TMI Blog2023 (4) TMI 739X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 also demonstrate that depreciation on goodwill was allowable before the amendment. AO and the ld. CIT(A) have stated that goodwill recorded by the assessee company is self-generated, but, fact remains that goodwill recorded in the books of accounts in resulting company is not self-generated goodwill but falls into the category of purchased goodwill. From the above facts, it is clear that goodwill recorded in the books of assessee company is purchased goodwill and cost of the same has been rightly arrived at. Pursuance to the scheme of demerger, goodwill recorded in books of accounts of resulting company was acquired, but not self-generated as per the order of the Hon ble High Court of Madras in a scheme document. Therefore, we are of the considered opinion that once the assessee proves that goodwill accounted in the books of accounts in a scheme of demerger is only of purchased goodwill by paying consideration then the same fall within the ambit of purchased goodwill and entitled for depreciation under section 32(1) of the Act. Assessee has rightly claimed depreciation on goodwill accounted in the scheme of demerger approved by the Hon ble High Court of Madras and thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the delay in the form of an affidavit, to which; the ld. DR has not raised any serious objection. Consequently, since the assessee was prevented by sufficient cause, the delay in filing of both the appeals stands condoned and the appeals are admitted for adjudication. 3. The first issue that came up for consideration from the appeals filed by the assessee and Revenue for all the three assessment years is relating to depreciation on goodwill under section 32(1) of the Income Tax Act, 1961 [ Act in short]. 3.1 Facts with regard to the impugned dispute are that the assessee M/s. Sunedison Solar Power India Private Limited is engaged in the business of manufacture power and energy, mainly solar energy. By virtue of the order passed by the Hon ble High Court of Madras on the combined petition filed by four entities in a scheme of amalgamation and Arrangement (Demerger) whereby first transferor company Sei Green Technology Private Limited and the second transferor company Sei Green Energy India Private Limited got amalgamated with M/s. Sunedison Energy India Private Limited with effect from 01.04.2011. Further in a scheme of demerger sanctioned by the Hon ble High Court of Mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble because the assessee has accounted goodwill towards difference between value of shares issued to Demerged company and net value of assets and liabilities taken over from demerged company. The relevant findings are as under: 4. Depreciation on Goodwill: 4.1 During the course of scrutiny it was observed from the financial that the Hon'ble High Court of Madras has sanctioned a scheme inter-alia involving the demerger of Engineering Procurement and Commissioning ('herein after referred to as EPC) undertaking of SunEdison Energy India Private Limited (SEIPL or demerged company) into the assessee company with effect from 1st April 2012. The assessee has filed a copy of the order of the Hon'ble High Court dated 28 January 2014 along with a copy of the scheme. It is also observed that the assessee has recorded goodwill amounting to Rs.132,55,66,771/- as difference between the purchase consideration paid to the shareholders of the demerged company and the net asset taken over and claimed depreciation on such goodwill classifying the same as intangible amounting to Rs.24,85,43,770/-, Vide this office letter dated 07.12.2016; the assessee was asked to explain the nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtinent to note that the solar power industry has been growing at a faster phase. The megawatt installation in India has been more than doubled since last five years. EPC Industry also has grown commensurately. Taking the above qualitative consideration into account, the valuation of the demerged undertaking has been done and the intangible asset has been acquired by the resulting company. Intangible/Goodwill once acquired, is the taxpayer's own asset and hence the amortization in the form of depreciation of acquired asset is deductible in computing commercial profit. 1.2 Analysis under the Act The term depreciable asset' has no specific definition under the Act, Hence, It would be appropriate to give the term its ordinary grammatical meaning, which would mean to include an asset in respect of which depreciation is allowable under the provisions of the Act. From a reading of section 32, for an asset to be regarded as a depreciable asset, following conditions need to be satisfied: a. There must be an asset in the nature of tangible assets being buildings, plant, intangible assets being know-how, patents etc., (as provided in section 32(1)(i)/(ii); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and thereafter the EPC business undertaking and the Investment undertaking of the said company got demerged to form the resulting company ie. assessee