9911796707
TMI Blog2025 (5) TMI 806X X X X Extracts X X X X X X X X Extracts X X X X ..... 15,690/-. The company, by name, M/s Rushikonda Petroleum Projects Private Limited ("M/s RPPPL"), having similar objects had been amalgamated with the assessee company w.e.f.01.04.2017, by virtue of an order of National Company Law Tribunal ("NCLT"), Hyderabad, vide order dated 11.01.2019 and as per the said order, the appointed date was from 01.04.2017 and by which, all the assets and liabilities of M/s RPPPL was taken over by the assessee company. On receipt of the order from NCLT, the assessee company has duly given effect to the said order and all the assets and liabilities as on 01.04.2017 were transferred and recorded in the books of accounts of the assessee company. Subsequently, to give effect to the amalgamation of M/s RPPPL and the assessee company, a revised return has been filed on 30.03.2019, declaring total income of Rs. Nil and refund tax claim of Rs. 9,23,40,520/-. 3. The case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer noticed that the transferor company, M/s RPPPL was formed in the year 2016 and the only activity it did was to borrow money from Axis Finance Ltd. to acquire 51% shares of the assessee from Energy inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, Mauritius had been purchased to consolidate the business and therefore, interest paid on said loan is in the nature of interest expenditure on loan borrowed for the purpose of the business of the assessee and same can be allowed as deduction u/s 32 of the Act. 5. The Assessing Officer, after considering the submissions of the assessee and also taking note of provisions of section 32 of the Act, observed that, in order to claim depreciation on any asset, the assessee must be owner of the asset and further, the asset must be used for the purpose of business or profession during the previous year. In the given case, amalgamation order has been passed on 11.01.2019, though w.e.f. 01.04.2017 and therefore, the so called goodwill arising out of amalgamation cannot be actually be called to have at all been used in the business for the F.Y. 2017-18, relevant to A.Y. 2018-19. Therefore, observed that the depreciation claimed on goodwill cannot be allowed as deduction. The Assessing Officer, further noted that had it been the case of the assessee that goodwill has been used during the year, the assessee would have claimed the depreciation in the original return, which the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h appointed date from 01.04.2017 is in the nature of intangible asset, on which, the assessee is entitled for depreciation u/s 32(1) of the Act and this principle is supported by the decision of Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd.(supra). Therefore, directed the Assessing Officer to delete the additions made towards disallowance of depreciation on goodwill. The Ld.CIT(A), further observed that the loan borrowed from Axis Finance Ltd to the extent of Rs. 116 crores was for the purpose of business of the assessee, which is evident from the loan utilised for acquiring share capital from Energy Infra Ltd., Mauritius, therefore, interest paid on loan borrowed from financial institutions for the purpose of business needs to be allowed u/s 36(1)(iii) of the Act. Therefore, directed the Assessing Officer to delete the addition made towards interest expenditure u/s 37(1) of the Act. 7. Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before the Tribunal. 8. The first issue that came up for consideration from Ground No.2 of Revenue's appeal is deletion of addition made towards disallowance of depreciation on goodwill. The facts with regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company was at Rs. 27.26 crores. Since the entire assets and liabilities of the amalgamating company has been taken over by the amalgamated company from the appointed date and to give effect to the order of the NCLT, all assets and liabilities of the transferor company has been incorporated / accounted in the books of transferor company, which resulted in taking over of excess liabilities to the tune of Rs. 88,21,86,061/- and the same has been treated as goodwill in the books of accounts of the assessee company in accordance with AS-14/accounting for amalgamation. The assessee has treated excess liabilities taken over from the transferor company in amalgamation, by virtue of order of NCLT as goodwill and depreciation @25% has been claimed in terms of section 32(1)(ii) of the Act. The Assessing Officer disallowed depreciation on goodwill on the ground that the conditions prescribed for claiming depreciation u/s 32 of the Act on goodwill is not satisfied, in as much as goodwill has not been put to use in the business of the assessee, which is evident from the date of NCLT order, i.e., 11.01.2019 and the appointed date 01.04.2017 and from the above, it is undisputedly clear that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef to the assessee. Therefore, she submitted that the additions made by the Assessing Officer should be sustained. 10. The learned counsel for the assessee, Shri H. Srinivasulu, Advocate, on the other hand, supporting the order of the Ld.CIT(A), submitted that, the facts with regard to the scheme of amalgamation, approved by the NCLT, vide order dated 11.01.2019 was not disputed by the Assessing Officer. Further, before the approval of scheme of amalgamation, the NCLT has issued notices to Assessing Officer to file objections, if any, for the proposed amalgamation for which, the Assessing Officer, except stating that there is demand, has not raised any objection for the proposed scheme of amalgamation. Further, as per the scheme of amalgamation approved by the NCLT, the same has been treated as 'purchase method' in terms of AS-14 issued by ICAI / Accounting for amalgamation and as per said method, difference between assets and liabilities in case of excess liabilities, the same shall be treated as goodwill and further in case of excess assets, the same shall be credited to capital reserve account. The assessee, while giving effect to NCLT order has accounted all assets and liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered the relevant case laws referred to by both the parties in support of their arguments. There is no dispute