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Income Tax Appellate Tribunal, ‘C‘ BENCH
Before: SHRI VIKAS AWASTHY & SHRI M.BALAGANESH
आदेश / O R D E R PER M. BALAGANESH (A.M):
This appeal in A.Y.2013-14 preferred by the order against the revision order of the ld. Principal Commissioner of Income Tax-2, Mumbai u/s.263 of the Act dated 27/03/2019 for the A.Y.2013-14.
The only issue to be decided in this appeal is as to whether the ld. Pr. Commissioner of Income Tax (PCIT) was justified in invoking revisionary jurisdiction u/s.263 of the Act in the facts and circumstances of the instant case. The interconnected issue involved thereon to be decided in this appeal is as to whether the ld. CIT(A) was justified in concluding that the assessee had made incorrect claim of depreciation on Goodwill and incorrect claim of premium on redemption of debentures in the facts and circumstances of the instant case.
We have heard rival submissions and perused the materials available on record. We find that assessee is engaged in the business of running electronic goods retail network in the name and style of “CROMA”. The return of income for the A.Y.2013-14 was filed by the assessee company on 29/11/2013 declaring loss of Rs.6,19,61,820/-. Subsequently, the revised return was filed by the assessee on 31/03/2015 declaring total loss of Rs.53,26,02,366/- on the basis of merger of “Infinity Wholesale Ltd.,” with “Infinity Pvt. Ltd.,” pursuant to the order of the Hon‟ble Bombay High court dated 04/04/2014 w.e.f. 01/04/2012. The assessment was completed u/s.143(3) r.w.s.144C(3) of the Act on 28/12/2016 determining loss of Rs.46,61,24,517/- under normal provisions of the Act and book loss of Rs.17,78,58,239/- u/s.115JB of the Act. In the said assessment, various disallowances were made by the ld. AO which are subject matter of appeal before the ld. CIT(A). The assessment framed by the ld. AO on 28/12/2016 was sought to be revised by the ld. PCIT by invoking revision jurisdiction u/s.263 of the Act on the ground that the order passed by the ld. AO is erroneous in as much as it is prejudicial to the interest of the Revenue in view of the following:-
(i) Incorrect claim of Premium on Redemption of Debentures: In this case during the course of assessment proceedings for AY 2015-16, it was observed that the assessee company had debited and claimed Rs. 55,53,50,000/- on account of "premium paid" on redemption of debentures. However, on perusal of assessment records of AY 2013-14, it was noticed that the assessee made a claim of Rs. 18,84,52,508/- on premium on redemption of debentures on "accrual basis". On being asked to justify the allowability of the claim made both on accrual basis and payment basis, the assessee company submitted vide letter dated 11.12.2018 that the assessee company had "inadvertently claimed" redemption premium of Rs. 18,84,52,508/- on accrual basis during F.Y. 2012-13 relevant to A.Y 2013-14. The assessee company also submitted that the said amount of Rs. 18,84,52,508/- is included in the aforesaid amount of Rs. 56,53,50,000/- claimed on payment basis in A.Y. 2015- 16, Hence, it is evident that the assessee company has claimed double deduction of the same amount of Rs. 18,84,52,508/- both in AY 2013-14 & AY 2015-16. Failure on the part of the assessing officer to disallow the claim of Rs. 18,84,52,508/- made by the assessee, on accrual basis on premium paid on redemption of debentures in AY 2013-14, has rendered the assessment order u/s 143(3) dated 28.12.2016 as erroneous in so far as it is prejudicial to the. interests of the revenue. (ii) Incorrect claim of depreciation on Goodwill: During the course of assessment proceedings u/s 143(3) for AY 2015-16, in this case, it was observed that the assessee company has made an incorrect claim of depreciation on Goodwill, which was claimed by the assessee as having arisen on account of merger of the assessee's wholly owned subsidiary, "Infiniti Wholesale Limited with the assessee company in the FY 2012-13 corresponding to A.Y. 2013-14. In the order passed for A. Y. 2015-16, the assessing officer has disallowed the depreciation on Goodwill u/s 32(1), since no asset such as Goodwill was acquired in the scheme of amalgamation. Hence, failure on the part of the assessing officer to disallow the claim of depreciation on Goodwill for A.Y. 2013-14 has rendered the assessment order u/s.143(3) dated 28/12/2016 as erroneous in so far as it is prejudicial to the interests of the revenue”.
3.1. In response to the show-cause notice dated 20/02/2019, assessee company filed its reply vide letter dated 08/03/2019 before the ld. PCIT as under:-
Background ● The assessee company is a wholly owned subsidiary of Tata Sons Limited. The assessee operates a national chain of multi-brand electronic stores of consumer electronics and durables under the brand name "Croma". ● As per the scheme of amalgamation approved by the Hon'ble Bombay High Court by way of merger order dated 4 April 2014, the assessee and Infiniti Wholesale Limited (Formerly known as Woolworths Wholesale India Private Limited) („IWL‟) got merged with effect from 1 April 2012. Accordingly, IWL ceased to exist as separate legal entity with effect from 1 April 2012 and all the rights, liabilities and obligations of IWL had been transferred to assessee.
