MYLAN LABORATORIES LIMITED ,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CIRCLE-16(2), HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD ‘A’ BENCH : Hyderabad Before Smt. P. Madhavi Devi, Judicial Member And Shri S. Rifaur Rahman, Accountant Member ITA No. 2335/Hyd./2018 Assessment Year: 2014-15 Mylan Laboratories Limited. Vs. Dy.CIT, Circle 16(2) Hyderabad Hyderabad. PAN: AADCM3491M (Appellant) (Respondent)

ITA No. 12/Hyd./2019 Assessment Year: 2014-15 Dy.CIT, Circle 16(2) vs. Mylan Laboratories Limited. 2nd Floor, B Block, Plot No.564/A/22, Road no.92 I.T.Towers, A.C.Guards, Jubilee Hills Masab Tank Hyderabad 500 034. Hyderabad & (Appellant) (Respondent) For Revenue: Sh. YVST Sai, D.R. For Assesse: S/Sh. Sriram Seshadri, Padam Chand Kincha, Amit Mishra & Ms.Amulya K, A.Rs.

Date of Hearing : 14/08/19 Date of Pronouncement : 13/11/19 O R D E R Per Smt. P. Madhavi Devi, J.M. Both are Cross Appeals for A.Y. 2014-15. The appeal is filed by the assessee while the Cross Objection is filed by Revenue against the order of Ld.CIT(A)-4, Hyderabad dated 09.10.2018.

3.4. On facts and in circumstance of the case and in law, the Ld. CIT(A) erred in disallowing depreciation on Rs.l,625 crores (out of total goodwill of Rs.4.492 crores) as self-generated goodwill without appreciating that an actual consideration of Rs.43,860 million in cash has been paid to acquire business along with the said goodwill.. 3.5. Without prejudice, the Ld. CIT(A) has failed to appreciate that depreciation on Rs.1,625 crores is allowable under section 32 read with section 43(1). 3.6. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in disallowing depreciation of Rs.183 Crores. on the erroneous understanding that Appellant had separately claimed depreciation on intangible assets of Rs.1,464 crores in addition to depreciation on total goodwill of Rs.4,492 Crores, resulting in double disallowance of depreciation on Rs.183 crores. 3.7. The Ld. CIT(A) has erred in concluding that the intangible", assets quantified at Rs.1,464 crore was not supported by any documentary proof. 4. Enhancement by Ld. CIT(A) u/s 68 of the Act: 4.1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in enhancing l the income of the Appellant to the extent of Rs, 1,592.6 Crores ss] s 68 of the Act. 4.2. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in dealing with an item, which was beyond the scope of appellate proceedings u/s 251 of the Act. 4.3. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in enhancing the income of the Appellant in violation of principles of equity and natural justice and in violation of statutory procedure laid down in section 251 (2) of the Act for enhancement of income of the Appellant. 4.4. Without prejudice, the learned CIT(A) has erred in not appreciating that there are no sums found credited in the books of account during the previous year and accordingly, the pre-requisite of section 68 fails at threshold. 4.5. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in making an addition in respect of an outgo of money, which is a 'debit' as an unexplained cash credit u/s 68 of the Act. 4.6. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in disregarding all the documents/evidence

already on record, which proves the nature of the transaction as well as its genuineness as a loan given by the Appellant to its wholly owned subsidiaries to settle their subsisting debts. 5. Disallowance under section 14A of Rs.3.11 Crores 5.1. On facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in upholding the action of Ld.AO in disallowing amount of Rs.3.11 Crores under section 14A under normal computation of the Act and under MAT . 6. Interest levied under section 234C 6.1. The Ld. AO has erred in levying interest under section 234C. The appellant denies its liability to pay interest under section 234C. The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto. The grounds of appeal raised by the Appellant herein are without prejudice to each other. The Appellant craws leave to add to and/ or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.” 2.1 Grounds raised by the revenue in ITA 12/Hyd./18 are as under: “1. Ld.CIT(A) erred in directing the AO to allow amortization of the goodwill in respect of acquired goodwill over a period of 5 years without appreciating the fact that, as per sixth proviso to Sec.32(1) of the Act, the assessee is not entitled to claim depreciation/amortization on goodwill, since the WDV of goodwill in the balance sheet of amalgamating company is ‘nil’. 2. Any other ground that may be raised at the time of hearing.” 3. Brief facts of the case are that the assessee company, engaged in pharmaceuticals business, filed its return of income for the A.Y. 2014-15 on 30.11.2014 admitting a total loss of Rs.29,09,02,208/- under normal provisions of the Income Tax Act, 1961 (the Act) and book profit of Rs.928,04,92,606/- u/s 115 JB of the Act. The return was initially processed u/s 143(1) of the Act and the case was selected for scrutiny under CASS. Notices u/s 143(2) of the Act and u/s 142(1) were issued and responded to by the assessee. 3.1. The Assessing Officer (AO) observed that during the relevant Previous Year (PY), the assessee company had certain international

transactions pertaining to purchases of from/with the associate enterprises. A reference was therefore made to TPO for determination of Arm’s Length Price (ALP). The TPO, vide his order u/s 92CA(3) dated 31.10.2017, warranted no adjustment and therefore the TP addition was ‘nil’. 3.2. During the assessment proceedings u/s 143(3) r.w.s. 92CA(3) of the I.T. Act 1961, the AO noticed from the Annual Report for the F.Y. 2013-14, that the Assessee company had charged Rs.141,50,90,000/- as litigation cost under the head ‘other expenses’. The details of expenditure were called for by the AO and the assessee furnished its replies from time to time. On verification of the submissions made by the assessee the AO observed that during the FY 2009-10, the European Commission (‘EC’ in short), had stated that it had initiated anti-trust proceedings against the assessee company and other companies, each of which entered into agreements with another Company Les Laboratories Servier (‘Servier’), relating to a product “perindopril”, and that on 27 th of July, 2012 the EC issued a statement of Objections against the assessee and others setting out its preliminary case and that the assessee had submitted its response to EC on the statement of objections. 3.3. Further on 9th July, 2014 the EC issued a decision to the effect that the Assessee company and Mylan Inc., as well as the other companies have violated European Union competition rules and for this violation, it imposed a fine/fee equivalent to the patent infringement settlement consideration received from Servier, of approximately Rs.1415.09 millions (EUR 17.2 Million) including approximately Rs.662.29 millions (EUR 8.05 Million) jointly and severally with Mylan Inc. USA, the ultimate holding company. He observed that the assessee company continued to contest the case in General Court of EU, while the management has made a provision towards the same in its books of accounts on prudent basis. 3.4. The AO, therefore, issued a show cause notice to the Assessee as to why the litigation expenditure of Rs.141,50,90,000/- claimed by assessee should not be disallowed under Explanation 1 to Sec.37(1) of the Act. The assessee filed its reply to the show cause notice stating that the

payment is not towards fine, but that it is only a return back of the income received from Servier on account of the agreement for development of generic version of ‘Perindopril’ tablets. For the sake of clarity and ready reference, the relevant portion is reproduced hereunder. “5.3. The assessee’s reply to the SCN dated 21.12.2017 is reproduced as under. 1. With respect to your SCN dated 21.12.2017 requesting to justify why the fine paid to EU commission should not be disallowed u/s 37. Further to the above and the discussion had with our good selves in relation to claim of pay back to EU Commission of GBP 11.8 million income earned earlier under a settlement agreement between Matrix Laboratories (now Known as 'Mylan Laboratories Limited'), we submit as under,. 1. The taxpayer has developed and stabilized the process for manufacture of ‘Perindopril’ and filed necessary regulatory applications ((DMFs) for manufacture of API drug from its manufacturing unit. 2. The taxpayer and Niche Generics Limited entered into an co- development agreement to jointly develop the generic version of Perindopril tablets for which the API would be supplied by the taxpayer. Niche filed the Dossiers for manufacture of Perindopril at its Unichern facility, based on the supplies from taxpayer. 3. Perindopril is Servier Laboratories limited ('Servier') most successful product in EU and it is the originator company/patent company. Niche working with Matrix and Unichem Laboratories Limited would result in a generic entry of perindopril. 4. Servier in Feb'04 warned Niche about its existing patent protection for perindopril and after a series of discussions had settled on 8th February 2005, Servier concluded with Niche a patent settlement agreement. 5. The taxpayer did not have capability to produce a final perindopril product, it had the capability to produce an API at that time. It had no presence in the ED for applying Market Authorization. As a result of losing Niche, taxpayer was out of the race and would not have been able to find another partner willing and able to overcome all barriers and produce in a timely manner a final perindopril product 6. With no choice left taxpayer settled with Servier under a settlement agreement wherein for a GBP of 11.8 million - taxpayer shall not, and shall procure that its affiliates shall not, (i) carry out in relation to Perindopril made using the process any restricted act in any country of the territory; and/or (ii) manufacture and/or supply Perindopril made using the process, for use anywhere in the Territory.