w.e.f 01.04,2012. (b) While accounting the demerger, assessee in its books of account has recorded goodwill amounting to Rs.132,55,66,771/- being difference between net assets transferred from the demerged company and recorded by assessee in its books and amount credited as share capital and securities premium in the books of the assessee. It may be noted that the demerged company did not have any asset as goodwill appearing to its books and no such, asset was transferred to assessee resulting company. It is only a book adjustment to balance the balance sheet i.e. deficit of value of assets received over the share capital and share premium recorded in the books of assessee company. (c) Depreciation u/s 32 of IT Act is granted on the actual cost of assets. Sec. 43(1) of the Act defines actual cost for this purpose. Expl. 7 to the said sub-section provides for adoption of cost of asset in case of amalgamation as per which actual cost of the capital asset transferred by the amalgamating companies has to be adopted as actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, rights, benefits and interest therein, subject to existing charges, if any, thereon. It is clarified that the provisions of Part III shall take effect only uponthe amalgamation of SGTPL and SGEPL into and with SEEIPL in terms of Part II hereof. 17.2 Upon the coming into effect of this Scheme and with effect from the Demerger Appointed Date the whole of the undertaking, assets, properties and liabilities of the Demerged Undertaking of the Demerged Company as defined in Clause 16.4 shall pursuant to the provisions contained in Section 391 to 394 and all other applicable provisions, if any, of the Act and without any further act or deed shall stand transferred to and vested in and/or be deemed to be transferred to and vested in the Resulting Company as a going concern so as to vest in the Resulting Company all rights, title and interest pertaining to the Demerged Undertaking. Thus the order of Hon ble high court clearly states that the assets of the demerged company comprised in the undertaking stand transferred and vested in the resulting company ie. assessee, as a going concern, On the appointed date the demerged company did not have any asset or property as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the hands of the amalgamated company. This practice is followed to balance the asset and liability sides by making accounting entries and by making such book entries, no real asset as goodwill in fact comes into existence. That is how the accounting treatment to be given was clearly stated in the scheme and no payment on account of any such asset was made by the appellant in this scheme which stood approved by the aforesaid order of the Hon'ble High Court. Godrej Boyce Mfg. Co. Ltd. Vs Addl. CIT (ITAT, Mum) 153 ITD 676 : Assessee acquired assets under scheme of demerger - In view of Expl. 2B to sec. 43(6), only the WDV of the transferred assets of the demerged company as per accounts maintained under I.T. Act constitutes the WDV of the block of assets of the resulting company w.e.f 01-04-2000. (i) Considering the above, claim of depreciation amounting Rs.24,85,43,770/- on goodwill, as claimed by assessee needs to be rejected . 4.5 In view of the above, the claim of depreciation amounting to Rs.24,85,43,770/- on goodwill, as claimed by assesses is disallowed and added back to returned income. 6. Being aggrieved by the assessment order, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at made before the AO. Matter is considered. The authorized representative has failed to controvert the findings of the assessing officer with any new information or evidence in support of grounds taken against the disallowance of depreciation claimed on goodwill. Having due consideration of the facts and circumstances of the case, I do not find any reason to interfere with the said disallowance. Addition made at Rs.24,85,43,770 stands confirmed. Grounds taken are dismissed. 7. In so far as assessment year 2015-16 is concerned, the ld. CIT(A) has deleted the addition made by the Assessing Officer towards depreciation on goodwill by holding that goodwill accounted in the books of account of the assessee company is not self-generated, but, was acquired in a scheme of demerger sanctioned by the Hon ble High Court of Madras. The assessee has paid excess consideration over and above the net value of the assets taken over. Because of consideration that has been paid over and above the value of net assets has been accounted in the books of accounts of the assessee by way of goodwill. Therefore, the ld. CIT(A) opined that the goodwill is not self-generated, but, the assessee company p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntangible asset to Resulting company. The scheme had also specified as the manner in which such consideration has been paid to Demerger company. Therefore, it cannot be said that goodwill accounted in the books of accounts of the assessee company is self-generated. The ld. Counsel for the assessee further submitted that once it is proved that goodwill is purchased then the assessee is entitled for depreciation as per the provisions of section 32(1) of the Act, as not disputed and thus, the assessee has rightly claimed depreciation on goodwill. The ld. CIT(A) for the assessment years 2013-14 and 2014-15, without appreciating relevant facts simply sustained the addition. In so far as assessment year 2015-16 is concerned, the ld. CIT(A) has rightly appreciated the facts that the depreciation claim of goodwill in the books of accounts of the assessee company is a purchased one, but not self-generated and the assessee is entitled for depreciation. 