● However, before the merger order had been issued, the assessee company had filed the original return of income for AY 2013-14 on 29 November 2013 declaring total loss of Rs 6,19,61,820. Post receiving the merger order, the assessee filed revised return of income for AY 2013-14 declaring the total loss of Rs 53,26,02,366 on 31 March 2015. In the revised return of income, the assessee has offered to tax the income of assessee (pre-merger) and IWL. The copy of original computation of income and revised computation of income are enclosed herewith as Annexure 2 and Annexure 3 respectively. ● The return of income was processed and the case was selected for scrutiny assessment under CASS. Notice under section 143(2) of the Act was issued on 04 September 2014. Post this notice, a Notice under section 142(1) of the Act was issued on 08 July 2015 alongwith a detailed questionnaire asking for various details for the captioned AY. A copy of the notice issued on 8 July 2015 is enclosed as Annexure 4. ● Subsequently, due to change in incumbency, a notice under section 142(1) read with section 129 of the Act was issued on 18 October 2016 alongwith detailed questionnaire asking the assessee to furnish various details for the captioned AY. A copy of the notice issued on 18 October 2016 is enclosed as Annexure 5. ● Further, the assessee had been also asked to furnish additional information during November 2016. A copy of the sheet containing the additional information asked for is enclosed as Annexure 6. ● In response to the aforesaid notices, the assessee company filed all details and made various submissions as called upon by the assessing officer from time to time. Copies of all the submissions filed during the course of assessment proceedings for AY 2013-14 are enclosed as Annexure 7. ● The claim of deduction in respect of redemption premium on Non- convertible Debentures and Depreciation on Goodwill was disclosed in the revised computation of income for the captioned AY. Besides, during the course of assessment proceedings, the assessee, vide letter dated 26 December 2016, had also submitted details regarding Goodwill arising on amalgamation and detailed justification regarding allowability of Depreciation on Goodwill alongwith supporting evidences. ● It is submitted that in the Financials for the year ended 31st March 2013, the amount of premium accrued on redemption of debentures has been disclosed as a reduction from the Securities Premium account. The financial statements were submitted during the course of the assessment proceedings. ● It is submitted that all the submissions and details submitted during the course of assessment proceedings had been duly verified and reviewed before passing the assessment order under section 143(3) of the Act.
● The scrutiny assessment of the assessee was completed under section 143(3) read with section 144C(3) of the Act vide assessment order dated 28 December 2016, wherein the following additions/ disallowances had been made to the returned loss of the assessee: Sr. No. Particulars Amount (in Rs) Business loss as per return of income (53,26,02,366) Add: Disallowance under section 14A of the 53,31,545 Act Add: Disallowance of stock revaluation 5,57,94,825 Add: Disallowance of advance written off 47,91,719 Add: Disallowance of soiled note 4,00,000 Add: Disallowance of Corporate Social 1,59,760 Responsibility expenses Total assessed income/ loss (46,61,24,517) ● From the above, it is evident that the claim deduction for premium on redemption of debenture and depreciation on goodwill had been duly allowed after considering all the necessary facts on record. ● In view of the above submissions, your Honour would appreciate that it proves beyond doubt that AO had applied his mind while framing the assessment order and had taken on record all the details regarding the claim of Depreciation on Goodwill and Redemption Premium on Non- Convertible Debentures for the captioned AY. ● Your Honour has now, sought to invoke revisionary powers under section 263 of the Act by issuing the notice dated 20 February 2019 proposing to revise the assessment order passed under section 143(3) read with section 144C(3) of the Act. In this regard, we would like to submit as under: On Jurisdiction: ● Section 263 of the Act grants power to the Principal Commissioner of Income Tax or Commissioner of Income Tax to revise orders which are erroneous and prejudicial to the interests of the Revenue. The object is to vest a supervisory jurisdiction in the Principal Commissioner or Commissioner to revise those orders passed by his subordinates, which according to him, are erroneous and against the interests of the Revenue. This power is to be used with utmost precaution and only after examining the issues from all angles and not merely from the angle of the Revenue. ● Based on the aforesaid para, your Honour would appreciate that the following twin conditions need to be satisfied before the assessment order passed by the assessing officer can be revised by invoking powers under Section 263 of the Act. The order is “erroneous” in nature. The error should be such which is prejudicial to the interest of the revenue
● In this connection, we would like to draw your kind attention to the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT [243 ITR 83) wherein certain important principles relating to jurisdiction under Section 263 have been laid down. The following observations made by the Hon'ble Apex Court are relevant to the case of the assessee company: "The phrase "prejudicial to the interests of the Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law." The Karnataka High Court in the case of Gokuldas Exports (20 Taxmann.com 491 (2012)] has held: "The phrase "prejudicial to the interest of the Revenue” under section 263 of the Act has to be read in conjunction with the expression "erroneous" order by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue." ● Based on the aforesaid paragraphs, following order can be termed as erroneous and Commissioner can invoke Section 263 provided the order is prejudicial to the interest of the revenue: Which suffers from a patent lack of jurisdiction Passed without due application of mind and/or passed based on wrong assumption of facts and/or passed based on incorrect application of law and/ or passed without following the principle of nature justice
