TMI Blog2022 (10) TMI 538X X X X Extracts X X X X X X X X Extracts X X X X ..... so to sec.32(1) has no application to the facts of the present case. Therefore, we are of the considered view that assumption of jurisdiction by the PCIT on this issue is fails. Disallowance of provision for warranty expenses - According to the PCIT, there is a five times increase in provision for warranty expenses for the AY 2014-15 when compare to AY 2013-14 - We find that the assessee is in the business of manufacturing diagnostic equipments is required to provide warranty on goods manufactured and sold to customers. The assessee is making provision for warranty expenses on the basis of past history and such provision has been made on scientific basis considering the facts including past history and experience and warranty provided to customers. In our considered view, provision for warranty expenses provided by the assessee in the books of accounts is on the basis of past history and further, such provision has been made on scientific basis. It is in accordance with the decision in the case of Rotork Controls India (P) Ltd. [ 2009 (5) TMI 16 - SUPREME COURT] wherein, it was held that provision for warranty expenses is ascertained liability and hence, allowable as business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is directed against the order of the Principal Commissioner of Income Tax-3, Chennai, dated 22.03.2019 passed u/s.263 of the Income Tax Act, 1961, and pertains to assessment year 2014-15. 2. The assessee has raised the following grounds of appeal: The order passed by the Principal Commissioner of Income Tax - 3, Chennai is erroneous considering the facts and circumstances of the case. The Appellant wish to submit as under: As per provisions of section 263 of the IT Act, a commissioner can issue notice only if he / she comes to the conclusion that the order passed by the AO is considered as erroneous and prejudicial to the interest of revenue, where AO passed order:-. 1) without making any inquiries/verification which he/she is required to make. 2) without making inquiry into a claim which is claimed by assessee and allowed such claim. 3) which is not in accordance with any order/direction/instruction (i.e. circulars) issued by CBDT u/s 119 of Income Tax Act, 1961. 4) which is not in accordance with any decision of jurisdictional High Court or Supreme Court which is prejudicial to the assessee or any other person. In other words, where jurisdictiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of Rs.10,53,20,918/- by disallowing belated remittances of PF ESI amounting to Rs.28,048/- u/s.36(1)(va) of the Act. 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 Assessing Officer has allowed depreciation on goodwill, even though 5th proviso to section 32(1) of the Act, very clearly restricts claim of depreciation to successor company on amalgamation, as if such succession has not taken place. However, the Assessing Officer has allowed claim of depreciation on goodwill without considering necessary provisions in right perspective of law which rendered assessment order passed by the Assessing Officer as erroneous, in so far as it is prejudicial to the interests of Revenue and thus, called upon the assessee to file its objections, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed rate as if succession or amalgamation or demerger, as the case may be, had not taken place and such deduction shall be apportioned between predecessor and successor in ratio of number of days for which the assets were used by them. In other words, if an assessee acquires certain assets on amalgamation and claimed higher depreciation, then as per 5th proviso, such depreciation should be restricted in proportionate to number of days both predecessor and successor utilized the asset, 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 assessee further submitted that provision for warranty expenses has been thoroughly examined by the AO, where, the assessee has filed detailed reply in response to show cause notice issued by the AO and thus, merely because, the assessment order does not find place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO has failed to carry out necessary enquiries with regard to provision for warranty and thus, the issue requires proper verification on the basis of submissions made by the assessee and also in light of the decision of the Hon ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra). The PCIT had also opined that the AO has not carried out required enquiries in so far as disallowance of expenditure u/s.14A of the Act, even though, the Tax Auditor of amalgamation company, has been quantified higher disallowance u/s.14A of the Act. Therefore, the PCIT opined that the assessment order passed by the AO u/s.143(3) of the Act, is erroneous in so far as it is prejudicial to the interest of the Revenue and thus, set aside the assessment order passed by the AO and directed the AO to examine the issues taken up in 263 proceedings and re-do the assessment in accordance with law. The relevant findings of the PCIT are as under: 4. The arguments oi the assessee have been considered- The assessee was asked to show cause why depreciation as good will on amalgamation of Kiran Medical Systems should not be disallowed in view of the proviso u/s.32(1) of the Income Tax Act, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deduction calculated at the prescribed rates, as if the amalgamation had not taken place. 