10. On the other hand, the ld. CIT DR Shri S. Senthil Kumaran submitted that the decision of the Hon ble Supreme Court in the case of CIT v. Smifs Securities Ltd. (supra) is on different facts and not applicable to the facts of present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated 28.01.2014, the EPC business of Sunedision Energy India Private Limited has been demerged into resulting company Sunedison Solar Power India Private Limited with effect from 01.04.2012. As per the approved scheme of demerger, the method and manner of accounting terms of assets and liabilities taken over by the Resulting company and consideration to be payable to Demerged company has been specified. As per para 22.1 of scheme document, details that the consideration to be paid by resulting company to be paid to the shareholders of Demerged company upon coming into effect of this scheme and in consideration for the transfer and vesting of the Demerged Undertaking in the Resulting company, the Resulting company shall issue and allot shares of ₹.10/- each at a premium, based on the valuation done by the valuer and adopted by the Board of Directors. Further, clause 24 under Part III, more particularly, clause 24.7 deals with accounting treatment of demerged entity in the books of accounts of Resulting company and as per which, surplus arising out of the excess of net assets of the Demerged Undertaking and transferred from the Demerged Company and recorded by the Resulting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clause (b) of Explanation 3 indicates that goodwill would fall under the expression any other business or commercial rights of a similar nature . The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b) to section 32(1) of the Act. Consequently, goodwill is an asset as per Explanation 3(b) to section 32(1) of the Act and eligible for depreciation. The Hon ble Karnataka High Court in the case of CIT v. Manipal Universal Learning (P.) Ltd. [2013] 359 ITR 369 (Kar), wherein, the Hon ble High Court followed the decision of the Hon ble Supreme Court in the case of CIT v. Smifs Securities Limited (supra) and held that depreciation is allowable on amount paid for goodwill being future profits. 13. In the light of factual and legal background, if it is examined the facts, there is no dispute with regard to the fact that the assessee has paid excess consideration over and above the value of net asset taken over from EPC undertaking by issue of shares to shareholders of demerged company and such difference has been treated as goodwill in the books of account by following purchase method as prescribed under Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the assessee proves that goodwill accounted in the books of accounts in a scheme of demerger is only of purchased goodwill by paying consideration then the same fall within the ambit of purchased goodwill and entitled for depreciation under section 32(1) of the Act. 16. At this stage, it is necessary to consider various case law relied upon by the ld. Counsel for the assessee and the ld. DR. The ld. Counsel for the assessee has relied on the decision of the Hon ble Supreme Court in the case of CIT v. Smifs Securities Limited (supra) and the Hon ble Supreme Court, in light of scheme of amalgamation and goodwill, has held as under: 6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill This is a factual finding. The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts 19. In the case of CIT v. Manipal Universal Learning (P.) Ltd. [2013] 34 taxmann.com 9 (Karnataka), the Hon ble Karnataka High Court has observed that: .........Assessing Officer held that excess consideration paid over value of net assets was in nature of goodwill paid for future profits and, therefore, allowed depreciation only on value mentioned in agreement-Supreme Court in CIT v. SMIFS Securities Ltd. [2012] 24 taxmann.com 222 has held that goodwill is an asset under Explanation 3(b) to section 32(1) and, therefore, depreciation is allowable even on goodwill Whether following same, depreciation was to be allowed on revalued rights-Held, yes . 20. In so far as case law relied upon by the ld. DR in the case of Chowgule Co. (P) Ltd. v. ACIT [2011] 137 TTJ 596 (Panaji) and in the case of United Breweries Ltd. v. Addl. CIT [2016] 76 taxmann.com 103 (Bangalore Trib.) and also in the case of Signode India Ltd. v. DCIT in ITA No. 954/H/2019 dated 24.02.2021 are concerned, we find tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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