M/S SUN EDISON SOLAR POWER INDIA PVT LTD,CHENNAI vs. DCIT CORPORATE CIRCLE 6 (2), CHENNAI

The assessee company had issued 6,61,25,780 preference shares at ₹.22.96 per share (face value of ₹.10 plus premium of ₹.12.96 per share) aggregating to ₹.151,82,47,909/- to the shareholders of SEIPL (demerged company) as consideration for EPC business undertaking.

The Assessing Officer, for the assessment year 2013-14, allowed depreciation on differential amount of consideration paid for acquisition of EPC business as cost of plant and machinery and allowed depreciation @ 15% as against depreciation claimed by the assessee at 25% as intangible asset. For the assessment years 2014-15 and 2015-16, the Assessing Officer disallowed the total depreciation claimed under section 32(1) of the Act on the ground that goodwill accounted in the books of assessee company is a self-generated which is not qualified for depreciation as an intangible. The Assessing Officer has discussed at length, considered the explanations of the assessee, judicial precedents and approval of the Hon’ble High Court of Madras vide its order dated 28.01.2014 and also obtained directions from the Addl. CIT under section 144A of the Act to come to the conclusion that depreciation on goodwill is not eligible 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 nature of transaction and also requested to explain as to why the depreciation on goodwill should be allowed. 4.2 In response, the AR vide his letter dated 15.12.2016 made his submissions as under:- ".... Nature of Goodwill/Intangible; ..... on account of consolidation of EPC business undertaking as a result of demerger, the goodwill has arisen. 1.1 Economic Valuation All the assets and Liabilities of the demerged undertaking have been consolidated into SSPIPL... As a consideration of demerger, shares have been issued to the shareholders of the transferor company. The above said consideration has been arrived at by undertaking the valuation of EPC business. The valuation report has been filled with the Hon'ble Madras High Court as a part of the scheme and is attached as Annexure 3. The difference between the net assets taken over and the consideration paid has been recorded as goodwill in the books of SSPIPL as per paragraph 24.7 of the scheme. We

Before me, Mr. V. Shekar Babu, CA holding power of attorney has appeared on 09.04.2019. Subsequently, the appellant made written submissions vide its letter dated nil received in this office on 02.05.2018. Submissions made before me are more or less similar to that 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.

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 paid excess consideration than the value of net assets taken over and the excess amount has been paid on account of an asset which has been recognized in the books of account for the first time by way of goodwill is entitled for depreciation. The relevant findings of the ld. CIT(A) are as under: “6.2 The arguments of the Assessing Officer and appellant have been considered. It is trite law that there is no depreciation in respect of self-generated goodwill as there is no cost involved and depreciation is allowable on goodwill if it had been acquired for a consideration. In this case, consequent to a scheme of demerger and arrangement approved by the order of the Hon’ble High Court of Madras, the appellant has paid excess consideration than the net value of assets taken over. The excess consideration that has been paid is on account of an asset which was recognized in the books for the first time by way of goodwill. This asset has been acquired by paying by allotment of shares. Therefore, with due respect to the decision of the Hon’ble ITAT Panaji, in this case it is clear that the goodwill has been acquired which is represented by the excess consideration paid in the form of shares of the resulting company. Therefore, the appellant’s claim of depreciation on goodwill requires to be allowed. In the result, this ground is allowed.”

Being aggrieved of orders of the ld. CIT(A) for three assessment years, the assessee as well as Revenue are in appeal before the Tribunal.

The ld. Counsel for the assessee has submitted that the ld. CIT(A) has erred in confirming the disallowance of depreciation for the assessment years 2013-14 and 2014-15 without appreciating the fact that the issue is squarely covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd. (supra). The ld. Counsel for the assessee referring to order of the Hon’ble High Court of Madras in the scheme of demerger dated 28.01.2014, more particularly, para 24.7 of scheme document and submitted that as per the scheme of demerger approved by the Hon’ble Madras High Court, the procedure for accounting and giving effect has been explained as per which excess consideration paid in the form of issues of shares to shareholders of demerged company is over and above the value of net asset taken over in a scheme of demerger shall be an intangible 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.

