DCIT, CENTRAL CIRCLE-3(2), MUMBAI vs. YOLA STAYS LIMITED, MUMBAI

"On the facts and in the circumstances of the case, the Ld. CIT(A) failed to consider the fact that goodwill arising from the amalgamation process is based on land value, which is an immovable property and not eligible for depreciation under Section 32 of the Income Tax Act, 1961."

"On the facts and in the circumstances of the case, the Ld. CIT(A) failed to appropriately apply the provisions of Section 32(1)(ii) of the Income Tax Act, 1961 by allowing depreciation on goodwill, which is not related to any identifiable intangible asset with a defined useful life, and thus should not have been allowed for depreciation.”

The assessee is a company engaged in the business of real estate builder. The assessee filed the return of income for AY 2016-17 on 28.09.2016 declaring a total income of Rs.2,52,66,410/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) noticed that the assessee has claimed depreciation @ 25% on the addition made to intangible assets and called on the assessee to furnish the relevant details in this regard. The assessee submitted that in accordance with the Scheme of Arrangement/ Amalgamation as approved by the Hon'ble Bombay High Court vide order dated 31.07.2015 M/s Rishiraj Enterprises Ltd. (REL) 100% subsidiary of the assessee company got amalgamated with the assessee. The assessee further submitted that as per the High Court order the excess of investments as against the net assets of REL was recorded as goodwill in the books of the assessee and depreciation is claimed on the goodwill so acquired. The AO after perusing the details furnished by the assessee held that “5.6 I have gone through the above submission of the assessee, however I am constrained to differ from the same on account of following reasoning: 1. On-going through the books of M/s Rishiraj Enterprises Limited, it is observed that the said company has no other assets other than land. 2. The assessee vide its submission dated 27/12/2018 has stated “the Government Ready Reckoner Rate in 2010 value of the Immovable Property situated at Mohan Nagar, Nagpur comes to Rs. 733.77 Lakhs (Land Area 2158.14 Sq. Mt. X Rs. 34,000/- per Sq. Mt.). The ready reckoner value of the property was Rs.733.77 lakhs was in 2010, which certainly would have appreciated to roughly double of its price, within the time span of 5 years, considering the location of the land in a very promising upcoming area of Nagpur. Thus, it can be conclusively held that the underlying asset due to which the valuation of the company was done at Rs 12.94 Cr is the property mentioned above. 3. Here, it would not be out of place to mention that depreciation is not allowed on land or in its appreciation. As such Goodwill amounting to Rs.12,83,98,000/- accounted by the assessee as intangible asset in nothing but the value of land, on which, at any stretch of imagination, depreciation cannot be allowed, since Income Tax Act, 1961 does not provide so. 4. In addition to above, the said amalgamation is between a subsidiary and its holding company wherein 100% rationality of the transaction i.e. the exactness of the quantum of transactions cannot be established.”

The AO while concluding the assessment also made addition towards Long Term Capital Gain (LTCG) under reported to the tune of Rs. 3,444/-. On further appeal the CIT(A) gave relief to the assessee by placing reliance on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. [2012] 348 ITR 302 (SC). The revenue is in appeal against the order of the CIT(A).

The ld. AR argued that the reasons for the AO to make the addition is based on the suspicion that the goodwill recorded in the books of the assessee is towards the land which according to the AO is the only asset in the books of the amalgamating company. The ld. AR further argued that the primary objective of the amalgamation is to combine resources and the expertise of both the companies since both are involved in the business of construction and development activities. The ld. AR further submitted that the entire working of net assets & liabilities for Hon'ble High Court and the same has been approved. The ld. AR in this regard drew our attention to the scheme of amalgamation as approved by the Hon'ble Bombay High Court (page 226 to 249 of PB). The ld. AR argued that the capital gain arising out of the transaction is already offered to tax and in this regard drew our attention to the workings in page 137 of PB.

The ld. DR on the other hand vehemently argued that in the balance sheet of REL the only asset is the land and therefore the scheme of amalgamation has been used by the assessee to acquire the land. The ld. DR further argued that the consideration paid by the assessee is attributable mainly to the land which is the only asset held by REI and therefore the AO has correctly denied the depreciation since no depreciation is allowed on land. Accordingly, the ld. DR supported the order of the AO.

We heard the parties and perused the material on record. We notice that REL which is the subsidiary of the assessee got amalgamated with the assessee company. We further notice that as per the scheme of amalgamation as approved by the Hon'ble High Court, the accounting treatment of the amalgamation is detailed as under:

1) Upon coming into effect of this Scheme, to the extent that there are inter company loans, advances, deposits, balances or other obligations as between the Transferor Company and the Transferee Company, the obligations in respect thereof shall come to an end and corresponding effect shall be given in the books of accounts and records of the Transferee Company for the reduction of any assets or liabilities, as the case may be For the removal of doubt, it is clarified that there would be no accrual of interest or other charges in respect of any such inter-company loans, advances, deposits, balances or other obligations from Appointed Date. 15.2) The Transferee Company shall record all assets and liabilities vested in the Transferee Company pursuant to the Scheme at their book values as appearing on the Appointed Date

3) Further, after adjusting for any diminution in the carrying cost of the assets and for any differences in the accounting polices between the Companies, the impact of the same till the amalgamation will be quantified and adjusted in the revenue reserves on the basis of consistent accounting policies.

4) The reserves of the Transferor Company will be merged with those of the Transferee Company in the same form as they appeared in the financial statements of the Transferor Company.

5) The excess, if any, of the value of the net assets of the Transferor Company shall be credited by the Transferee Company to an account to be styled as "Amalgamation Reserve Account" and the said account shall be treated as free reserve of the Transferee Company. The deficit, if any, shall be debited by the Transferee Company to its Goodwill Account.

6) Further, in case of any differences in accounting policy between the Company the impact of the same till the amalgamation will be quantified and adjusted in the Revenue Reserve(s) to ensure that the financial statements of the Transferee Company reflect the financial position on the basis of consistent accounting policy.

7) The Transferee Company can amend the accounting treatment of different items to comply with the Accounting Standards and the regulations and other requirements for the time being in force.”

We further notice that the assessee has submitted the below workings of net Assets & Liabilities for the purpose of amalgamation as under: 8. From the combined perusal of the above, it is clear that the Hon'ble High Court has approved the scheme of amalgamation, where the deficit if any between the book value of assets acquired and the consideration paid would be accounted as good will. Though the AO is contending that the assessee has indirectly acquired the land as a reason for denying depreciation on Goodwill, the AO did not record any adverse finding with regard to determination of the consideration paid by the assessee. It is a settled position that prior to amendment to section 32 there is no restriction to claim depreciation on good will. Further, when the consideration paid is in excess of the book value then it is the accepted accounting practice which is approved in assessee's case by Hon'Ble High Court that the difference be accounted as goodwill. Accordingly we see no reason to interfere with the decision of the CIT(A) in deleting the disallowance made by the AO.

In result, the appeal of the revenue is dismissed. Order pronounced in the open court on 22-09-2025. (SAKTIJIT DEY) (PADMAVATHY S) Vice President Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. 5. Guard File CIT BY ORDER,