M/S. CRODA INDIA COMPANY PVT. LTD,MUMBAI vs. THE PR. COMM OF INCOME TAX, MUMBAI-6

आदेश / O R D E R PER M. BALAGANESH (A.M):

This appeal in ITA No. 1439/Mum/2022 for A.Y.2017-18 preferred by the order against the revision order of the ld. Principal Commissioner of Income Tax-6, Mumbai u/s.263 of the Act dated 31/03/2022 for the A.Y.2017-18.

2 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd.

3 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd.

4 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd.

5 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. on 05/01/2007. The assessee carried out purchase price allocation over the fair value of the assets and liabilities of the said division as under:-

Particulars Amount (Rs. in lakhs) Net Consideration 28,783.03 Less; Fixed Assets (7,576.71) Less; Working Capital as on January 04, 2007 (1,934.77) Total Tangible Assets 19,271.55 Less; Identified Intangible Assets (12,194.99) Goodwill 7,076,56

5.1. The assessee had recognized the Goodwill as an asset. However, no depreciation u/s 32(1)(ii) of the Act was claimed and allowed on the same for the Assessment Years 2007-08 to 2011-12. Subsequently, the Hon’ble Supreme Court in the case of CIT vs Smifs Securities Limited reported in 348 ITR 302(SC), wherein it was held that the Goodwill is an intangible asset within the meaning of section 32 of the Act and thus depreciation on the same will be allowable. The assessee also placed reliance on the decisions of Hon’ble Jurisdictional High Court in the case of Toyo Engineering India Limited vs DCIT in ITA No. 1330 of 2012 and CIT vs Birla Global Asset Finance Ltd in ITA No. 6835 of 2010. Pursuant to these decisions, the assessee claimed depreciation on the Goodwill from A.Y. 2012-13 onwards. The ld. PCIT in the show cause notice had alleged that the depreciation on goodwill was claimed in contravention of provisions of Explanation 5 to section 32(1) of the Act. The assessee submitted that as per the provisions of section 32(1) of the Act, it provides that in respect of block of assets, the depreciation shall be allowed at such percentage on the written down value (WDV) thereof, as

6 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. may be prescribed. The assessee also placed reliance on the provisions of section 43(6) of the Act which defines WDV as under:-

“Section 43(6) - „Written Down Value‟ means (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force: Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, "depreciation actually allowed" shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi); (c) in the case of any block of assets,— (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,— (A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced— (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value;

7 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. (ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year Explanation 1.—When in a case of succession in business or profession, an assessment is made on the successor under sub-section (2) of section 170 the written down value of any asset or any block of assets shall be the amount which would have been taken as its written down value if the assessment had been made directly on the person succeeded to. Explanation 2.—Where in any previous year, any block of assets is transferred,— (a) by a holding company to its subsidiary company or by a subsidiary company to its holding company and the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied; or (b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year. Explanation 2A.—Where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets of the demerged company for the immediately preceding previous year shall be reduced by the written down value of the assets transferred to the resulting company pursuant to the demerger. Explanation 2B.—Where in a previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets in the case of the resulting company shall be the written down value of the transferred assets of the demerged company immediately before the demerger. Explanation 2C.—Where in any previous year, any block of assets is transferred by a private company or unlisted public company to a limited liability partnership and the conditions specified in the proviso to clause (xiiib) of section 47 are satisfied, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the limited liability partnership shall be the written down value of the block of assets as in the case of the said company on the date of conversion of the company into the limited liability partnership. Explanation 3.—Any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation "actually allowed". Explanation 4.—For the purposes of this clause, the expressions "moneys payable" and "sold" shall have the same meanings as in the Explanation below sub-section (4) of section 41.

8 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. Explanation 5.—Where in a previous year, any asset forming part of a block of assets is transferred by a recognised stock exchange in India to a company under a scheme for corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the written down value of the block of assets in the case of such company shall be the written down value of the transferred assets immediately before such transfer. Explanation 6.—Where an assessee was not required to compute his total income for the purposes of this Act for any previous year or years preceding the previous year relevant to the assessment year under consideration,— (a) the actual cost of an asset shall be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of account; (b) the total amount of depreciation on such asset, provided in the books of account of the assessee in respect of such previous year or years preceding the previous year relevant to the assessment year under consideration shall be deemed to be the depreciation actually allowed under this Act for the purposes of this clause; and (c) the depreciation actually allowed under clause (b) shall be adjusted by the amount of depreciation attributable to such revaluation of the asset. Explanation 7.—For the purposes of this clause, where the income of an assessee is derived, in part from agriculture and in part from business chargeable to income-tax under the head "Profits and gains of business or profession", for computing the written down value of assets acquired before the previous year, the total amount of depreciation shall be computed as if the entire income is derived from the business of the assessee under the head "Profits and gains of business or profession" and the depreciation so computed shall be deemed to be the depreciation actually allowed under this Act.”