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, because, in the case before the Hon’ble Supreme Court the issue was whether goodwill is an intangible asset or not eligible for claiming deduction under section 32(1) of the Act and the CIT – Revenue has not contended the factum of valuation of goodwill. In the present case, the sole basis for disallowance of depreciation on goodwill is valuation on the scheme of demerger. The Assessing Officer and the ld. CIT(A) had given categorical findings that the assessee has not justified the issue of shares at higher rate including premium when the EPC business of Demerged company was a persistence loss making company and net asset taken over by the assessee company as per the valuation report dated 10.09.2013, the valuation was only ₹.19.21 crores Further, the ld. DR has submitted that the assessee has considered the difference between value of shares issued to the shareholders of demerged company and value of net asset taken as goodwill, even though there is no specific valuation for goodwill in the valuation report as stated by the Assessing Officer. Further, the Assessing Officer has specifically stated that the quantum of goodwill paid by the assessee is not acceptable since there is no mention about valuation of goodwill. For the assessment year 2014-15, the Addl. CIT has issued directions to the Assessing Officer under section 144A of the Act and discussed the issue in light of provisions of sections 43(1) and 43(6)(c) of the Act and discussed as to how the asset should be accounted in the books of Resulting company in a scheme of amalgamation and demerger. Therefore, he submitted that once depreciation is reflected under fifth proviso to section 32(1) of the Act in a scheme of amalgamation, the valuation issue become irrelevant to decide whether is there any difference between the consideration paid for transfer of business undertaking and value of net assets of undertaking. In this regard, he relied upon the decisions of ITAT in the case of Godrej and Boyce Mfrs. Co. Ltd. v. Addl. CIT [153 ITD 676 Mumbai] as well as in the case of Signode India Pvt. Ltd. in dated 05.01.2021.

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. There is no dispute with regard to the fact that in a scheme of demerger approved by the Hon’ble High Court of Madras vide its order 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 company in terms of clause 24.4, over the amount credited as share capital and securities premium and after making adjustment shall be credited to General Reserve Account of the Resulting company and deficit, if any, shall be debited to the goodwill account of the Resulting Company. The assessee has issued 6,61,25,780 CCPS valued at ₹.22.92 which includes ₹.12.96 as share premium aggregating to ₹.151.82 crores to the shareholders of Demerged company. The net asset taken over by the Resulting company was valued at ₹.19.27 crores. Thus, there is a difference of ₹.132.57 crores being value of CCPS issued to shareholders of demerged company and net asset taken over by the resulting company and the same has been accounted as goodwill in the books of assessee company. Further, the accounting term given by the assessee in its books of accounts towards assets and liabilities taken over in a scheme of demerger approved by the Hon’ble High Court of Madras and consideration paid for acquisition of such business undertaking by issue of shares in accordance with scheme approved by the Hon’ble High Court, which is further strengthen by the guidelines issued by the Institute of Chartered Accountants of India for accounting goodwill, as per which, the assessee has followed the purchase method for accounting the assets and liabilities taken over under a scheme of demerger, which resulted in deficit as specified in clause 24.7 of scheme document, which has been rightly accounted as goodwill.

In this factual background, if it is examined the legal position on the issue of depreciation on goodwill, the issue is no longer res integra. The Hon’ble Supreme Court has considered identical issue in the case of CIT v. Smifs Securities Limited (supra), where the question of law before the Hon’ble Supreme Court was whether goodwill arises on account of amalgamation is an intangible asset eligible for depreciation under section 32(1) of the Income Tax Act or not. The Hon’ble Supreme Court, after considering relevant facts and also provisions of Explanation (3) to section 32(1) of the Act, held that the expression “asset” shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. The words “any other business or commercial rights of similar nature” 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.

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 Accounting Standard for accounting goodwill by ICAI. Further, the method followed by the assessee is specified in the scheme document submitted before the Hon’ble High Court of Madras and approved vide its order dated 28.01.2014. Therefore, we are of the considered opinion that to this extent, there is no error in the reasons given by the assessee to claim depreciation of goodwill, which is supported by the decision of the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Limited (supra).

In so far as the observations of the Assessing Officer and the ld. CIT(A) are concerned, we find that neither the Assessing Officer nor the ld. CIT(A) had any dispute regarding manner in which quantum of goodwill was arrived at. In fact, both the authorities have accepted the valuation of net asset acquired by the assessee company and the valuation for arriving at the consideration to be paid to the shareholders of the demerged company. It is also a fact that no goodwill was appeared in the books of Demerged company before appointing date. The fact that the depreciation on goodwill was specifically omitted by amending section 32 by the Finance Act, 2021 w.e.f. 01.04.2021 also demonstrate that depreciation on goodwill was allowable before the amendment. Further, the Assessing Officer 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.

