TMI Blog2024 (2) TMI 634X X X X Extracts X X X X X X X X Extracts X X X X ..... nature being intangible assets as referred to in section 32(1) of the Act which is eligible for depreciation under the Act. The amount of consideration (in form of issue of shares) paid in excess of net assets of KSPL is attributable to such intangible benefits which is nothing but represents payment towards goodwill. The excess consideration discharged by KIPL over net assets of KSPL represents the amount paid by KIPL towards acquisition of bundle of business and commercial rights which represents goodwill. In the absence of such intangible asset, KIPL would have to commence the business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the appellant got an up and running business. Such excess payment thus denotes goodwill which in no way can be regarded as outcome of revaluation of any amount. Considering the ratio laid down by the Hon'ble Supreme Court in case of Smits Securities [ 2012 (8) TMI 713 - SUPREME COURT] thus, KIPL is eligible for depreciation on goodwill recognized in course of the Scheme u/s 32 of the Act and as a consequence, the Appellant is also eligible to claim depreciation u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd analogously and are being disposed of by this common order for the sake of convenience. ITA No. 682/Ahd/2023 A.Y. 2016-17 (Lead Case) 3. The brief facts leading to the case is this that (i) KIFS Securities Pvt. Ltd. (in short KSPL ), (ii) KIFS International Pvt. Ltd. (in short KIPL ) (iii) KIFS Trade Capital Pvt. Ltd. (in short KTPL ) entered into composite scheme of arrangement through which stock broking business undertaking of the said company, namely, KIFS Securities Pvt. Ltd. (in short KSPL ) was transferred in slump sale to KTPL and other business undertakings was amalgamated with KIPL w.e.f. 1 st April, 2015 which was approved by the Hon ble Jurisdictional High Court of Gujarat by and under the order dated 21 st December, 2015. Pursuant to the said scheme, the transferee company i.e. KIPL consideration determined as per valuation report of expert independent valuer, namely, SSPA Co., Chartered Accountants, discharged by issuing shares of KIFS International Pvt. Ltd. to the shareholder KIFS. The appellant company accounted with purchase method as per Accounting Standard (AS) 14, as per the accounting treatment preferred in the scheme. The excess consideration discharged by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant. Before the authorities below, one of the grounds raised by the appellant is this that the assessment order was passed in the name of KIPL which is a non-existent entity and thus bad in law and thus liable to be quashed. This additional ground was, however, dismissed by the First Appellate Authority and before us, the Ld. Counsel appearing for the appellant pressed the matter only on merit. 7. It was submitted by the Ld. AR that the Goodwill had arisen in the books of KIPL in the course of the scheme of amalgamation of KSPL to KIPL which is eligible for depreciation under Section 32 of the Act, particularly, in view of the decision passed by the Hon ble Supreme Court in case of Smifs Securities Ltd., reported in (2012) 348 ITR 302. Once the Goodwill forms part of the block of assets of KIPL under Section 32 of the Act, it would also form part of the block of assets of the appellant formed pursuant to the conversion of KIPL into LLP (Limited Liability Partnership) in terms of the conditions specified under Section 47(xiiib) of the Act. Furthermore, in terms of Explanation 2C to Section 43(6) of the Act, if the block of assets is transferred by a Private Company or unlist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been conducted in any manner prejudicial to the public interest. Affidavit to that effect was also filed by the RD. The companies filed an affidavit in response to said RD s affidavit and finally upon considering the entire aspect of the matter, the Hon ble Court sanctioned the Scheme on 21 st December, 2015 holding that the arrangement is in the interest of the shareholders and creditors of all the companies as well as in public interest which is reflecting at paragraph 8 of the said order. 9. However, the case of the appellant was turned down and the same was confirmed by the Ld. CIT(A). 10. On the other hand, the Ld. DR vehemently argued against the claim of the appellant on the premise that depreciation on Goodwill in the case of the predecessor company KIPL was disallowed contending the main object of amalgamation was to create goodwill to claim depreciation and the Scheme of arrangement was only a device for tax evasion and thus such claim of depreciation is not a genuine one. He relied upon the orders passed by the authorities below. 11. We have heard the rival submissions made by the respective parties and we have also perused the relevant materials and also case laws reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court and the Fair Market Value of equity shares was worked out by expert valuer Ort the basis of the exchange ratio, the excess value-of-shares issued vis- -vis the asset/liability has been determined as goodwill. 6. The goodwill was created in the books as per AS-14 7. The assessee also relied on the following judicial pronouncements: 1. CIT v Smifs Securites Ltd (SC)(2012) 348 ITR 302 (SC) 2. Vimalchal Print Pack Pvt Ltd v DCIT (Guj) 5. Rebuttal of assessee's contentions: 51. The contention of the assessee has been considered carefully but not found acceptable. At the outset it is clarified that there is no dispute that the Scheme of Amalgamation was approved by the Gujarat High Court The scheme was brought up and approved by the Hon'ble High Court as per the provisions of Companies Act. However the Assessing Officer has the liberty to check the allowability of deductions claimed on the self created assets on account of the revaluation of the assets of the transferor company due to amalgamation, within the purview of Income Tax Act. It is important to understand here that the amalgamation is not questioned by the Department, what is under challenge is the colourable d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited issue of whether goodwill was entitled to depreciation and whether it fell within the provisions of S.32. Other aspects such as S.43 were never dealt by the Hon'ble Court. This is clear from the finding given by Hon'ble Apex Court itself in its order. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. The valuation of goodwill was a finding of fact and which was accepted by both CIT(A) and ITAT, It was never a subject matter of appeal before the High Court or Supreme Court, as stated earlier. It is a settled position that a case is an authority, for what it decides, and not for what logically follows from it. Reference may be made to the following: 2. In the case of Smits Securities Ltd (a renowned independent entity) in acquired the business of YSN Shares Securities (P) Ltd, a well- established independent entity. However, in our case, the existing busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may make a lot of difference in the precedential value of a decision 1. In Bharat Petroleum Corporation Ltd. another vs. N.R.Vairamanis another (AIR 2004 SC 4778), it was held by Hon'ble Supreme Court that a decision cannot be relied on without disclosing the factual situation. In the same Judgment the Court also observed: Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are neither to be read as Euclid's theorems nor as provisions of the statute and that too taken out of the context. These observations must be read in the context in which they appear to have been stated. Judgments of Courts are not to be construed as statutes. 1. Thus, the provisions which are relevant to the issue in hand, given the fact that these were not argued before the court, could not be extended on the points which were not argued or evaluated at all. (A detailed discussion on this is made in subsequent paragraphs). 5.2.2. In view of the above, a blind reliance on the decision of Smits Securities Ltd without appreciating the basic difference in facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld. AR. The crux of the case of the appellant is found as follows: i. The scheme of amalgamation of KSPL into KIPL was duly sanctioned by the order of the Hon ble Gujarat High Court and the same is binding on all the authorities. ii. No objection was raised by the Income Tax Department when time was provided by the Hon ble High Court to that effect and therefore the Revenue department is estopped / barred to raise any further objection that the scheme was to avail the benefit of depreciation on Goodwill. Considering the ratio laid down by different High Courts on the identical issue, the scheme sanctioned by the Hon ble Jurisdictional High Court cannot be said to be a device of tax avoidance and consequently Goodwill arising on account of such scheme of amalgamation also cannot be held to be non-genuine. iii. Neither the Goodwill said to be created artificially to claim depreciation nor the decision of the Hon ble Court could be questioned. 15. As relied upon the judgment passed by the High Court of Madras in case of CIT vs. Parry and Company Limited in Tax Cas Appeal No. 2439 of 2008 has also been considered by us, wherein it has been held that when the transaction is withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the claim of depreciation made by the appellant before us on the same Goodwill for remaining period from 15.03.2016 to 31.03.2016 deserves to be allowed as was the ultimate submission made by the Ld. Counsel appearing for the appellant which has also been considered by us. We have carefully gone through the order passed by the Co-ordinate Bench. While dealing with this particular aspect of the matter and granting relief by directing the Ld. AO to allow the claim of depreciation on the Goodwill as made by the appellant therein, the following observation was made: 14. We have heard the rival contentions of both the parties and perused the materials available on record. It is provided under the provisions of section 2(1B) of the Act that in a scheme of amalgamation all the properties liabilities of the amalgamating company would become the assets and liabilities of the amalgamated company. Similarly, it was also provided that the shareholders holding not less than 75% in value of the shares in the amalgamating company should become the shareholders of the amalgamated company. The provision of section 2 (1B) of the Act reads as under: (1B) amalgamation , in relation to companies, mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering various internal and external factors which may affect future profitability and growth. Such factors include previous earnings, future possible earnings, location, technical know-how, customer base, marketing network etc. Thus, it leads to a difference between the net value of assets taken over and purchase consideration paid. 14.3 Accounting standard-14, issued by the ICAI prescribes two methods of accounting for the transaction carried out in the scheme of amalgamation namely pooling of interest method and purchase method. If the scheme of the amalgamation fulfills the conditions of para 3(e) of the Accounting Standard-14, then pooling of interest method should be followed otherwise purchase method of accounting should be applied. The relevant extract of accounting standard reads as under: 7. There are two main methods of accounting for amalgamations: (a) the pooling of interests method; and (b) the purchase method. 8. The use of the pooling of interests method is confined to circumstances which meet the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger. 14.4 Under the pooling of interest method the difference between purchase consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved by the Hon ble Gujarat High Court vide order dated 21 st December 2015 which was effective from 1-4-2015. Subsequently, the assessee at the time of filing return of income claimed depreciation on such goodwill by treating the same as intangible asset which was disallowed by the AO and confirmed by the learned CIT (A) by holding it at NIL value for the purpose of taxation. 14.8 Undeniably, the purchase consideration paid by the assessee to the shareholders of the transferor/ amalgamating company stands at Rs. 598.18 crores as evident from the scheme of amalgamation. The relevant clause of the scheme of the amalgamation stands as under: 23.1 Upon this Scheme becoming effective, Transferee Company-2 shall without any further application or deed, issue and allot Equity . Shares at par, credited as fully paid up, to the extent indicated below to the shareholders of Transferor company, holding shares in Transferor company and whose name appear in the Register of Members on the Appointed Date or to such of their respective heirs, executors, administrators or other legal representative or other successors in title as may be recognized by the respective Board of Directors in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der along with the Scheme duly authenticated by the Registrar, High Court of Gujarat. The Registrar, High Court of Gujarat shall issue the authenticated copy of this order along with the Scheme of expeditiously as possible. 14.10 Furthermore, it was mentioned in the scheme of amalgamation that the difference if any between the value of the assets acquired by the amalgamated company and the consideration paid shall be recorded either as capital reserve or goodwill. The relevant portion of the scheme reads as under: The difference (excess or deficit), between the net value of assets over aggregate face value and premium amount for the Equity Shares issued by Transferee Company-2 to the shareholders of Transferor company pursuant to this Scheme and after giving effect to Clause 24.3 be adjusted to Capital Reserve or Goodwill, as the case may be in books of Transferee Company-2. 14.11 At this juncture, it is also important to note that the Hon ble Gujarat High Court in the impugned scheme of amalgamation while approving has also observed that the Regional Director, Ministry of Corporate affairs vide letter dated 3rd December 2015, has invited objections from the Income Tax Department i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral Circular No 1/2014 F.No 2/1/2014 Dated 15 th January 2014 Subject: Report u/s 394A of the Companies Act, 1956- Taking accounts of comments/inputs from Income Tax Department and other sectoral Regulators while filing reports by RDs. Section 394A of the Companie Act, 1956 requires service of a notice on the Central Government wherever cases involving arrangement/compromise (under Section 391) or reconstruction / amalgamation (under Section 394) come up before the Court of competent jurisdiction. As the powers of the Central Government have been delegated to the Regional Directors (RDs) who also file representations on behalf of the Government wherever necessary. 2. It is to be noted that the said provisions is in addition to the requirement of the report to be received respectively from the Registrar of Companies and the Official Liquidator under the first and second provisos to Section 394(1). A joint reading of Sections 394 and 394A makes it clear that the duties to be performed by the Registrar and Official Liquidator under Section 394 and of the Regional Director concerned acting on behalf of the Central Government under Section 394A are quite different. 3. An instance has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to file an intervention application opposing such amalgamation before the High Court which was rejected on the ground that the Department had no locus standi in the matter and that Regional Director, MCA has been delegated power in this regard. 3. In this connection Circular No 1/2014 dated 15.01.2014 has been issued by MCA to Regional Directors which lays down that while furnishing any report regarding reconstruction or amalgamation of companies under the Companies Act, comments and inputs from the Income Tax Department may invariably be obtained so as to ensure that the proposed scheme of reconstruction or amalgamation has not been designed in such a way as to defraud the Revenue and consequently being prejudicial to public interest. It has further been said that the Regional Directors would invite specific comments from the Income Tax Department within 15 days of receipt of notice before filing response to the Court. It is emphasised that this is the only opportunity with the Department to object to the scheme of amalgamation if the some is found prejudicial to the interest of Revenue and therefore, it is desired that the comments/objections of the Department are sent by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble tax liability, stamp duty. In the instant