● As mentioned in foregoing paragraphs, the assessment for the captioned AT was completed by the assessing officer on the basis that the depreciation on Goodwill arising on amalgamation is allowable under section 32 of the Act by relying on various details and submissions filed. This was also supported by the decision of the Supreme Court in the case of Smits Securities Ltd. Hence, the Assessing Officer has duly followed the law of the land while allowing the depreciation on Goodwill. As regards the premium on debentures, the AQ has considered all the facts on record and allowed the same as a deduction. ● It is submitted that powers under Section 263 of the Act cannot be applied in each and every case of mistake in the assessment order. The essence of revisionary proceedings is that the mistake is such which is apparently against the provisions of the laws and cannot be sustained. ● Your Honour would further appreciate that only because the assessing officer has followed one of the possible legal views which happen to be in favour of the assessee company, the same would not itself mean that order suffers infirmity and is erroneous and prejudicial to the interest of the revenue. ● Your Honour may hold a different view regarding depreciation on Goodwill arising on amalgamation and Redemption premium on Non- Convertible Debentures. However, the assessing officer has accepted the assessee's stand though not correct in Your Honour's view is a possible view and the assessment has been framed in accordance with the provisions of the Act. ● In view of the above, the view adopted by the learned assessing officer is in accordance with the laid down principles of law in this regard. Thus, applying the principles laid down by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) and the aforesaid decisions to the facts of the case of the assessee company, it is clear that the proceedings under Section 263 of the Act do not merit to be initiated. ● Reliance can also be placed on the decision of Hon'ble Supreme Court in the case of Greenworld Corporation [181 Taxman111 (SC)] wherein it was held as under: ”Section 263 provides for a revisional power. It has its own imitations. An order can be interfered with suo motu by the said authority not only when an order passed try the Assessing Officer is erroneous but also when it is prejudicial to the interests of the revenue. Both the conditions precedent for exercising the jurisdiction under section 263 are conjunctive and not disjunctive. An order of assessment passed by an ITO, therefore, should not be interfered with only because another view is possible.” ● Reliance in this regard, can be placed on the decisions of Jurisdictional High Court in the case of Gabriel India Ltd (71 Taxman 585 (1993)]. ● Based on the aforesaid judicial precedents and facts of the case, it is clear that, when the assessing officer has taken one of the possible views, the Commissioner cannot exercise his revisionary powers under section 263 of the Act. ● In the instant case, both the proposed disallowances i.e. redemption of premium on debentures and depreciation on goodwill are sought to be made on the basis of the stand taken by the Assessing Officer in the assessment order for AY 2015-16 in the assessee's own case. The Assessing Officer in course of the assessment of AY 2013-14 has applied his mind and provisions of the law while allowing this deduction t the assessee. Hence, the proceedings under section 263 ought to be dropped, since the same is without merits. Applicability of Explanation 2 to Section 263 of the Act: ● We wish to draw your Honour's attention to Explanation 2 to Section 263(1) of the Act which reads as under: "For the purpose of this section, it is hereby declared that an order passed by the Assessing officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner-, (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High court or Supreme Court in the case of the assessee or any other person.” (Emphasis supplied) ● The aforesaid Explanation 2 to Section 263(1) of the Act was inserted vide Finance Act 2015 and is applicable with effect from 1 June 2015. ● Given the above, since the aforesaid Explanation 2 to Section 263 of the Act was inserted with effect from 1 June 2015, the same is not applicable in case of assessee as the notice for initiating proceedings under Section 263 of the Act has been issued for FY 2012-13. ● It is already submitted in the foregoing paragraphs that the assessment order in question is not erroneous as the Assessing Officer has duly considered all the facts, circumstances and material on record before passing the assessment order. Hence, the initiation of proceedings under Section 263 ought to be quashed. ● However, in the event that your Honour considers that the Explanation 2 to Section 263(1) of the Act is applicable to the assessee, it is submitted the proceedings initiated under Section 263 of the Act still ought to be quashed. In this regard, we wish to submit as under: a. The assessing officer had duly made inquiries and conducted verifications regarding the claim of depreciation on goodwill and redemption premium on Non convertible Debentures b. The assessee had filed detailed submission giving justification regarding its claim of depreciation on goodwill with the assessing officer upon the inquiry by the assessing officer. Besides, the said submission had duly been taken on record by the assessing officer before passing the assessment order for AY 2013-14.The aforesaid claims were allowed in the assessment order for AY 2013-14 after considering the provisions of the Act. C. There is no order, direction or instruction issued by the Central Board of Direct Taxes under section 119 on respect of the issue of claim of deduction of premium on redemption of debentures and depreciation on goodwill d. The assessee would like to mention here that, while claiming depreciation on Goodwill, the assessee had relied on the Hon'ble Supreme Court decision in case of Smifs Securities Ltd where in the contention of the assessee to claim the depreciation on Goodwill had been allowed. ● Considering the above, we humbly wish to submit before your Honour that assuming without admitting that Explanation 2 to section 263 of the Act is applicable for AY 2013-14, the conditions mentioned therein are not satisfied so as to merit initiation of proceedings under Section 263 of the Act. ● In this regard, attention is invited to the decision of the Ahmedabad Tribunal in the case of Torrent Pharmaceuticals Ltd (97 taxmann.com 671). In this decision, it has been held that Explanation 2 was inserted for the purpose of providing clarity on the expression "erroneous insofar as it is prejudicial to the interest of the Revenue'. The Explanation being clarificatory would not lead to dilution of the basic requirements of Section 263(1) of the Act. The provisions of Section 263 although appear to be of a very wide amplitude and more particularly after