In so far as observations of the Addl. CIT in the order under section 144A of the Act, for the assessment year 2014-15 is concerned, the conclusion drawn by the Addl. CIT which has been accepted both by the Assessing Officer and the ld. CIT(A) is totally flawed for the reason that the Addl. CIT went on the wrong premise that goodwill recorded in the books of the assessee company is self-generated. In 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.

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 the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee- Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal [ITAT, for short]. We see no reason to interfere with the factual finding".

The ld. Counsel for the assessee also relied upon the decision of the Hon’ble Gujarat High Court in the case of PCIT-4 v. Zydus Wellness Ltd. [2017] 87 taxmann.com 82 (Gujarat), wherein, the Hon’ble High Court, in an identical set of facts and following the decision of the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Limited, held as under: "6. With respect to the claim of depreciation) the decision of Supreme Court in case of Smifs Securities Ltd. (supra) would squarely apply. There is no material referred to by the Assessing Officer to hold that the claim of depreciation was fictitious. If we read his entire expression in this respect) he seems to be suggesting that being an intangible asset acquisition thereof would not qualify for depreciation. If that be so) the view of the Assessing Officer was opposed to the decision of the Supreme Court in case of Smifs Securities Ltd. (supra). On the other hand, if the observations of the Assessing Officer can be seen as his findings that the claim itself was baseless, there was no discussion or reference to any material to enable him to come to such a conclusion".

Even the Hon’ble High Court of Delhi in the case of Triune Energy Services (P.) Ltd. v. DCIT [2016] 65 taxmann.co 288 (Delhi) while deciding the issue regarding "Where assessee purchased business as going concern, consideration paid in excess of value of tangible assets was classifiable as goodwill eligible for depreciation and, therefore, further exercise to value goodwill was not warranted" Concluded that "it is well established that 'goodwill' is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net tangible assets, that is, assets less liabilities. The difference in the purchase consideration and the net value of assets and liabilities is attributable 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"

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”.

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 dated 24.02.2021 are concerned, we find that the facts of above cases are not applicable to the present case because in the case before the ITAT, Hyderabad, the Tribunal has discussed the issue of valuation of goodwill, but not discussed how depreciation of goodwill had been accounted on demerger is not allowable . The other two case law also discuss the issue but facts remain that subsequent judgement of Hon’ble Karnataka High Court has overruled the decision of the ITAT, Bangalore in the case of United Breweries Ltd. (supra) and then when the Hon’ble High Court is in favour of the assessee, the question of following ITAT decision, which is against the assessee does not arise. Therefore, we reject the case law relied upon by the ld. DR.

In view of the matter and considering the facts and circumstances of the case and also by following the case law discussed hereinabove, we are of the considered opinion that the assessee has rightly claimed depreciation on goodwill accounted in the scheme of demerger approved by the Hon’ble High Court of Madras and thus, we direct the Assessing Officer to allow depreciation on goodwill as claimed by the assessee for all the three assessment years.

The next issue that came up for consideration in the assessment year 2015-16 relates to confirmation of disallowance made under section 14A r.w. Rule 8D of IT Rules, 1962. The Assessing Officer has disallowed expenses relating to exempt income under section 14A of the Act by invoking the Rule 8D of IT Rules of ₹.35,74,259/-. It was the argument of the assessee before the Assessing Officer that the assessee has not earned any exempt income for the assessment year in question and thus, in the absence of any exempt income, no disallowance can be made on expenses relating to exempt income under section 14A of the Act.

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. It is an admitted fact that the assessee had not earned any dividend income, which was claimed as exempt under section 10(34) of the Act. It is well settled principle of law by the decision of Hon’ble Supreme Court in the case of Chettinad Logistics (2018) 95 Taxmann.com 250 (SC), wherein, it was held that section 14A of the Act can be triggered if the assessee seeks to square off expenditure against income which does not form part of total income. In other words, where no exempt income is earned, section 14A could not be invoked. Hon’ble Delhi High Court in the case of Cheminvestments Ltd. v. CIT [ITA 749/2014] had considered identical issue and held that no disallowance can be made where no dividend income has been received. In this case, there is no dispute with regard to the fact that the assessee has not earned any dividend income. Therefore, we are of the considered opinion that in the absence of exempt income, no disallowance under section 14A r.w. Rule 8D could be made. Thus, we direct the Assessing Officer to delete the addition made towards disallowance under section 14A of the Act.

In the result, the appeals filed by the assessee for the assessment years 2013-14, 2014-15 and 2015-16 are allowed and the appeal filed by the Revenue for the assessment year 2015-16 is dismissed.