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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM & SHRI M. BALAGANESH, AM
O R D E R
Per Amit Shukla, Judicial Member:
The aforesaid appeal has been filed by the assessee against the impugned order dated 01.12.2021, passed by National Faceless Appeal Centre (NFAC), Delhi for the quantum of assessment passed u/s 143(3) r.w.s. 263 for AY 2015-16. The assessee has raised the following grounds of appeal:-
Mahavir Ghar Sansar Private Limited 1. On the facts and circumstances of the case as well in law the learned CIT(A) (National Faceless Appeal Centre) erred in confirming the disallowance of depreciation amounting to Rs. 5,90,759/- on goodwill claimed by your appellant on Intangible Asset as contemplated u/s 32(1)(ii) of I.T Act, 1961, without appreciating the facts that your appellant has paid for the goodwill and the depreciation on goodwill has been allowed by the learned C.I.T(A) in your appellant's own case for the Ass. Year 2008-2009; 2009-2010 and 2011-2012.The goodwill is forming part of block of assets on which the depreciation has been allowed in earlier years.
2. On the facts and circumstances of the case as well in law the learned CIT(A) (National Faceless Appeal Centre ) erred in assuming that depreciation cannot be claimed on goodwill arising out of amalgamation under the existing provisions of the I.T Act, 1961.
None appeared on behalf of the assessee despite service of notice, therefore the appeal is being decided on merits.
The facts in brief are that, during the assessment year 2008- 09 the assessee had via slump sale taken the entire Pharma and agro division as a going concern basis from Almet Corporation Ltd. from the effective date of November, 2007. The assessment for the said assessment year 2008-2009 was made vide order dated Mahavir Ghar Sansar Private Limited December 15, 2010 passed under section 143(3) of the Income-tax Act. The Assessing Officer accepted the slump sale and also allowed depreciation on goodwill by treating the same as intangible asset for the assessment year 2008-2009. In the assessment year 2013- 2014, the assessee is carrying on the business acquired by way of slump sale and has claimed depreciation on the brought forward Block. The Assessing Officer vide notice under section 148 has reopened the assessment year 2008-2009 of the assessee and has disallowed the depreciation on Goodwill in the said year vide order dated February 26, 2014 passed under section 143(3) r.w.s 147. Against the said order, the appellant preferred an appeal before the Commissioner (Appeals) 2, Mumbai. The Ld. Commissioner (Appeals) 2, Mumbai vide order dated 18/03/2015 has held that the assessee is entitled to depreciation under section 32(1)(ii) on the goodwill capitalized by the company. The AO while passing the order under section 143(3) of the Income-tax Act for the assessment year 2013-2014, has disallowed the claim of depreciation only on the basis that the decision of the Ld. Commissioner (Appeals)-2, Mumbai in the assessee’s own case for the years 2008-2009, 2009- 2010, 2011-12 is not acceptable and has filed an appeal in the Mahavir Ghar Sansar Private Limited Tribunal. The assessee had acquired the Pharma & Agro Division on Slump Sale from Almet Corporation Limited. Prior to the acquisition the assessee did not carry business in the field of Pharma and Agro Division. Therefore, when the assessee purchased the said division along with the debtors and creditors the assessee also acquired all the fixed assets, contracts, technical Know-how, trade name, brand name and other tangible and intangible assets owned and belonging to Almet Corporation Limited to ensure that the acquired business runs smoothly.
Before the AO, assessee had strongly relied on the decision of Hon’ble Supreme Court in the case of Smifs Securities Ltd. (348 ITR 302) and submitted that ‘Goodwill’ represents the amount paid by the assessee for obtaining the rights (including the patents and know how involved) in the process and business of M/s Almet Healthcare Pvt. Ltd and depreciation has been claimed @ 25% in accordance with section 32(1)(ii) read with Explanation 3 to the said section. The references were also made to relevant Clause 1 of the agreement, which has been reproduced in the assessment order. However, Ld. AO simply said the depreciation on goodwill is subject Mahavir Ghar Sansar Private Limited matter of appeal before ITAT therefore, he will not accept the order of CIT(A) in earlier years and aaccordingly, he made disallowance of depreciation on goodwill.