4.4 The Supreme Court in the case of M/s.Smifs Securities has only held that goodwill is an intangible asset, but has not gone in to the question of whether depreciation on good will is available to the amalgamated company. The Hon'ble Supreme Court has also recorded its decision in the context of the proviso to Section 32(1) of the Act. 4.5 In the case of United Breweries., the Bangalore Bench of the ITAT has considered the issue of depreciation on goodwill. In that case the assessee has submitted that ' when the assets are introduced in the books of the assessee being the balancing figure of excess consideration over the value of the tangible assets then 5th proviso to Section 32(1) is not applicable. He has further submitted that in all the cases before the Hon'ble Supreme Court as well as Hon'ble High Courts, the revenue has not raised this objection of restricting the claim of depreciation by applying 5th proviso to Section 32(1) of the Act. Therefore, the revenue cannot raise this objection when it was not raised in the other cases before the Hon'ble Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamated company cannot claim or he allowed depreciation on the assets acquired in the scheme of amalgamation more than the depreciation is allowable to the amalgamating company. As regards the decision of Hon'ble Supreme Court in the case of CIT Vs. Smiff Securities Ltd. (2012) 348 ITR 302, the said ruling of the Hon'ble Supreme Court is only on the point whether the goodwill falls in the category of intangible assets or any other business or commercial rights of similar nature as per the provisions of section 32(1) of the Act. Therefore, there is no quarrel on the issue that goodwill is eligible for depreciation. However, the said ITA Nos.722, 801, 1065 l066/Bang/2014 judgment would not over-ride the provisions of 5th proviso to Section 32(1) of the Act which restricts the claim in the cases specified there under. The consideration paid by the assessee for acquiring the shareholding of the subsidiary in the earlier years is not relevant for the issue of depreciation on the assets taken under amalgamation and for the purpose of 5th proviso to Section 32(1) of the Act. Accordingly, in view of the above facts and circumstances of the case as well as the above discussion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out at the time of finalization of sales and it cannot be expected that the amount of warranty has to be same year after year. d) Similarly, certain warranties may include only the service and others may require Pads replacement as well as service. Again this may vary year to year and hence it is submitted that warranty liability need not be consistent year after year, e) It is industry norms that anything between 2% to 5% would be the liability towards warranty commitment and hence 1.68%, is quite normal for a company of this nature particularly when the company is dealing with medical and electronic equipment with very heavy obsolescence, wear and tear and where the break down instances are many and common. f) The Company in the subsequent year (Financial Year 2014-15) had utilized a sum of Rs.1,98,09,774/- from the provision made in FY 2013-14, which justifies the provision of Rs.2,25,71,530/- made in the FY 2013-14. g) In view of the above it is submitted that the Provision for warranty is made on scientific and systematic basis and there has been significant utilization of such warranty in the subsequent year and as such it is an allowable deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had stated that the said issue has been examined in detail during the course of Assessment and they have made detailed submissions with, regard to 14A disallowance vide letter dated 30.11.2016 and therefore we object to the issue of Notice Under section 263 of IT Act with regard 14A disallowance. 7.2 The assessee has further stated the following facts in support of his claim; a) It is submitted that dividend income from company pertains to the dividend declared by Kiran Medical Systems Private Ltd, which was merged with the Company with effect from 01/04/2013 vide court order dated 19/03/2015. b) As the merger scheme was approved only on 10/03/2015, the dividend declared by Kiran Medical Systems Private Ltd in the year was disclosed in the audited accounts of the assesse, which was adopted in the Board Meeting held on 29.09.2014 much before the court order which was received only on 19/03/2015. c) Consequent to the merger effective from 01/04/2013, when both asseesee's financials and Kiran Medical Systems accounts are merged, the dividend earlier received from the amalgamating company loses it nature of dividend as no company can declare a dividend for its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h) Based on the above working assessee has voluntarily disallowed a sum of Rs.16,13,302/- under the third leg and hence no further disallowance is needed. 8. The submissions of the assessee and the materials on records have been considered. The issue requires proper verification of the submissions made by the assessee. Therefore, the issue is reverted back to the AO for fresh consideration with particular reference to the observations made by the Auditor in the Tax Audit Report. The AO is directed to verify the facts regarding, the contentions reproduced in Para(1) in page 13 of this order. The assessee's contentions regarding cross investments relating to Kiran Medical Systems P. Ltd is also to be verified by the AO. 9. From the above discussions, it is evident that the AO has tailed to apply his mind before passing the order, lie has failed to properly enquire the issues with reference to the submissions made by the assessee. There-tore., the assessment u/s 143(3) is rendered erroneous in so far as it is prejudicial to the interest of the revenue. The assessment is therefore set aside on the issues discussed in the above paras. The AO is directed to examine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee dated 30.11.2016, has accepted suo moto disallowance made by the assessee. Further, on merits, the assessee has earned dividend income from M/s.Kiran Medical Systems, which was later merged with the assessee company w.e.f. 01.04.2013 and thus, dividend declared by merged company and received by amalgamated company losses its nature of dividend as no company declared a dividend for itself and accordingly, the same cannot be treated as dividend for the purpose of s.14A of the Act. The AO after considering relevant facts allowed the claim of the assessee and thus, the PCIT erred in revision of assessment order on this issue. 11. 