insertion of Explanation 2 but cannot possibly mean that recourse to Section 263 of the Act would be available to the Revisional Authority on each and every inadequacy in the matter of inquiries and verification as perceived by the Revisional Authority. ● The Tribunal observed that the object of such Explanation was probably to dissuade the AO from passing orders in a routine and perfunctory manner and where he failed to carry out the relevant and necessary inquiries or where the AO had not applied mind on important aspects. However, where the preponderance of evidence indicates absence of culpability, an onerous burden cannot obviously be fastened upon the AO while making assessment in the name of inadequacy in inquiries or verification as perceived in the opinion of the Revisional Authority. ● In the instant case, the AO has duly made the necessary inquiries during the course of the assessment proceedings which are evident from the notice issued and the numerous submissions filed by the assessee. Hence, it is evident, the AO had not passed the order is passed without making inquiries or verification which should have been made. ● Further, as stated above, there is no order, direction or instruction issued by the Central Board of Direct Taxes under section 119 in respect of the issue of claim of deduction of premium on redemption of debentures and depreciation on goodwill. ● Additionally, while claiming depreciation on Goodwill, the assessee had relied on the Hon'ble Supreme Court decision in case of Smits Securities Ltd where in the contention of the assessee to claim the depreciation on Goodwill had been allowed. ● Accordingly, it is humbly submitted that the conditions prescribed in Explanation 2 to Section 263(1) of the Act do not get satisfied ● Attention is also invited to the decision of the Mumbai Tribunal in the case of Narayan Tatu Rane (70 taxmann.com 227). In this decision, the Tribunal observed that clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. This provision shall apply, if the order has been passed without making enquiries of verification which a reasonable and prudent officer shall have carried out in such cases. ● Hence, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying out enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. ● In view of the aforesaid submissions, it is submitted that given that the AO had duly made the necessary inquiries during the course of the assessment proceedings, the current proceedings to re-examine the issues are clearly beyond the scope of Section 263 of the Act. Hence the notice under Section 263 is without jurisdiction and merits should be dropped. On Merits: ● Without prejudice to the aforesaid submission that the conditions for invoking the provision of section 263 of the Act are not satisfied and hence the proceedings ought to be dropped, the assessee wishes to make the following submission regarding claim of depreciation on Goodwill and claim of redemption premium on debentures A. Claim of Depreciation on Goodwill: At the outset it is submitted that detailed submissions on facts and technical basis for allowability of depreciation on goodwill was made before the Assessing Officer. The same is attached as Annexure During FY 2012-13, the business of Infiniti Wholesale India Private Limited (IWL) (earlier known as Woolworth Wholesale (India) Private Limited) has been amalgamated with the business of IRL. The transaction/merger history is as under: a. IWL was wholly owned subsidiary company of Woolworths Australia Pty Limited. b. IR is wholly owned subsidiary company of Tata Sons Limited. c. IRL entered into a share purchase agreement during September 2012 with Woolworths Australia Pty Limited to buy the shares of IWL d. Post the purchase of shares IWL became wholly owned subsidiary of IRL e. Post-acquisition of IWL, IRL merged its wholly owned subsidiary IWL with itself, The goodwill of Rs 162.37 Cr has arisen pursuant to acquisition of business of IWL by assessee which had been recorded in the books of accounts of assessee. Infiniti Wholesale Limited operated as a "cash and carry" wholesaler of electronic goods. It managed product sourcing for Croma. Infiniti Wholesale. Limited purchased about 95% of the total electronic goods locally, with the major suppliers being - Samsung, LG, Sony, HP, Dell, Apple, Acer, Lenovo, Voltas, Philips etc. In addition, Infiniti Wholesale Limited procured goods from Hong Kong and other local vendors for private label products which were sold under the brand name 'Croma Infiniti Wholesale Limited also managed the logistic operations and operated warehouses in Maharashtra, Gujarat, Karnataka, Tamil Nadu, Andhra Pradesh, NCR and Punjab,\ With the merger of Infiniti Wholesale Limited with the assessee, the assessee acquired intangible assets such as vendor contract, brand, supply chain resources etc of Infiniti Wholesale Limited. These underlying assets form part of the 'Goodwill Goodwill is also approved by the Scheme of amalgamation filed before the Hon'ble Bombay High Court vide its order dated 4 April 2014. A copy of the scheme filed before the Bombay High Court is attached as Annexure 9 and the order of the Bombay High Court is attached as Annexure 10. The said scheme was submitted, considered and depreciation had been granted to assessee in the earlier assessment years as well. The Accounting treatment given under Scheme of Amalgamation approved by the High Court has also been reads as under: 15.1 The Transferee Company shall upon the Scheme coming into effect, record all assets and liabilities of the Transferor Company vested in it pursuant to this Scheme, at their respective fair values as on the Appointed Date 15.2 The Investments held by the Transferee Company in the Transferor Company shall stand cancelled and there shall be no further obligation/outstanding n that behalf.
15.3 To the extent there are inter-corporate loans or balances between the Transferor Company and the Transferee Company, the obligations in respect thereof shall come to an end and corresponding effect shall be given in the books of accounts and records of the Transferee Company for the reduction of any assets or liabilities, as the case may be 15.4 After giving effect to clauses 15.1 to 153 above, any excess of the amount of consideration over the value of net assets of the Transferee Company shall be recognized in the Transferee Company's financial statements as Goodwill arising on consolidation referred to in Accounting Standard-21- Consolidated Financial Statements Such Goodwill will be recorded at the carrying amount as determined aforesaid and will be tested for impairment at every balance sheet date.