5.1.1. Hence it could be seen that the entire provisions of section 43(6) of the Act together with its various Explanations only uses the expression ‘depreciation actually allowed’. Since assessee has started claiming depreciation on Goodwill from A.Y. 2012-13 onwards, the closing WDV as on 31/03/2016 was taken as the opening WDV as on 01/04/2016 at Rs 24,80,50,073/- and depreciation claimed accordingly. It was submitted that there is no discretion available to the ld. AO to change the opening WDV as stated in section 43(6) of the Act. It was also argued that once an asset forms part of any block of asset, the said asset loses its individual identity and the WDV of the said asset cannot be independently determined as it had already entered the block of assets. In the instant case, the Goodwill forms part of the block of assets under ‘Intangible

9 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. Assets’. In any case, it was contended that the depreciation actually allowed on an asset to the assessee is to be considered for an asset and the same cannot be stretched to mean ‘notionally allowable depreciation’ and since the depreciation on Goodwill was actually allowed to the assessee only from AY 2012-13 onwards, there is no case for reworking the opening WDV from AY 2007-08 as contemplated by the ld. PCIT in his show cause notice. The assessee in support of this contention also placed reliance on the decision of Hon’ble Supreme Court in the case of CIT vs Straw Products Limited reported in 60 ITR 156 (SC) wherein it was held that the expression ‘actually allowed’ is unambiguous and connotes the idea that the allowance was actually given effect to.

5.2. The assessee also submitted before the ld. PCIT that in para 2 of the show cause notice, the depreciation claimed on Goodwill is claimed to be Rs 620.13 lakhs, however, the actual depreciation claimed on Goodwill during the AY 2017-18 is Rs 4,19,82,521/-. The said amount of Rs 620.13 lakhs is actually depreciation on all intangible assets held by the assessee including the Goodwill. Accordingly, it was submitted that in view of provisions of section 32(1) read with section 43(1) read together with section 43(6)(b)/ (c ) of the Act, the depreciation on Goodwill of Rs 4,19,82,521/- is to be allowed. It was also submitted that Explanation 5 to section 32 of the Act would apply only to the extent as to state that depreciation should be allowed even if not claimed by the assessee. However, it does not deal with the computation of depreciation or the manner of determination of WDV of the asset. Therefore, no fault could be found with the claim of depreciation or computation of WDV of the asset. Moreover, it was also pointed out that the ld. AO had accepted the WDV and claim of depreciation on Goodwill in the first year of its claim i.e. AY 2012-13 and in all subsequent years. The ld. AO had accordingly considered the closing WDV as on 31/03/2016 which is the same figure of

10 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. opening WDV as on 01/04/2016 and had granted depreciation to the assessee. Hence no error could be attributed in the order of the ld. AO in this regard warranting any revision u/s 263 of the Act by the ld. PCIT.

5.3. It was also submitted that during the scrutiny assessments of AY 2012-13 and 2014-15, the assessee had specifically submitted details in respect of Goodwill purchased and depreciation claimed thereon. The then ld. AO after considering the submissions made by the assessee, accepted the assessee’s view, as it was in consonance with provisions of section 32 r.w.s. section 43 of the Act. Hence it was submitted that the order passed by the ld.AO for the A.Y. 2017-18 cannot be termed as erroneous. In any case, the view taken by the ld. AO in the assessment would fall under the category of a possible view taken by him in the facts and circumstances of the case considering the past income tax behavior of the assessee and that the ld. PCIT cannot try to substitute his own view in place of the possible view already taken by the ld. AO in the revision proceedings u/s 263 of the Act.

5.4. The ld. PCIT ignored all the contentions of the assessee and proceeded to conclude that the order passed by the ld. AO is erroneous and prejudicial to the interests of the revenue on the ground that there is lack of enquiry by the ld. AO with regard to the issue of depreciation on Goodwill and passed the revision order u/s 263 of the Act by directing the ld. AO to rework the depreciation on Goodwill from AY 2007-08 onwards and arrive at the revised opening WDV of the asset.

11 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. the paper book. We find that the tax auditor had commented that the depreciation on Goodwill claimed by the assessee has been claimed on opening WDV which figure is not in consonance with requirement of Explanation 5 to section 32(1) of the Act .

