MAHADHAN AGRITECH LIMITED (FORMERLY KNOWN AS SMARTCHEM TECHNOLOGIES LTD),MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 8(1), MUMBAI

1. and others Mahadhan Agritech Limited For AY 2016-17 Ground 1(a) - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowances made in the order u/s 153A in utter disregard of the express provisions of the Act since no incriminating material has been found during the course of search and seizure carried out us 132 of the Act. Ground 1(b) - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in not considering the cardinal principle of law that the scope of assessment u/s 153A in respect of completed / unabated assessment is limited only to undisclosed income unearthed during the course of search. Ground 1(c) - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred the in holding that materials were unearthed during search & seizure carried out u/s 132 of the Act in utter disregard of the facts of the case Ground 1(d) - That on the facts and in the circumstances of the case and without prejudice to Ground No. 1(a), 1(b) & 1(c) taken herein above, the Ld CIT (Appeals) was not justified and grossly erred in confirming additions made u/s 69A of alleged inflated capital expenditure without appreciating the fact that no incriminating material had been found referable to the assessment year under consideration, during the course of search & seizure carried out u/s 132 of the Act. Ground 2 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of the claim of depreciation on goodwill and or other intangible assets while computing total income under the normal provisions of the Act. Ground 3 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the additions of undisclosed income us 69A on account of alleged inflated capital expenditure while and others Mahadhan Agritech Limited computing total income under the normal provisions of the Act. Ground 4 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of depreciation claimed on alleged inflated capital expenditure under the under the normal provisions of the Act. Ground 5 - That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in confirming disallowance of expenses incurred on donation. Ground 6 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming addition of depreciation on goodwill and/or other intangible assets while computing book profit u/s 115JB of the Act. Ground 7 - That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in confirming the addition of depreciation on the alleged inflated capital expenditure while computing book profit u/s 115JB of the Act. For AY 2017-18 Ground 1 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of the claim of depreciation on goodwill and/or other intangible assets in computing total income for non-specified business and specified business under the normal provisions of the Act. Ground 2 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of deduction claimed u/s. 35AD of the Act. Ground 3 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the additions of undisclosed income u/s. 69A on account of alleged inflated capital expenditure in and others Mahadhan Agritech Limited computing total income under the normal provisions of the Act. Ground 4 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of deduction claimed u/s. 35AD on alleged inflated capital expenditure. Ground 5 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of depreciation claimed on alleged inflated capital expenditure under the normal provisions of the Act. Ground 6 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming addition of depreciation on goodwill and/or other intangible assets in computing book profit u/s. 115JB of the Act. Ground 7 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the addition of depreciation on the alleged inflated capital expenditure in computing book profit u/s. 115JB of the Act. For AY 2018-19 Ground 1 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of the claim of depreciation on goodwill and/or other intangible assets while computing total income for non-specified business and specified business under the normal provisions of the Act. Ground 2 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the additions of undisclosed income u/s. 69A on account of alleged inflated capital expenditure in computing total income under the normal provisions of the Act.

The brief background of the business carried out by the assessee are that; M/s Deepak Fertilizers and Petrochemicals Corporation Limited (DFPCL), M/s SCM Fertichem Private Limited (SCMFPL) and M/s Smartchem Technologies Limited (STL), {now Mahadhan Agritech Limited (“MAL”) („the assessee‟)} have entered into a scheme of arrangement to transfer Technical Ammonium Nitrate (TAN) and fertilizer business verticals to its wholly owned subsidiaries and filed a petition before the NCLT, Mumbai bench. The scheme was sanctioned by NCLT, Mumbai by an order dated 30.03.2017, wherein the appointed date was 01.01.2015. The effective date of the scheme was 01.05.2017. and others Mahadhan Agritech Limited 4. For the periods under consideration, the assessee was engaged in the business of manufacturing and trading of ammonium-nitrate and weak nitric acid. It has its manufacturing facility at Srikakulam in the state of Andhra Pradesh. DFPCL has three prominent verticals namely (i) Industrial Chemicals (“IC”), (ii) Technical Ammonium Nitrate (“TAN”) and (iii) Fertilizers. While TAN and fertilizers business have inter-linkages in the form of use of common raw materials and similarity of select manufacturing processes, the IC business is relatively independent of such process commonalities.

A search and seizure action u/s 132 was conducted on 15.11.2018 on the Deepak Group and in pursuance thereof notices u/s 153A were issued for the assessment years as mentioned above.

The various additions and disallowances arising in impugned assessment years are as under:- AY 2016-17 9. Assessee filed its original return of income u/s 139(1) of the Act on 13.10.2016, declaring a loss of Rs. 4,24,09,063/-. Said return was duly processed under Section 143(1) of the Act. The case of the assessee was not selected for scrutiny assessment. Later on, the assessee filed a revised return u/s 139(5) of the Act on 28.02.2018, declaring a loss of Rs.395,96,32,472/-, wherein an enhanced claim of depreciation, including on goodwill, was and others Mahadhan Agritech Limited made. The revised return of income captured all the adjustments arising out of the scheme of arrangement and was filed within the statutory period prescribed under the Act.

Subsequently, a search and seizure action u/s 132 of the Act was carried out on 15.11.2018 on the assessee along with other entities forming part of „Deepak Fertilizers Group‟. Consequently, a notice u/s 153A of the Act was issued on 01.01.2020. In response to the notice u/s 153A of the Act, the assessee filed return of income on 30.01.2020 declaring the same income as computed in the revised return of income filed on 28.02.2018. During the course of assessment proceedings, Assessing Officer questioned the claim of the depreciation on goodwill and other intangibles which arose pursuant to the scheme of arrangement. Further, based on certain Whatsapp chats found during the course of search and statements on oath, Ld. AO alleged that assessee has inflated capital expenditure during the year.

Following additions / disallowances have been made by the ld. AO:- Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.387,99,30,797/- b) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.3,08,64,221/- and others Mahadhan Agritech Limited c) Disallowance of claim of donation of Rs.1,04,37,000/- d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.1,99,316/- Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.97,25,00,000/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.11,90,603/- AY 2017-18 12. Assessee originally filed its original return of income u/s 139(1) of the Act on 30.11.2017, declaring a loss of Rs.1036,29,83,804/-. Subsequently, the assessee filed revised return of income u/s 139(5) of the Act on 30.11.2018, declaring loss of Rs.1030,82,22,871/-. Subsequently, in response to notice u/s 153A, the assessee filed its return of income on 30.01.2020 declaring total losses at Rs.1030,82,22,771. Further, during the course of assessment proceedings, assessee filed revised computation of income, wherein certain mistakes were rectified. The said revised computation of income was accepted by the Ld. AO. On conclusion of assessment proceedings, Ld. AO passed assessment order u/s 153A of the Act on 26.07.2022, thereby assessing total loss at Rs. 1,86,53,02,509/- under normal provisions of the Act and book profit at Rs. 91,11,08,762/- under MAT provisions.

Following additions / disallowances have been made by the ld. AO:- and others Mahadhan Agritech Limited Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.177,37,33,254/- while calculating income from non-specified business b) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.113,62,14,844/- while calculating income from specified business c) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.8,94,23,421/- d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.13,94,630/- e) Disallowance of deduction claimed u/s 35AD of Rs.165,16,74,407 f) Disallowance of inflated capital expenditure on disallowance of deduction claimed u/s 35AD of Rs. 16,64,93,836 Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.58,20,00,000/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.41,71,384/- AY 2018-19 14. Assessee filed return of income u/s 139(1) of the Act on 30.11.2018, declaring a loss of Rs. 152,62,35,196/-. Subsequently, in response to notice u/s 153A, the assessee filed its return of income on 30.01.2020 declaring total losses at Rs.152,62,35,196/-. Further, during the and others Mahadhan Agritech Limited course of assessment proceedings, assessee filed revised computation of income, wherein certain mistakes were rectified. The said revised computation of income was accepted by Ld. AO. On conclusion of assessment proceedings, Ld. AO passed assessment order u/s 153A of the Act on 26.07.2022, thereby assessing total income at Rs.482,84,68,667/- under normal provisions of the Act and book profit at Rs.134,66,16,621/- under MAT provisions.

Following additions / disallowances have been made by the ld. AO:-: Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs. 133,02,99,940/- while calculating income from non-specified business b) Disallowance of claim of depreciation on goodwill and other intangibles of Rs. 85,21,61,133/- while calculating income from specified business c) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.585,73,130/- d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.71,12,480/- Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.58,20,00,000/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.61,23,821/- and others Mahadhan Agritech Limited AY 2019-20 16. Assessee filed its return of income u/s 139(1) of the Act on 29.11.2019, declaring a loss of Rs. 241,34,73,307/-. Further, during the course of assessment proceedings, assessee filed revised computation of income, wherein certain mistakes were rectified. The said revised computation of income was accepted by Ld. AO. On conclusion of assessment proceedings, Ld. AO passed assessment order u/s 143(3) of the Act on 26.07.2022, thereby assessing total income at Rs.366,70,65,237/- under normal provisions of the Act and book profit at Rs. 78,58,36,570/- under MAT provisions.

