M/S. I & B SEEDS PRIVATE LIMITED,BENGALURU vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)(1), BENGALURU

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

All these appeals by assessee are directed against different orders passed by NFAC for the assessment years 2017-18, 2018-19 & 2020-21 dated 28.8.2023, 11.9.2023 & 11.9.2023 respectively. Since the issues in these appeals are common in nature, these are clubbed together, heard together and disposed of by this common order for the sake of convenience. The assessee has raised following grounds of appeal: I. “The order of the Ld. CIT (A) is opposed to the law, facts and circumstances of the case. II. The order is passed against the principle of natural justice and thus, liable to be quashed. III. The learned CIT(A) has erred in considering the word goodwill not included under the provisions of section 32(1) of the Act as an asset eligible for depreciation.

ITA No.683, 701 & 702/Bang/2023 M/s. I&B Seeds Private Limited, Bangalore Page 2 of 11 IV. The learned CIT(A) ought to have contemplated that the goodwill is in the nature of any other commercial or business right under the category of an intangible asset that is eligible for depreciation under section 32 of the Act. V. The learned CIT(A) ought to have appreciated the fact that the matter is duly covered by the judgment of the Hon'ble Bengaluru I TAT in the Appellant's own case for the assessment year 2015-2016 in ITA No. 3415/Bang/2018. VI. The learned CIT(A) erred in considering the fact that the judgment of the Hon'ble Bengaluru ITAT has referred to the amendments specified in the Finance Act, 2021 will take effect from April 01, 2021, and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. VII. The learned CIT(A) has erred in understanding the facts that when the disallowance of depreciation on Goodwill is deleted by the Hon'ble ITAT for the Initial assessment year of acquisition i.e. 2015-16, a similar disallowance cannot be made for the subsequent assessment years. VII. The learned ClT(A) has erred in making the disallowance under Section14A read with Rule 8D. VIII. The learned CIT(A) has made a grave error in not appreciating the fact that the appellant has not incurred any expenses to earn the dividend income. XIX. The learned CIT(A) failed to consider that the calculation of expenses related to exempt income cannot be on a notional basis as it would result in the imposition of an artificial method of computation. X. The learned CIT(A) erred in considering the fact that the assessee has adequate own funds and the investment is undertaken with their own funds and no amount of borrowed funds has been utilized for the purpose of such investments. XI. The learned CIT(A) erred in assuming that there may be expenses expended for earning such exempt income despite the fact that no fresh investments were made during the year under review. XII. The Appellant craves leave to add, alter, substitute, and delete any or all the grounds of appeal urged above. XIII. For the above and other grounds to be urged during the hearing of the appeal, the Appellant prays that the appeal be allowed in the grant of a refund. Total tax effect Rs.94,62,182/-“

