ACIT, MUMBAI vs. AAACORP EXIM INDIA PVT. LTD., MUMBAI

The Department has raised the following grounds of appeal:

The brief facts of the case are that the assessee, AAACORP Exim India

During the assessment proceedings, the Assessing Officer examined the valuation report, the share-swap ratio and the assessee's explanation that the goodwill was the excess of the purchase consideration over the value of the net assets acquired pursuant to the amalgamation. The assessee relied, inter alia, upon the decision of the Hon'ble Supreme Court in CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)] and submitted that goodwill constituted an intangible asset eligible for depreciation under section 32 of the Act. The Assessing Officer accepted the legal proposition that goodwill could constitute an intangible asset, but held that the goodwill in the present case had arisen merely by way of accounting entries, the transferor company had not separately held goodwill in its books, the assessee had not incurred any separate actual cost for acquiring goodwill and that the working underlying the NAV and DCF valuation used for the share-swap ratio was not transparent. The Assessing Officer, therefore, treated the goodwill as artificial and disallowed the depreciation.

The Assessing Officer also recorded an alternative finding. He observed that the NCLT passed the amalgamation order only on 09.11.2017 and, therefore, according to him, the goodwill could have been put to use for less than 180 days during the previous year relevant to A.Y. 2018-19. On this basis, the Assessing Officer held that, even if depreciation were otherwise allowable, the assessee could at best claim depreciation at half of the normal rate. The Assessing Officer ultimately disallowed the assessee's entire claim of depreciation of about ₹4.42 crore.

The learned CIT(A) examined the NCLT-approved scheme of amalgamation, the audited financial statements and the valuation report. The learned CIT(A) found that the amalgamation took effect from 01.04.2016 and that the goodwill of ₹23.60 crore was towards the excess of the purchase consideration of ₹50.95 crore over the net assets of ₹27.35 crore taken over from J.J. Polyplast Pvt. Ltd. The learned CIT(A) held that the goodwill had arisen as a direct consequence of the amalgamation and could not be regarded merely as a notional accounting entry. Relying principally upon the decision of the Hon'ble Gujarat High Court in Zydus Wellness Ltd. v. ACIT and the legal position relating to depreciation on acquired goodwill, the learned CIT(A) held that the goodwill was an acquired intangible asset falling within section 32(1)(ii) of the Act and allowed the depreciation claimed by the assessee. However, while allowing the claim, the learned CIT(A) did not adjudicate the Assessing Officer's alternative finding that depreciation, even if otherwise admissible, should be restricted to half of the normal rate on the ground that the NCLT passed its order on 09.11.2017.

The Department is in appeal before us against the order passed by the learned CIT(A) allowing the appeal of the assessee.

We have heard the rival submissions and perused the material available on record. The dispute before is with respect to the assessee's claim of depreciation on goodwill arising pursuant to the amalgamation of J.J. Polyplast Pvt. Ltd. with the assessee. The Department has challenged the finding of the learned CIT(A) that the goodwill arising on amalgamation constitutes an acquired intangible asset eligible for depreciation under section 32(1)(ii) of the Act. The Department has also specifically raised the objection that the learned CIT(A), while allowing the entire claim, has not dealt with the Assessing Officer's alternative finding regarding restriction of depreciation to half of the normal rate on the ground that the NCLT passed the amalgamation order on 09.11.2017 and the asset was, according to the Assessing Officer, put to use for less than 180 days.

As regards the basic eligibility of the goodwill for depreciation, we find that this issue is no longer open for examination in the present year. The very same goodwill arose from the same amalgamation of J.J. Polyplast Pvt. Ltd. with the assessee and the same issue came before the Coordinate Bench in the assessee's own case for the immediately preceding A.Y. 2017-18 in DCIT, Circle-14(1)(1), Mumbai v. AAACORP Exim India Pvt. Ltd., ITA No.

The Coordinate Bench thereafter further held:

We find that the goodwill under consideration in the present A.Y. 2018- 19 is not a fresh goodwill or a different asset. It is the very same goodwill of ₹23.60 crore arising from the same amalgamation which the Coordinate Bench examined in A.Y. 2017-18. The assessee claimed depreciation in the present year only on the balance written-down value after claiming depreciation in the preceding year. Therefore, respectfully following the decision of the Coordinate Bench in the assessee's own case, we uphold the finding of the learned CIT(A) that the goodwill arising from the amalgamation is an intangible asset eligible for depreciation under section 32(1)(ii) of the Act. Consequently, to this extent, we find no merit in the appeal of the Department and uphold the order of the learned CIT(A).

There is, however, one limited aspect which requires separate consideration. The Assessing Officer specifically recorded in paragraph 6.13 of the assessment order that, since the NCLT passed the amalgamation order on 09.11.2017, according to him the goodwill was put to use for less than 180 days and, therefore, depreciation, even if accepted as being admissible, could be allowed only at half of the normal rate. Although the learned CIT(A) noticed this alternative finding while summarising the assessment order, the learned CIT(A), while allowing the depreciation, did not specifically adjudicate whether the restriction relating to use of an asset for less than 180 days could at all apply in the facts of the present year. Since the Department has specifically raised this issue before us, we consider it appropriate that the learned CIT(A) should adjudicate this limited question.

While doing so, the learned CIT(A) shall also take into consideration an important aspect which comes from the record. The scheme of amalgamation itself provides that the amalgamation takes effect from 01.04.2016, and the present A.Y. 2018-19 represents the second year of the assessee's claim of depreciation on the same goodwill. The assessee had already claimed depreciation on the goodwill in A.Y. 2017-18, and the Coordinate Bench, by its order dated 30.07.2026, has upheld the allowance of that claim. The Coordinate Bench specifically proceeded on the basis that the goodwill arose pursuant to the amalgamation and upheld the depreciation claimed for A.Y. 2017-18. The learned CIT(A) shall, therefore, examine whether, once depreciation on the same goodwill has already been allowed in the first year and the asset has entered the block of assets, the Assessing Officer could in the second year restrict depreciation by treating the date of the NCLT's approval order dated 09.11.2017 as the date on which the asset was first put to use. The learned CIT(A) shall also examine the effect of the fact that the NCLT sanctioned the scheme with the appointed/effective date of 01.04.2016.

We make it clear that we have restored the matter only for adjudication of this limited issue concerning the applicability of the restriction for use of the asset for less than 180 days and the consequent quantum of depreciation. The finding of the learned CIT(A) that the goodwill itself constitutes an eligible intangible asset under section 32(1)(ii) is hereby upheld and shall not be reopened. 14. The learned CIT(A) shall decide the limited issue in accordance with law after giving reasonable opportunity of hearing to the assessee.

Accordingly, the Department's challenge to the eligibility of goodwill for depreciation is dismissed, whereas the limited question relating to the alleged use of the goodwill for less than 180 days and the quantum of depreciation is restored to the file of the learned CIT(A) for fresh adjudication.

Thus, the appeal of the Department is treated as partly allowed for statistical purposes in the terms indicated above.