Following additions / disallowances have been made by the ld. AO:- Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.99,77,24,955/- while calculating income from non-specified business b) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.63,91,20,850/- while calculating income from specified business c) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.45,23,580/- d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.68,53,590/- e) Disallowance u/s 14A of Rs.2,72,16,530/- f) Addition on account of difference in stock of and others Mahadhan Agritech Limited Rs.10,82,560/- Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.55,59,88,097/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.62,74,607/- c) Addition on account of difference in stock of Rs.10,82,560/- AY 2020-21 18. Assessee filed its return of income u/s 139(1) of the Act on 07.01.2021, declaring a loss of Rs. 75,92,21,315/- Further, during the course of assessment proceedings, assessee filed revised computation of income, wherein certain mistakes were rectified. The said revised computation of income was not accepted by Ld. AO. On conclusion of assessment proceedings, Ld. AO passed assessment order u/s 143(3) of the Act on 12.05.2023, thereby assessing total income at Rs. 157,26,02,050/- under normal provisions of the Act and book profit at Rs. 64,29,67,192/- under MAT provisions. The revised computation furnished by the assessee was taken cognizance of by the ld. CIT (A).

Following additions / disallowances have been made by the ld. AO:- Under Normal provisions a) Disallowance of claim of depreciation on goodwill and and others Mahadhan Agritech Limited other intangibles of Rs. 74,82,93,717/- while calculating income from non-specified business b) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.47,93,40,637/- while calculating income from specified business. c) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.4,88,825/-. d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs. 62,17,114/- Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.47,54,51,920/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs. 62,90,901/- 20. Aggrieved by the above-mentioned additions / disallowances, the assessee filed appeal before the ld. CIT(A) and challenged the assessment order on the validity of the assessments u/s 153A / 143(3) as well as the additions/disallowance made on merit. However, ld. CIT(A) has decided all the issues against the assessee except for the disallowance u/s 14A against the revenue. Against the order of ld. CIT(A), assessee has filed the present appeals. Further, aggrieved by the relief provided by ld. CIT(A) in AY 2019-20, department has filed present appeal.

Ergo, to summarise, the issues under consideration for all the impugned Assessment Years are as under:-

The ld. CIT (A) has, for the most part, confirmed the additions / disallowances made by the AO, primarily relying upon the reasoning provided in the assessment order. However, for the sake of brevity, the reasoning and findings of the Ld. CIT(A) are summarized issue wise as under:-

Before us ld. Counsel has filed written submissions and also made oral submissions during the course of hearing. The contentions raised by the ld. AR on behalf of the assessee are summarized as under:- On Issue no. 1 - Incriminating Material, the following contentions were put forth: (i) Regarding disallowance of depreciation on goodwill/intangibles, the ld. AR submitted that the assessee had filed a revised return of income on 28.02.2018 for AY 2016-17 to give effect of the demerger of and others Mahadhan Agritech Limited 'TAN and fertilizers' business from SCM Fertichem Limited to the assessee as per the approved scheme of arrangement vide NCLT order dated 30.03.2017 with an appointed date of 01.01.2015. (ii) Further, it was brought to our notice that the Revenue has accepted the said revised return of income since no notice u/s 143(2) was issued initiating assessment proceedings and the due date for issuing notice u/s 143(2) expired on 30.09.2018. The ld. AR submitted that if the notice u/s 143(2) has not been issued for an assessment year within the prescribed time limit, the same shall be considered as unabated assessment. (iii) Therefore, AY 2016-17 is an unabated assessment year since as on the date of search i.e. 18.11.2018, the prescribed time limit to issue notice u/s 143(2) had already passed. Reliance was placed on the CBDT Circular No. 549 dated 31.10.1989 and on the following judicial pronouncements to support the assessee's contentions- - Chintels India Ltd. vs. DCIT (2017) 84 taxmann.com 57 (Delhi HC) - PCIT vs. E-City Projects Lucknow (P) Ltd. (2022) 143 taxmann.com 423 (Orissa HC) - Jai Lokenath Oil Extractions (P) Ltd. vs. DCIT (2017) 83 taxmann.com 369 (Kol. ITAT)

Opportunities for investment in an unlisted company are much higher than that in a publicly listed company. Private Equity investors, Alternate Investment Funds (AIFs), Venture Capital Fund (VCF), and other investment vehicles have certain restrictions while making investment in listed companies.

To achieve the above goal, the efforts taken by the Group for attracting investors were iterated that for the undertaking demerged to the assessee company, DFPCL had entered into a Heads of Agreement with Yara International ASA („Yara‟) on 28.01.2008 to constitute a joint venture vehicle with a primary purpose to carry on TAN and fertilizer business activities. However, subsequently, the deal fell off. Agreement entered with

Further, DFPCL had engaged Morgan Stanley India Company Private Limited for advice and services, inter-alia, for raising of capital for expansion of Ammonia and TAN product business, vide agreement dated 17.07.2020. Thereafter, Morgan Stanley worked on the assignment and approached various potential investors. It also submitted status update reports on regular basis wherein the list of potential investors and the details of progress made was mentioned. Agreement entered with Morgan Stanley dated 17.06.2020 was submitted before the Bench during the course of hearing.

In view of the above, it was submitted that the group intended to bring in future investors into a particular line of business. Thus, the restructuring scheme was entered into for commercial reasons.

The ld. AR submitted that some of the outside investors were interested only in the TAN business of the Group as against other businesses (such as industrial chemical and fertilizers) run by DFPCL. Thus, eventually, the TAN business of the entity was further demerged from the assessee to another group entity vide NCLT order dated 28.06.2024. Appointed date of the scheme was 01.01.2022. and others Mahadhan Agritech Limited In the newly demerged business, the group managed to get an investor, wherein they received investment of approx. Rs. 800 crores in the TAN business by way of subscription of private placement. The intimation by DPFCL to the stock exchange regarding the investment in TAN business being fructifying for the Group and the chart depicting the subsequent demerger was submitted before the Bench during the course of hearing.

Therefore, the ld. AR submitted that the group has independently analysed commercial opportunities to restructure its operations even post the amendment made vide Finance Act 2021, wherein goodwill was specifically excluded from the block of assets, therefore making it ineligible for claiming depreciation under section 32 of the Act. Thus, time and again, the group has exercised its commercial right to restructure its operations which was driven by commercial reasons rather than tax as has been alleged by the Revenue.

It was further submitted that para 23.12 of the scheme of arrangement specifically provides for allowance of depreciation on intangibles and goodwill acquired but not recorded in the books of the demerged company. Relevant portion of the scheme is reproduced below - “23.12 all intangible assets and various business or commercial rights, belonging to but not recorded in books pertaining to Demerged Undertakings shall be transferred to and vested with Smartchem and shall be recorded at their respective fair values under the head intangible assets. The consideration agreed under the Scheme shall be deemed to include payment towards these intangible assets at their respective fair values. Such intangible assets shall, for all purposes, be regarded as Intangible assets in terms of Explanation 3(b) to section 32(1) of Income Tax Act and shall be eligible for depreciation there under at the prescribed rates.”

Further, the NCLT in its order at para 15 has held that the proposed scheme of arrangement is fair and reasonable and not violative of any provisions of law and is not contrary to public policy.

In view of the above, the ld. AR submitted that the NCLT has approved the scheme of arrangement and others Mahadhan Agritech Limited considering all the factors such as rationale, accounting treatment, recognition of intangible assets, etc. Thus, such a well-reasoned order cannot be ignored, much less be categorized as a colorable device as has been alleged by the department.

The ld. AR further addressed all the points raised by Ld. AO and ld.CIT(A) in the assessment order and ld.CIT(A) order respectively in the following manner:

The ld. AR submitted that the rationale of the scheme, accounting treatment to record the demerger, and NCLT order passed considering the above holding that the scheme is fair and reasonable, underscores that restructuring was not a colorable device. The scheme of arrangement, which is duly approved by NCLT cannot be called as a colorable device to evade tax. The same has been held in the case of PCIT vs. Carolina Food and Industries (P) Ltd. 172 taxmann.com 44 (Cal. HC).

Para 23.12 of the scheme of arrangement specifically provides for allowance of depreciation on intangibles and/or goodwill acquired but not recorded in the books of the demerged company.

Intimation was given to the Income Tax Department for and others Mahadhan Agritech Limited their comment prior to the approval of the scheme by the NCLT. However, no response was received from Income Tax Department, resulting in deemed approval under the Companies Act, 2013. The said fact is also mentioned in the order of the NCLT dated 30.03.2017. Relevant extract of the order is reproduced below: “…8(e) As per existing practice, the Petitioner Companies are required to serve Notice for Scheme of Amalgamation to the Income Tax Department for their comments. It appears that the company vide separate letters dated 2nd February 2017 has served a copy company scheme petition no. 88 to 90 along with relevant orders etc., Further, this Directorate has also issued reminder letters to the Income Tax Department dated on 14.03.2017. However, as on date, there is no response from income Tax Department.”

Regional Director (RD) in the report dated 14.03.2017 filed before the NCLT at Para IV(f) has requested that tax implications, if any, arising out of the scheme shall be subject to the final decision of the income tax authorities. In the order, the NCLT has nowhere acceded to the request of the RD. It has only asked the assessee to give an undertaking that it will comply with all the provisions of the Act in giving effect to the scheme of arrangement which the assessee has duly provided.