Based on the aforesaid scheme, the assessee has recognised the Goodwill As per Section 2(11) of the Act, "block of assets means a group of assets falling within a class of assets comprising tangible assets, being buildings machinery, plant or furniture; intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature; in respect of which the same percentage of depreciation is prescribed As per Section 32(1) of the Act, depreciation is allowable in respect of the following assets owned, wholly or partly by the taxpayer and used for the purposes of the business or profession a. building, machinery, plant or furniture, being tangible assets b. know how, patents, copyrights, trademarks, licences, franchises or any other business or commercial nights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998 The Supreme Court in the case of Smifs Securities Limited has held that the excess consideration paid by the assessee over the value of net assets for the reputation being enjoyed by the amalgamating company in order to retain its existing clientele should be considered as goodwill The Supreme Court held that Goodwill in this case was an asset under Explanation 3(b) to Section 32(1) of the Act and hence eligible for depreciation. The relevant extract of the case is reproduced below: “… Explanation 3 states that the expression asset shall mean an intangible: asset, being know how, patents, copyrights, trademarks, licences, franchises or any other business or commercial nights of similar nature. A reading the words any other business or commercial rights of similar nature in clause (b) of Explanation 3 indicates that goodwill would fall under the expression any other business or commercial right of a similar nature' The principle of ejusdem genens would strictly apply while interpreting the said expression which finds place in Explanation 3(b).
The claim of goodwill has also been upheld in the following Judicial precedents a. CIT v Birla Global Asset Finance Co Ltd 221 Taxman176 b. Toyo Engineering, Mumbai ITAT judgement dated 13/10/2014, C. India Capital Markets Pvt Ltd v Dy Commosioner of Income tax 56 SOT 32 d. Supreme Nonwoven Pvt (ITA/5915/Mumy/2009) e. Virbac Animal Health P. Ltd. (ITA No. 6806/Mum/2011) f. Dy, Commissioner of Income-tax 050 1(1) Worldwide Media pvt. Ltd. (2015) 153 (TD 162 g. Jeypore Sugar Co. Ltd (2011) 44 50T 625 h. Cyber India Online. Asst. Commissioner of Income tax, Cirde 3(1) (2014) 64 SOT 1 (Del.)(URO) i. SKS Micro Finance Ltd. v. Dy. Commissioner of Income-tax, Circle 3(2) (2013) 145 TD 111 In the circumstances, we are of the view that Goodwill is an asset eligible for depreciation and the Assessing Officer has rightly allowed depreciation to the assessee on the basis of the Supreme Court decision in the case of Smifs Securities Decision of Supreme Court is Binding on All Tax Authorities Further, the assessee submits that, as per Article 141 of the Indian Constitution, the law declared by the Hon'ble Supreme Court is binding on all the courts within the territory of India. Hence, the principle laid down by the Supreme Court is in the nature of the law of the land. Placing the reliance on the aforesaid Article of the Indian Constitution, various courts in India have unequivocally relied on the decision of the Supreme Court where the issue in question has already been decided by the Supreme Court. Some of these decisions have been listed as under: a. Doris Educational & Commercial Services (P) Ltd (332 TTR 528) (Madhya Pradesh HC) b. Shree Bhagavathi Textiles Ltd (244 ITR 496) (Kerala HC) c. Gujrat Alkalies & Chemicals Ltd (77 TT) 304) (Ahmedabad Tribunal) It is submitted that given that the decisions of the Supreme Court are binding on all courts in India and is law of the land, the principles laid down by the Supreme Court in the case of Smifs Securities Limited i.e a. Goodwill is an asset under Section 32 of the Income-tax Act; b. Accordingly, being as asset, it is eligible for depreciation ought to be followed in the case of assessee as well Considering the aforesaid submissions and various Judical Precedents, the assessee humbly submits before your Honour that, addition/ enhancement should not be made in the Assessment order for AY 2013-14 regarding the depreciation on Goodwill.
B. Claim of Redemption of Premium on Non-Convertible Debentures: At the outset, it is submitted before your Honour that, during the course of assessment proceedings for AY 2013-14, the assessee has submitted computation of income, wherein on the face of computation, the assessee has claimed the deduction in respect of redemption premium on Non- Convertible Debentures The assessing officer has duly verified the line items of computation and then only passed the assessment order disallowing certain expenditures mentioned in the foregoing paragraphs During FY 2011-12, the assessee had allotted Non-Convertible Debentures of Rs 150 Cr to J.P. Morgan Securities India Private Limited. The said Non Convertible Debentures were redeemed during AY 2015-16 and the premium payable on the redemption of the aforesaid debenture was Rs 56,53,50,000. Judicial Precedents have held different views regarding the year of deductibility of either discount on issue of debentures or premium payable on redemption of debentures. The Supreme Court in the case of Madras Industrial Investment (91 Taxmann 340) has held that assessee was entitled to proportionate deduction of discount spread over the period for which the debentures would remain outstanding However, the Supreme Court in the case of Taparia Tools Ltd vs CTT (55 taxmann.com 361) wherein it was held that, the claim of the assessee on payment basis as such course of action was in consonance with the provisions of he Act which permitted the assessee to claim the expenditure in the year in which it was incurred In the assessment order for AY 2012-13, the assessee's claim of Rs 0.43 Cr being redemption premium payable on pro-rata basis was not accepted by the assessing officer. Accordingly, in AY 2013-14, the assessee had claimed Rs 18.84 Cr of redemption premium on pro-rata basis to keep the claim alive in case the redemption premium has not been allowed by the assessing officer on payment basis during AY 2015-16. During AY 2015-16, the assessee had claimed redemption premium on Non Convertible Debentures of Rs 56,53,50,000 as allowable expenditure while filing the return of income. However, during the course of assessment proceedings for AY 2015-16, the assessee on its own accord, vide submissions filed on 12 December 2018 and 24 December 2018 had submitted that, Rs 18,84,52,508 had been claimed by the assessee on accrual basis during AY 2013-14 and the said amount is included in aforesaid amount of Rs 56,53,50,000. Copy of the submissions is attached as Annexure 11 as aforesaid. Besides, the assessee has also requested the assessing officer to allow the balance redemption premium of Rs 37,68,97,492 on payment basis (Rs 56,53,50,000 - Rs 18,84,52,508) as the amount of Rs 18,84,52,508 had already been allowed in the assessment order for AY 2013-14. However, the assessing officer has while passing the assessment order for AY 2015-16 has allowed the entire premium of Rs 56,53,50,000 on payment basis and no adjustments were made in respect of Rs 18,84,52,508 which was earlier allowed.
In this regard, the assessee humbly wishes to submit before your Honour that, the assessee had claimed redemption premium of Rs 18,84,52,508 in the computation of income for AY 2013-14 on accrual basis. Thus, the intention of the assessee to claim the deduction of Rs 18,84,52,508 during AY 2013-14 was for the reasons aforesaid. We request your Honour to consider the aforesaid submission on records. Prayer: ● In view of the foregoing, we humbly pray to your Honour to drop the proceedings initiated under section 263 of the Act. We request you to take the above submission on records. We would be glad to submit any further information that your Honour may require in respect of the aforesaid submissions. Yours faithfully, For Infiniti Retail Limited
Authorised Signatory Encl.: As above 3.2. With regard to the objection made by the assessee that the issue of claim of expenditure in respect of redemption of premium of non- convertible debentures as well as the claim of depreciation on Goodwill which were already examined by the ld. AO during the course of assessment proceedings is concerned, the ld PCIT merely observed that the ld.AO had accepted the contentions of the assessee without any verification thereon. Accordingly, the ld. PCIT sought to invoke Explanation 2 to Section 263 of the Act clause (b) in respect of depreciation on Goodwill and clause (d) thereon in respect of issue of allowability of redemption on premium of non-convertible debentures. Accordingly, the ld. PCIT was justified the invocation of revision jurisdiction u/s.263 of the Act by treating the order of the ld. AO erroneous as well as it is prejudicial to the interest of the Revenue.
3.3. On merits, the ld. PCIT observed that with regard to claim of premium on redemption of debentures, the said claim has been made wrongly by the assessee during the year under consideration as assessee had also claimed a total sum of Rs.56,53,50,000/- on account of premium paid on redemption of debentures in A.Y.2015-16 which has been allowed by the ld. AO on payment basis and accordingly, the proportionate sum claimed by the assessee in A.Y.2013-14 amounting to Rs.18,84,52,508/- amount to double deduction. The ld. PCIT also placed reliance on the decision of the Hon‟ble Jurisdictional High Court in the case of CIT vs. Grindwell Norton Ltd, in Income Tax Appeal No.694 of 2012 dated 24/12/2014 to drive home the point that the premium on payment of debentures shall be allowed as deduction in the year of payment. The ld. PCIT further observed that the deduction claimed by the assessee in A.Y.2015-16 has been rightly allowed by the ld. AO in A.Y.2015-16 u/s.143(3) of the Act and correspondingly, the proportionate claim of Rs.18,84,52,508/- made by the assessee on accrual basis in A.Y.2013-14 i.e. the year under consideration is incorrect and to be disallowed.
3.4. With regard to claim of depreciation on Goodwill is concerned, the ld. PCIT observed that in A.Y.2015-16, the depreciation on Goodwill has not been disallowed by the ld. AO and that the Goodwill emanated out of the merger for which no payment has been made by the assessee and hence, the assessee would not be entitled for depreciation on Goodwill during the year under consideration. Accordingly, he directed the ld. AO to disallow the depreciation on Goodwill. Aggrieved, the assessee is in appeal before us.
3.5. With regard to claim of depreciation on Goodwill is concerned, we find that assessee herein is Infiniti Retail Ltd. Infiniti Wholesale Ltd is a 100% subsidiary of assessee company. In view of merger, there cannot be any issue of shares pursuant to amalgamation and investment in shares stood cancelled. The ld. PCIT says that the assets and liabilities of the amalgamating entity are to be taken over by the amalgamated entity at fair value whereas they were taken over at book value in the instant case. The ld. PCIT observed that Infinity Wholesale Ltd., had no intangibles and therefore, no Goodwill is possible thereon. The ld. PCIT further observed that there was no mention about Goodwill in the scheme of arrangement.
3.6. We find that the fact of amalgamation is not in dispute as the same has already been taken note by the ld. AO in page 1 of the assessment order. The effect of amalgamation has been captured by the assessee by way of vesting of various assets and liabilities after cancellation of intercompany entries thereon in the revised return filed by the assessee on 31/03/2015 which has been taken due cognizance by the ld. AO while completing assessment on 28/12/2016. We find that the ld. AO during the course of assessment proceedings had issued notice u/s.142(1) of the Act dated 18/10/2016 together with the questionnaire wherein vide question no.8 had sought for complete details of other expenses claimed by the assessee, among other items. The assessee vide reply letter dated 26/12/2016 had furnished complete workings of arriving at the Goodwill and justification for claiming depreciation on Goodwill. We find that the business of Infiniti Wholesale Ltd (IWL) is amalgamated with the business of assessee company. IWL was wholly owned subsidiary company of Woolsworths Australia Pty Ltd. Assessee is wholly owned subsidiary company of Tata Sons Ltd. The assessee entered into a share purchase agreement during September 2012 with Woolsworth Australia Pty Ltd to buy the shares of IWL. Post the purchase of shares, the IWL became wholly owned subsidiary of assessee post acquisition of IWL with itself. The Goodwill of Rs.162.37 Crores had arose pursuant to acquisition of business of IWL by assessee. The workings of the Goodwill on amalgamation as submitted before the ld. AO is as under:- Infiniti Retail Limited Audit for the year ended March 31, 2014 Working of Goodwill on Amalgamation of IWL with IRL Companies Art Particulars Amount (Rs. in crores) Share Capital of IWL as at 31 March 2012 being the 6.55 appointed date Reserves and Surplus of IWL as at 31 March 2012 38.56 being the appointed date Total 45.11 Less: Fair valuation of Inventory of IWL as at March -4.97 31, 2012 (IWL did not use to make NRV provision on inventory, since the same was never applicable to them as they always used to sell the inventory to IRL at a margin of 1.1% Less: Fair valuation of Inventory of IWL as at March -0.87 31, 2012 (provision made for damaged inventory as at March 31, 2012) Less: Fair valuation of Fixed Assets -0.98 Less: Fair valuation of GRN Liability balance -3.46 Less: Fair Valuation of MAT credit as at March 31, -6.52 2012 (As a merged entity Company will not be able to utilize the MAT credit lying in IWL books, since IRL has sufficient brought forward losses and hence the same has been fair valued) Total Fair value of Net Assets taken over 28.32 Investments in IWL lying in IRL books 190.69 (Consideration) Goodwill on Amalgamation 162.37 3.7. The above workings very clearly go to prove that the assets and liabilities of the amalgamating entity were taken over by the assessee company only at fair value and not at book value as erroneously stated by the ld. PCIT in his order. We find that the entire scheme of arrangement has been duly approved by the Hon‟ble Bombay High Court and merger has been given effect only after the said approval. Moreover, the Hon‟ble Bombay High Court while granting approval had taken note on affidavit dated 28/02/2014 filed by the Regional Director of Ministry of Corporate Affairs wherein he had affirmed that the scheme of arrangement is not prejudicial to the interest of the shareholders and public. The entire accounting treatment to be given pursuant to the transfer of assets and liabilities of the amalgamating company with the amalgamated company were also forming part of the scheme of arrangement and that has also been approved by the Hon‟ble Bombay High Court. The relevant accounting treatment mentioned in the scheme of arrangement is reproduced hereunder for the sake of convenience:-
“On the Scheme becoming effective, the Transferee Company shall count for the amalgamation of the Transferor Company with the Transferee Company in its books of account with effect from the Appointed Date as under: 5.1. The Transferee Company shall upon the Scheme coming into effect, record all assets and liabilities of the Transferor Company vested in it pursuant to this scheme, at their respective fair values as on the Appointed Date. 5.2. The investments held by the Transferee Company in the Transferor Company shall stand cancelled and there shall be no further obligation/outstanding in that behalf. 5.3. To the extent there are inter-corporate loans or balances between the Transferor Company and the Transferee Company, the obligations in respect thereof shall come to an end and corresponding effect shall be given in the books of accounts and records of the Transferee Company for the reduction of any assets or liabilities, as the case may be. 5.4. After giving effect to clauses 15.1 to 15.3 above, any excess of the amount of consideration over the value of net assets of the Transferor Company shall be recognised in the transferee companies financial statements as Goodwill arising on consolidation referred to accounting standard 21-‘consolidated financial statements’. Such goodwill recorded at the carrying amount as determined aforesaid and will be tested for impairment at every balance sheet date. (Emphasis supplied by us)
3.8. We find that the expression „Goodwill‟ arising on amalgamation has been duly mentioned in the scheme of arrangement itself which has been approved by the Hon‟ble Bombay High Court. It is grossly incorrect on the part of the ld. PCIT to state that Goodwill was not mentioned in the scheme of arrangement. All these details were indeed filed before the ld. AO by the assessee and the ld. AO having taken due cognizance of the same and the accounting entries passed by the assessee company pursuant to the order of the Hon‟ble Bombay High Court approving the merger, had accepted the claim of depreciation on Goodwill of the assessee. Hence, it cannot be said that relevant enquiries were not carried out by the ld. AO with regard to this issue on depreciation of Goodwill. Accordingly, we hold that invocation of Explanation 2(b) of the Section 263 of the Act is grossly incorrect. In any case, we find that Goodwill in the instant case had arose on account of excess of takeover of liabilities over assets from the amalgamating company and it is part of consideration paid. Hence, the assessee would be entitled for claiming depreciation on Goodwill in view of the decision of the Hon‟ble Supreme Court in the case of CIT vs. Smifs Securities Ltd., reported in 348 ITR 302. Hence, even on merits, assessee is entitled for depreciation on Goodwill. In fact, we find that the ld. PCIT in page 9 of his order had merely relied on the disallowance of depreciation on Goodwill made by the ld. AO in A.Y.2015-16 u/s.143(3) of the Act. This goes to prove that the ld. PCIT had not independently applied his mind as to whether the assessee is entitled for depreciation on Goodwill or not? He simply relies on the order passed by the lower authorities to justify his invocation of revision jurisdiction u/s.263 of the Act which is beyond the mandate provided in Section 263(1) of the Act. We also find that under similar facts and circumstances, the Co-ordinate Bench of this Tribunal in the case of DCIT vs. Toyo Engg. India Ltd., in for A.Y.2003-04 dated 30/10/2014 had indeed granted depreciation on Goodwill arising on amalgamation by placing reliance on the decision of the Hon‟ble Supreme Court in the case of Smifs Securities Ltd., referred to supra. In any case, the decision of this Mumbai Tribunal, decision of the Hon‟ble Supreme Court and the decision of the Hon‟ble Bombay High Court approving the scheme of merger were all available before the ld. AO while framing the assessment. The ld. AO after taking due cognizance of all these documents and case laws had indeed taken a possible view in the matter, which in our considered opinion, is also the correct view in the eyes of law. Hence, the ld. PCIT could not invoke his revision jurisdiction to substitute his erroneous view on the matter in the place of view already taken by the ld. AO. Reliance in this regard is placed on the decision of Hon‟ble Jurisdictional High Court in the case of Nirav Modi reported in 390 ITR 292 (Bom). Hence, the order passed by the ld. PCIT u/s.263 of the Act is hereby quashed on this issue both on jurisdiction as well as on merits.
3.9. With regard to issue of allowability of deduction of premium on redemption of debentures, we find that the ld. PCIT observed that the Hon‟ble Jurisdictional High Court in the case of Grindwell Norton Ltd., in Income Tax Appeal No.694 of 2012 dated 24/12/2014 had held that the premium on redemption of debentures shall be allowed as deduction on payment basis. Since assessee had claimed the prorata portion of premium available on redemption of debentures in A.Y.2013-14 on accrual basis, in the opinion of the ld. PCIT, the same is not allowable as deduction for which purpose, he had invoked Explanation 2(d) to Section 263 of the Act on the ground that the ld. AO had not followed the decision of the Hon‟ble Jurisdictional High Court. In this regard, the Income Tax behaviour of this issue needs to be understood as under:-
A.Y. Particulars 2012-13 The ld. AO disallowed the prorata claim made by the assessee on accrual basis which was accepted by the assessee.
2013-14 Prorata claim made by the assessee was allowed by the ld. AO ignoring the earlier scrutiny assessment made for A.Y.2012-13 wherein the same issue has been disallowed.
2014-15 No prorata claim on deduction made by the assessee on accrual basis.
2015-16 The entire payment of Rs.56.50 Crores was allowed by the ld. AO on payment basis in full u/s.143(3).
3.10. From the above history of Income Tax behaviour for various assessment years with regard to the impugned issue, it could be seen that the ld. AO while passing the assessment order for A.Y.2013-14 had not looked into the scrutiny assessment order framed for A.Y.2012-13 wherein the similar issue has been disallowed by his predecessor and that assessment on that issue had attained finality in view of the fact that assessee had not preferred any appeal against that issue. Non-looking of this aspect from the assessment order of A.Y.2012-13 primafacie makes the order of the ld. AO erroneous and prejudicial to the interest of the Revenue in A.Y.2013-14. To this extent, the invocation of revision jurisdiction by the ld. PCIT u/s.263 of the Act may be correct. It is pertinent to note that the claim of the assessee on accrual basis with regard to the premium on redemption of debentures equally over the period of debentures is strictly in accordance with the ratio laid down by the Hon‟ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd., reported in 225 ITR 802. Hence, it cannot be said that there was an inadvertent claim made by the assessee in A.Y.2013-14 on accrual basis. When the action of the assessee is in accordance with the decision of the Hon‟ble Supreme Court, the ld. AO accepting the said claim of the assessee by duly following the decision of the Hon‟ble Supreme Court , cannot be termed as erroneous order and it cannot be stated that the ld. AO had passed an order without application of mind warranting revision u/s.263 of the Act by the ld. PCIT. In fact, the ld. AO had taken a correct view by allowing claim of the assessee on accrual basis in the A.Y.2013-14 as the said claim is in consonance with the decision of the Hon‟ble Supreme Court reported in 225 ITR 802 supra. We find that the decision relied upon by the ld. PCIT in case of Grindwell Norton Ltd., referred to supra of the Hon‟ble Jurisdictional High Court is factually distinguishable in as much as in that case, debentures were issued for five years and for the first three years, prorata deduction of premium on redemption was allowed by the ld. AO and in the fourth year debentures were redeemed prematurely and hence, assessee claimed the remaining premium portion in the fourth year itself. This claim was allowed by the Hon‟ble Jurisdictional High Court. The Hon‟ble Jurisdictional High court never said that the entire premium payable on redemption of debentures would be allowed only on payment basis as claimed by the ld. PCIT in the revision order passed u/s.263 of the Act herein. Hence, the reliance placed on this decision of the Hon‟ble Jurisdictional High Court itself is incorrect and accordingly, invocation of provisions of Explanation 2(d) to Section 263 of the Act is also incorrect. Hence, the order passed by the ld. AO by following the decision of the Hon‟ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd., vs. CIT reported in 225 ITR 802 is correct in the eyes of law and accordingly, his order cannot be treated as erroneous even if it is prejudicial to the interest of the Revenue. The law is very well settled by the decision of the Hon‟ble Supreme Court in the case of Malabar Industrial Co. Ltd., reported in 243 ITR 83 that twin conditions should be satisfied cumulatively for invoking revision jurisdiction u/s.263 of the Act i.e. (1) order of the ld. AO must be erroneous (2) it should be prejudicial to the interest of the Revenue. In the instant case, the twin conditions are not satisfied cumulatively. In view of the above, we hold that the ld. PCIT was unjustified in invoking the revision jurisdiction u/s.263 of the Act in respect of this issue of allowability of premium payable on redemption of debentures. In view of the aforesaid observations, the revision order passed by the ld. PCIT deserves to be quashed and is hereby quashed.
In the result, appeal of the assessee is allowed.
Order pronounced on 31/10/2022 by way of proper mentioning in the notice board.