ITA No.683, 701 & 702/Bang/2023 M/s. I&B Seeds Private Limited, Bangalore Page 3 of 11 For the AY 2017-18, the ld. AO took a similar stand by denying the claim of depreciation on the goodwill by holding that no documentary evidences were made available before him in support of this claim. Accordingly, he disallowed an amount of Rs.2,82,68,464/-. 3. In assessment year 2018-19, the disallowance on this count was Rs.2,12,01,349/-. For assessment year 2020-21, the disallowance was R.s1,19,25,759/-. Against this, assessee went in appeal before NFAC who has confirmed the addition made by ld. AO in all these assessment years. Against this assessee is in appeal before us. 4. We have heard the rival submissions and perused the materials available on record. Admittedly, similar issue came for consideration before this Tribunal in assessee’s own case in ITA No.3415/Bang/2018 for the assessment year 2015-16 dated 15.6.2022 wherein held as under: “13. We have considered the rival submissions and perused the record. The issue before us with regard to the valuation of goodwill and granting depreciation on the same. In the assessment year under consideration, the assessee claimed depreciation on 25% of intangible assets i.e. goodwill at Rs.17,39,83,689/- in the return of income worked out at Rs.2,15,02,864/- on the reason that assessee company has paid for goodwill of Rs.16,46,08,759/- to M/s. Indus Seeds, sole property concern of Managing Director of the assessee company and Rs.74,14,150/- to M/s. Sasya Gentech Pvt. Ltd., the company in which the Managing director of assessee company is the substantial shareholder and Director. The assessee has taken over the business/assets and liabilities of M/s. Indus Seeds and also M/s. Sasya Gentech Pvt. Ltd. by a slump sale arrangement. The value of intangible asset was the difference between the book value of assets and liabilities taken over and the sale consideration paid to both the concerns. In other words, the difference between net- worth over the sale consideration is considered as goodwill and claimed depreciation on the same. The A.O. invoked the provisions of explanation 3 to section 43(1) of the Act and observed that assessee is not entitled for depreciation on intangible assets as he doubted the net consideration paid by the assessee to those two concerns on the reason that these are related party transactions. According to the A.O., assessee has not provided any material for justification of such a huge amount of goodwill to both M/s. Indus Seeds & M/s. Sasya Gentech Pvt. Ltd. According to the A.O., M/s. Sasya Gentech Pvt. Ltd. has negative net-worth of Rs.34,14,150/- at the time of take over of the asset & liability of that company. However, the goodwill was valued at Rs.74,14,150/- in the case of M/s. Sasya Gentech Pvt. Ltd. In the case of M/s. Indus Seeds net-worth at Rs.2,13,91,242/-. The payment of goodwill was Rs.16,46,08,759/-. The value of brand name and intangible assets recorded in the books of M/s. Indus Seeds as on 31.10.2014 was

ITA No.683, 701 & 702/Bang/2023 M/s. I&B Seeds Private Limited, Bangalore Page 4 of 11 Rs.19,60,780/-. But no value of goodwill was there in M/s. Sasya Gentech Pvt. Ltd. No valuation certificate of goodwill has been furnished before the lower authorities. 13.1 In our opinion, the relevant provisions applicable to the facts of the case are section 32(1), 43(1), 47(xiv)/47(vi) & 47(via) of the Act, which we discussed elsewhere in this order. 13.2 After having noticed the above statutory provisions, we find the relevance of that provision to the present facts of the case. The business purchased by assessee were in the similar field since many years. They are establishing the respective business and having a trade name as brand name in respective field. The valuation has been determined by the assessee in accordance with the business transfer agreements and following the applicable accounting standard of Institute of Chartered Accounts of India i.e. AS-10. It is also mentioned by AO that valuation of intangible assets recorded in the books of M/s. Indus Seeds as on 31.3.2014 was Rs.19,60,780/-. In case of M/s. Sasya Gentech Pvt. Ltd., it was Nil. However, it has been valued by assessee at Rs.17,39,83,689/- and said amount has been paid by assessee.

13.3 Section 32(1) of the Act provides for depreciation in respect of trade mark owned wholly or partly by the assessee. In the present case, assessee has taken over the business of M/s. Indus Seeds and M/s. Sasya Gentech Pvt. Ltd. as a growing concern. It is noteworthy to mention herein that 5th Proviso to section 32(1) of 13.4 the Act restrict the total depreciation, which can be claimed in case of succession, etc. to the depreciation which would have been allowable and there has been no succession. The 5th Proviso to section 32(1) was inserted by Finance Act, 1996 to restrict the claim of aggregate deduction, which is evident from the memorandum of Finance Bill, 1996, which reads as under:- In cases of succession in business and amalgamation of companies, the predecessor of the business and successor the amalgamating company and amalgamated company as the case may be, are entitled to depreciation allowance on same assets which in aggregate exceeds depreciation allowance for Previous year at the prescribed dates. It is proposed to restrict the aggregate deduction in a year to the deduction computed at the prescribed rates and apportion the allowance in the ratio of number of days for which the assets were used by them. 13.5 Thus, it is evident that 5th proviso to Section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. 13.6 It is also pertinent to note that u/s 47(xiv) of the Act, any transfer of capital asset or intangible asset by a proprietorship concern to a company as a result of

ITA No.683, 701 & 702/Bang/2023 M/s. I&B Seeds Private Limited, Bangalore Page 5 of 11 succession of the concern by a company is a recognized mode of transfer. Admittedly, the assessee had taken over proprietorship concerns and private company which are different entities and there were transfer of intangible asset by those two concerns to the assessee for a valuable consideration at Rs.17,39,83,689/-