The ld. AR pointed out that paragraph 8(f) of the NCLT‟s order provides that any tax implications arising out of the scheme shall be subject to examination by the Income-tax Department based on the return of income filed and others Mahadhan Agritech Limited by the assessee. However, the said order does not suggest that the Revenue is permitted to go beyond the framework of the scheme itself. In the present case, the Revenue has considered matters extending beyond the scope of the scheme, rather than confining its scrutiny to the return as contemplated. It was, therefore, submitted that the scope of examination ought to remain within the contours of the scheme as approved. Relevant part of the NCLT‟s order is reproduced below: “…8(f) The tax implication if any arising out of the scheme is subject to final decision of Income Tax Authorities. The approval of the scheme by this Hon'ble Court may not deter the Income Tax Authority to scrutinize the tax return filed by the transferee Company after giving effect to the scheme. The decision of the Income Tax Authority is binding on the petitioner Company”

The ld. AR further submitted that an order of the Court in a scheme of arrangement is final and binding on everyone including the statutory authorities and the same cannot be challenged in any collateral proceedings. Reliance was placed on the decision of the Hon‟ble Bombay High Court in the case of Sadanand Varde v. State of Maharashtra [2001] 247 ITR 609 (Bom.). Similar view has also been expressed in the below cases: - Keva Fragrance P. Ltd. v. DCIT (ITA No. 334/Mum/2020) (Mum. Trib) - Electrocast Sales India Ltd. v. DCIT (2018) 92 taxmann.com 85 (Kol. Trib) and others Mahadhan Agritech Limited 46. The ld. AR submitted that commercially, it is possible that goodwill may arise on restructuring. Thus, only because goodwill has been recorded and depreciation on the same is claimed, the entire restructuring cannot be held as a colorable device. Also, the fact that the transaction occurs within a group does not, in itself, render it invalid or devoid of commercial substance. Group restructurings, including demergers, slump sales, etc. are common and legally recognized methods of corporate reorganization. The transaction was carried out under a Court-approved Scheme of Arrangement as per Sections 391–394 of the Companies Act, 1956 (now under Sections 230–232 of the Companies Act, 2013). The manner and methodology of the transaction including its valuation were determined in accordance with accepted accounting and valuation principles.

In a demerger, all assets are typically valued, often bringing to light self-generated assets that were previously unrecorded but already embedded in the transferor company‟s existing assets. This results in unlocking of potential intangible assets. Recognizing such assets is a widely accepted in corporate reorganizations.

In terms of the rationale, para 23.12 & para 32 of Part IV of the NCLT approved scheme of arrangement, the assessee has recorded goodwill and identifiable intangible assets arising pursuant to the duly approved scheme of arrangement and has claimed depreciation on the same u/s 32(1)(ii). Accordingly, the goodwill arising out of the approved scheme of demerger and the consequential, claim of depreciation on such goodwill is merely incidental to the approved scheme of arrangement. Therefore, the contention of the Revenue that the scheme of arrangement is entered only for obtaining tax benefit does not hold true.

The ld. AR brought to the notice of the Bench plethora of favorable decisions rendered by various Courts including Supreme Court on allowability of depreciation on goodwill &/or intangible assets, including inter-alia the below: and others Mahadhan Agritech Limited CIT v. Smifs Securities Ltd. (2012) 348 ITR 302 (SC) - CIT v. Birla Global Asset Finance Co. Ltd. (2014) 221 - Taxman 176 (Bom HC) - JX Nippon Two Lubricants India Pvt. v. DCIT (ITA No. 4985/Del/2019) (Delhi Trib.) M/s. Merck Specialities Pvt. Ltd. V. ACIT (ITA - No.1727/Mum/2017) (Mum. Trib.)

Further, the ld. AR pointed out the below specific judicial precedents where depreciation on goodwill &/or intangible assets pursuant to demerger has been specifically allowed: - PCIT v. Aculife Healthcare Pvt. Ltd. [2023] 155 taxmann.com 283 (Guj. HC) - SunEdison Solar Power India Pvt. Ltd v. DCIT (ITA No.1520/Chen./2018) DCIT v. J.K. Cement Ltd. (497 & 498/Lucknow/2010) - D. Conditions of demerger u/s 2(19AA) have been complied with: 52. The Ld. AR submitted that the conditions prescribed under section 2(19AA) have been duly complied with since: a) All assets and liabilities appearing in the books of the demerged undertaking has been recorded at book value in the books of the assessee. b) Further, the goodwill and/or intangible assets that have arisen pursuant to the approved scheme of and others Mahadhan Agritech Limited arrangement were not reflected in the books of the demerged company and have been recorded for the first time in the books of the assessee. c) The consideration for the transfer of undertakings in a tax demerger must be in the form of issuance of shares by the resulting company to the shareholders of the demerged company. The resulting company is not allowed to discharge the purchase consideration through payment of cash.

Further, the sixth proviso to Sec. 32(1) does not apply for assets on which depreciation has never been claimed by the transferor company towards which reliance was placed on the following decisions: - Triune Energy Services (P) Ltd. v. DCIT [2016] 237 Taxman 230 (Del. HC) Urmin Marketing P. Ltd. v. DCIT [2020] 122 - taxmann.com 40 (Ahmd. ITAT) - Sri Krishna Drugs Limited v. DCIT (ITA No.198/Hyd/2011)

In determining the equity value of SCM, the valuer has adopted DCF and Market Multiple Method. Thus, the apprehension raised by the ld.CIT(A) that only DCF method is followed is patently incorrect.

The ld. AR further submitted the below points with respect to the valuation report: i) Projections cannot be compared with actual figures. The name itself suggests that it is a „projected‟ figure. ii) A valuation report cannot be dismissed only because projections were provided by management. Only the management is best positioned to forecast future revenues and profits. Their insights offer an informed and realistic basis for projections than speculative estimates from a valuer lacking operational context. iii) The approach followed for valuation is 60% based on projections and 40% based on market capitalisation of the business i.e. TAN and fertilisers. However, ld.CIT(A) with a prejudiced mind has viewed the valuation report on selective basis by looking only at the performance of fertilisers business and not the TAN business. iv) For the purposes of DCF based valuation, the actual figures vis-à-vis projected figures as per management for and others Mahadhan Agritech Limited both TAN as well as fertilisers division on an overall basis has performed well. Hence, projections used for valuation purposes cannot be doubted upon.

To support the above, the ld. AR pointed out the decision of the Delhi ITAT in case of DCIT vs. M/s Global Fairs & Media Pvt. Ltd. (ITA No. 4317/Del/2017) wherein it was held that valuation of goodwill done on the basis of DCF method cannot be rejected merely due to gap between projected and actual figures of revenue since valuation is intrinsically based on projections which can be effected by various factors and hence, it should be left to the consideration and wisdom of experts in the field on accountancy. Further, reliance was also placed on the below decisions where similar principles were upheld: - Akash Ceramics (P.) Ltd. vs. ITO [2024] 168 taxmann.com 407 (Guj.) - PCIT v. Cinestaan Entertainment Pvt Ltd (ITA 1007/2019 & CM Appl. 54134/2019) (Delhi HC) - CIT vs. VVS Hotels (P.) Ltd. [2020] 122 taxmann.com 106 (Mad.) 60. The ld. AR submitted that in the instant case the share price of SCM Fertichem Limited and Smartchem Technologies Limited, which were valued by independent valuers were coming approximately similar and accordingly the shares were issued in the ratio of 1:1. and others Mahadhan Agritech Limited 61. It was pointed out that these valuation reports were presented before the NCLT prior to the scheme‟s approval. Department never raised any objections to the valuation reports nor the valuations provided by the valuers. Further, based on above reports and values, NCLT has approved the scheme.

Additionally, in United Breweries (Supra), goodwill was appearing in the books of amalgamating company which was enhanced in the books of the amalgamated company. In the present case, goodwill has arisen purely pursuant to the scheme of arrangement and hence never used by or

In Altimetrik India (P) Ltd. v. DCIT [2022] 137 taxmann.com 9 (Bang. Trib) and Aricent Technologies (Holdings) Ltd. (supra), the ITAT has distinguished the decision of United Breweries (Supra) on the contention that in the said case, goodwill was already recorded in the books of the amalgamating company which were subsequently enhanced in view of amalgamation.

The decision of Hon‟ble Karnataka High Court in Padmini Products (P.) Ltd. (supra) as relied upon by the Ld. CIT(A) is in fact in favour of the assessee and has been rendered subsequent to the decision of United Breweries (supra). In the said decision, the Hon‟ble High Court has held that the 5th proviso to Sec. 32 restricts the aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply.

Further, the decision in the case of ACIT vs. Dosti Realty Ltd. (ITA No. 2043/Mum/2022) relied upon by the Revenue is also distinguishable on facts. In the said decision amalgamation was accounted under „pooling of interest method‟. However, in the case of the assessee, demerger was recorded as per „purchase method‟. In fact, the ITAT itself at Para 8, Pg. 8 has held that consideration

It was also pointed out that the decision of Dosti Realty Ltd. (supra) has later been distinguished by the Mumbai ITAT in case of Dow Chemical International (P.) Ltd. v. DCIT (ITA No. 1200/Mum/2023)wherein it has been held that in case of Dosti Realty Ltd. „pooling of interest‟ method has been followed to account for amalgamation as compared to „purchase method‟ adopted in the instant case. Similarly, the decision of United Breweries (Supra) has also been distinguished.

It was also submitted that since the scheme is approved by the shareholders and NCLT, the decision of Killick Nixon Ltd Ltd. [2012] 20 taxmann.com 703 (Bom. HC) does not apply to the present case. In case of Killick Nixon, the issue involved circular share transactions, i.e. buying at inflated prices and selling at nominal values to generate artificial capital losses and offset against gain on land sale, rendering the transaction non-genuine. In contrast, the assessee's transaction is genuine and duly approved by the relevant authority (refer para 15 of the NCLT order). Therefore, as the transaction is genuine in the current case, the case of Killick is not applicable to the assessee.

The ld. AR submitted that the arguments made for AY 2016-17, 2017-18, 2018-19 and 2020-21, that addition cannot be made in the absence of any incriminating material qua the assessment year under consideration shall apply mutatis mutandis to this issue as well.

