TMI Blog2022 (7) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... for merger in its books of account as per 'purchase method' of accounting prescribed under Accounting Standard-14 issued by Institute of Chartered Accountants of India. In this case, there was no goodwill in the books of account of the amalgamating company and further, goodwill has been acquired by amalgamated company by paying consideration over and above net value of assets at amalgamating company. Therefore, in our considered view, case of the assessee squarely comes under ratio laid down by the Hon'ble Supreme Court in the case of M/s. Smifs Securities Ltd.[ 2012 (8) TMI 713 - SUPREME COURT] It is well settled principle of law by decisions of various Courts, including decision in the case of Malabar Industrial Co. [ 2000 (2) TMI 10 - SUPREME COURT] where it has been clearly held that the PCIT cannot assume jurisdiction to revise assessment order, unless the PCIT satisfies that assessment order passed by the Assessing Officer is erroneous, insofar as it is prejudicial to the interests of the Revenue. In this case, on the issue of depreciation on goodwill, the Assessing Officer has taken one possible view with which the PCIT does not agree, however, it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y erred in setting aside the said assessment order for examining the applicability of the 5th proviso to section 32(1) of the Act as per the findings from para 6 without assigning proper reasons and justification. 3. The PCIT failed to appreciate that the presumption of error in the assessment order which caused prejudice to the interest of the Revenue was wholly unjustified and the order of revision under consideration was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law. 4. The PCIT failed to appreciate that the twin conditions prescribed in section 263 of the Act were not satisfied concurrently on the facts and in the circumstances of the case, thereby vitiating the order of revision. 5. The PCIT failed to appreciate that in any event, the assessment order was passed after proper enquiry and application of mind on the part of the Assessing Officer including the issue sought to be revised in the impugned order, the review of the decision taken in the assessment order in assuming jurisdiction u/s. 263 of the Act should be reckoned as bad in law. 6. The PCIT failed to appreciate that the distinction between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has treated difference between net value of assets of amalgamating company and value of investments in shares of M/s. Kiran Medical Systems Pvt. Ltd. (amalgamated company) amounting to Rs. 71,63,61,739/- as goodwill arising on amalgamation and claimed depreciation as applicable to intangible assets. The assessee has disclosed scheme of amalgamation in Note No. 30 of financial statement and explained reason for treatment of difference consideration as goodwill. The assessment for the impugned assessment year has been completed u/s. 143(3) of the Income Tax Act, 1961 on 29.12.2017 and the Assessing Officer has accepted depreciation claimed on goodwill arising out of amalgamation. 4. The case has been, subsequently taken up for revision proceedings by the Principal CIT, Chennai-3, and issued show cause notice u/s. 263 of the Income Tax Act, 1961 dated 07.02.2019 and called upon the assessee to explain as to why assessment order passed by the Assessing Officer shall not be revised. The Principal CIT, in the said show cause notice observed that assessment order passed by the Assessing Officer is erroneous, insofar as it is prejudicial to the interests of Revenue, because the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et, as if, said amalgamation or succession has not been taken place. In this case, the assessee has not acquired any goodwill from amalgamating company. Further, goodwill in the present case arose out of amalgamation, because the assessee has paid consideration for acquisition of asset over and above net asset of amalgamating company, therefore, submitted that proposed revision on the issue of depreciation on goodwill is incorrect. 6. The learned PCIT, after considering relevant submissions of the assessee and also taken note of various decisions including decision of the ITAT., Bangalore bench in the case of DCIT Vs United Breweries Ltd. (TS-553-ITAT-2016-Bang) opined that the assessment order passed by the Assessing Officer is erroneous, insofar as it is prejudicial to the interests of Revenue, because the assessment order passed by the Assessing Officer is silent on the issue. The PCIT further observed that order of the Assessing Officer becomes erroneous, if it has been passed without making inquiries or verification which the Assessing Officer should have been made. The order is also erroneous, if it is prejudicial to the interest of the Revenue, and if the assessment is on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that merely because the AO has been silent on the issue, it does not mean that the issue has not been examined. It has been contended that voluminous material was placed before AO who considered air of this before allowing the claim of depreciation on goodwill. But the issue is whether the AO examined the issue and applied law correctly or not. 6.3 An order of the AO is erroneous if it has been passed without making inquiries or verification which should have been made. An order is also erroneous in so far as it is prejudicial to he interests of the revenue if the assessment is made on (i) wrong assumption of facts, (ii) Incorrect application of law or (iii) without due application of mind (CIT Vs Jawahar Bhattacharya (341 ITR 434). It was also held by Rajasthan High Court in the case of CIT Vs Energy Shoe Manufacturing Co (213 ITR 843) held that failure to apply the correct provisions of law may be applicable to the facts of the case would result in an erroneous order. 