Treatment of the ‘take back’ under Income Tax Act, 1961 Given the above rationale for the levy of fine which is entirely related to alleged violation of competition laws of European Union (until finally adjudicated by a higher appellate authority), it is our prima- facie view that the fine is nothing but 'take back' of the non-compete settlement income received from Servier. The recitals in the Commission orders would buttress the argument that the amount is a 'take back' and not a fine. Therefore, the amount would be allowable as a deduction under section 28 of the Income tax Act, 1961. Under the Income tax Act, 1961 non-compete receipts are taxable as part of income irrespective of their legal enforceability. Any Court decision that declares that the amount is required to be 'given back' on the ground that they are 'gains improperly made', the deduction would also be made under the same section, i.e., section 28 of the Act. This amount is not hit by Explanation 1 to Sec 37(1) and we provide our reasons below : a. For the sake of convenience, the sub-section with explanation thereto is quoted below: "37 (1) Any expenditure (not being expenditure of the nature described in sections 3010 36 and not being in the nature of Capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an Offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction Or allowance shall be made in respect of such expenditure. b. The Explanation was introduced in 1998 and the amendment Was made retrospective from 01st April, 1962. The Memorandum Explaining the Provisions of the Finance Bill 1998 stated as follows: It is proposed to insert an explanation after sub-section (i) of section 37 to clarify that no allowance shall be made in respect of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. This proposed amendment will result in disallowance of the claim made by certain tax payers of payments on account of protection money, extortion, hafta, bribes, etc. as business expenditure. c. The disallowance under this Explanation, therefore, rests on the following conditions precedent: i. It should be an expenditure; and ii. It should have been incurred for any purpose which is an offence or

which is prohibited by law. d. Once it is established that the amount is 'expenditure' the second condition precedent for attracting disallowance under Explanation to Section 37(1) is whether it has been incurred by the assessee for any purpose which is an offence or which is prohibited by law. The word "offence" is not defined in the Income Tax Act. However, it is defined in Section 3(38) of the General Clauses Act, 1887 as follows: "offence" shall mean any act or omission made punishable by any law for the time being in force;". The expression "prohibited by law" , too, is not defined in the Income Tax Act. It may be viewed either as an act arising from a contract which is expressly or impliedly prohibited by statute, or contracts entered into with the object of committing an illegal act. e. The Hon'ble Madras High Court in the case of CIT v. Parthasarathy [1995] 78 Taxman 470 held that for deciding the question whether an expenditure is hit by the Explanation 1 to section 37(1) one has to examine the scheme of the provisions of the relevant statute, providing for payment of such imposts notwithstanding the nomenclature of the impost as given by the statute to find out whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income-tax Act, whenever such examination reveals the concerned impost to be purely compensatory in nature. Whenever such impost is found to be of composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obliged to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature. f. The Explanation (1) to section 37(1} was brought in to nullify the Pranav Construction Co. v, Asstt. CIT (1998] 96 Taxman 323 (Mag.)(Mum.) judgment. In that case a sum of Rs. 20 lakhs had been paid as protection money by builder as the areas were vulnerable to hafta and extortion and this money was allowed as deduction. Thus, to disallow income-tax deductions for hafta, the Explanation had been incorporated. But extending the proviso to fines was never intended. Hence, disallowing income-tax deduction for any kind of fine is not proper. g. Another noteworthy point is that the Explanation to section 37(1) is a deeming provision. It only creates a legal fiction. Next, the Explanation comes into play when expenditure, though incurred for business purpose, is coupled with purpose which is offence or prohibited by law. Here the purpose is to do business and there is no double purpose to do unlawful or illegal acts. h. The Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. [(1988) 172 I1R 113, 118-19](AP) has taken the view that the amount of such damages comprises both an element of penalty levy as well as compensatory payment. Therefore, the entire sum can

neither be considered as mere penalty nor as mere interest. In that view of the matter, that portion out of the amount of such damages, which is held to be compensation, is an allowable deduction. i. It may be that a particular payment made by the assessee under a statutory provision, though called a penalty, is a composite one comprising both a penalty and a compensation for delayed payment. Under section 37( 1) , only that portion of such payment having composite nature which is attributable to its compensatory character can only be allowed as a deduction. The other portion which is attributable to its penalty nature cannot be allowed as a deduction under section 37(1) because such payment is for infraction of law [Prakash Cotton Mills P. Ltd. v. CIT, (1993) 201 ITR 684, 690-91(SC) ; Standard Batteries Ltd. v. err, (J995) 211 ITR 444, 446(SC) ; Swadeshi Cotton Mills Co. Ltd. v. err. (1998) 233 ITR 199, 202(SC) ; CIT v. Bharat Television Pvt. Ltd_, (1996) 218 ITR 173, 175, J 78(AP) ; CIT v , Hyderabad Allwyn Metal Works Ltd., (1988) 172 ITR 113. 121 (AP) . 10. In view of the above, the above, the amount of GBP 11.8 million payable by Mylan, being the same amount received from Servier under Article 23(2) of the EU Regulation (EC) No. 1/2003, which is called fine is nothing but compensatory doesn't fall within Explanation 1 to Section 37( 1) and should be allowed as deduction from Income.” The AO, however was not convinced with assessee’s contentions and held that the levy of fine is for violation of rules and hence the expenditure claimed as litigation cost is to be disallowed under the Explanation 1 to Sec. 37(1) of the Act. He accordingly brought the same to tax. 4. Aggrieved, the assessee preferred an appeal before the CIT(A), who confirmed the order of AO on this issue and the assessee is in second appeal before us. In addition to this disallowance, there were also certain other disallowances and the consequential additions made by the AO and the CIT(A) had granted partial relief to the assessee which are also challenged by both the parties in the appeal filed before us. 5. We shall deal with all the issues in seriatum, after deciding the first issue before us i.e. the allowability of the litigation costs. 6. The Ld.Counsel for the assessee, while reiterating the submissions made before the authorities below, submitted as under:- (a) that prior to the year 2004, the assessee had developed and stabilized the process of manufacture of “Perindopril”, an anti-high

blood pressure drug, and filed the necessary regulatory applications (DMFs) for manufacture of the API drug from its manufacturing unit. (b) The assessee and Niche Generics Limited (“Niche”) entered into a co-development agreement to jointly develop the generic version of Perindopril tablets, for which the API would be supplied by the assessee and accordingly Niche filed the Dossiers for manufacture of Perindopril, at its Unichem facility, based on the supplies from the assessee. (c) that “Perindopril” is Servier Laboraties Limited’s (‘Servier’) most successful innovator product in the European Union (“EU’) region, for which it is the originator company/patent company. ‘Niche’, a competitor to ‘Servier’, was working with ‘Matrix’ (now called as ‘Mylan’) and Unichem Laboratores Limited for the generic entry of Perindopril in the EU region. (d) ‘Servier’, in February 2004, warned ‘Niche’ about its existing patent protection for perindopril, and after a series of discussions, on 8th February, 2005, a ‘Patent Settlement Agreement’, was concluded by Servier with Niche. (e) As the assessee did not have capability to produce independently the final perindopril product, but only had the capability to produce an API and since it had no presence in the EU region, to apply for Market Authorization the assessee had to enter into a partnership with ‘Niche’ and, therefore, it had to settle with ‘Servier’ under a Settlement Agreement for GBP of Rs.1.18 crores. (f) According to this agreement, the assessee or its affiliates shall not : (i) carry out in relation to ‘Perindopril’ made using the process any restricted act in any country of the territory; and/or (ii) manufacture and/or supply ‘Perindopril’ made using the process, for use anywhere in the Territory. (g) In return, ‘Servier’ committed, first, not to bring any infringement actions against Matrix based on the patents in respect of any act of alleged infringement occurring before the conclusion of the Agreement and, secondly, to pay Matrix, the sum of GBP Rs.1.18 crores towards consideration for the commitments made by Matrix

and for the ‘substantial costs and potential liabilities’ that may be incurred by Matrix as a consequence of ceasing its programme to develop and manufacture ‘Perindopril’ made using the process. (h) The said settlement obligation prevented the assessee from launching a generic version of Perindopril, manufactured on the basis of the process developed by it in cooperation with Niche, in the Territory. (i) The amount of GBP Rs.1.18 crores received by the assessee in the said settlement, was recognised in the books of accounts of the assessee as income on a deferred basis, over a period of 44 months. But the entire amount of GBP Rs.1.18 crores was offered to tax as income from business, in the same year, i.e. in A.Y. 2005- 06. (j) On July 9, 2014, the order of the EU Commission was passed imposing a fine on the assessee, under its anti-trust laws in the region, for violation of the competition laws, by way of accepting a non-compete settlement from Servier, (k) The fine imposed on the assessee was in Euros equivalent to the amount of GBP Rs.1.18 crores received by it in settlement i.e. € 1.72 crores. The assessee was therefore required to disgorge the entire sum received by it from Servier. (l) Thus, the assessee incurred an amount of INR 141.50 crores from its profits for the year, as Litigation costs under the head ‘other expenses’. The assessee, therefore, claimed that the payment towards levy by EU Commission constitutes business loss eligible for deduction u/s 28(i) of the Act. It was submitted that for arriving at the figure of profits and gains of the business of the assessee in a particular year, business expenditure of all types, whether specifically provided for or not, may be allowed u/s 28(i) of the Act itself. He also referred to Sections 30 to 43C of the Act, submitting that these sections expressly provide for the deductions in computing business income and if an expenditure comes within any of the enumerated classes of allowances, it can be considered under the appropriate provision. He further submitted that in