For AY 2018-19, the ld. AR further submitted that WhatsApp chats relied by the revenue of 20th, 21st and 23rd March 2018 did not contain any mention of the parties Ray and Onshore based on whom the additions u/s 69A were made. Therefore, he submitted that even for AY 2018-19 no additions could be made in the absence of any incriminating material.

Reliance was placed on the following decisions to support the above contentions: CIT v. Sinhgad Technical Education Society (2017) 84 - taxmann.com, 290 (SC) - Sunny Jacob Jewellers Gold Hyper Market v. CIT (2024)(ITA Nos. 54 of 2019)(Ker. HC) PCIT v. Saumya Construction (P) Ltd [2017] 81 - taxmann.com 292 (Guj. HC).

The ld. AR vehemently refuted the allegations made by the Revenue and pointed that there is no specific reference to any cash being generated/ exchanged between the parties, nor is there any mention of cash receipt or cash payment, etc. in the said messages.

The WhatsApp messages do not mention the nature of the transactions with these parties; they merely reflect numbers listed against their names. Such references do and others Mahadhan Agritech Limited not indicate that cash was received/paid from/to the contractors, as the numbers could pertain to various matters such as bills, pending contracts, new agreements, etc.

Therefore, in the absence of any specific incriminating evidence indicating that the assessee company is the owner of any money, bullion, jewellery or other valuable article the provisions of Section 69A cannot be invoked.

The ld. AR also submitted on a without prejudice basis that the WhatsApp messages found during the course of search were not authenticated in accordance with section 65B of the Indian Evidence Act, 1872 and hence is not even admissible as evidence. The ld. AR placed reliance on the below decisions to support his contentions– Anwar PV v. B.K. Basheer (Civil Appeal No. 4226 of - 2012)(SC) - Dell International Services India Pvt. Ltd. v. Adeel Feroze & Ors. [W.P.(C) 4733/2024] (Del. HC) ACIT vs. Dinesh Jaiprakash Baheti (ITA No. - 5607/Mum/2024) and others Mahadhan Agritech Limited 79. The ld. AR also pointed out the decision in case of Prashant Prakash Nilawar v. DCIT (ITA No. 5073/Mum/2024)(Mum.) wherein although the judgment has been decided against the assessee, it does not take cognizance of the landmark ruling on Section 65B in the case of Anwar P.V. vs. P.K. Basheer (Civil Appeal No. 4226 of 2012) (SC).

The ld. AR further went on to point that where the WhatsApp messages are not incriminating in nature and not even admissible as evidence before the eyes of law, the additions made solely on the basis of WhatsApp messages r.w. statement recorded u/s 132(4) would be considered as bad in law. The ld. AR placed reliance on the following decisions to support his contentions that in the absence of any corroborative evidence being brought on record, no addition could be made to the assessee‟s income based on a statement recorded: - CIT v. Jagdishprasad Mohanlal Joshi [2018] 99 taxmann.com 288 (SC) wherein it was held that in absence of any corroborative evidence, addition could not be made to assessee's income in view of statement recorded. - CIT v. Harjeev Aggarwal (2016) 70 taxmann.com 95 (Delhi HC) wherein it was held that a statement recorded under section 132(4) can form basis for a block assessment only if such statement relates to any incriminating evidence of undisclosed income unearthed during search.

The ld. AR strongly argued that since the WhatsApp messages did not contain any incriminating material, the entire basis of making the additions, automatically fails.

The ld. AR further pointed that while reference of various seized material has been given at many places in the order u/s 153A, the type of documents seized are nowhere mentioned in the order nor in the remand report. Simply put, there was no corroborative evidence that there were transactions in cash.

Further, the retraction affidavit filed by all individuals contained just and proper reasons of retraction and were not retracted in a cryptic manner (refer page no. 313 to 329 of paper book filed for AY 2016-17).

It was submitted that in the instant case, the company is not found to be owner of any unexplained cash since no cash has been recovered from the possession of the company. It is a settled position that possession is evidence of ownership. This presumption is one of the strongest in case of cash found in the possession of a person since cash is one of the properties of which title is

Further it was submitted that no evidence has been brought on record by the Revenue to establish that any funds owned by the assessee were not recorded in its books of accounts.

On issue no. 4 regarding disallowance of depreciation on inflated capital expenditure, the following contentions were put forth:

During the hearing, ld. AR explained that consequent to the disallowances made u/s 69A of the Act on account of inflated capital expenditure, the ld. AO made further disallowance of depreciation on alleged and others Mahadhan Agritech Limited inflated capital expenditure on the presumption that the assessee has also taken depreciation u/s. 32(1) of the Act on the disallowed portion of the alleged inflated capital expenditure.

The ld. AR submitted that the above disallowance of depreciation cannot be made in the absence of any incriminating material qua the assessment year under consideration.

Reliance was placed on the following decisions to support the above contentions: - CIT v. Sinhgad Technical Education Society (2017) 84 taxmann.com, 290 (SC) - Sunny Jacob Jewellers Gold Hyper Market v. CIT (2024)(ITA Nos. 54 of 2019)(Ker. HC) - PCIT v. Saumya Construction (P) Ltd [2017] 81 taxmann.com 292 (Guj. HC).

Further, for AY 2019-20, reliance was placed on the decision of Jurisdictional High Court in case of CIT v. Karma Energy Ltd. (2015) 57 taxmann.com 235 (Bom.) wherein the Hon'ble High Court deleted the disallowance of depreciation on windmill on the contention that there is no documentary evidence on record to substantiate that the assessee has paid excess money for purchase of windmill which has been returned back to the assessee.

He further submitted that no addition can be made on the basis of conjectures and surmises. Applying a certain percentage to the total amount debited in the name of the party cannot be the basis for any addition. Thus, the addition made on this aspect suffers from infirmity and ought to be deleted.

On issue no. 5 relating to disallowance of donation expense in AY 2016-17, the following contentions were put forth:

The ld. AR submitted that in the revised financial statements prepared to give effect to the approved scheme of arrangement, the assessee, inter-alia, has recorded donations of Rs. 1,04,37,000/- attributable to the demerged undertaking under the head 'Interdivisional Overheads' which is clubbed and grouped in Note - 26 [Other Expenses] of the revised audited accounts. In the audited accounts of DFPCL, the amount transferred to the assessee towards donations on account of demerger of Fertiliser & TAN Division has been credited under 'Other Expenses' shown in Note 28 of the revised audited accounts and has been offered to tax in its computation of total income.

The above expenses of donation was claimed as a and others Mahadhan Agritech Limited deduction by the assessee in the revised` return filed on 28.02.2018 for AY 2016-17 which was correspondingly offered to tax by DFPCL in its computation of income. The same has also been accepted in the order u/s 153A passed in the case of DFPCL. Therefore, disallowing this once again will result in double disallowance of the same expenditure. Reliance in this regard is placed on the following decisions of various High Courts wherein it has been held the same income cannot be taxed twice in the hands of two persons. - CIT v. Smt. Prabha Debi Bagaria (1991) 192 ITR 416 (Cal. HC) - CIT v. Sobhrajmal (2014) 51 taxmann.com 506 (Raj. HC)

Without prejudice to above, the ld. AR submitted that even if the disallowance is made, it is submitted that since the amount of donation has been transferred by DFPCL to the assessee in view of the duly approved scheme of arrangement with effect from 01.01.2015, being the appointed date, the assessee is eligible to claim deduction u/s 80G on the same. Hence, necessary direction may please be given to the AO to allow deduction u/s 80G on the amount of donation despite the fact that certificate and receipt for such donations has been issued in the name of DFPCL.

On issue no. 6 relating to disallowance of and others Mahadhan Agritech Limited depreciation on goodwill/intangibles and inflated capital expenditure while computing book profits u/s 115JB,the following contentions were put forth:

During the hearing, the ld. AR highlighted the facts that the disallowance made on account of depreciation on goodwill/intangibles and on account of depreciation on alleged capital expenditure were made under the normal provisions of the Act as well as under Section 115JB of the Act while computing the book profits.

In relation to the disallowances made while computing book profits, the ld. AR submitted that Clause (iia) of Explanation 1 to Sec. 115JB invoked by the ld. AO is not applicable in the case of the assessee as no revaluation of assets were made. Goodwill/Intangible Assets was recorded as on 01-01- 2015, pursuant to demerger and these assets never existed in the accounts of the demerged company.

Further, Section 115JB provides that every assessee, being a company, shall for the purposes of this section prepare its profit and loss account in accordance with the provisions of Parts II & III of Schedule VI to the Companies Act, 1956 and the AO has to accept the authenticity of accounts prepared in accordance with the provisions of the Companies Act.

Reliance was placed on various judicial precedents listed below wherein it is held that the ld. AO has limited power to make any modification to book profits as provided in Explanations to Section 115JB - - Apollo Tyres Limited vs. CIT (2002) 255 ITR 273 (SC) - Mahindra & Mahindra Ltd. vs. CIT (ITA No. 416 of 2003) (Bom) - PCIT vs. Varun Corporation Ltd. (2023) 154 taxmann.com 548 (Bom) - CIT vs. Nuclear Power Corporation of India Ltd. (2021) 132 taxmann.com 100 (Bom)(HC). SLP dismissed by the Hon‟ble Supreme Court

Therefore, the ld. AR submitted that in view of the limited powers of the AO to modify the book profits, the additions made by him are bad in law and ought to be deleted.