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, in so far 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 learned DR further submitted that by insertion of Explanation 2 to section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , perused material available on record and gone through orders of the authorities below. The learned PCIT has set aside assessment order u/s.263 of the Income Tax Act, 1961, on the issue of depreciation claimed on goodwill arose out of amalgamation. The sole basis for the PCIT to assume jurisdiction u/s.263 of the Act is applicability of 5th proviso to section 32(1) of the Act and restriction of depreciation in a scheme of amalgamation. According to the PCIT, in a scheme of amalgamation, claim of depreciation should be in accordance with 5th proviso to section 32(1) of the Act. Therefore, it is necessary to refer to 5th proviso to section 32(1) of the Act and relevant proviso reads as under:- Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for which said assets were used by them. From the memorandum explaining Finance Bill, and purpose of introduction of 5th proviso to section 32(1) of the Act, it is very clear, as per which predecessor and successor in a scheme of amalgamation should not claim depreciation over and above normal depreciation allowable on a particular asset. In other words, in a scheme of amalgamation where existing assets of amalgamating company are acquired by amalgamated company, then while claiming depreciation after amalgamation, amalgamated company can claim depreciation only on the basis of number of days a particular asset were used by them. Therefore, in our considered view, said proviso only determines amount of depreciation to be claimed in the hands of predecessor / amalgamating company and in hands of the successor or amalgamated company only in the year of amalgamation based on the date of such amalgamation. However, it does not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation. Therefore, it is very clear from 5th proviso to section 32(1) of the Act, that once any asset, including intangible asset, more particularly, g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany shall account 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. As per AS-14 issued by the ICAI, all assets and liabilities recorded in the books of account of transferor company shall stand transferred and vested in the transferee company pursuant to scheme and shall be recorded by the transferee company at their book value. The excess of or deficit in net asset value of the transferee company, after reducing aggregate face value of shares issued by the transferee company to the members of the transferor company, pursuant to the scheme and cost of investment in the books of the transferee company for the shares of transferor company held by it on the effective date be either credited to the capital reserve or debited to the goodwill account, as the case may be in the books of transferee company. Such resultant goodwill, if any shall be amortized in the books of transferee company as per principles laid down in Accounting Standard-14. Therefore, from scheme of amalgamation and Accounting Standard-14 issued by the ICAI, it is very clear that once amalgamation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gamating company. Further, in a scheme of amalgamation, goodwill has been revalued and shown higher value. The amalgamated company on succession has claimed higher depreciation on goodwill arose out of amalgamation. Under those facts, the Tribunal came to the conclusion that in terms of 5th proviso to section 32(1) of the Act, predecessor and successor company can claim depreciation on proportionate basis for number of days assets used by them, however, they cannot claim depreciation over and above normal depreciation allowable on a particular asset. 13. 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.(supra). In any way, in a subsequent decision, ITAT ., Bangalore Bench in the case of M/s. Altimetrik India Pvt.Ltd, Vs. DCIT (2022) 137 taxmann.com 9 had considered an identical issue and after considering decision of the United Bre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assume jurisdiction to revise assessment order passed by the Assessing Officer. 14. In this view of the matter, and considering facts circumstances of the case, we are of the considered view that the assessment order passed by the Assessing Officer u/s.143(3) of the Act dated 29.12.2017, is neither erroneous nor prejudicial to the interest of the Revenue. The PCIT has assumed jurisdiction u/s.263 of the Act on the sole basis of application of 5th proviso to section 32(1) of the Act, towards depreciation on goodwill. In view of the factual matrix as stated in preceding paragraphs and non-applicability of 5th proviso to section 32(1) of the Income Tax Act, 1961, to the facts of the present case, there cannot be error in relation to the view taken by the Assessing Officer while framing the original assessment. Therefore, in absence of any such error in the assessment order, assumption of jurisdiction u/s.263 of the Act, by the learned PCIT should be reckoned as invalid. Hence, we quash impugned order passed by the learned PCIT u/s.263 of the Income Tax Act, 1961. 14. In this view of the matter and by following the decision of the ITAT, in the assessee s own case for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment order, however, just because there is no specific discussion on the issue in the assessment order, it does not mean that the AO has not carried out necessary enquiries. In this case, on the basis of details furnished by the assessee, what we noted that the issue has been thoroughly examined by the AO and has allowed the claim of the assessee. Therefore, we are of the considered view that assumption of jurisdiction by the PCIT on this issue also fails. 16. Coming back to the third issue taken up by the PCIT for revision proceedings. The PCIT has set aside the assessment order passed by the AO on the issue of disallowance u/s.14A r.w.r.8D of IT Rules. According to the PCIT, although, the Tax Auditor of amalgamation company i.e. the assessee has quantified the disallowance u/s.14A of the Act, at Rs.68,94,556/-, but the assessee has made disallowance of Rs.16,13,602/- in the statement of total income. The AO without verifying the relevant facts has simply allowed the claim of the assessee which rendered the assessment order passed by the AO to be erroneous in so far as it is prejudicial to the interest of the Revenue. We do not find any merits in the findings of the PCIT o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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