assessing the amount of the profits and gains of the year, account must necessarily be taken of all losses incurred besides the expenditure allowable u/sec. 30 to 43C of the Act. In support of this contention, he placed reliance upon the decision of Hon’ble Supreme Court in the case of Badridas Daga reported in (1958) 034 ITR 0010. He also submitted that in the A.Y. 2005-06, the assessee had received an amount of GBP Rs.1.18 crores which was duly offered to tax and during the relevant AY, assessee was intimated that it would be required to pay back the entire amount received earlier, to the EU Commission and, therefore, it would constitute a loss to be deducted in computing the income of the assessee for the relevant AY. He submitted that if such a deduction was not allowed, it would tantamount to levying of tax on the amount which was never earned by assessee and it is a settled principle that tax should be charged only in respect of a real income of the tax payer. 6.1. Ld.Counsel for the assessee also submitted that what is to be disallowed under Explanation 1 to section 37(1) of the Act is a fee or fine which is penal in nature. He submitted that levy by EU Commission is not penal in nature but was akin to disgorgement i.e. a monetary equitable remedy that is designed to prevent a person from unjustly enriching himself. He submitted that disgorgement takes away the profits earned by the said person and therefore is not a fine or penalty but an equitable relief. He submitted that since the assessee did not incur additional amounts over and above the amounts received in settlement, the deductibility of the said payment cannot be denied under Explanation 1 to Sec.37(1) of the Act. It was also submitted that only those payments which are penal in nature are to be disallowed as per Explanation 1 to Sec.37(1) of the Act and what constitutes penal and what constitutes compensatory is to be determined independently and in the facts and circumstances of each case. He submitted that the AO had disallowed the said expenditure/ levy, merely going by its nomenclature in the order of the EU Commission and did not examine as to the exact nature of levy. In support of his contentions that AO has to allow deduction of an expenditure u/s 37(1) of the Act, wherever

such examination reveals that the concerned impost is not penal in nature or that it is purely compensatory in nature, the Ld.Counsel for the assessee placed reliance upon the following cases. • Prakash Cotton Mills P Ltd. (SC) (1993) 201 ITR 684; • Swadeshi Cotton Mills Co.Ltd. (SC) (1998) 233 ITR 199; • Standard Batteries Ltd. (SC) (1995) 211 ITR 444; • Hyderabad Allwyn Metal Works Ltd. (High Court of AP) (1988) 172 ITR 1131; • Bharat Television Pvt.Ltd. (High Court of AP) (1996) 218 ITR 172. 6.2. The Ld.Counsel for the assessee further reiterated that the amount received from Servier, in settlement for non-compete, was duly offered to tax in AY 2005-06 and the same has been directed to be returned except to the extent of difference in foreign exchange fluctuation rate, and since it is a payment towards patent infringement or settlement, the same is compensatory in nature and cannot be disallowed, particularly because the expenditure is purely for commercial purposes. For this proposition, he placed reliance upon the decision of Hon’ble High Court of Delhi in the case of Desiccant Rotors International (P) Ltd. Reported in 245 CTR 572 (2012). 6.3. Without prejudice to the above arguments, the Ld.Counsel for the assessee submitted that the word ‘law’ referred to in Explanation 1 to Sec.37(1) of the Act is only the ‘law of the land’ i.e. laws in force in India and violation of the provisions of the Treaty on the Functioning of the European Union (TFEU in short) cannot be considered as violation of the law under Explanation 1 to Sec.37(1) of the Act. He submitted that the treaty on the functioning of the EU (TEFU) is between the constituents of the EU i.e. 28 Member States that are located primarily in Europe and is applicable only within such states and is separate from International Law. Therefore EU Treaties are like any other international agreements between the countries and the violation of the Articles of Agreement cannot be construed as violation of law, even if such agreement forms the basis of the laws of various countries in a region. In support of his contention that the word law mentioned in Explanation 1 to Sec.37(1) of the Act refers to laws

in force in India, the Ld.Counsel placed reliance upon the Board’s Circular no.772 dated 2.12.1998 reported in 235 ITR (St) 35 (1999) explaining the amendment by way of insertion of Explanation (1) to Sub-section (1 of Sec.37 of the Act and submitted that what is proposed t)o be disallowed is the payment on account of protection money, extortion, Hafta, bribes etc. (emphasis supplied by us), which may be claimed as business expenditure. He also placed reliance upon the decision of Hon’ble Calcutta High Court in the case of Susanta Mukherjee in CW No.412 of 1975 wherein, Sec.3(38) of the General Clauses Act which defines “offence” to mean “any act or omission made punishable by law for the time being in force” was considered. Further, Article 13 of the Constitution of India and the decision of Hon’ble Supreme Court in the case of Edward Company Mills AIR 1955 (SC) 25 were considered and it was held that any law for the time being in force as occurring in Section 3(38) of the General Clauses Act, 1897, must be construed as ‘any law for the time being in force’ in India and it has no reference to any law of other countries of the world. He also referred to the decision of the Full Bench of Hon’ble Allahabad High Court in the case of Abdul Hameed vs. Mohd. Ishaq AIR 1975 All.166 in support of his contention that reference to the word ‘law’ in the relevant section means the law of the land i.e. the law of India as the definition under the General Clauses Act is applicable to all the Central Acts and Regulations, including the Income Tax Act. 6.4. The Ld.Counsel for the assessee further submitted that the expenditure incurred towards levy by EU Commission was incurred for the purpose of carrying on its business and, therefore, it cannot be disallowed u/s 37(1) of the Act. He placed reliance upon the decision of Hon’ble Supreme Court in the case of Udaipur Distillery Co.Ltd. reported in 224 CTR 32 (2009). Thus, he prayed that the disallowance of litigation cost made by AO and confirmed by CIT(A) be deleted. 7. The Ld.DR, on the other hand, supported the orders of the authorities below and submitted that the assessee had resorted to Anti Competitive Practices by way of delaying the entry into market of certain generic medicines and this issue was investigated by the European Commission

and the EC has levied the fine for infringement of EC Treaty Rules that outlaws cartels and other restrictive business practices as well as abuse of dominant position. He submitted that the EC levies fines as a measure of deterrence so that the companies do not resort to such type of anti- competitive behaviour, and that the General Court has also confirmed the levy of penalty imposed by EU Commission. Therefore, he argued that the amount is paid as penalty for breach of law and not as a compensatory settlement. He submitted that fine is not compensation but is a payment made for infringement of law and hence cannot be allowed under Explanation 1 to Sec. 37(1) of the Act. He also submitted that the same is also not allowable u/s 28(i) as the payment is made for infringement of law. In support of his contentions, he placed reliance upon the following cases. i. Haji Aziz and Abdul Shakoor Bros (1961) 41 ITR 350 (SC) ii. Maddi Venkataraman & Co. (P) Ltd. (1998) 96 Taxman 643(SC). iii. Mamta Enterprises (2004) 135 taxman 393 (Kar.). iv. Sushil Gupta (2019) 102 taxmann.com 409 (Bom.). v. Nahar Spinning Mills Ltd. (2014) 49 taxmann.com 565 (P&H).

7.1 The Ld.DR also filed the copy of the judgement of General Court and other documents on guidelines of European Commission on levy of fines etc. as additional evidence and prayed for admission of the same under Rule 29 of ITAT Rules. Thus, he prayed for confirmation of the disallowance made by AO and CIT(A). 8. Having regard to rival contentions and the material placed on record, we find that the allowability of the claim of litigation costs of Rs.141,50,90,000/- u/s 37(1) of the Act is before us. While the assessee has claimed it as business expenditure, the revenue has treated it as payment of penalty for infringement/violation of EU Treaty in law and, hence not eligible for deduction due to application of Explanation 1 to S.37(1) of the Act to the said payment. The assessee has taken various grounds to claim it as deduction i.e. : i. The levy constitutes business loss;

ii. The levy is not penal in nature; iii. Treaty on the functioning of the EU is not law as provided in Explanation 1 to Sec.37(1) of the Act; iv. The word ‘law’ referred to in Explanation 1 to Sec.37(1) of the Act refers to laws in force in India. 8.1. The Ld.Counsel for the assessee had relied upon various case laws and also CBDT Circular to argue that the violation should only be of the laws in India to be considered for disallowance under Explanation 1 to Sec.37(1) of the Act. 8.2. The CBDT Circular, explained the amendments made to the Finance Act, 1998 for the introduction of the Explanation 1 to Sec.37(1) of the Act as under: “20.1. Section 37 of the Income-tax Act is amended to provide that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in disallowance of the claims made by certain assessees in respect of payments on account of protection money, extortion, hafta, bribes etc. as business expenditure. It is well decided that unlawful expenditure is not an allowable deduction in computation of income. 20.2. This amendment will take effect retrospectively from 1 st April, 1962 and will, accordingly, apply in relation to the assessment year 1962-63 and subsequent years.” 8.3. The General Clauses Act also defines an ‘offence’ u/s 3(38) of the Act to mean “any act or omission made punishable by law for the time being in force”. 8.4. The Hon’ble Allahabad High Court in the case of Abdul Hameed vs. Mohd. Ishaq cited (supra) had the occasion to deal with this provision of the General Clauses Act. The Hon’ble High Court was dealing with the Provisions of U.P. (Temporary) Control of Rent and Eviction Act, 1947 and the applicability of Sec.7A of the Act, while dealing with the said provision, the Hon’ble Court was considering the meaning of the word ‘law’ and at Para 12 of its decision, has held as under: “12. The expression 'law' has not been defined in the Contract Act, nor in the U. P. General Clauses Act, 1904, but in the Central