13.7 It is to be noted that clause (xiv) to section 47 does not apply to the facts of the present case on the following reasons: 1. All the assets and liabilities of the proprietary concern were not transferred to the succeeding company which is otherwise a requirement under the above clause. Only the assets forming part of undertaking were transferred to the succeeding company, which means the assets which were left in the sole proprietorship. This is evident from the page no.271 of assessee paper book. 2. The above clause requires that the sole proprietor should not receive any consideration or benefit other than by way of allotment of shares in the company, where in the present case, the consideration is paid through banking channels.

13.8 Since the transaction is not covered under the above- mentioned clause of section 47, consequently fifth proviso of section 32 would also not be applicable in this case. Erroneous invocation of the explanation 3 to section 43(1) of the Act

13.9. In our opinion, the invoking of this Explanation 3 to section 43 of the Act by the AO in the present case is totally misplaced and not justified. The said explanation does not restrict the claim of depreciation on goodwill arising pursuant to a slump sale. It is applicable if the impugned goodwill has been appeared in the books of accounts of transferee and this goodwill never appeared in the books of seller. In our humble opinion, the explanation 3 to section 43 will be applicable only in cases where the assets were at any time used by any other person for the purpose of his business or profession, but in the present case, the asset in question, “goodwill which is arising due to the transfer of business, which is explained in earlier para and assets were not used by any other person”, therefore, it cannot be said that the said explanation is applicable to the present facts of the case. Goodwill arising on slump sale — eligible for depreciation

13.10. In this case, the AO did not principally contend against the position of the Appellant, that the goodwill recorded by it is an intangible asset eligible for depreciation under Section 32(1) of the Act. In our opinion, the claim of assessee is to be allowed on the following lines:-

ITA No.683, 701 & 702/Bang/2023 M/s. I&B Seeds Private Limited, Bangalore Page 6 of 11 i. The said goodwill is in the nature of any other commercial or business right under the category of an intangible asset that is eligible for depreciation under section 32 of the Act. The issue whether Goodwill arising on transfer is eligible for depreciation or not, is no longer Res-Integra, and has been settled by the Hon'ble SC in the case of Smifs Securities Ltd. (348 ITR 302), wherein held that “in the present case, it is the valuation that is challenged and not the eligibility of depreciation on goodwill.” The position of law held by the Hon'ble SC constitutes the law of the land and is binding on all the lower authorities, in terms of Article 141 of the Constitution of India. ii. In this regard, we place further reliance on the decision of the Hon'ble Karnataka High in the case of Manipal Universal Learning P. Ltd., 255 ITR 26, the facts and circumstances of which are similar to the present case, wherein the Hon'ble HC allowed the claim of depreciation on goodwill arising on acquisition of business under slump sale model, reiterating the decision of the Hon'ble SC in the case of Smifs Securities (Supra). iii. Further, we place reliance on the following decisions, wherein it was principally held that goodwill is an intangible asset eligible for depreciation under section 32 of the Act in the context of business transfer through slump sale:

Areva T & D India Ltd. 345 ITR 21 Truine Energy Services (P) Ltd. 65 taxmann.com 238 Toyo Engineering India India Limited TS-811-HC-2012 Volvo India Pvt. Ltd. TS-391-ITAT-2019 Dorma India Pvt. Ltd. TS-735-ITAT-2019

13.11. The sixth proviso to Section 32(1) of the Act also not applicable. It is applicable, only in case of assets already existing in the books of predecessor company on which predecessor company was claiming depreciation before slump purchase, and it is not applicable on assets recognized only by successor company pursuant to such slump purchase. The legislative intent behind the introduction of the said proviso was to curb the practice of claiming' depreciation on the 'same assets' by both the predecessor company and the successor company. This evident from the memorandum explaining the provisions of Finance Bill, 1996, which introduced the sixth proviso (erstwhile fifth proviso) to section 32(1) of the Act. Thus, a commonality of assets should exist between predecessor and the successor goodwill arising pursuant to acquisition belongs only to successor company. 13.12. Further, the Ahmedabad Bench of the Tribunal, in the case of Urmin Marketing Pvt. Ltd., 122 taxmann.com 40 rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger, on the basis of purchase consideration paid (which is

ITA No.683, 701 & 702/Bang/2023 M/s. I&B Seeds Private Limited, Bangalore Page 7 of 11 determined based on a valuation report), and no goodwill from the books of the transferor is recorded by the transferee.