6.4 in this case, the provisions of the Income Tax Act have not been correctly applied by the AO. The proviso under section 32(1) clearly prescribes that in the case of an amalgamation, the aggregate de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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) of the Act 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 6 such amalgamation has not taken place. The Assessing Officer made a reference to filth proviso to Section 32 in para asunder: As highlighted above the company paid Rs. 180.52 Crores in the preceding year as consideration for acquiring shares of KBDL from original owners and thereby KBDL became a subsidiary last year. Thus, the consideration paid is for shares but not for individual assets. It is not the case of the assessee that the subsidiary has claimed any depreciation of goodwill. Therefore by value of 5th proviso to Section 32(1), the depreciation in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamation at higher rate so as to acquire the company is on capital account which cannot be considered for the purpose of cost of acquisition on amalgamation. Thus, the case law quoted by the assessee is distinguishable both on facts and Law. 6.10 The assessee also stated that the said asset of goodwill exist for the first lime in AY 2014-15 and therefore, in the absence of commodity of assets. the 5th proviso to section 32(1) cannot be invoked either in AY 2014-15 or in AY 2015-16. As mentioned earlier, when here is no consideration paid by the assessee for acquiring the assets as per the scheme of amalgamation, question any excess paid over the value of assets would arise. Further, my predecessor has already considered the issue for AY 2014-15. As mentioned earlier, the assessees case comes within the facts and circumstances of the decision in United Breweries. 7. The learned A.R for the assessee submitted that the learned PCIT has erred in assuming jurisdiction u/s. 263 of the Act for interfering with the original assessment order passed u/s. 143(3) of the Act dated 29.12.2017 and consequently, erred in setting aside the assessment order for examining applicability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oodwill is purchased in scheme of amalgamation. The learned AR further referring to the decision of ITAT., Mumbai benches in the case of M/s. Keva Fragrances Pvt. Ltd. Vs. DCIT in ITA No. 334/Mum/2020 submitted that an identical situation had been considered by the Tribunal and held that in a scheme of amalgamation, if goodwill is purchased, then assessee is entitled for depreciation u/s. 32(1) of the Income Tax Act, 1961. In this case, the assessee has paid consideration for goodwill and has claimed depreciation therefore, application of 5th proviso u/s. 32(1) of the Act is misplaced on the facts of the case and thus, the PCIT has erred in assuming jurisdiction u/s. 263 of the Act and revised assessment order. 9. The learned DR, on the other hand, supporting order of the learned CIT(A) submitted that the assessment order passed by the Assessing Officer is erroneous, insofar as it is prejudicial to the interests of Revenue, because assessment order passed by the Assessing Officer, is silent on the issue of depreciation claim on goodwill arising out of amalgamation and thus, it cannot be argued that the Assessing Officer has considered issue and has taken one possible view. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. Explanation 1. -Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. Explanation 2. -For the purposes of this sub-section written down value of the block of assets shall have the same meaning as in clause* (c) of sub-section (6) of section 43. Explanation 3.- For the purposes of this sub-section, the expression assets shall mean- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso was inserted in the statute as reflected in the Memorandum to the Finance Bill. To further clarify, 5th proviso to section 32(1) of the Act, with regard to depreciation on goodwill is restricted to assets which belongs to amalgamating company and its application cannot be extended to the assets which arise in the course of amalgamation to the amalgamated company. The intention of law was to extend benefit available to the amalgamated company on succession and not to restrict depreciation on assets which generated in the course of succession. It is very clear from the proviso that it refers to depreciation allowable to the predecessor and successor in the case of succession and this should be understood as reference to the assets that belong both to the predecessor and successor and which can only once belonged to the predecessor company and it does not apply to the assets which were generated in the hands of amalgamated company for the first time, as a result of amalgamation as approved by the High Court. In our considered view, 5th proviso applies only to those assets which commonly exist between predecessor and successor, however, it does not apply to asset which has been cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferee company i.e., in the present case, the assessee in the shares of transferor company (in the present case amalgamating company) was at Rs. 114,30,11,323/-. The value of investments held by the assessee company in the shares of amalgamating company extinguishes after amalgamation and consequently difference between net asset value of amalgamating company and value of investment held by amalgamated company would become goodwill in the books of account of transferee company. In the present case, difference between net value of assets of amalgamating company and value of investments held by amalgamated company is at Rs. 71,63,61,739/- and same would become goodwill in the books of account of amalgamated company. Therefore, in our considered view, accounting of goodwill and consequent depreciation claim on such goodwill in the books of account of the assessee company is nothing but purchase of goodwill and thus, the assessee has rightly claimed depreciation on said goodwill in terms of section 32(1) of the Income Tax Act, 1961. This legal principle is supported by the decision of Hon'ble Supreme Court in the case of M/s. Smifs Securities Ltd. (2012) 348 ITR 302. This princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h proviso to section 32(1) has no application and further, in absence of any other possible view, view taken by the Assessing Officer while allowing depreciation on goodwill in the assessment proceedings, cannot be held to be erroneous or unsustainable under the law. Since, foundation for assuming jurisdiction u/s. 263 of the Act, is completely erroneous on account of wrong assumption of applicability of 5th proviso to section 32(1) of the Income Tax Act, 1961, to the facts of the present case, assessment order passed by the Assessing Officer needs no revision, as there is no error committed by the Assessing Officer in claim of depreciation on purchase of goodwill. It is well settled principle of law by decisions of various Courts, including decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Vs. CIT 243 ITR 83 (SC), where it has been clearly held that the PCIT cannot assume jurisdiction to revise assessment order, unless the PCIT satisfies that assessment order passed by the Assessing Officer is erroneous, insofar as it is prejudicial to the interests of the Revenue. In this case, on the issue of depreciation on goodwill, the Assessing Officer has taken ..... X X X X Extracts X X X X X X X X Extracts X X X X
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