On issue no. 7 - Disallowance of deduction claimed u/s 35AD of the Act in AY 2017-18, the following contentions were put forth:

DFPCL commenced construction of NPK fertilizer unit at Taloja in Maharashtra in February 2015. The said unit was commissioned in March 2017. In view of the demerger w.e.f. 01.01.2015 being the appointed and others Mahadhan Agritech Limited date, the Fertiliser undertaking (including NPK Fertiliser unit) was transferred to the assessee. The Ld. AR pointed that in terms of section 35AD, an assessee shall, if he opts, be allowed deduction at the rate of 150% of capital expenditure incurred on „specified business‟. In terms of the provisions of section 35AD(8)(c)(vii) „specified business‟ includes 'production of fertiliser in India‟. Hence, the assessee had claimed weighted deduction u/s 35AD of Rs 804.95 crores [@150% of capital expenditure of Rs. 536 crores. incurred for setting up of NPK Fertilizer Unit].

During the course of search action, from certain extract of seized log book and based on statement on oath recorded, it was noted that a conveyor belt and bagging unit no. 5 were occasionally used for to transmit and bag the ANP fertilizers product. Deduction u/s 35AD was claimed on capital expenditure incurred for NPK plant and not ANP fertilizers plant.

As per provisions of Section 35AD(7A), the assets should be exclusively used for specified business. According to Ld. AO and ld.CIT(A), the assessee violated the said condition by occasionally using the assets for ANP fertilizers plant instead of being exclusively used for NPK plant, and thus, the deduction claimed u/s 35AD was disallowed. Deduction claimed for conveyor belt and

With respect to the above disallowance, ld. AR of the assessee submitted as under:-

For issue no. 8 regarding disallowance under the normal provisions of the Act on account of difference in stock in AY 2019-20, the following contentions were put forth:

The ld. AR highlighted that during the Survey proceedings conducted u/s 133A at the manufacturing facility and godown at Panipat, a physical stock verification was done and a minor difference was found and others Mahadhan Agritech Limited which was treated as cash sales by the Revenue. With respect to the same, the ld. AR made the following submissions: 112. A recording lag cannot be considered as stock discrepancy. A time lag is inevitable between the physical receipt of stock at the godown and its corresponding entry in the books of accounts and a prejudiced view cannot be taken on this basis.

Minor discrepancy, amounting to just 6.68 metric tonnes or 0.70% of the total inventory of 954.13 metric tonnes, underscores the practical challenges of real-time inventory tracking in high-volume operations. Despite 99.30% of the inventory being accurately accounted for, the ld. AO made an unwarranted addition without appreciating the entire context of the matter.

Without prejudice to the above, the excess stock is shown in the credit side of the profit & loss A/c either as sales or closing stock of inventory. In both the scenarios the excess stock has been duly offered to tax. The action of the AO considering such minor difference in stock as cash sales would tantamount to double taxation of the same stock.

The Ld. AO has applied an ad-hoc rate of Rs. 17,000/- per tonne while computing disallowance on account of stock difference which is totally unjustified and others Mahadhan Agritech Limited since ad-hoc rates/disallowance cannot be made by the Revenue.

Without prejudice to the above, any addition, if at all warranted, should be restricted to the net difference of 6.68 MT (i.e., 954.13 MT – 947.45 MT), amounting to Rs. 1,13,560 (6.68 MT * Rs. 17,000).

Further, it was prayed that the amount added should be allowed as the opening stock for Assessment Year 2020–21.

For issue no. 9 regarding additions made while computing book profit u/s 115JB on account of difference in stock in AY 2019-20, the ld. AR reiterated the submissions made in issue no. 6 above.

For department appeal for AY 2019-20 in case of disallowance made u/s 14A of Rs. 2,72,16,529, the Ld. AR submitted the following:

During the previous year, the assessee has not earned any dividend income. In the absence of any dividend income which is exempt from tax, the provisions of section 14A, per se, cannot be applied. Reliance was placed by the ld. AR on the following decisions to support the above contentions: Cheminvest Limited v. CIT [2015] 378 ITR 33 - (DelhiHC), and others Mahadhan Agritech Limited PCIT v. GVK Project and Technical Services Ltd. - [2019] 106taxmann.com 180 (Del. HC). SLP dismissed by Supreme Court CIT v. Chettinad Logistics (P) Ltd [2018] 248 Taxman - 55 (Mad. HC). SLP dismissed by the Supreme Court

The amendment made to Sec. 14A vide Finance 2022 cannot be presumed to have retrospective effect and hence no disallowance can be made u/s 14A where the assessee has not earned any dividend income in earlier years. Reliance was placed by the ld. AR on the following decisions to support the above contentions:- PCIT v. Era Infrastructure (India) Ltd. [2022] 141 - taxmann.com 289 (Del. HC) - ACIT v. Bajaj Capital Ventures (P) Ltd. [2022] 140 taxmann.com 1 (Mum) ACITv. K Raheja Corporate Services (P) Ltd. (ITA No. - 2521/Mum/2021) - PCIT v. Delhi International Airport (P) Ltd. [2022] 144 taxmann.com 80(Del. HC) 122. The AO has relied on Circular No. 5/2014 dtd. 11- 02-2014 which provides for disallowance of expenditure in accordance with Rule 8D r.w.s 14A, where assessee has not earned any exempt income.

The ld. AR submitted that CBDT circulars are only binding on the department and not binding on the and others Mahadhan Agritech Limited assessee or on the appellate authorities. Reliance in this regard was placed on: - CIT vs.Hero Cycles (P) Ltd. [1997] 228 ITR 463 (SC) UCO Bank vs. CIT [1999] 237 ITR 889 (SC) -

Reliance was also place by the ld. AR on the following decisions wherein even after considering the aforesaid Circular, it has been held that no disallowance u/s 14A can be made in the absence of exempt income: CIT vs. Chettinad Logistics (P) Ltd (supra) - Redington (India) Ltd. vs. ACIT [2017] 392 ITR 633 - (Mad.) - Kamat Hotels (India) Ltd. vs. DCIT [ITA No. 7083(Mum) of 2014] PCIT vs. IL & FS Energy Development Company Ltd. - [2017] 297 CTR 452 (Del. HC)

Before us ld. DR on each and every additions / disallowances qua each of the issues has referred to various observations of the ld. AO and the ld. CIT(A) wherein the issue has been decided against the assessee. His arguments shall be dealt by deciding each and every issue.

Ld. CIT DR has summarized her entire arguments in her written submissions which for the same of ready reference is reproduced hereunder:- and others Mahadhan Agritech Limited 1 The above appeals are filed by the assessee company against the orders of the CIT(A) confirming the various additions/disallowances made by the AO in the orders passed u/s 143(3) rwis 153A of the IT Act, 1961 in the above-mentioned AYs. As directed by the Bench, written submissions on the various grounds of appeals are discussed AY-wise in the ensuing paragraphs

AY 2015-16 2.1 Ground of appeal

AY 2017-18 4.1 Ground of appeal no 1.0 is similar to ground no 2.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs. and others Mahadhan Agritech Limited 4.2 Ground of appeal no 2.0 is against the confirming of the disallowance of deduction claimed u/s 35AD of the Act. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant paras of the assessment order wherein the A.O has given his analysis and findings are para

AY 2018-19 5.1 Ground of appeal

We will take up the first issue which has been raised in all the years, i.e., claim of depreciation goodwill or intangible assets.

The brief facts have already been discussed in the foregoing paragraphs however, in a succinct manner; the facts relevant for the issue involved are reiterated. Here in this case DFCPL, SCMFPL and STL now known as MAL, the assessee has entered into a scheme of arrangement to transfer Technical Ammonium Nitrate (TAN) and fertilizer business verticals to its wholly owned subsidiaries and filed a petition before the NCLT, Mumbai, which sanctioned and others Mahadhan Agritech Limited the scheme vide order dated 30/03/2017 and effective date of scheme was 01.05.2017 and appointed date was 01/01/2015. The background behind scheme was that DFPCL has three prominent verticals namely (i) Industrial Chemicals (“IC”), (ii) Technical Ammonium Nitrate (“TAN”) and (iii) Fertilizers. While TAN and fertilizers business have inter-linkages whereas industrial chemical business is relatively independent.

A Scheme of Arrangement was proposed amongst DFCPL, SCMFPL and MAL with each of the varied businesses carried out by DFPCL either by itself or through strategic investments in subsidiaries including TAN, fertilizers, industrial chemicals, real estate and power have potential for sustainable profit growth and also capable of attaining a different set of investors, strategic partners and know how providers to scale up the size and operations. Additionally, in order to enable investors to choose the business of their liking and priority of portfolio in the event of such a possibility arising, DFPCL proposed to reorganize and segregate its TAN business and Fertilizer business into a separate company. Accordingly, scheme of arrangement was propounded and TAN and fertilizers were proposed to transfer to slump sale from DFPCL, SCMFPL and further, demerger of TAN and fertilizers business, an integral and individual part of the scheme from SCMFPL, assessee i.e. MAL, the consideration paid above the fair value of net

The ld. AO based on the seized email of Mr. Debasish Benarjee and statement recorded on oath during the course of search, deduced that scheme of arrangement was a colorable device to evade payment of taxes. He further observed that conditions of demerger as prescribed under Section 2(19AA) of the Act were not complied with in as much as, as per provisions of said Section, assets are recorded in the books of the resulting company at the written down value of transferred assets appearing in the books of demerged company. AO further noted, in terms of Explanation 7A to Sec. 43(1) of the Act, where, under a scheme of demerger, any capital asset is transferred by the demerged company to the resulting company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purposes of its own business. In the present case, goodwill and intangibles were not recorded in the books of SCMFPL and therefore, it could not have been recorded at a higher value in the books of assessee. AO further referred to Explanation 3 to 43(1) of the Act, which provides that actual cost of goodwill and other intangible assets in the hands of assessee is liable to be held to be NIL where such assets were not purchased and thus,

AO further held that as per the sixth Proviso to Section 32(1) of the Act, the total claim of depreciation shall not exceed the amount calculated as if the demerger had not taken place and such deduction shall be apportioned between the demerged company and the resulting company in the ratio of number of days for which the assets/businesses were used by them. In the instant case, since the demerged company (SCMFPL) had neither accounted for goodwill and other intangible assets nor claimed depreciation thereon, the assessee being resulting company could not have claimed any deprecation on such goodwill / intangibles.