case, the transferor is a private Ltd. company which is a separate legal entity and any transfer of shares to other entity including individuals from the legal entity would attract applicable tax liability. Therefore, we are of the considered view that the Bench can sanction/approve the scheme only if it complies with all applicable provisions of the Act, Rules and if the scheme is in the interest of public, shareholder etc. However, the petitioner companies did not provide details with regard to compliance of tax liability raised by the Income Tax Department, their undertaking to pay the huge tax liability as pointed out by the income department etc. 38. From the above analysis of the financials of Gabs, the bench noted that with an equity share capital of only 1,91,100 the promoters/share holders of Gabs who are also the common promoters of APL, by way of this proposed scheme of amalgamation and arrangement would get the shares of APL worth ?1477.50 Crores (market value as on 31.03.2017 ) and that too without paying any Income Tax, Stamp Duty etc. for which the bench is of the considered view that the same is not in the public interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity was afforded to it and raising the same issue during the assessment proceedings which in our considered view is not desirable. 14.18 Moving ahead, there is also no dispute in the amount of the purchase consideration and the NAV determined between the companies, as available in the scheme of amalgamation, which was approved by the Hon ble Gujarat High Court as well. However, the lower authorities held the value of goodwill at NIL for the purpose of taxation during the assessment proceedings for the reasons as discussed above in their respective orders. But, in the backdrop of the above discussion, we are not convinced with the orders of the authorities below on this preliminary issue. 15. Now, the next question arises for our consideration whether the value of goodwill should be taken at NIL under the provision of Income Tax Act in the books of amalgamated company as no such goodwill was available in the books of amalgamating company prior to amalgamation and such goodwill emerged in the books of amalgamated company on account of valuation and revaluation of business as no cost incurred by the amalgamated company for such goodwill. In this connection, we are inclined to ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces, franchises or any other business or commercial rights of similar nature. 15.1 The above provision of section 32 of the Act provides allowing the depreciation to the amalgamated company in the same manner which would have been allowed to the amalgamating company in the event had there not been any amalgamation. 15.2 Similarly, the actual cost of the assets acquired in the scheme of amalgamation in the hands of the amalgamated company will continue to be the same as it would have been in the hands of the amalgamated company in the event, had there not been any amalgamation. The relevant extract of the explanation 7 to section 43(1) reads as under: Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires 3 4 (1) actual cost means the actual cost 3 of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met 3 directly or indirectly by any other person or authority: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 14 [Explanation 7. Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain in the hands of the amalgamating company on the transfer of capital assets in the scheme of amalgamation under the provisions of section 47(vi) of the Act. ii. The cost of stock-in trade in the hands of the amalgamated company shall remain the same as in the hands of the amalgamating company either as capital asset or stock in trade as provided under section 43C of the Act. iii. Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc under the provisions of section 72A of the Act. iv. Exemption of capital gains in the hands of shareholders of amalgamating company on transfer of shares of amalgamating company in the scheme of amalgamation under the provisions of section 47 (vii) of the Act. v. 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) r.w.s. 49(1)(iii)(e) of the Act. vi. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets acquired and the purchase consideration paid by the transferee is regarded as goodwill. The succeeding question arises whether such goodwill acquired by the assessee is eligible for depreciation under the provisions of section 32 of the Act. In this connection, we are inclined to refer to the provisions of section 32(1) of the Act which reads as under: 32. (1) In respect of depreciation of (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed 15.8 On perusal of the above provisions, we note that the word goodwill has nowhere been mentioned. However, we note that, the Hon ble Supreme Court in the case of CIT vs. Smifs Securities Ltd reported in 348 ITR 302 has held that the goodwill falls within the definition of the assets under the category of any other business or commercial rights of similar nature. The relevant extrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason to interfere with the factual finding. (Para 6) 15.11 We also find that the Hon ble Delhi High Court, involving identical facts and circumstances, in the case of CIT Vs. M/s Eltek SGS Pvt. Ltd. in ITA No. 475-476/2022 has decided the issue in favour of the assessee by observing as under: 7. Before us, learned counsel appearing in support of the appeal contended that it would be the provisions of Section 49 of the Act which would apply and that both the CIT (Appeals) as well as the ITAT have clearly erred in holding otherwise. Learned counsel referred to the definition of cost of acquisition as spelt out in Section 55(2) of the Act and which had defined that expression to also include goodwill of a business or profession or a trademark or brand name associated with the business or profession or any other intangible asset. It is in the aforesaid context that learned counsel for the appellant had sought to rely upon Section 49 and more particularly Section 49(1)(e) thereof. 