with regard to the fact that the assessee has claimed deprecation on goodwill which was arisen, on account of amalgamation of M/s RPPPL with the assessee company, by virtue of an order of NCLT dated 11.01.2019 w.e.f appointed date 01.04.2017, by which, all assets and liabilities of the transferor company has been taken over by the transferee company. The purpose and the terms of the scheme have been specified in documents submitted before the NCLT. In fact, the NCLT has passed an order and approved the scheme of amalgamation vide order dated 11.01.2019 and sanctioned the scheme of amalgamation. Further, the Assessing Officer has not raised any objection for the scheme of amalgamation. As per the scheme of amalgamation approved by the NCLT, all assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company from the appointed date and upon sanction of the scheme, the transferee company shall have to provide ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1996, to restrict claim of aggregate deduction, which is evident from memorandum of Finance Bill of 1996, as per which, in case of succession in business and amalgamation of companies, predecessor of business and successor of amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on same assets, which in aggregate cannot exceed depreciation allowance, in any previous year at prescribed rates. Therefore, it is proposed to restrict aggregate deduction in a year, depreciation at the prescribed rate and apportion the same allowance in the ratio of number of days 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the issue on hand. In the present case, there is no dispute with regard to the fact that goodwill is not existing in the books of account of the amalgamating company. Further, depreciation on goodwill claimed by the assessee was first time recognized in the books of account of amalgamated company, in a scheme of amalgamation approved by the NCLT. As per said scheme of amalgamation, accounting treatment in the books of transferee company has been specified, as per which, transferee company shall account for merger in its books of account as per 'purchase method' of accounting prescribed under AS-14 issued by ICAI. 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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1961. Further, the decision of DCIT Vs United Breweries Ltd. (supra) of ITAT, Bangalore Bench is distinguishable from facts of the present case, because in the case of DCIT Vs United Breweries Ltd.(supra), before amalgamation there was a goodwill in the books of account of amalgamating 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. 14. 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 of amalgamating company. Therefore, in our considered view, case of the assessee squarely comes under ratio laid down by the Hon'ble Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... user u/s 32 of the Act should be interpreted in the context of intangible assets. The word user shall have a wider meaning in the context of intangible assets. The existence of goodwill arising from the amalgamation tantamount to user. Intangible assets are creation of human mind and do not have physical existence like plant, building, machinery etc. In the context of intangible assets, the word user has to be interpreted in a practical manner and if we go by the facts in the present case, the goodwill comes into existence w.e.f. 01.04.2017, by order of NCLT, amalgamating two companies from the appointed date. Section 32 in the form of depreciation confers the benefit to the assessee and the word used should be interpreted in such a manner, which will enable the assessee to obtain the benefit intended by the legislature. And in this behalf, it is relevant to refer to the Hon'ble Supreme Court in the case of Mysore Minerals Limited Vs. CIT (supra). Therefore, we are of the considered view that the reasons given by the Assessing Officer to disallow the depreciation is totally incorrect, devoid of merit and thus, rejected. 16. Having said so, let us come back, whether goodwill is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. The proviso only determines the amount of depreciation to be claimed in the hands of the predecessor or amalgamating company and in the hands of the successor or amalgamated company only in the year of amalgamation based on the date of such amalgamation. It does not in any way restrict the depreciation allowable on assets acquired after amalgamation or during the course of amalgamation. Once an asset, including an intangible asset, more particularly, goodwill. is added to the respective block of assets of the amalgamated company. in the context of the claim of depreciation in the hands of the amalgamated company such addition to the block of assets would not fall within the purview of the fifth proviso to section 32(1) of the Act. Effectively, the scope of the proviso is narrow. The fifth proviso to section 32(1) of the Act, with regard to depreciation on goodwill, is restricted to assets which belonged to the amalgamating company and its application cannot be extended to assets which arise in the course of amalgamation to the amalgamated company. The intention of the law was to extend the benefit available to the amalgamated company on succession and not to restrict the depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gamation. The Principal Commissioner in revision under section 263, set aside the order passed by the Assessing Officer and directed him to examine the applicability of the fifth proviso to section 32(1) of the Act. On appeal : Held, allowing the appeal. (i) that goodwill did not exist in the books of account of the amalgamating company and had been acquired by the amalgamated company by paying consideration over and above the net value of the assets of the amalgamating company. Further, depreciation claimed by the assessee on goodwill was recognised in the books of account of the amalgamated company for the first time in the scheme of amalgamation approved by the High Court. According to the scheme of amalgamation, the accounting treatment in the books of the transferee-company had been specified according to which the transferee-company shall account for the merger in its books of account according to the "purchase method" of accounting prescribed under Accounting Standard 14 issued by the institute of Chartered Accountants of India. The difference between the net value of assets of the amalgamating company and the value of investments held by the amalgamated company would beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r business scenario or fruitful outcome resulted from the business transfer. Even otherwise also, it is the prerogative of the business man to decide how to conduct the business and all the business decisions need not always result in profits or in better business scenario. 