The ld. CIT DR relying upon the order of the ld. AO submitted that the entire scheme of transaction was a colourable devise which is evident from the contents of the e-mail seized during search and deposition of the person under oath. She further contended that the conditions prescribed under Section 2(19AA) of the Act had not been complied with, since the goodwill and intangibles were not recorded in the books of the demerged company and hence, could not be recorded in the hands of the assessee. Referring to Explanation 7A to Section 43(1) and the sixth proviso to Section 32(1), she submitted that the actual cost of such assets should be taken as nil and consequently, no

Ld. CIT (A) has confirmed the addition merely referring to the reasoning given by the ld. AO and further held that in so far as the valuation reports obtained from from Registered Valuers were instrumental in the process of demerger, there was a wide gap between the projected and actual figures for both the divisions that were transferred. Thus, it clearly shows that the figures have been taken at a very arbitrary manner suitable to the assessee to justify the market valuation. Apart from that, he held that valuation for the purpose of slump sale and demerger calculated to different values of the undertaking. Therefore, the valuation reports to justify such a high valuation to account for the difference of the goodwill cannot be sustained. Apart from that the assessee company has failed to justify with supporting evidence that demerger was done to attract potential investors.

We are unable to concur with the conclusions drawn by the ld. AO and ld. CIT (A). In the first place, the scheme of agreement was sanctioned by the NCLT after issuing of notice to all stakeholders including the Income Tax department. No objections were raised by the department at that stage. The accounting treatment for goodwill and intangibles has been explicitly stated in the scheme and was given effect in the audited books of account as already and others Mahadhan Agritech Limited noted above. As discussed in the earlier part of the order while dealing with the submissions of the ld. AR, in the present case the net value of the asset transferred in demerger was Rs. 743 crores, whereas, the total consideration of the demerger was Rs. 2,517 crores. The excess of consideration paid over the net value of assets resulted in goodwill and other intangible assets. We have already elaborated upon the rationale of the restructuring which has been discussed in the foregoing paragraphs. The said rationale has been also disclosed before the NCLT, which thereafter approved the scheme of agreement vide its order dated 30/03/2017.

It has further been brought to our notice that re- structuring was undertaken primarily to attract future investors into specific line of business. It was submitted that the investors were only interested in TAN business of the group, as opposed to the other business run by DFPCL. Accordingly, the TAN business was first demerged from the assessee to another group entity, pursuant to the NCLT order dated 28/06/2024 with the aappointed date of the scheme was 01/01/2022. Following the demerger, the group succeeded in securing investment of approximately Rs. 800 crores in the TAN business through private placement. This substantiates the commercial rationale for the restructuring, which continued to remain viable even after the amendment brought in by Finance Act 2021, and others Mahadhan Agritech Limited whereby goodwill was excluded from the block of assets, thereby rendering it ineligible for depreciation under section 32 of the Act. The restructuring was guided by sound rationale and the assessee‟s intent to realign its business operations, driven by legitimate business exigencies and not by any motive of tax avoidance as alleged by Revenue.

Upon the perusal of the material placed on record, we find substance in the arguments advanced by the ld. Counsel for the assessee. It has been demonstrated that there existed a genuine commercial rationale for undertaking the restructuring, which involved entering scheme of arrangements for separating the TAN and fertilizer business to a distinct entity. This segregation was intended to facilitate synergistic integration within the assessee's operations, enabling streamlined management and efficient utilisation of resources. The restructuring was thus commercially expedient and aligned with the broader objectives of business optimization and investor alignment. Thus, it cannot be held that restructuring undertaken pursuant to the demerger was done solely for the purpose of generating goodwill and claiming depreciation thereon. On the facts on record reinforce the position that the restructuring was carried out even when goodwill was specifically excluded from the block of assets pursuant to the amendments introduced by the Finance Act 2021. It is and others Mahadhan Agritech Limited further noted that the assessee had undertaken similar re- structuring to demerge its TAN business, which enabled it to attract substantial investment for that line of business. This clearly indicates that the generation of goodwill was not intended as a device to avail depreciation benefits, albeit, it stemmed from bonafide business consideration. The objective purely was to attract investors and achieve operational efficiency a strategic realignment of business segments.

Apart from the above, under the scheme of arrangement approved by the NCLT, specific reference was made to para 32 of the scheme which has also been incorporated in preceding paras. The said clause provided that, even in the event of any excess of the consideration determined as the fair value of the equity shares issued over the net value of assets of the demerger undertaking taken (after making appropriate adjustments for the inter- company loans etc.) such excess shall be recognized as goodwill in the books of Smartchem. Conversely, if the result of such computation is negative, the same shall be credited as Capital Reserve in the books of account of Smartchem. Thus, the accounting treatment adopted pursuant to the demerger was in accordance with scheme duly approved by the NCLT. Therefore, the question of recognition of any assets in the books of accounts arising

Further para 23.12 of the scheme of arrangement specifically provides for allowance of depreciation on goodwill and other intangible assets acquired but not recorded in the books of the demerged company. Once the NCLT has approved the scheme and held that proposed scheme of arrangement is fair, reasonable and not violative of any provisions of law or contrary to public policy, any allegation that the scheme was undertaken only for the purpose of creating goodwill and claiming depreciation thereon to avail tax benefits cannot be sustained.

A re-structuring exercise that has been approved by NCLT cannot be treated as a colourable device. It is also placed on record that, prior to the approval of the scheme by NCLT, notice was issued to the department, however, no objection or response was filed by the department. Thus, placing reliance on decision of the Hon‟ble Bombay High Court in the case of Sadanand Varde v. State of Maharashtra [supra], once a scheme of arrangement is sanctioned by the NCLT, the same attains finality and is binding upon the stakeholders, including statutory authorities. and others Mahadhan Agritech Limited 141. Before us it has been stated that there was two step re-structuring (i), the fertilizer and TAN division owned by DFPCL was transferred to SCMFPL by way of slum exchange and the said divisions were demerged from SCMFPL to assessee company. The purpose of these two step re-structuring was to attract the private equity investors / funds into specific business. The rationale for such two step arrangements have been stated by the ld. AR in his arguments which have been captured in Preceding para 27 to 33. We have already held in the preceding para 137 that this segregation was intended to facilitate firstly, synergistic integration within the assessee‟s operation enabling streamline management and efficient utilization of resources and to attract substantial investment in the TAN business. These two stage arrangements were purely guided by business and commercial expediency rather than any colourable scheme only for creating goodwill and claiming depreciation thereon.

In the context of restructuring and demerger, where there exists a difference between the net asset value and the valuation of the shares, such difference is generally recorded as goodwill. It may not be necessary that goodwill or other intangibles assets must already be recorded in the books of the demerged company for such treatment to apply. At the time of demerger, the valuation of the shares of the demerged company is required to be undertaken at and others Mahadhan Agritech Limited fait market value (FMV), which may be determined using any of the valuation methodologies. The FMV is generally determined by the Valuer based on the prospective business potential of the company. In the present case, it has been brought on record that the TAN and fertilizer business were expected to generate significant profits in the future and had attracted substantial investor interest. Therefore, the valuation was carried out taking into account the company‟s future prospects, which is a recognised and accepted approach in determining the fair value in a demerger scenario. Here in this case, the Registered Valuer has adopted DCF method relying upon financial that was subsequently justified by actual performance. The assessee has also obtained valuation reports from two independent Registered Valuers (i) adopting DCF method and other market multiple approach, both being globally accepted valuation methodologies. The allegation of the learned Assessing Officer that the projections under the DCF method did not align with the actual results is misplaced.

A suitable explanation was furnished by the assessee, and it is further noted that in the subsequent periods, the actual share value far exceeded the projected figures. The fact that actual results may have deviated from initial projections does not, by itself, vitiate or invalidate the valuation. It is a settled principle that the reliability of a

Accordingly, the reasoning given by the learned Assessing Officer and the learned CIT (A) for discarding the assessee‟s valuation is rejected.

In the present case, the reference by the Assessing Officer to Explanation 7A to Section 43(1) of the Act is misplaced, as the said provision applies only where the asset was already recorded in the books of the demerged company. In the instant case, the goodwill and other intangible assets in question arose for the first time in the books of the assessee, being the resulting company, pursuant to the scheme of arrangement.

Clause 23.12 of the scheme explicitly provides that such intangible assets though not recorded in the books of the demerged company shall be eligible for depreciation under Section 32(1) of the Act. The embargo on depreciation of goodwill introduced by the Finance Act, 2021, is prospective in nature and does not apply to the years under consideration.

The Hon‟ble Supreme Court in CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)] has held that depreciation is allowable on goodwill arising out of amalgamation. The and others Mahadhan Agritech Limited same principle applies mutatis mutandis to demergers and corporate reorganizations, provided that the transaction is genuine and the asset is recognised in accordance with law.