Amendment by Finance Act 2021 clarifies the position on Goodwill depreciation

13.13. The Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an Assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. 13.14. Further, amendments were made in section 55 of the Act, in relation to the meaning of 'cost of acquisition' etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to April 1, 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition.

13.15. Therefore, the intention of the legislature is that depreciation on goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be rejected.

13.16 Further, it is also brought to our notice that the department accepted offer of capital gain by the individual assessee who has sold the goodwill i.e. in the case of Praveen Narayan Noojibail for the assessment year 2015-16, which is evident from the statement of income filed before us. Which is kept on record in assessee’s paper book at page no.65 and also accepted by the AO for the assessment year 2015-16 vide assessment order u/s 143(3) of the Act dated 31.12.2017, which is kept on record in assessee’s paper book at page no.89. Once the department accepted the capital gain offered by individual assessee in the respective hand, the same transaction cannot be doubted in the hands of purchaser. On this count also, we find force in the argument of Ld. A.R. that AO not established that the main purpose of transfer of such asset was reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish aforesaid fact, it has to be established that apart from claiming additional depreciation on enhanced cost, there is other main purpose for acquiring the asset i.e. goodwill in question. The AO in the instant case wrongly invoked the explanation 3 to section 43 of the Act. Our above decision is also supported by the order of the Tribunal relied by the Ld. A.R. in the case of M/s. Dorma India Pvt. Ltd., Chennai in ITA Nos.1664 to 1666/Chny/2019 dated 20.11.2019. Further, we also place reliance on the judgement of Hon’ble Karnataka High Court in the case of Padmini Products (P) Ltd. Vs. Deputy Commissioner of Income-tax in ITA No.154 of 2014 dated 5.10.2020, wherein similar circumstances Hon’ble High Court has allowed the claim of the assessee.”

ITA No.683, 701 & 702/Bang/2023 M/s. I&B Seeds Private Limited, Bangalore Page 8 of 11 4.1 However, the ld. D.R. submitted that the Tribunal much placed of judgement of Hon’ble Karnataka High Court in the case of Padmini Products Pvt. Ltd. Vs. DCIT in ITA No.154/2014 dated 5.10.2020. However, the said decision has been stayed by Hon’ble Supreme Court in the case of DCIT Vs. Padmini Products Pvt. Ltd. reported in 283 Taxman 177 (SC), wherein held as under: “ Section 32, read with section 47, of the Income-tax Act, 1961 - Depreciation Allowance/Rate of (Succession of business) - Assessment years 2005-06 to 2008-09 - Under a scheme of succession, erstwhile partnership firm was succeeded in its business by assessee-company - Before firm was converted into private limited company, partnership firm had revalued its intangible assets using standard valuation methods and same were transferred to assessee-company - In consideration, assessee allotted shares to partners of erstwhile partnership firm - Assessee claimed depreciation on such intangible assets Same was accepted and an same assessment order was passed - Thereafter, a reopening notice was issued against assessee on ground that original assets which were added in company at time of succession could not be considered for purposes of depreciation Accordingly, claim for depreciation on intangible assets was disallowed - It was noted that assessee and erstwhile partnership firm were different entities and there was transfer of intangible assets by partnership firm to assessee for a valuable consideration that was by way of allotment of shares - High Court by impugned order held that, aforesaid transaction between firm and assessee-company was covered under section 47(xiii) and, therefore, assessee was entitled to depreciation on actual cost incurred by it with reference to intangible assets - Whether notice was to be issued in SLP filed by revenue against impugned order of High Court - Held, yes - Whether in meantime impugned order was to be stayed - Held, yes [Paras 1 and 31 [In favour of revenue]”

4.2 As seen from earlier order of the Tribunal, the said decision is based on the judgement of Hon’ble Karnataka High Court in the case of Padmini Product Pvt. Ltd. cited (supra), the operation of which is stayed by Hon’ble Supreme Court as of now as mentioned above. In view of this, we are of the opinion that it is appropriate to remit this issue to the file of ld. AO to decide the same on consideration of final outcome of decision in the case of M/s. Padmini Products Pvt. Ltd. cited (supra). This issue is remitted to the file of ld. AO for fresh consideration as observed above.