General Clauses Act. 1897, 'Indian Law' is defined in Section 3 (29) as below:- " 'Indian law' shall mean any Act, Ordinance, Regulation, rule, order, bye-law or other instrument which before the commencement of the Constitu1ion had the force of law in any Province of India or a part thereof, or thereafter has the force of law in any Part A State or Part C State or part thereof, but , does not include any Act of Parliament of the United Kingdom or any Order in Council, rule or other instrument made such Act." This definition is applicable to all the Central Acts and Regulations made after the commencement of the General Clauses Act. The Contract Act was enacted in 1872 before the commencement of the General Clauses Act, 1897. Therefore, this definition is not directly applicable to the Contract Act, but there appears to be no reason why the principles contained in the above definition be not made applicable to even the earlier enactments. 'Law' must, therefore, include not only an Act and Ordinance but also Regulations, rule, order, bye-Law or other instrument which has the force of law. Similar inference can be drawn from the provisions of the Constitution also. For the purposes of Article 13 of the Constitution the term law' includes any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law. In Article 366(10) the expression 'existing law'; has been defined for the purpose of the Constitution, to mean any law, Ordinance, order, bye- law, rule or regulation passed or made before the commencement of this Constitution by any Legislature, authority or person having power to make such a law, Ordinance, order, bye-law, rule or regulation. By virtue of Article 367(1), the General Clauses Act, 1897, is, subject to such adaptations and modifications that may be made therein under. Article 372, apply for the interpretation of the Constitution as it applies for the interpretation of an Act of the Legislature of the Dominion of India.” 8.5. Further, in the case of Susanta Mukherjee cited (supra), the Hon’ble Calcutta High Court was considering the case of a person, who was an employee of Food Corporation of India at Calcutta, and on a visit to Switzerland, he was arrested by Swiss Police and later was convicted and sentenced to imprisonment for a period of eight days on a charge of repeated thefts. After release from imprisonment, the said person returned to India and resumed his duties. However, on receipt of information about the imprisonment and conviction in Switzerland, he was put under suspension under the CCS Rules. In this context, the Hon’ble Calcutta High Court, after considering various provisions of the Constitution of India and also the Hon’ble Supreme Court judgements on the issue, held that a

reference to the word ‘law’ is any law for the time being in force in Indian territory and not in the foreign country. For the sake of clarity and ready reference, the relevant para is reproduced hereunder. “4. The point that arises for consideration is whether the words "offence", "conviction" and 'imprisonment" occurring in Rule 10 (2)(b) also includes an" offence", "conviction" and "imprisonment" under the penal law of a foreign country. In other words, whether, when a Government servant is convicted of an offence and sentenced to a term of imprisonment exceeding forty-eight hours under the law of a foreign country, he can be suspended in accordance with Rule 1O(2)(b). The Rules do not define these terms. The words "offence" and "imprisonment" have, however, been defined in the General Clauses Act. Under Section 3(38) of the said Act "offence" shall mean any act or omission made punishable by any law for the time being in force. The expression "any law for the time being in force" undoubtedly refers to any Indian law for the time being in force, for it is apparent from Section 3 of the General Clauses Act that the definitions given under that section shall apply to the General Clauses Act and all Central Acts and Regulations made after the commencement of the said Act. It is unthinkable that the General Clauses Act has been enacted by Parliament not only for the interpretation of the Central Acts and Regulations hut also of the provisions of any fa reign law, as can fended on he half of the appellants. The word "offence" as referred to in Rule 10 (2) (b) or the Rules read with Section 3(38) of the General Clauses Act means any act or omission made punishable by any Indian law for the time being in force if any act or omission which is not punishable under any Indian law it will not he an offence, although such an act or omission may he an offence under the law of a foreign country. We do not think that the decision in Edward Milts Co. Ltd. v. State of Ajmer , has any hearing on the question whether the word "offence" as defined in Section 3(38) of the General Clauses Act also includes an offence under the law of another country beyond India. In that ease, the Supreme Court has considered the difference between the expressions "an existing law" and "a law in force" as used in Section 94(3) of the Government of India Act, 1935 and Article 372 of the Constitution respectively. It has been held by the Supreme Court that there is no material difference between "an existing law" and a "a law in force". It has been further observed that the words "a law in force" a used in Article 372 are wide enough to include not merely a legislative enactment but also any regulation or order which has the force of law. "As already stated, the proposition of law which has been laid down by the Supreme Court in the above decision is not relevant to the issue with which we are concerned.” 8.6. Therefore, according to him, it is only laws of the land i.e. the laws in force in India, if violated, the extent of such violation is to be disallowed.

8.7. He also placed reliance on the decision of Hon’ble Supreme Court in the case of Hari Shanker Jain vs. Sonia Gandhi dated 12th September, 2001 in CA no.4400/2000 wherein it has been held as under: “Italian law is a foreign law so far as the Courts in India are concerned. U/s 57(1) of Indian Evidence Act, 1872, the Court shall take judicial notice of, inter alia, all laws in force in the territory of India. Foreign laws are not included therein. Sections 45 and 84 of Evidence Act permit proof being tendered and opinion of experts being adduced in evidence in proof of a point of foreign law. Under Order VI Rule 2 of the Code of Civil Procedure, 1908, every Pleading shall contain a statement in concise form of the material facts relied on by a party but not the evidence nor the law of which a Court may take judicial notice. But the rule against pleading law is restricted to that law only of which a Court is bound to take judicial notice. As the Court does not take judicial notice of foreign law, it should be pleaded like any other fact, if a party wants to rely on the same (See Moghas Law of Pleadings, 13th Edition, Page 22). In Guaranty Trust Company of New York Vs. Hannay & Co., 1918 (2) KB 623, it was held that, Foreign law is a question of fact to an English Court the opinion of an expert on the fact, to be treated with respect, but not necessarily conclusive. In Beatty Vs. Beatty, 1924 (1) KB 807, it was held that the American law in English courts must be proved by the evidence of experts in that law. In Lazard Brothers and Company Vs. Midland Bank, Limited, 1933 AC 289, their Lordships of Privy Council observed that what the Russian Soviet law is, is a question of fact, of which the English court cannot take judicial cognizance, even though the foreign law has already been proved before it in another case. The Court must act upon the evidence before it in that actual case. The statement of law by Halsbury in Laws of England (Third Edition, Vo1.15, Para 610, at page 335) is that the English courts cannot take judicial notice of foreign law and foreign laws are usually matters of evidence requiring proof as questions of fact.” 8.8. Further the Hon’ble Delhi High Court in the case of Desiccant Rotors International (P) Ltd. has held that violation of a patent in a foreign country cannot be considered as violation of India laws. The relevant paras are as under:- “11. Learned counsel also took support from the reasons given by the AO as well as the CIT(A) in their respective orders. He pointed out that the CIT(A) had clearly held that it was a case where there was an infringement of United States Patent Law by the assessee. The goods were manufactured and sold by the assessee to VENMAR for sale in US and Canada markets and as a manufacturer, the assessee could not escape the primary responsibility by stating that it was not directly involved in infringement. Further, for making a disallowance under Section 37 in respect of penalty, etc. finding by a