However, Ld. CIT (A) noted that business acquired from slump sale with effective date from 30.11.17, goodwill was determined at Rs. 85,35,270/- which represented the difference between the excess liabilities over the assets taken over by the assessee and there was no pre-existing goodwill in the business acquired and it was only a balancing figure. There was no asset purchased in the name of goodwill and therefore, balance figure could have been adjusted against capital reserved rather than name as ‘goodwill’. Thereafter, he discussed the issue on the method of accounting for amalgamation and the judgment in the case of Smifs Securities Ltd. (supra) and observed as under:-
5.1 CIT (A) in its earlier decisions relied on Supreme Court decision in Smifs Securities Ltd. It may be noted that the decision in Smifs Securities which was without considering the provisions-5th proviso to section 32(1), section 49(1)(iii)(e), Explanation 7 to section 43 (1) and/or Explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii) which were relevant to the issue in hand, given the fact Mahavir Ghar Sansar Private Limited that these were not argued before the court, could not be extended on the points which were not argued or evaluated at all. The only issue decided by the Supreme Court was that goodwill is an intangible asset is entitled for depreciation under section 32.
6. Thus, he held that after the amalgamation, no such asset exists in the amalgamating entities and therefore depreciation is not allowable to the amalgamating concern.
7. After hearing Ld. DR and on perusal of the impugned order, we find that it is not in dispute that, depreciation on goodwill stands allowed in the earlier years, wherein Ld. CIT(A) right from the AY 2008-09 and 2011-12 have allowed the depreciation following the ratio and principle laid down by the Hon’ble Supreme Court in the case of Smifs Securities Ltd.. Ld. CIT (A) in this year has digressed from the earlier years precedence stating that the existence of goodwill was never examined and judgment of Smifs Securities Ltd. will not apply. Such an observation to our utter surprise is not the correct way of reading of the judgment but also judicial callousness by making such an observation that Hon’ble Supreme Court has not considered the various provision of the law correctly stating that various provisions were not argued before the Mahavir Ghar Sansar Private Limited Court, therefore the judgment cannot to be followed. When the Hon’ble Apex Court has clearly held that after the amalgamation the assets and liability are transferred and the difference between the cost of an asset and the amount paid, constitute goodwill and such goodwill is liable for depreciation, then we fail to understand as to why the Ld. First Appellate Authority can make such an observation that the Hon’ble Apex Court has not considered the law properly or not considered the various provision of the Act.
Before the Hon’ble Apex Court in the case of Smifs Securities Ltd. (supra), one of the questions which were referred was, whether goodwill is an asset within the meaning of section 32 of the Act and whether depreciation on goodwill is allowable under such section. The facts in that case were as under:-
In the present case, the assessee had claimed deduction of Rs. 54,85,430 as depreciation on goodwill. In the course of hearing, the explanation regarding the origin of such goodwill was given as under: "In accordance with the scheme of amalgamation of YSN Shares and Securities (P.) Ltd. with Smifs Securities Ltd. (duly sanctioned by the Hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and Mahavir Ghar Sansar Private Limited liabilities of YSN Shares and Securities (P) Ltd. were transferred to and vest in the company. In et w the process goodwill has arisen in the books of the company."
It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities P. Ltd. (amalgamating company) should be considered as goodwill arising on the amalgamation. It was claimed that the extra consideration was paid towards the reputation which the amalgamating company was enjoying in her order to retain its existing clientele. However, Ld. AO in that case held that goodwill was not an asset falling under Explanation 3 to section 32(1) of the Act. There was no dispute that amalgamation of two companies of the assets and liability of M/s YSN Shares and Securities were transferred to the assessee for a consideration and the difference between the cost of an asset and the amount paid was treated as goodwill. The Hon’ble Apex Court has upheld the finding of Tribunal that the assessee company in the process of amalgamation had acquired a capital right in the form of goodwill, because of which the amalgamating worth of the assessee company would increase and once the good is an asset u/s 32 of the Act, then depreciation is allowable. Accordingly, the question referred was decided in favour of the Mahavir Ghar Sansar Private Limited assessee. Thus, it cannot be held that the decision of the Hon’ble Apex Court is not applicable. Hence, we hold that depreciation on goodwill is allowable and the order of Ld. CIT (A) is reversed.
In the result, the appeal filed by the assessee stands allowed.