which public is substantially interested' the appellant company also qualifies to be a treated as 'company in which public is substantially interested' as per the item (B) of the clause b of section 2(18). Thus, in view of the bare provisions of the Act as discussed above, the provisions of section 56(2)(viib) of the Act are not applicable to the case of the appellant Therefore, in view of the above, the addition of ₹ 251,18,95,121/- made by the AO under section 56(2)(viib) of the Act is hereby deleted. The concerned ground is allowed. 16. We have heard the rival submissions and perused the material on record. The undisputed facts are that the assessee is a subsidiary company of a company SHK which is listed on the stock exchange and therefore is a company in which public are substantially interested. Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forward losses even if the amalgamation was carried out and done in the reverse manner. He accordingly, allowed the benefit of brought forward losses of the amalgamated company. 20. After hearing the rival contentions of parties and perusing the facts on records including the impugned appellate order under challenge before us, we note that the change of name was approved by the Hon'ble High Court of Bombay and the same is stated in the order of amalgamation as under: 13. CHANGE OF NAME OF TRANSFEREE COMPANY 14.1 With effect from the effective date, the name of transferree company shall stand changed to Keva Fragrances Private Limited or such other name as may be decided by the Board of Directors.... 21. We have also perused the provisions of section 72A of the Act minutely and observe that the section allows benefit of losses incurred by amalgamating company to the amalgamated company. Therefore, there is merit in the arguments of the ld. AR that even if the amalgamation was done the other way around, benefit of brought forward losses would have been available to the amalgamated company. Under these facts and circumstances we do not find any infirmity in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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