ITA No.683, 701 & 702/Bang/2023 M/s. I&B Seeds Private Limited, Bangalore Page 9 of 11 5. Next issue in the common grounds in all these appeals in ground Nos.VIII to XI is with regard to disallowance u/s 14A of the Act read with Rule 8D(2)(ii) of the I.T. Rules, 1963. In these assessment years, the ld. AO invoked the provisions of section 14A of the Act read with Rule 8D(2)(ii) of the I.T. Rules and disallowed in these assessment years as follows: Asst. Year Amount (Rs.) 2017-18 Rs. 75,000/- 2018-19 Rs.1,04,372/- 2020-21 Rs.7,99,060/- 5.1 Against this assessee is in appeal before us. The ld. A.R. contended that assessee has not incurred any expenditure to earn tax free income. As such, no disallowance could be made u/s 14A of the Act read with Rule 8D(2)(ii) of the I.T. Rules and also submitted that the assessee is having surplus fund against investment was made. Further, it was submitted that ld. AO has not recorded proper satisfaction to invoke these provisions. 6. The ld. D.R. relied on the orders of lower authorities. 7. We have heard the rival submissions and perused the materials available on record. In this case, the ld. AO invoked the provisions of section 14A read with Rule 8D(2)(ii) of the Rules as follows: “The expenditure in relation to income which does not form part of the total income shall be aggregate of following amounts namely:-

(i)………………………………… (ii) The amount equal to 1% of the annual monthly average of the opening and closing balances of the value of invested income from which does not or shall not form part of total income.”

7.1 In this case, there is no dispute that the assessee has exempted income yielding investments and the assessee must have incurred administrative and common expenses when the assessee derives exempted income and these investments give rise to exempted dividend income or interest. Investment decisions are very complex and strategic and obviously, assessee shall be incurred expenses

ITA No.683, 701 & 702/Bang/2023 M/s. I&B Seeds Private Limited, Bangalore Page 10 of 11 such as salary, telephone charges, commission, brokerage and stationery. Therefore, the assessee cannot say that no expenditure incurred for making such investments. Hence, the ld. AO is duty bound to invoke section 14A read with Rule 8D(2)(ii) of the Rules. Before us, the assessee relied on various decisions stating that assessee is having surplus funds and no expenditure incurred to earn taxable income. Here, we are concerned with disallowance under Rule 8D(2)(ii) and not relating to the direct expenditure incurred by the assessee. In other words, the ld. AO invoked provisions of section 8D(2)(ii) of the Rules with regard to indirect expenses incurred by assessee which are common expenses and cannot be identified independently. Hence, certain percentage of investments to be considered for disallowance under these provisions. The assessee has also pleaded that no satisfaction has been recorded by the ld. AO in this regard. 7.2 We have carefully gone through the assessment orders, wherein the assessing officer clearly established that assessee has earned exempt income in these assessment years and claimed that no expenditure has been incurred in assessment year 2017-18 and 2018-19, however, disallowed a meagre amount of Rs.6,000/- in the assessment year 2020-21 without applying the formulas specified in Rule 8D(2)(ii) for disallowance u/s 14A of the Act. Hence, it cannot be said that ld. AO has not applied his mind or recorded satisfaction on this issue. In our opinion, he came to subjective satisfaction on disallowance u/s 14A of the Act read with Rule 8D(2)(ii) of the Rules. We do not find any infirmity in the findings of the lower authorities and the same is confirmed.

ITA No.683, 701 & 702/Bang/2023 M/s. I&B Seeds Private Limited, Bangalore Page 11 of 11 8. In the result, the appeals of the assessee are partly allowed for statistical purposes. Order pronounced in the open court on 16th Nov, 2023

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 16th Nov, 2023. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.