6.1. We find that the ld. PCIT in para 7.1. of his order had accepted the fact that the block of assets under ‘intangible assets’ comprise of Technical knowhow, licences and Goodwill. Hence there is absolutely no doubt that the cost of Goodwill had already entered the block of assets in the earlier years and loses its individual identity and becomes inseparable part of block of assets. Reliance in this regard is placed on the celebrated decision of the Hon’ble Delhi High Court in the case of CIT vs Bharat Alumunium Co. Ltd reported in 187 Taxman 111 (Del). Accordingly, there would be no occasion for the ld. AO to even look into the revised opening WDV of Goodwill alone . While this is so, how the order of the ld. AO could be termed as erroneous. It is trite law that the ld. PCIT in order to invoke his revision jurisdiction u/s 263 of the Act has to bring on record the satisfaction of two cumulative conditions – (i) order of the AO must be erroneous and (ii) it must be prejudicial to the interests of the revenue. Even if one of the condition is conspicuously absent, then revision jurisdiction u/s 263 of the Act cannot be invoked by the ld. PCIT. Reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd vs CIT reported in 243 ITR 83 (SC) and CIT vs Max India Ltd reported in 295 ITR 282 (SC).

6.2. We deem it fit to address the actual meaning of the expression ‘actually allowed’ used in the entire provisions of section 43(6) of the Act which defines ‘Written Down Value’. We find that the Hon’ble Supreme Court in the case of CIT vs Doom Dooma India Ltd reported in 310 ITR

12 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. 392 (SC) had addressed the meaning of expression ‘depreciation actually allowed’ as under:- 7. Deductions by way of depreciation allowance have been specifically recognized and dealt within sections 32, 34 and 43(6) of the 1961 Act (which deals with the definition of the words "written down value"). Section 32 adopts two methods in allowing depreciation. In the case of ocean-going ships, depreciation is allowed, year after year, at the fixed percentage on the original cost of the asset [See : section 32(1)(i)]. This is called the straight-line method. In the case of non-ocean-going ships and buildings, machinery, plant or furniture, the prescribed percentage of depreciation is to be computed on the basis of "written down value" of the asset [See : section 32(1)( ii)]. This is known as "written-down value" method. Both these methods seek to ensure that the total depreciation allowance(s) granted, year after year, does not exceed 100 per cent, of the original cost of the asset. In the straight-line method, the entire depreciation is written off sooner than in the "written down value" method, if the figures of the actual cost and the prescribed percentage are the same in either case. Section 32(2) allows the carry forward and unabsorbed depreciation allowances to any subsequent year, without any time limit, where such non- absorption is "owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains being less than the allowance". Depreciation loss under section 32(2) stands on the same footing as any other business losses. An assessee claiming depreciation of assets has to show that such assets are owned by him and are used by him in the accounting year for the purpose of his business, the profits of which are being charged [See : section 32(1)(i)]. Further, the total of all deductions in respect of depreciation under section 32(1)(i), made year after year, should not, in any event, exceed the actual cost of the assets to the assessee [See : section 34(2)(i)]. The definition of "actual cost" is to be found in section 43(1) and the definition of "written down value" is to be found in section 43(6) of the 1961 Act. The latter defines "written down value" under section 43(6) to mean— (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation(s) actually allowed under the 1961 Act. 8. The key word in section 43(6)(b) of the 1961 Act is "actually". We quote hereinbelow an important observation, made by this Court on the meaning of the words "actually allowed" in section 43(6)(b) in the case of Madeva Upendra Sinai v. Union of India [1975] 98 ITR 209 (SC), which reads as under :— "The pivot of the definition of 'written-down value' is the 'actual cost' of the assets. Where the asset was acquired and also used for the business in the previous year, such value would be its full actual cost and depreciation for that year would be allowed at the prescribed rate on such cost. In subsequent year, depreciation would be calculated on the basis of actual cost less depreciation actually allowed. The key word in clause (b) is 'actually'. It is the antithesis of that which is merely speculative, theoretical or imaginary. 'Actually' contra-indicates a deeming construction of the word 'allowed' which it qualifies. The connotation of the phrase 'actually allowed' is thus limited to

13 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. depreciation actually taken into account or granted and given effect to, i.e., debited by the Income-tax Officer against the incomings of the business in computing the taxable income of the assessee; it cannot be stretched to mean 'notionally allowed' or merely allowable on a notional basis. * * * From the above conspectus, it is clear that the essence of the scheme of the Indian Income-tax Act is that depreciation is allowed, year after year, on the actual cost of the assets as reduced by the depreciation actually allowed in earlier years. It follows, therefore, that even in the case of assets acquired before the previous year, where in the past no depreciation was computed, actually allowed or carried forward, for no fault of the assessee the "written-down value" may, under clause (b) of section 43(6), also, be the actual cost of the assets to the assessee." (pp. 223-224) 9. Therefore, this Court has clearly laid down the meaning of the words "actually allowed" in section 43(6)(b) to mean - "limited to depreciation actually taken into account or granted and given effect to, i.e., debited by the Income-tax Officer against the incomings of the business in computing the taxable income of the assessee". (Emphasis supplied by us)