competent Court was not a condition precedent to attract the Explanation to Section 37(1). According to the CIT (A), the Explanation simply states that if expenditure is incurred for any purpose, which is an offence, or which is prohibited by law, such expenditure will not be deeded to have been incurred for the purpose of business. The Explanation does even imply that there must be a finding of a Competent Authority or Court that an offence was committed or that any law was infringed. In fact, there may be numerous situations where expenditure is incurred for a purpose, which is prohibited by law, but there may not necessarily be any order of any authority or Court to this effect. Payment of protection money, hafta money, ransom, etc. are examples of such expenditure. There may not be any order prohibiting a person from making payment of protection money but nonetheless the payment will be for a purpose prohibited by law and would not be allowable under Section 37 of the Act. 18. At the outset, we are inclined to accept the submission of the assessee that the paramount and governing consideration behind such a settlement/agreement can be to avoid the expenses and uncertainty of further litigation. It is a matter of common knowledge that litigation can turn out to be quite expensive and it cannot be even possible, what to talk of feasible, for a small time/middle level company in India like the assessee to litigate in US Court. Furthermore, the settlement agreement contains a specific recital to this effect inasmuch as it records "whereas, in order to avoid the expenses or uncertainty or further litigation, the parties desired to settle and adjust all differences and controversies among themselves subject to the terms of this Agreement." No doubt in the Agreement, the assessee accepted the patent of SEMCO. That by itself would not mean that the assessee also accepted that it was infringing the said patent. Secondly, payment is made by the assessee to SEMCO for "loss of goodwill and damages to its capital and for terminating of case US Courts" as is clearly mentioned in Clause (3) of the Agreement. No finding is given by any Court that the assessee had violated the patent right of SEMCO. With the aforesaid payment, the "Covenants to Release" recorded in Clause (2) is as under: "2. COVENANTS TO RELEASE 2.1 SEMCO hereby releases, remises and forever discharges the Settling Entities and their agents, attorneys, consultants, offices, employees, representatives, heirs, successors and assigns and their Customers form any and all claims, demands, or causes of action that arise out of or relate to the Action, and any and all obligations, actions, causes of action, suits, debts, contracts, controversies, agreements, promises, damages, judgments, awards, executions, claims and demands whatsoever in law or in equity, and any and all claims for damages (and attorneys‟ fees and costs) based upon the violation of a federal, state or other statute, regulation or law or arising out of any conduct,

contract, employments, action, event or circumstance, under the law of any and all nations, whether known or unknown, which occurred at any time up to an including the date of the execution of this Agreement, except obligations created by this Agreement, any associated licence Agreement and/or by the Consent Judgment to be filed in accordance with this Agreement." 19. It would be pertinent to highlight that the Agreement is applicable within the area defined as "territory". This territory mentions some specific countries in Europe as well as Japan, Australia and Korea. There is no mention of India at all. That clearly implies that SEMCO has no objection if the assessee continues to manufacture the goods in the same manner using same patent which it has been using and marketing it in India or any other countries, which are not stipulated in the territory with respect to which only restraint is provided in the agreement. It is for this reason the assessee even today continues to manufacture those goods and is selling the products in this country. Once we find that the settlement has arrived at under the aforesaid circumstances, there is no room to hold that it was because of the reason that the assessee was violating the patent laws or the payment was made for an objective prohibited by law. This is our view even when we presume that the expression prohibited by law would include US laws and would not be confined to law in India. 20. Moreover, we also agree with the contention of the learned counsel for the assessee that the payment under the settlement is compensatory in nature. The remedy for infringement of patent involves civil action for compensating the damage to private properties. It may be noted that in the plaint filed by it, SEMCO has sought civil damages under Sections 284 and 285 of the US Paten Code (US 35). Criminal Suit is scored out in the plaint. The relevant provisions of US 35 (Patent Code) read as follows: "Section 284. Damages Upon finding for the claimant the Court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the sue made of the invention by the infringer, together with interest and costs as fixed by the Court. Section 285. Attorney fees The Court in exceptional cases may award reasonable attorney fees to the prevailing party." 21. It will be seen from the above that the damages are calculated for compensating the owner of the patent rights for the loss of profit/royalty even under the laws of USA. There is no element of penalty even in USA. Even the Indian Patents Act, 1970 (as amended by the Act of 2005) does not prescribe any penalty or fine for infringement of a patent registered under that Act. This is clear from the Section 108 of the Indian Patent Act, which reads as under:

"Sec. 108 Reliefs in suit for infringement The reliefs which a Court may grant in any suit for infringement include an injunction (subject to such terms, if any, as the Court things fit) and, at the option of the plaintiff, either damages or an account of profits." 22. Therefore, any payment for infringement of patent, being purely compensatory in nature, cannot be disallowed as per the law settled by the Supreme Court in the case of Prakash Cotton Mills (supra), where the Apex Court observed as under: "... Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under Section 37(1) of the Income-tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income-tax act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature." 23. It was an expenditure which was motivated purely by commercial purpose and would be allowable under Section 37(1) of the Act as held by the Apex Court in the case of Sri Venkata Satya Narayana Rice Mill Contractor Co. Vs. Commissioner of Income Tax [223 ITR 101].” 8.9. Thus, from the above decisions, it is clear that what has to be disallowed under Explanation 1 to Sec.37(1) of the Act is a payment made, for contravention of laws in force in India and not of any foreign country. The laws are specific to each of the countries according to their rules and regulations and an offence in one country may not be so in another country. Therefore, we agree with the contentions of Ld.Counsel for the assessee that it is only payment made for contravention of laws in force in India that disallowance under Explanation 1 to Sec.37(1) of the Act is to be made. 8.10. The next question before us is whether the payment is compensatory or penal in nature. 8.11. We find that the European Commission had required the assessee to pay 1.18 crores of GBP which is equivalent to 141,50,90,000 INR which is the exact amount received by assessee from Niche. The assessee had claimed it to be disgorgement/compensatory, whereas the Revenue had

pleaded that it is only by coincidence that the penalty levied by EU is also exactly the same amount which is received by the assessee. Ld.DR argued that it is not disgorgement because though the receipt is from Niche, the payment by the assessee is to European Commission. Therefore, we agree with the Ld.DR that it cannot be treated as disgorgement or compensatory in nature. The next contention of the assessee is that without such payment and without such agreement, the assessee could not have carried out its business in EU and therefore it is towards commercial expediency and to carry on business of assessee, and, therefore, it is business loss. However, we find that the authorities below have not examined this aspect of the issue. Therefore, we are of the opinion that the question as to whether it is to be allowed as business loss particularly when assessee has offered the receipt as income in earlier AY and the revenue has accepted it as business income is to be examined by the AO. Therefore, for this limited purpose, we set aside the issue to the AO with a direction to allow it as business loss if the income has been offered to tax in the earlier A.Y. In the result ground no.2 of the assessee is partly allowed for statistical purposes.

d) Net assets taken over (B-C) = (1,068) Mn e) Intangible assets valued including goodwill As residual value = 43,860 – (1068) Mn = 44,928 Mn. 10.1 In terms of the amalgamation scheme, the excess of investment made over the aggregate value of the net assets acquired and liabilities assumed, the intangibles including goodwill were depreciated @ 25% on WDV from the Financials submitted. The AO observed that the price of the intangible asset was in the form of goodwill has been introduced in the books of the assessee, only as a result of amalgamation undertaken by the company and also that goodwill does not exist in the books of ASPL prior to the amalgamation. In order to understand the introduction of goodwill in the books and tax implications thereon, AO issued a show cause notice dated 15/12/2017 to the assessee calling for its reply by 22/12/2017. Assessee vide its letter dated 22/12/2017 explained the transaction and also relied upon the decision of Hon’ble Supreme Court in the case of Smiff Securities Ltd., [2012] 348 ITR 302, to argue that depreciation on goodwill is allowable. However, AO was of the opinion that since the goodwill was not existent in the books of ASPL and was introduced only under the scheme of amalgamation, the proviso to section 32(1) of the Act is applicable and, therefore, the depreciation, allowable in the case of succession, amalgamation or merger, demerger should not exceed the depreciation allowable had the succession not taken place. In other words, the allowance of depreciation to the successor/amalgamated company in the year of amalgamation would be on the WDV of assets in the books of the amalgamated company and not on the cost as recorded in the books of amalgamating company. Therefore, he held that the assessee cannot claim depreciation on the goodwill that has arisen only as a result of amalgamation scheme. Further, he also placed reliance upon the decision of ITAT, Bangalore in the case of M/s United Breweries Ltd. Vs. Addl. CIT, vide its order dated 30/09/2016 in ITA Nos. 722,801 & 1065/Bang/2014 for disallowing the depreciation on good will. 11. Aggrieved, Assessee preferred an appeal before the CIT(A), who confirmed the order of AO and the assessee is in second appeal before us.

of the above position, the assessee allocated the consideration of INR 55 crores as fair value of the identifiable assets and liabilities taken over and the excess of net consideration amounting to INR 4,331was accounted as goodwill including various intangibles arising on amalgamation. He submitted that the details of transaction and its accounting was duly disclosed in the notes to the Accounts. 12.1 Similarly, the assessee for the purposes applying the principles of purchase method of accounting considered the difference between the amount of investment (INR 4,386 Crores) and the fair value/ tax WDV value of net assets (being INR (106) Crores) as Goodwill arising on amalgamation. This Goodwill of INR 4,492 Crores encompassing the specified intangible asset (INR 1,465 Crores) were grouped under the Intangible Assets block as 'Goodwill' and depreciation at half of eligible rate of 25 per cent was claimed by the Appellant in return of income for AY 201415 since assets were put to use for less than 180 days. 12.2 He submitted that the issue of depreciation on goodwill arising on amalgamation is directly covered by the decision of the Hon’ble Apex Court in the case of Smiff Securities Ltd. (supra). In support of the contention that the law interpreted by the Hon’ble Supreme Court is binding on all courts and lower authorities, he relied on the decision of the Apex court in the case of Aluminium Corporation of India, 85 ITR 167 (1972) (SC) and also relied upon the decision of the Hon’ble Gujarat High Court in the case of Karamchand Premchand Pvt. Ltd., 101 ITR 46 (Guj.). He further submitted that goodwill arising on amalgamation is a business of commercial right or of similar nature as referred to in clause (b) to Explanation 3 of section 32(1) and in support of his contention, he placed reliance upon the decision of the coordinate bench of the Tribunal in the case of AP Paper Mills Ltd., 128 TTJ 596 (Hyd.) and also the decision of the Hon’ble Delhi High Court in the case of Areva T&D India Ltd., 345 ITR 451. In support of his contention that there cannot be a differential tax treatment between goodwill generated on slump sale and amalgamation, the ld. Counsel for the assessee placed reliance upon the decision of the Hon’ble Delhi High Court

in the case of Triune Energy Services (P) Ltd., 65 taxmann.com 288 [2016] (Del.). 12.3 He also referred to 6th proviso to section 32(1) of the Act and submitted that it is the only mechanism of allocation of depreciation otherwise allowable on the WDV of assets owned and carried by the amalgamating company whereby such depreciation gets allocated between the amalgamating and amalgamated company in the year of amalgamation and has no applicability for any new asset arising on account of the amalgamation in the hands of the amalgamated company. He also referred to the memorandum explaining the provisions of Finance Bill, 1996, introducing the six proviso to section 32(1) of the Act, to argue that the intent of the legislature behind introduction of the proviso was to cover within its ambit only those assets which were recorded in the books of account of the predecessor company and which are transferred pursuant to the amalgamation. He argued that sixth proviso was introduced to curb the practice of claiming depreciation on the same assets, by both the predecessor company and the successor company in the case of a merger or succession and therefore, the said proviso is not applicable to the assessee. He also tried to distinguish the facts between the case of the assessee and United Breweries Ltd. (supra). 12.4 The ld. Counsel for the assessee also submitted that similar issue had arisen before the Hon’ble Kolkata High Court, on revenue appeal, in the case of Smifs Securities ltd. (supra) for the AY 2001-02 and the said question was not pressed by the department by conceding that it was covered by the decision of the Hon’ble Supreme Court. It is submitted that the revenue has not filed any appeal before the SC and once the revenue has chosen not to challenge a particular decision, it is bound by the principles laid down in those decisions. In this regard, reliance was placed on the decision of the Hon’ble Supreme Court in the case of Narendra Doshi, 254 IYT 606 [2002][SC]. 12.5 Ld. Counsel for the assessee also submitted that though ld. CIT(A) in principle agreed that depreciation is allowable on goodwill in view of the

Supreme Court judgement in the case of Smiffs Securities Ltd., she has held that assessee should have carried the expenditure over a period of 5 years and depreciation should have been claimed accordingly. He submitted that there is no provision under the Act, which requires that, only a portion of goodwill is to be recognized during a year for claiming depreciation. He, therefore, argued that artificially splitting of the goodwill by the ld. CIT(A) is an arbitrary action and the said direction goes beyond the provisions of the Act and, hence, are invalid and without jurisdiction. 12.6 He also submitted that ld. CIT(A) has held that the Hon’ble Supreme Court in the case of Smiffs Securities refers to goodwill arising on amalgamation and concluded that depreciation would be allowable only on the amount of goodwill recognized as per the accounting standard and not on the self-generated goodwill. He submitted that the goodwill amount alleged to be internally generated goodwill is actually the consideration paid by the assessee towards intangible assets in the nature of intellectual rights, trademarks, products under development, licenses etc. as is demonstrated from the SPA, which forms part of the assessment record. He submitted that consideration paid towards the said intangibles was allocated in the books account of the assessee in recording the entry for amalgamation and by the order of CIT(A), the further disallowance of the claim which was already disallowed by the AO, amounts to double disallowance. He submitted that the assessee’s total claim of depreciation was INR 561 crore, whereas total disallowance made by the CIT(A) is of INR 745 crores. Therefore, he submitted that section 32 of the Act cannot be used to prescribe the value at which the asset is recorded for the purpose of claiming depreciation. He therefore, prayed that the depreciation claim by the assessee in ITR should be allowed in full. 13. The ld. DR, on the other hand, supported the orders of authorities below and submitted that the assessee acquired the shares of Agila Specialities Ltd. along with its wholly owned subsidiary Onco Therapies Ltd. on 05/12/2013. The net assets acquired were valued at Rs. (-) 106.8 crores after reducing the liabilities. He submitted that when the net asset value is negative, there cannot be any goodwill because no positive value can be

attributed to a negative asset. He also submitted that the purchase of shares was part of global acquisition of the Strides Acro Lab Group and there was a global agreement prior to the acquisition of shares. He submitted that it is only after the shares were acquired and the assessee became 100% owner of M/s Agila Specialities Ltd that the amalgamation took place and, therefore, when the assessee company is the owner of another company through shareholding, subsequent merger would not lead to transfer of assets u/s 2(47) of the Act. Therefore, u/s 2(47)(v), transfer of capital assets by subsidiary to parent is not recognized as transfer and claiming goodwill would be a case of making profit out of oneself. He also referred to clause 3.1 of the share purchase agreement to submit that the purchase price was equal to the enterprise value minus a sum equal to cash, a sum equal to debt, a sum equal to withholding or deductions and Sr. Manager transaction proceeds and therefore, there is substantial out go in the form of payments to Sr. Managers and as a result, the assessee lost technical expertise let alone gaining any goodwill. According to him, the payment made to Sr. Managers cannot be considered for deduction from the asset value. With regard to debt, withholdings and deductions also, he submitted that it is not known whether they are related to the assets or not and therefore, the valuation of the goodwill suffers from serious flaws, because the payments which are unrelated to assets are set off against the value of assets. He submitted that the valuation of the enterprise for purchase of shares cannot be equated to the valuation for amalgamation as there is no basis made available in the valuation report for the valuation of plant and machinery, land etc. by the valuer Mr. H.V. Krishna Swamy, but, it had simply stated that the valuation has been done by considering respective book values/market values provided by the assessee. He submitted that the valuation of intangibles by PWC, LLP is also based on the information provided by the assessee and is not based on any independent verification. Therefore, according to him, no goodwill arises on the amalgamation and since the net asset was negative, if there is anything arising out of amalgamation, it is only negative goodwill.

13.1 On the issue of non-allowability of depreciation on goodwill, ld. DR placed reliance on the decision of ITAT, Visakhapatnam Bench in the case of Kanaka Mahalakshmi Co-operative Bank Ltd., [2018] 97 Taxmann.com 638 (Vizag-Trib.) wherein it was held that when the other company has not shown any goodwill and when the assessee has taken over accumulated losses, he did not acquire any goodwill. He also placed reliance on the decision of ITAT, Mumbai Bench in the case of Toyo Engineering India Ltd. wherein it was held that when the purchase of goodwill is not proved by the assessee, depreciation on the same cannot be allowed. He also placed reliance on the decision of the ITAT, Bangalore in the case of United Breweries Ltd., [2016] 76 taxmann.com 103 and decision of ITAT Panaji Bench in the case of Chowgule & Co. (P) Ltd., [2011] taxmann.com 224 (Panaji). 14. Having regard to the rival submissions and material on record, we find that on account of amalgamation, the consideration paid by the assessee to the vendor is much more than the net value of assets and liabilities taken over by the assessee. Such excess consideration paid by the assessee has been treated by the assessee as goodwill and has claimed depreciation thereon at the applicable rate. The finding of the AO that the goodwill cannot be self-generated and that the claim of the assessee is on account of self- generated goodwill is not correct. The consideration to be paid to Strides for acquisition of the shares of Agila and Onco is after negations between the assessee and Strides. It is an admitted fact that Strides is not a related party to the assessee and therefore, the consideration agreed upon cannot be doubted and in fact is not disputed by the AO or the CIT(A). The AO has relied upon the sixth proviso to section 32(1) of the Act, to hold that the claim of depreciation on goodwill cannot exceed the depreciation allowable to the amalgamating company if the succession had not taken place. But as explained in AS-14, amalgamation can be, a) in the nature of merger; and b) in the nature of purchase. In the second type of amalgamation by purchase, the consideration paid in excess of the net value of assets and liabilities of the amalgamating company is to be treated as goodwill. In the case before us, the goodwill on which depreciation is claimed by the

assessee is arising out of the amalgamation scheme, but is not solely the self-generated goodwill as alleged by the AO. Further, the AO followed the decision of Bangalore bench of ITAT in the case of United Breweries (cited supra) to disallow the claim of depreciation on goodwill. The Tribunal had considered the judgment of the Hon’ble Supreme Court in the case of Smiffs Securities Ltd. and has held that the Hon’ble Supreme Court has only held that goodwill is an intangible asset and that depreciation is allowable thereon, but, that it does override the provisions of 5th Proviso to section 32(1) of the Act. We find that the facts of United Breweries are distinguishable from the facts of the case before us, as in the case of United Breweries, there was a merger with its Wholly owned Subsidiary, whereas in the case of the assessee, it is amalgamation by purchase. Therefore, the decision in the case of United Breweries is not applicable to the case before us. Let us therefore now consider the facts in the judgement of the Hon’ble Supreme Court in the case of Smiff Securities ltd. For the sake of clarity and ready reference, the relevant paras are reproduced hereunder: “Question No.[b]: "Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on `goodwill' is allowable under the said Section?" Answer: In the present case, the assessee had claimed deduction of Rs.54,85,430/- as depreciation on goodwill. In the course of hearing, the explanation regarding origin of such goodwill was given as under: "In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company." It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. 2 http://www.itatonline.org The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 [`Act', for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act:

"Explanation 3.-- For the purposes of this sub-section, the expressions `assets' and `block of assets' shall mean-- [a] tangible assets, being buildings, machinery, plant or furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." Explanation 3 states 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. A reading 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 right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. 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. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee.” Thus, it is clear that the Hon’ble Supreme Court has considered the circumstances under which the goodwill has arisen on which depreciation was claimed. Therefore, the judgement in the case of Smiff Securities Ltd. is applicable to the facts of the case before us. The following decisions

relied upon by the ld. Counsel for the assessee also hold that depreciation on goodwill is allowable.: 1. Zydus Wellness Ltd., 348 ITR 302 (SC) 2. Sri Krishna Drugs Ltd., TS-5874-ITAT-2011 (Hyd. Trib.) 3. AP Paper Mills Ltd., TS-5628-2009 (Hyd. Trib.) 4. Zuari Cement Ltd., TS-5823-ITAT-2016 (Hyd. Trib.) 5. MTANDT Rentals Ltd., TS-7175-ITAT-2018 ( Hyd. Trib.) 6. Dr. Reddy’s Laboratories Ltd., 78 Taxmann.com 63 (Hyd.Trib.) 7. Cosmos Cooperative Bank Ltd., TS-47-ITAT-2014 (Pune Trib.) 8. Areva T&D India Ltd. 345 ITR 421 (Del.) 9. Triune Energy Services (P) Ltd., 237 Taxmann 230 (Del.) 10. CLC & sons Pvt. Ltd., 95 Taxmann.com 219 (ITAT-Del.-SB) 11. Volvo India Pvt. Ltd., IT(TP)A No. 1537/Bang/2012. 14.1 The decisions relied upon by the ld. DR are all decisions of coordinate benches of the Tribunal and also are all distinguishable on facts. Respectfully following the above precedents relied upon by the assessee on the issue, we are inclined to allow the ground of appeal No. 3. 15. The next ground is against the enhancement made by the Ld. CIT(A) u/s 68 of the Act. 16. The facts relating to this issue are that he ld. CIT(A), during the course of hearing held in September, 2018 sought for the details of the transaction of amalgamation undertaken by the assessee, which resulted in the goodwill being recorded in its books. The assessee explained in detail the mechanism of the said transaction and that the goodwill was the excess of consideration paid over and above the fair value of the assets and liabilities taken over by it. Ld. CIT(A) invoking the provisions of section 251(2) of the Act and asked the assessee to explain, (i) how the goodwill was arrived at and why the goodwill, which is shown as an asset should not be treated as non-existing and added back, (ii) why should the claim of depreciation on goodwill not be treated as wrong claim that should be disallowed; , and (iii) how extending liabilities were shown in the financials or books of account. The assessee filed its detailed reply. However, ld.

CIT(A) was not convinced and he held that deal value of the shares was INR 5,978 crores while the corresponding investment recorded in the books of assessee is INR 4,386/- and the differential amount of Rs. 1,592 crores used for repayment of third party loan and liabilities of Agila and Onco was held to be unexplained creditors in the books of account u/s 68 of the Act and brought the same to tax. 17. The ld. Counsel for the assessee reiterated the submissions made before the CIT(A) in response to the enhancement notice and submitted that the treatment of the debts of Agila and Onco, agreed to be settled by the assessee pursuant to the SPA was not dealt with by the AO during the course of assessment proceeding and therefore, the said aspect was not a subject matter of appeal before the ld. CIT(A). He submitted that ld. CIT(A) has travelled beyond her jurisdiction in enhancing the income of assessee in respect of the issue, which was never considered by the AO. He relied upon the provisions of section 251(1) of the Act, to argue that the enhancement is prohibited in respect of issues that were never considered by the AO during the assessment proceedings. In respect of his contention, he placed reliance upon the decision of Hon’ble Apex Court in the case of Rai Bahadur Hardutroy Motilal Chamaria, [1967] 66 ITR 443 (SC). He submitted that various High Courts and Tribunals have held that CIT(A) does not have the power to question the taxability of income from a new source, which was not considered by the AO. In support of this submission, he placed reliance on the following other decisions: 1. Shapoorji Pallonji Mistry, 44 ITR 891 (SC) 2. Sardarilal & co., 251 ITR 364 (Delhi) 3. Bikram singh, 48 ITR 689 4. Hari Mohan Sharma in ITA No. 2953/Del/2018 5. B.P. Sheraffudin, 23 SOT 227 (2008) 17.1 Further, he also submitted that CIT(A) cannot enhance an assessment unless the assessee has been given a reasonable opportunity of being heard. He submitted that no enhancement notice was given to the assessee and therefore, the enhanced income cannot be sustained. According to him,

enhancement made by the CIT(A) is contrary to the facts and law and invalid and beyond jurisdiction and it is to be deleted. 18. The ld. DR, on the other hand, relied upon the order of CIT(A) and submitted that ld. CIT(A) had the powers of enhancement and had accordingly issued enhancement notice on 17/09/2018 to the assessee, to which, assessee filed its reply on 08/10/2018 and only after considering the reply of the assessee, the CIT(A) has passed the order. He, therefore, supported the findings of CIT(A) that Rs. 1592.6 crores on account of repayment of loans and debtors which have not been proved by the assessee as genuine. as part of total income and added the same to the total income u/s 68 of the Act for want of proof. 19. Having regard to the rival contentions and material on record. We find that u/s 251(1) of the Act, the CIT(A) has the power to confirm, reduce, enhance or annul the assessment in an appeal against an order of assessment. The Hon’ble Supreme Court in the case of Shapoorji Pallonji Mistry (supra) confirmed the decision of the Hon’ble Bombay High court reported in [1958] 34 ITR 342 (Bom, wherein the Hon’ble High court held as under:

“So the power of the Appellate Assistant Commissioner is confined to considering the matter which has been considered by the Income-tax Officer and determined in the course of the assessment; and "matter" is used, not in the sense of a head of income, but in the sense of a specific source of income. So the question that has to be asked when deciding whether the Appellate Assistant Commissioner has the power or not is : "Is this the matter which was considered and decided by the Income-tax Officer ?" If it was, irrespective of the nature of the appeal preferred by the assessee, the Appellate Assistant Commissioner Commissioner would have the power to consider that matter. Now, it is clear on the record that the Income-tax Officer never considered this matter in the assessment year 1947-48. Strangely enough, as the record shows, he did consider it in the assessment year 1946-47 when it was unnecessary for him to consider it because the receipt did not fall in that assessment year; and the opinion then expressed by him was that this payment could not be treated as a business receipt. Now, if his successor had expressed the same opinion for the assessment year 1947-48, then undoubtedly the Appellate Assistant Commissioner could have refused to accept that opinion and brought this amount to tax. In our opinion, therefore, it is clear that, under the circumstances of this case, the Appellate

Assistant Commissioner was not competent to enhance the assessment of the assessee for the assessment year 1947-48 by a sum of Rs. 40,000. It is always wise to consider the practical effects of ones judgment and especially in matters of tax and revenue. It is not as if a court should come to a different conclusion was inescapable in law even though its decision may lead to serious difficulties in the way lead to loss of revenue or evasion of tax, it should hesitate before it comes to a particular conclusion. Now, in this case, our decision will not in any way put difficulties in the way of the taxing department. In this very case two remedies were open to the Department neither of which was resorted to. It was open to the Income-tax Officer to have proceeded against the assessee under the first part of section 34; or alternatively, the Commissioner could have exercised his powers of revision under section 33B. Section 34 expressly deals with a case where an assessee fails to disclose fully and truly all material facts necessary for his assessment; and clearly this is a case where the assessee failed to disclose the sum of Rs. 40,000. Now, if we were to hold that the Appellate Assistant Commissioner has the power - which Mr. Joshi contends he has - he in effect would be bringing to tax an income which the assessee had failed to disclose and which had never been subjected to the process of assessment. That surely is not the power which section 31 gives to the Appellate Assistant Commissioner when it refers to the power of enhancing an assessment.” 19.1 In the subsequent judgment in the case of Rai Bahadur Hardutory Motilal Chamaria (supra) also, the Hon’ble Supreme Court, reiterated its stand as under:

“The principle that emerges as a result of the authorities of this Court is that the Appellate Assistant Commissioner has no jurisdiction, under s. 31(3) of the Act, to assess a source of income which has not been processed by the Income- tax Officer and which is not disclosed either in the returns filed by the assessee or in the assessment order, and therefore, the Appellate Assistant Commissioner cannot travel beyond the subject- matter of the assessment. In other words, the power of enhancement under s. 31 (3) of the Act is restricted to the subject-matter of assessment or the sources of income which have been considered expressly or by clear implication by the Income-tax Officer from the point of view of the taxability of die assessee. It was argued by Mr. Vishwanath lyer on behalf of the appellant that by applying the principle to the present case, the Appellate Assistant Commissioner had jurisdiction to enhance the quantum of income of the assessee. It was pointed out that the fact of alleged transfer of Rs. 5,85,000 to Forbesganj branch was noted by the Income-tax Officer and also the fact that it did not reach Forbesganj on the same day. So, it was argued that in the appeal the Appellate Assistant

Commissioner had jurisdiction to deal with the question of the taxability of the amount of Rs. 5,85,000 and to hold that it was taxable as undisclosed profits in the hands of the assessee. We are unable to accept the argument put forward on behalf of the appellant as correct. It is true that the Income-tax Officer has referred to the remittance of Rs. 5,85,000 from the Calcutta branch, but the Income- tax Officer considered the despatch of this amount only with a view to test the Genuineness of the entries relating to Rs. 4,30,000 in the books of the Forbesganj branch. It is manifest that the Income-tax Officer did not consider the remittance of Rs. 5,85,000 in the process of assessment from the point of view of its taxability. It is also manifest that the Appellate Assistant Commissioner has considered the, amount of remit- tance of Rs. 5,85,000 from a different aspect, namely, the point of view of its taxability. But since the Income-tax Officer has not applied his mind to the question of the taxability or nontaxability of the amount of Rs. 5,85,000, the Appellate Assistant Commissioner had no jurisdiction, in the circumstances of the present case, to enhance the taxable income of the assessee on the basis of this amount of Rs. 5,85,000 or of any portion thereof. As we have already stated. it is not open to the Appellate Assistant Commissioner to travel outside the record, i.e., the return made by the assessee or the assessment order of the Income- tax Officer with a view to find out new sources of income and the power of enhancement under s. 31(3) of the Act is restricted to the sources of income which have been the subject-matter of consideration by the Income-tax Officer from the point of view of taxability. In this context "consideration" does not mean "incidental" or "collateral" examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non- taxability and not to any incidental connection. In the present case it is manifest that the Income-tax Officer has not considered the entry of Rs. 5,85,000 from the point of view of its taxability and therefore the Appellate Assistant Commissioner had no jurisdiction, in an appeal under s. 31 of the Act, to enhance the assessment.” 19.2 The Hon’ble Delhi High Court in the case of CIT Vs. Sardarilal & Co. (supra), also held as under: "The Appellate Assistant Commissioner, on an appeal preferred by the assessed, had jurisdiction to invoke, for the first time, the provisions of rule 33 of the Indian Income Tax Rules, 1922 (hereinafter referred to as 'the Rules'), for the purpose of computing the income of a non-resident even if the Income Tax Officer had not done so in the assessment proceedings. But, in Shapoorji Pallonji Mistry's case (supra), this court, while considering the extent of the power of the Appellate Assistant Commissioner, referred to a number of cases decided by various High Courts including the Bombay High

Court judgment in Narrondas' case (supra) and also the decision of this court in McMillan and Co.'s case (supra) and held that, in an appeal filed by the assessed, the Appellate Assistant Commissioner has no power to enhance the assessment by discovering new sources of income not considered by the Income Tax Officer in the order appealed against. It was urged on behalf of the revenue that the words 'enhance the assessment' occurring in section 31 were not confined to the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found. The court observed that there was no doubt that this view was also possible, but having regard to the provisions of sections 34 and 33B, which made provision for assessment of escaped income from new sources, the interpretation suggested on behalf of the revenue would be against the view which had held the field for nearly 37 years." In the case before us, the AO did not examine the allowability of the sum paid to settle the liabilities of Agila and Onco as part of the sale consideration. In fact, the AO accepted the payment. If the CIT(A) was of the opinion that the AO ought to have verified the genuineness of the same, the option available to the Department are under section 147 or under section 263 of the IT Act, but, CIT(A) could not have embarked on bringing a new source of income to tax. Therefore, respectfully following the above judicial precedents on the issue, we delete the income enhanced by the CIT(A) and brought to tax. The ground No. 4 is allowed. 20. The next issue is with regard to the addition of Rs. 3,11,70,470/- towards disallowance of expenditure u/s 14A of the Act. 21. Brief facts of the case are that on 31/03/2014, the assessee had shown under the head ‘non-current investments’ a sum of Rs. 2,48,80,000 and Rs. 152,91,50,000/- as current investments. AO observed that assessee had debited interest & finance cost of Rs. 248,46,20,000/- and that the assessee had taken secured loans of Rs. 340,33,50,000/- and unsecured loans of Rs. 199,56,60,000/-. He observed that since the income from such investment was not taxable, no deduction shall be allowed in respect of expenses incurred by the assessee in relation to such income. Therefore, assessee was asked to justify as to why interest expenditure should not be disallowed u/s 14A of the Act rwr 8D of the IT Rules. Assessee submitted that provisions of section 14A are not applicable to the

assessee’s case since it has not incurred any expenditure for earning exempt income i.e. in relation to income which does not form part of the total income. Further, it was submitted that no exempt income was received from the investments for the year under consideration. It was also submitted that the investments were made strategically in the group companies for achieving better business results and not for earning exempt income. AO, However, held that for making disallowance u/s 14A, it is not necessary that exempt income should necessarily be included in a particular year’s income for disallowance to be triggered. He also placed reliance on CBDT Circular No. 5/2014, dated 11/02/2014 to hold that the expenditure is to be disallowed u/s 14A rwr 8D of the Act. Accordingly, he worked out the disallowance at Rs. 3,11,70,470/-. On appeal, the CIT(A) confirmed the disallowance made by the AO. Aggrieved, the assessee is in second appeal before us. 22. The ld. Counsel for the assessee submitted that assessee had sufficient interest free funds in the form of share capital and reserve and surplus is far in excess of the amount of investments and therefore, it is to be presumed that such investments would be out of such interest-free funds available with the assessee. For this purpose, he placed reliance upon the decision of the Hon’ble Apex Court in the case of Reliance Industries ltd., 410 ITR 466 (SC), HDFC Bank Ltd., 36 ITR 505 and Reliance Utilities & power Ltd., 313 ITR 640. He also submitted that no actual expenditure was incurred by the assessee for earning exempt income and that before making a disallowance u/s 14A of the Act rwr 8D, it is necessary for the AO to peruse the accounts of the assessee and record a finding that he was not satisfied with the correctness of the claim of the assessee and that such an exercise was not done in this case. He further submitted that the assessee’s income was taxed at book profit u/s 115JB and no disallowance u/s 14A can be made under MAT provisions. In support of his contention, he relied on the special bench decision of the ITAT, Delhi in the case of vireet Investments Pvt. Ltd. 23. The ld. DR, on the other hand, supported the orders of the authorities below and submitted that irrespective of whether the assessee has incurred

any expenditure in earning of exempt income, the disallowance u/s 14A is required to be as per CBDT Circular No. 5/14. He prayed for the confirmation of the orders of authorities below on this issue. 24. Having regard to the rival contentions and material on record, we find that the assessee has earned exempt income of Rs. 3,86,52,685/- during the relevant AY whereas the disallowance made by the AO is of Rs. 3,11,70,470/- and, therefore, as held by the Hon’ble Delhi High Court in the case of Joint Investments (P) Ltd. Vs. CIT, reported in [2015] 37 ITR 694 (Delhi), that the disallowance u/s 14A rwr 8D is to be restricted to the exempt income earned during the year. The AY before us is AY 2014-15 and therefore, Rule 8D is very much applicable to the assessee. Further, in a number of cases, it has been held that only the average of the investments which have yielded exempt income is to be considered for computation of 14 A disallowance. AO is directed accordingly. This ground of appeal is accordingly partly allowed. 25. In the result, appeal of the assessee is partly allowed. 26. As regards the appeal of the revenue, which is linked to the ground of appeal No. 3 of assessee’s appeal, since we have already allowed assessee’s ground of appeal, the finding of the CIT(A) that goodwill has to be amortized over a period of 5 years cannot be sustained. Particularly, when there is no provision for such amortization of goodwill and allowability of depreciation thereon over a period of 5 years. Thus, revenue appeal is dismissed. 27. To sum up, appeal of the assessee in ITA No. 2335/H/18 is partly allowed and appeal of the revenue in ITA No. 12/H/19 is dismissed. Order pronounced in Open Court on 13th November, 2019.

Sd/- Sd/- (S.RIFAUR RAHMAN) (P MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 13th November, 2019. *GMV/kv