In our considered view, the assessee has demonstrated that the restructuring was carried out with a legitimate business purpose, was duly approved by the competent authority, and has been given effect to in accordance with accounting and legal norms. The goodwill and intangible assets recorded in its books cannot be disregarded merely because of a resultant tax benefit. The depreciation claimed on such assets is permissible under law and supported by both fact and jurisprudence. Accordingly, we direct that the disallowance of depreciation on goodwill and other intangible assets should be deleted for all the assessment years under appeal. Thus, this issue is decided in favour of the assessee. Issue relating to addition made under Section 69A of the Act on the alleged inflation of capital expenditure

The next issue arising for our consideration is the addition made by the learned Assessing Officer under Section 69A of the Act on the allegation that the assessee had inflated its capital expenditure by recording bogus construction expenses, allegedly resulting in the generation and return of unaccounted cash. The foundation of this addition rests primarily on certain WhatsApp

The brief facts, as noted by the learned AO, pertain to a search action conducted at various premises of the Deepak Group. No Money and jewellery was seized from residential premises. Statements of various important persons were recorded. One of the allegations made by the Department was that the assessee-company was engaged in the practice of inflating capital expenditure and subsequently receiving the inflated amount back in cash from vendors. During the search, digital data of one Mr. Pandurang Langde was seized, and in a statement recorded from him, he was confronted with suspicious WhatsApp communications wherein certain words such as “contribution” and “drawings” were used, which purportedly referred to cash transactions connoting crores and lakhs, respectively. Further investigation revealed that the cash allegedly represented amounts received back from vendors involved in projects of the group concerns.

The modus operandi described was that bills were raised by vendors like Onshore Construction Company Pvt. Ltd., Ray Constructions Ltd., Jobby Engineering Pvt. Ltd., and National Builders Infrastructure Ltd. After raising the bills and receiving the payments, it was alleged that certain cash amounts were handed back to officials of the company. This cash was allegedly

In response to the show-cause notice, the assessee submitted all details pertaining to the vendors, stating that these entities were civil contractors engaged for execution of capital projects of the assessee group. Detailed information regarding services received was also submitted. It was clarified that the capital expenditure recorded against these vendors pertained to a project that was subsequently demerged to M/s. Smartchem Technologies Ltd. and was duly recorded as capital expenditure in the books of accounts. The assessee gave point-wise rebuttal to each allegation made by the learned AO, clarifying that out of the four vendors named, there were no transactions with two of them, and only two vendors had been appointed as contractors. The assessee submitted year-wise certified ledger accounts, copies of bank accounts, invoice details, details of retention money, penalties levied for delayed work, etc., from Financial Year 2012–13 to 2018–19.

However, the learned AO rejected these contentions primarily on the basis of certain WhatsApp chats retrieved from the phone of Shri Pandurang Langde and statements recorded under oath, which were subsequently elaborated before the Investigation Wing and the learned AO. The AO relied upon the statement recorded under Section 132(4), without considering the retraction, and also incorporated certain WhatsApp chats and others Mahadhan Agritech Limited and statements of employees in the assessment order. Accordingly, the AO concluded that these WhatsApp chats and the statement under Section 132(4) constituted incriminating material and concluded that the assessee had inflated capital expenditure to generate cash. He accordingly estimated the inflated capital expenditure at 10% of the total capital expenditure booked with the said parties, even though no incriminating material was found for any assessment year other than A.Y. 2018–19.

Before us, learned Counsel for the assessee raised a preliminary objection regarding the absence of incriminating material for the assessment years under consideration. He further contended that capital expenditure cannot be disallowed on an ad-hoc basis by disallowing 10% thereof. He relied upon the judgment of the Hon‟ble Supreme Court in CIT v. Sinhgad Technical Education Society [(2017) 84 taxmann.com 290 (SC)], and decisions of various High Courts, including Sunny Jacob Jewellers Gold Hyper Market v. CIT (2024) (Ker. HC) and PCIT v. Saumya Construction (P.) Ltd. [(2017) 81 taxmann.com 292 (Guj. HC)].

As noted above, the main reliance of the Revenue is upon certain WhatsApp messages dated 20th, 21st, and 23rd March 2018, which allegedly referred to civil contractors, specifically Ray Constructions Ltd. and Onshore Construction Co. Pvt. Ltd. and purportedly indicated cash circulation through inflated and others Mahadhan Agritech Limited billing. On this basis, an ad-hoc addition of ₹4,52,35,800/-, being 10% of the civil construction payments made to these parties, was made under Section 69A.

Upon perusal of the assessment order and the WhatsApp chats reproduced therein, we find it extremely difficult to arrive at a conclusive finding that such vague chats alone can justify an ad-hoc addition or disallowance of capital expenditure across all the impugned assessment years. For instance, a screenshot at page 57 of the assessment order reads: “on-shore: 200I; Onshore: 200L; Ray: 562.56L; Confirmed with Naresh Mehta”. We are unable to accept the inference drawn from these numbers as indicating any cash-back arrangement post billing. These chats merely refer to isolated references to vendors and numeric values that could plausibly relate to bills, project codes, milestones, or administrative records. There is no clear reference to any cash transaction, no mention of kickbacks, and no context to suggest the existence of unaccounted income. Such cryptic entries are wholly insufficient to meet the threshold required under Section 69A.

It is further pertinent to note that no unaccounted cash or valuable article was found in the possession of the assessee during the search. The essential condition for invoking Section 69A is that the assessee must be found in possession of money, bullion, jewellery, or other valuable articles that are not recorded in the books and for which no explanation is provided. In the and others Mahadhan Agritech Limited present case, none of these foundational requirements are fulfilled. Mere conjecture or presumption cannot substitute the evidentiary standards mandated by law.

As regards the statements of employees reproduced in the assessment order, while some answers may indicate post- payment handover of cash to one Mr. Naresh Mehta, such statements remain uncorroborated by any documentary evidence or material discovered during the search. Sole reliance on such statements particularly when subsequently retracted and not supported by additional evidence cannot sustain an addition under Section 69A. The text of the section itself reads:

Ergo, to invoke the deeming fiction of this provision, it must be shown that the assessee was found to be the owner of unrecorded money or valuables. In the present case, not only were all capital expenditure transactions duly recorded in the books, but no physical or financial evidence of unaccounted cash was found. A deeming provision must be construed strictly, and cannot be invoked merely on the basis of suspicion or inference. Even assuming argued that certain cash was received back, it and others Mahadhan Agritech Limited has not been shown to have reached the assessee‟s office, or to have been utilized by the assessee. At most, it might point to possible embezzlement by certain individuals, but such presumption cannot be extended to implicate the assessee- company unless the benefit of such income is directly traced to it. Notably, the search did not unearth any such documentary evidence or material indicating such a flow of cash.

It is well-settled that in income-tax proceedings, especially in search assessments, the burden of proof lies squarely on the Revenue to establish that the assessee is the owner of unaccounted money or assets. In this case, the Revenue has not produced any corroborative evidence documentary or otherwise to demonstrate that the assessee received any cash component from the vendors. There is no material to establish a money trail, concealment of receipts, or cash inflows.

Without prejudice, learned counsel rightly argued that the WhatsApp chats relied upon by the Revenue constitute electronic evidence, and have not been authenticated in accordance with Section 65B of the Indian Evidence Act, 1872. The Hon‟ble Supreme Court in Anvar P.V. v. P.K. Basheer [(Civil Appeal No. 4226 of 2012)] has categorically held that electronic records are admissible only if accompanied by the requisite certificate under Section 65B. In the absence of such certification, the WhatsApp chats lack admissibility. Reliance was also placed on the decisions in Dell International Services India Pvt. Ltd. v. Adeel

Further, the addition is based in part on statements recorded under Section 132(4) during the search. However, it is trite law that a statement under Section 132(4), in the absence of supporting evidence, cannot form the sole basis for addition. This legal position has been settled in CIT v. Harjeev Aggarwal [(2016) 70 taxmann.com 95 (Del.)], CIT v. Jagdishprasad Mohanlal Joshi [(2018) 99 taxmann.com 288 (SC)], and PCIT v. Rohit Karan Jain [2025] 173 taxmann.com 184 (Gauhati HC). In this case, not only were the statements retracted by the concerned individuals, but such retractions were duly supported by cogent reasoning and affirmed through sworn affidavits (refer pages 313–329 of the paper book for AY 2016–17). In such circumstances, the statements recorded u/s.132(4) during search lose all probative value.

As discussed above, the invocation of Section 69A, in our considered view, is wholly misplaced. The three cumulative conditions for its applicability, firstly, that the assessee must be found to be the owner of unexplained money or valuable article; secondly, that such asset is not recorded in the books of account; and thirdly, that the assessee has failed to offer a satisfactory explanation are conspicuously absent in the present case. In the absence of any discovery or seizure of such and others Mahadhan Agritech Limited unrecorded asset or money, the essential jurisdictional facts necessary to trigger the deeming fiction under Section 69A are not fulfilled. Possession, or its absence, is a critical indicator of ownership in matters involving alleged unaccounted assets. The law mandates that the Revenue must establish a clear and substantive linkage between the unaccounted asset and the assessee. Such linkage is wholly lacking in the present case.

Further, the addition has been made on an ad-hoc basis at 10% of the civil construction cost incurred with two vendors, without any tangible nexus to actual inflation or cash reversal. The learned AO has not identified any concrete evidence or cash trail suggesting that payments made were inflated or that any part of the payment was returned to the assessee. Such estimations, made in vacuum and unsupported by primary evidence, are legally unsustainable. The law does not permit ad- hoc or estimated additions under Section 69A without first satisfying the jurisdictional prerequisite that unexplained money or asset is found in the possession or ownership of the assessee. In ACIT v. Harsukhlal Dhirajlal Doshi [1999] 102 Taxman 297 (Rajkot), it was held that additions based on arbitrary percentages and conjectures, without corroborative material, cannot be sustained.