12. Coming to the observation of the learned CIT(A) that the capital gains tax paid by the seller would be very marginal as compared to the eligible depreciation to the assessee, learned AR submitted, with reference to the facts and figures, that the total tax impact on depreciation on good will comes to Rs. 55,76,696/- whereas the capital gains tax paid by the seller is Rs. 67,41,196/-. She submitted that considering the amendments introduced by the Finance Act, 2021, with effect from 01/04/2021, no depreciation is allowable on goodwill whether or not it is recorded in the books prior to the amendment and, therefore, the tax impact on depreciation claim would be far less than Rs. 55,76,696/-. This is another factor which missed the attention of the learned CIT(A) from the books and, therefore, the learned CIT(A) was labouring under the impression that the capital gains tax paid by the transferor c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceed the deduction calculated at the prescribed rates as if the succession had not taken place, and such deduction shall be apportioned between the predecessor and successor in the ratio of the number of days for which the assets were used by them. No record is available before us throwing light on the proportion of the depreciation claimed by the seller, but the assessee is entitled to claim such depreciation only in proportion to the number of days for which the asset held by it. We, therefore, deem it just and proper to cause verification of this fact and to allow such depreciation. 17. With this view of the matter, we set aside the issue relating to the depreciation on the other tangible assets to the file of the learned Assessing Officer to verify and allow depreciation as directed above. Ground No. 2 is allowed with the above directions." 19. In view of this matter and considering the facts and circumstances of the case, we are of the considered view that the assessee is eligible for depreciation on goodwill created on account of amalgamation. The Assessing Officer without appreciating relevant facts, simply disallowed depreciation on goodwill. The Ld.CIT(A) has rightly de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per section 37 of the Act, expenditure should not be of capital nature in order to be admissible. Since the interest paid on loan borrowed for the purpose of acquiring shares of assessee company from third party is in the nature of capital expenditure and was not allowed as deduction, therefore, rejected the claim of the assessee and disallowed interest expenditure u/s 37 of the Act. 21. On appeal, the Ld.CIT(A) for the reasons stated in their appellate order, deleted the additions made by the Assessing Officer, by holding that the Assessing Officer has wrongly invoked the provisions of section 37(1) of the Act, because, when the loan is taken in the ordinary course of business and the said loan is utilised for acquiring controlling on interest in any company, which gives business advantage in the long run, then, the same cannot be considered as not for the purpose of business and therefore, invoking provisions of section 37(1) of the Act, when the particular expenditure covered under the specific provisions of section 30 to 36 is not in accordance with law. The Ld.CIT(A) further held that once the loan taken from any banks or financial institutions is for the purpose of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that M/s RPPPL was a holding company of the assessee company. Further, the assessee company shares were held by Energy Infra Limited, Mauritius. M/s RPPPL acquired the share of assessee company from Energy Infra Limited, Mauritius and for this purpose, taken loan from Axis Finance Limited, on which, interest has been debited in Profit & Loss account. Admittedly, as on appointed date, 1st April, 2017, M/s RPPPL was not holding shares of assessee company. Therefore, the issue of interest paid on loans, whether it is deductible u/s 36(1)(iii) of the Act is to be examined, in light of amalgamation between the two companies under the scheme of amalgamation. There is no dispute with regard to the scheme of amalgamation approved by NCLT by order dated 11.01.2019 and as per the said scheme, all assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company from the appointed date. The scheme further provides that immediately, after sanction of the scheme, the transferee company shall record all assets and liabilities, including the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the business purpose, interest paid on such borrowing would allowable deduction. The sum and substance of ratios laid down by various courts including Hon'ble Supreme Court is that even if the loan is borrowed for controlling interest in any company by acquiring shares, then the said purchase of shares tantamount to expansion of business and therefore, any interest paid on borrowed capital for the purpose of business should be allowed as deduction. In the present case, there is no dispute with regard to the fact that the amalgamated company has borrowed loan from Axis Finance Limited for the purpose of acquiring shares of assessee company, which was held by M/s Energy Infra Limited, Mauritius and therefore, in our considered view, interest paid on said loan is deductible u/s 36(1)(iii). The Assessing Officer, without appreciating relevant facts simply disallowed interest u/s 37(1) of the Act. The Ld.CIT(A), after considering the relevant facts has rightly deleted the addition. Therefore, we are inclined to uphold the order of the Ld.CIT(A) and reject the grounds taken by the Revenue. 26. In the result, appeal filed by the Revenue is dismissed. Order pronounced in the Open C ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