8. The aforesaid submission, however, clearly loses sight of the fact that Section 47 in express terms excludes the transfer of a capital asset in terms of a scheme of amalgamation. We further find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Departmental Valuation Officer for ascertaining the fair market value of the asset, in the event he is not satisfied about the claim of the assessee. Both the authorities below are not justified in adopting the rate as the assessee had furnished a report from an expert, i.e., Government approved valuer. 16.1 The subsequent allegation of the AO is that both the companies i.e. amalgamated and the amalgamating companies were controlled and managed by the same group of person pre and post amalgamation. Thus, the issue arises whether it was a colourable device adopted by the assessee to create goodwill in the books of accounts and claim such huge amount of depreciation. In this regard we note that both the companies, namely KSPL and KIPL were registered on 27 th January 1995 and 27th December 2007 respectively with the Ministry of corporate affairs. These 2 companies were filing separate income tax returns. Both the companies being body corporate have a separate legal identity. All these details were duly disclosed in the scheme of amalgamation which was duly approved by the Hon ble Gujarat High Court vide order dated 21 st December 2015. 16.2 We also note that vide letter dated 3rd De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is very common and prevailing in the corporate world for synergizing resources, control, eliminate the competition etc. (iii) Even where individual transactions of the device are legal/ legitimate, whether combination of these steps creates an effect which is abnormal in the business world and could not have been otherwise undertaken in normal circumstances: Ans. In the present case there was no reference made by the authorities below suggesting that the transaction is carried out illegally. As the transactions in the instant case were within the ambit of the law as per the provision of section 2(1B) of the Act. (iv) These individual transactions create an effect which is contrary to human probabilities: Ans. The transactions carried out by the parties were very much normal transaction. (v) Whether actions of the parties finally are at variance with the terms of the agreement: Ans. There was no variance in the impugned transaction with regard to the terms of the agreement. 16.5 It is also important to highlight the fact that there is no prohibition under the Act for disallowing the depreciation on the goodwill generated in the scheme of amalgamation. There are certain kinds of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng entries. Thus, we hold that the impugned transaction cannot be regarded as colorable device merely on the reasoning that the assessee claimed the depreciation on the goodwill in the scheme of amalgamation. 16.8 We also note that this Tribunal in case of Urmin marketing (P) Ltd. Vs. DCIT reported in 122 taxmann.com 40 has already decided the issue in favor of assessee on the similar facts and circumstances. 16.9 It is important to note that there was an amendment to section 32, section 2(11) of the Act and other relevant sections of the Income Tax Act from the Finance Act 2021, effective from AY 2021-22. The amendment was brought into section 32 of the Act to exclude goodwill from depreciable assets. The relevant portion of the amendments in section 32 is reproduced as under: 32. (1) 97 [In respect of depreciation of (i)xxxxxxxx (ii)know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature 98 , being intangible assets acquired on or after the 1st day of April, 1998, 99 [not being goodwill of a business or profession,] Explanation 3. For the purposes of this sub-section, 23 [the expression assets ] shall mean (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Furthermore, the company also had a wide network and efficient technological process systems. These benefits represent any other business or commercial rights of similar nature being intangible assets as referred to in section 32(1) of the Act which is eligible for depreciation under the Act. The amount of consideration (in form of issue of shares) paid in excess of net assets of KSPL is attributable to such intangible benefits which is nothing but represents payment towards goodwill. The excess consideration discharged by KIPL over net assets of KSPL represents the amount paid by KIPL towards acquisition of bundle of business and commercial rights which represents goodwill. In the absence of such intangible asset, KIPL would have to commence the business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the appellant got an up and running business. Such excess payment thus denotes goodwill which in no way can be regarded as outcome of revaluation of any amount. Considering the ratio laid down by the Hon'ble Supreme Court in case of Smits Securities (supra) thus, KIPL is eligible for depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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