In view of the foregoing discussion, we hold that the addition made under Section 69A is legally untenable, factually unsubstantiated, and contrary to the well-settled principles of and others Mahadhan Agritech Limited law. The Revenue has failed to discharge its burden of proof and has proceeded to make an addition solely based on speculative interpretation of cryptic WhatsApp chats and uncorroborated, retracted statements. In the absence of any incriminating or corroborative material, such addition cannot be sustained in law.

Accordingly, the addition made under Section 69A on account of alleged inflation of capital expenditure stands deleted for all the years under appeal.

The next issue relates to the disallowance of depreciation on the alleged inflated capital expenditure. The learned AO has proceeded to make a further disallowance of depreciation on the assumption that the assessee had claimed depreciation under Section 32(1) of the Act on the disallowed portion of the allegedly inflated capital expenditure. However, we have already held that the addition on account of inflated capital expenditure is unsustainable and has been deleted. Consequently, the basis for the disallowance of depreciation also ceases to exist. Furthermore, since the learned AO has made an ad-hoc disallowance of 10% of the capital expenditure, the corresponding disallowance of depreciation on such ad-hoc basis is equally untenable. Accordingly, this ground is allowed in favour of the assessee.

The next issue pertains to the disallowance of donation expenses in A.Y. 2016–17. As noted earlier, the assessee had recorded donation expenses amounting to ₹1,04,37,000/- under the head “Interdivisional Overheads,” clubbed under “Other Expenses.” In the revised return filed on 28.02.2015 for A.Y. 2016–17, these were claimed as donations. It was explained that the corresponding income was duly offered to tax by DFPCL in its computation, which was accepted in the order passed under Section 153A in the case of DFPCL. Therefore, there remains no justification for disallowing the same once again in the hands of the assessee. Accordingly, this issue is decided in favour of the assessee.

Coming to the issue of disallowance under Section 115JB of the Act, we note that the learned AO has reiterated the disallowance made under the normal provisions, specifically in respect of depreciation on goodwill/intangible assets and alleged inflated capital expenditure, while computing the book profits under Section 115JB. The learned AO has invoked Clause (iia) of Explanation 1 to Section 115JB, which is applicable only in and others Mahadhan Agritech Limited cases where there is a revaluation of assets. However, this is not a case involving revaluation. The goodwill and intangible assets were recorded as on 01.01.2015, pursuant to a scheme of demerger, and the adjustments were not made at the instance of the assessee. Therefore, Clause (iia) has no application, and the disallowance made under Section 115JB is accordingly directed to be deleted.

We now turn to the issue relating to the disallowance of deduction under Section 35AD in respect of the NPK Fertiliser Unit. The facts, in brief, are that the assessee claimed a deduction under Section 35AD amounting to ₹804.95 crores (being 150% of the capital expenditure of ₹560 crores) incurred for setting up a new NPK Fertiliser Unit at Taloja, Maharashtra. The unit was commissioned in March 2017, and the claim was made for A.Y. 2017–18. The fertilizer undertaking stood vested in the assessee pursuant to a scheme of demerger w.e.f. 01.01.2015. The learned AO disallowed the claim under Sections 35AD(7A) and 35AD(7B), alleging that Unit No. 5, the conveyor belt, and the bagging units forming part of the NPK unit were occasionally used for the ANP Fertiliser Plant, and thus the assets were not used exclusively for the “specified business.” and others Mahadhan Agritech Limited 171. The foundational issue to be examined is, whether the occasional or incidental use of certain assets for another fertilizer unit (albeit within the same line of business) constitutes a violation of the exclusivity condition under Sections 35AD(7A) and 35AD(7B), thereby warranting complete disallowance of the deduction.

At the outset, it is important to note that Clause (vii) of Section 35AD(8)(c) defines “specified business” in the context of the fertilizer sector without restrictive expressions such as “setting up and operating” or “developing and operating,” which are used in other clauses. This linguistic distinction demonstrates legislative intent to confer broader relief to the fertilizer industry. Therefore, both NPK and ANP units, being engaged in the manufacture of fertilizers, fall within the ambit of “specified business.”

Before us, learned counsel for the assessee contended that the bagging unit and conveyor belt in question were used wholly and exclusively for the production of fertilizers in India, whether for NPK or ANP. Even if the NPK plant assets were temporarily used for ANP production, such usage was only to address operational exigencies or downtime and not a deliberate diversion. This claim is further substantiated by the fact that the assessee had initiated the process of installing two additional bagging units at the ANP plant, in respect of which no deduction under Section 35AD was claimed. This demonstrates bona fide and others Mahadhan Agritech Limited conduct on the part of the assessee. In the absence of any intent to misuse the benefit of weighted deduction, no disallowance is warranted.

The phrase “used for any purpose other than the specified business” under Section 35AD(7B) is intended to address cases of systematic diversion of assets to non-specified domains. In the present case, there is no such diversion. The inference drawn is based solely on a single entry in a logbook recording isolated usage. This does not meet the evidentiary threshold required for invoking Sections 35AD(7), (7A), or (7B).

The cost attributable to Bagging Unit No. 5 and the conveyor belt, as per the assessee‟s submission, aggregates to ₹13,50,87,173/- (i.e., ₹6,60,60,070/- for the bagging unit and ₹6,90,27,103/- for the conveyor belt). Even if disallowance were warranted, it should have been restricted to the deduction relatable to these components alone. However, since the business of the assessee pertains exclusively to fertilizers, the claim under Section 35AD is held to be allowable in full.

A further legal infirmity arises from the fact that the deduction under Section 35AD was claimed for the first time in A.Y. 2017–18. Subsections (7A) and (7B) are applicable only where deduction has already been claimed and allowed in earlier years, and the asset is subsequently used for non-specified purposes. This condition does not stand fulfilled in the present and others Mahadhan Agritech Limited year. Accordingly, the invocation of these sub-sections is legally untenable. In view of the above, we hold: • The NPK Fertiliser Unit qualifies as a “specified business” under Section 35AD(8)(c)(vii), and all conditions for claiming weighted deduction are satisfied. • Incidental use of certain assets for another fertilizer unit within the same business does not amount to violation of Section 35AD(7A)/(7B). • The condition of “claimed and allowed” in prior years is not met in A.Y. 2017–18, and therefore the disallowance fails on statutory grounds. Accordingly, the disallowance made under Section 35AD is directed to be deleted.

In the result, this ground is allowed.

The next issue pertains to the disallowance made under the normal provisions of the Act on account of alleged stock difference in A.Y. 2019–20. The brief facts, as culled out from the record, reveal that during the course of survey proceedings conducted under Section 133A at the manufacturing facility and godown located at Panipat, a physical verification of stock was undertaken. It was observed that a minor difference existed

However, such minor timing discrepancies between physical stock receipts at the godown and their corresponding accounting entries in the books are common and inevitable, particularly in large-scale manufacturing concerns. In the present case, the difference was to the extent of only 6.68 Metric Tonnes, which constituted a mere 0.70% of the total inventory of 954.13 Metric Tonnes. This implies that 99.30% of the inventory was duly reconciled and accounted for. Such marginal variation, in our considered view, cannot be the basis for invoking a disallowance, especially when the same is plausibly explained as a timing issue and not as unaccounted sales.

Furthermore, it is well settled that where the alleged excess stock is already credited to the Profit & Loss Account, whether as sales or closing stock, there can be no occasion for a further addition. In the present case, even assuming the stock difference was treated as sales or inventory, the same has already been factored into the computation of taxable income. The learned AO, however, proceeded to apply an ad-hoc rate of ₹17 per kilogram for computing the disallowance, which is wholly unjustified. Even if we were to accept the alleged difference of 6.68 MT and apply a much higher rate of ₹70,000 per MT (as suggested in some parts of the record), the resultant disallowance would not exceed ₹1,13,560/-. In the broader context of the total stock,

The Revenue has also reiterated the same stock difference while computing the book profit under Section 115JB for A.Y. 2019–20. Since we have held that the alleged difference in stock does not warrant any addition under the normal provisions, the consequential adjustment under Section 115JB also stands deleted.

In so far as the issue raised in ground No.1 that additions made by the ld. AO are beyond the scope of Section 153A as there were no incriminating materials found in the course of search which has been argued by the ld. Counsel at length, however, we are not dealing with this issue and is kept open because we have decided the issue on merits and have held that on the facts and in law such additions are not sustainable. Therefore, ground No.1 is treated as academic.

The Revenue is in appeal for A.Y. 2019–20 against the deletion of disallowance under Section 14A of ₹2,72,16,529/-. It is an admitted position that the assessee has not earned any dividend income during the year under consideration. In the and others Mahadhan Agritech Limited absence of any exempt income, the invocation of Section 14A is legally untenable. This legal position is now well settled by a long line of judicial precedents, including the decisions of the Hon‟ble Delhi High Court in CIT v. Era Infrastructure India Ltd. and PCIT v. Delhi International Airport Ltd., which have categorically held that Section 14A cannot be applied where no exempt income has been earned during the year.

Before us, the learned Departmental Representative sought to argue that the amendment to Section 14A by the Finance Act, 2022 should be given retrospective effect. However, this contention has already been rejected by various High Courts, including in the aforementioned cases. It is now settled law that the said amendment is prospective and cannot be applied to A.Y. 2019–20. Accordingly, the finding of the learned CIT(A) deleting the disallowance under Section 14A is confirmed.

In the result, the appeals filed by the assessee are allowed, and the appeal filed by the Revenue is dismissed.