6.2.1. Respectfully following the aforesaid decision of Hon’ble Supreme Court, the contention of the ld. PCIT to consider the notional depreciation in earlier years i.e from AYs 2007-08 to 2016-17 and rework the opening WDV as on 01/04/2016 deserve to be dismissed as it would be against the decision of the law of the land. Admittedly, the depreciation on goodwill had been actually allowed and granted to the assessee only from AY 2012-13 while computing the business income of the assessee. Hence the ld. AO had actually considered the closing WDV of the block as on 31/03/3016 as the opening WDV as on 01/04/2016 and granted depreciation on the same in AY 2017-18 i.e the year under consideration. This action of the ld. AO is strictly in consonance with the aforesaid decision of Hon’ble Supreme Court in 310 ITR 392. Hence no error could be attributed in the order of the ld. AO in this regard.

6.3. It is not in dispute that the depreciation on goodwill was claimed by the assessee and actually allowed to the assessee only from AY 2012-13

14 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. onwards. Admittedly, the assessment for the AY 2012-13 was neither subjected to reopening u/s 147 of the Act by the ld. AO nor revision u/s 263 of the Act by the ld. PCIT. Hence the decision with regard to grant of depreciation on goodwill in AY 2012-13 had attained finality. Once depreciation is allowed in prior years, the opening WDV of the block of asset cannot be changed in subsequent year by the ld. AO. Reliance in this regard has been rightly placed by the ld. AR on the Co-ordinate bench decision of this Tribunal in the case of HSBC Asset Management (India) Private Limited vs DDIT (International Taxation) in ITA No. 2028/Mum/2009 for AY 2004-05 dated 15/06/2011 vide para 8 and decision of Pune Tribunal in the case of Shapers India (P) Ltd vs DCIT reported in 191 ITD 700 vide para 10. For the sake of brevity, the operative portion of the said order is not reproduced hereunder. Hence on this ground also, the order of the ld. AO cannot be termed as erroneous.

6.4. Moreover, we also find that the ld.AO had made adequate enquiries with regard to the issue of depreciation on Goodwill during the course of scrutiny assessment proceedings for the AY 2017-18 (i.e the year under consideration before us) which is evident from the following facts :-

a) Notice issued by the ld. AO u/s 142(1) of the Act dated 08/04/2019 vide Question No. 10 specifically asking for the details of opening WDV of assets together with the reconciliation of closing WDV of earlier year with opening WDV of current year. We find that the assessee had filed its reply vide letter dated 15/04/2019 vide para 10 in this regard before the ld. AO. The evidence in this regard is enclosed in pages 137, 139 and 140 of the paper book.

b) Notice issued by the ld. AO u/s 142(1) of the Act dated 09/08/2019 vide Question No. 10 specifically asking for the details of opening WDV of

15 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd. assets together with the reconciliation of closing WDV of earlier year with opening WDV of current year. We find that the assessee had filed its reply vide letter dated 16/08/2019 vide para 10 in this regard before the ld. AO. The evidence in this regard is enclosed in pages 179, 181 and 182 of the paper book.

c) Notice issued by the ld. AO u/s 142(1) of the Act dated 12/11/2019 vide Question No. 3 specifically asking for the details of opening WDV of assets together with the reconciliation of closing WDV of earlier year with opening WDV of current year. We find that the assessee had filed its reply vide letter dated 19/11/2019 vide para 2 in this regard before the ld. AO. The evidence in this regard is enclosed in pages 219, 221, 222, 223 and 224 of the paper book.

6.4.1. Thus it could be seen that the ld. AO had made enquiries on the impugned issue thrice during the course of assessment proceedings. Hence the version of the ld. PCIT that there is lack of enquiry by the ld. AO is patently wrong and incorrect. On this ground also, the revision order passed by the ld. PCIT u/s 263 of the Act deserves to be quashed.

16 ITA No.1439/Mum/2022 M/s. Croda India Company Pvt. Ltd.

Order pronounced on 23/12/2022 by way of proper mentioning in the notice board.

Sd/- Sd/- (KAVITHA RAJAGOPAL) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 23/12/2022 KARUNA, sr.ps

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai