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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
PER PRASHANT MAHARISHI, AM:
This appeal is filed by assessee Franklin Templeton asset Management (India) private limited (assessee/appellant) against Appellate order passed by the Commissioner of income tax, Appeal – 12, Mumbai [ The ld. CIT (A)] dated 26/8/2020 for assessment year 16 – 17 raising following grounds of appeal: -
“Based on the facts and circumstances of the case, Franklin Templeton Asset Management (India) Private Limited (hereinafter referred to as the
Ground No. 1: Disallowance of claim of depreciation on goodwill amounting to Rs 1,47,05,938
The order of the learned CIT(A) is vitiated by errors of law and fact and by a failure to appreciate the Scheme of Amalgamation and the effect thereof.
The learned CIT(A) erred in upholding the order of the Deputy Commissioner of Income Tax-Circle 6(3)(1), Mumbai (hereinafter referred to as the 'learned AO') in disallowingthe Appellant's claim for depreciation under section 32(1) of the Act amounting to Rs 1,47,05,938 in respect of Goodwill arisen on amalgamation of Pioneer ITI AMC Limited (PAMC) with the Appellant. While doing so, the learned CIT(A) respectfully erred as under:
2.1 In stating that no consideration has been paid on amalgamation and that no goodwill has arisen as a result of amalgamation without appreciating the fact that the premium paid by the Appellant for acquisition of PAMC and its Assets under management over and above the net book value of PAMC represents goodwill.
2.3 In relying on the accounting guidance/ principles prescribed for accounting for amalgamations/ without appreciating the fact that the entitlement of a taxpayer to claim a deduction under the Act would be independent of accounting treatment followed in its books of account.
2.4 The leaned CIT(A) erred in holding that there is no question of goodwill arising in the present case as it was an amalgamation in the nature of merger.
2.5 The learned CIT(A) erred on facts and in law in alleging that there were two separate transactions, one by way of purchase of shares and the other by way of amalgamation, overlooking inter-alia that the aforesaid two events were only two different parts of one composite transaction as borne out inter-alia by the Appellant's letter to the Securities and Exchange Board of India dated 17 April 2002.2. In completely ignoring that the Amalgamation Scheme approved by the Hon'ble High Court specifies that the difference between the cost of investment of PAMC in the books of Appellant and the book value of net assets of PAMC taken over by the Appellant would be recorded as goodwill capital reserve in the books of account of the Appellant.
2.8 The learned CIT(A) erred in not appreciating the fact that the learned AO has erroneously stated that the Appellant has claimed depreciation on goodwill for the first time in its return of income for AY 2012-13 whereas the Appellant has been claiming depreciation on goodwill since AY 2003-04 through rectification letters, revised return and original returns as applicable, after the Supreme court's decision in the case of C.I.T. Kolkata v Smits Securities Ltd [2012] 348 ITR 302 (SC).
2.9 The learned CIT(A) erred in not appreciating the fact that the learned AO has incorrectly stated that, the Appellant (in the year of amalgamation i.e., 2002 and subsequent years) held the shares of PAMC as investment and was claiming expenditure on account of diminution in value of investment to reduce the tax liability. In fact, such provision of diminution in value of investment was never claimed as a deduction and was added back by the Appellant while computing its total income for each year in which such provision was made.
The Appellant denies each and every allegation and statement made by the learned CIT(A) in the impugned order unless the same is specifically admitted by the Appellant or is otherwise borne out by the record.
The order of the learned CIT(A) is vitiated inter- alia by the following amongst other factual and illegal errors:
i. 'there was no amalgamation which took place between the appellant company and PAMC in the year 2002."
ii. "Having regard to the facts and circumstance of the case, in view of the discussion in the preceding paragraphs, I find that no such intangible asset in the nature of Goodwill, for the purposes of Section 32 of the Act, could be said to have arisen as a result of the said Amalgamation."
iii. "On this point, I am in agreement with the finding reverted by the AO that the ratio of the Supreme Court decision in the case of CIT vs Smifs Securities Ltd (supra) is not at all applicable in the present case."
v. AO has also reverted a factual finding that no such asset of Goodwill had arisen to the appellant company as a result of amalgamation. Thus, the facts of the present case are distinguished on these grounds. Therefore, I find that the ratio of the Supreme Court decision in the case of CIT Vs Smifs Securities Ltd (supra) is not at all applicable to the present case."
vi. "In view of the facts and circumstances of the case, and having regard to the prevailing position of law applicable on such facts, I find that the disallowance of claim of depreciation on Goodwill has been correctly made by the AO, as no such Intangible asset in the nature of Goodwill, for the purposes of Section 32 of the Act, had arisen to the appellant company as a result of the amalgamation."
The order of the learned CIT(A) is vitiated inter- alia by
i. his ignoring the orders of the Hon'ble Income- tax Appellate Tribunal in the Appellant's own case
ii. his failure to consider the written submissions filed before him.
Ground No. 2: Non-grant of credit for taxes paid on regular assessment amounting to Rs 675,500
The learned CIT(A) erred in concluding that the Appellant did not press the ground in relation to non-granting of credit for taxes paid on regular assessment amounting to Rs 6,75,000 and thus, had erred in dismissing the said ground without adjudication.
The Appellant craves leave to add, amend, alter, vary, omit, substitute or amend any or all the above grounds of appeal, at any time before or at, the time of hearing of the appeal so as to enable the Honorable Income-tax Appellate Tribunal to decide this appeal according to the law.
Each of the above grounds of appeal are independent of and without prejudice to one another.”
Brief facts of the case shows that assessee company is engaged in asset management of mutual fund including transfer agency services and receiving of portfolio management services. It filed its return of income on 20/11/2016 declaring a total income of ₹ 525,94,14,510. Return of Income was picked up for
It was emphatically stated that in assessee‟s own case for assessment year 2005 – 06, assessment year 2000 – 11 and assessment year 2011 – 12 the coordinate bench has held that depreciation on goodwill should be allowed to the assessee company. All the orders of the coordinate bench in earlier years were also pressed into support of the claim. It Was also stated that for assessment year 2006 – 07 the learned assessing officer has allowed the claim of the assessee. Therefore, it was submitted that the claim is allowable to the assessee.
The learned assessing officer questioned the same during assessment holding that from the scheme of amalgamation of the company, no such asset of Goodwill has arisen in because of amalgamation and the transaction does not fall within the definition of amalgamation u/s 2 (1B) of the income tax. He also questioned the assessee that as per the fifth proviso of Section 32 of the income tax act the deduction of depreciation should not exceed in any previous year
“4 Disallowance of depreciation on intangible assets 4.1 from perusal of working of depreciation as per income tax act, 1961, it is seen that the assessee company has claimed depreciation on goodwill amounting to Rs 1,47,05,938/–. However it is clear from the scheme of amalgamation of the company Franklin Templeton AMC (Chennai) with the assessee company, that no such assets
““6 I have carefully considered the relevant and material facts on record, in respect of this ground of appeal, as brought out in the assessment order and submissions made during appeal proceedings.
6.1 Brief facts of the case are that the appellant company on 17.04.2002 submitted a proposal seeking approval of Securities and Exchange Board of India (SEBI) regarding the proposed acquisition of Pioneer ITI AMC Ltd (PAMC). On perusal thereof, it is noted that the appellant company had proposed to execute a share purchase agreement to acquire 100% ownership of PAMC. It was also proposed that Templeton Trust Services Pvt. Ltd. (TTSL) would acquire 100% ownership of Pioneer ITI Mutual Fund Pvt. Ltd (PMF). The consideration for purchase of shares, for the proposed acquisition of PAMC, was to be paid to the shareholders of PAMC. This has been clearly mentioned in the proposal submitted to SEBI, as under: -
"Subject to the fulfillment of the conditions precedent set out in the share purchase agreement, TAMC would purchase and own 100% shares of PAMC and TTSL would own the shares of PMF and would pay the consideration agreed in the share purchase agreement to the shareholder."
6.3 Thereafter, in the year 2005, the appellant company made an application before the Bombay High Court and Madras High Court seeking sanction of one scheme of amalgamation of Franklin Templeton AMC Limited (formerly known as PAMC) with the Franklin Templeton Asset Management (India) Private Limited (i.e., the appellant company). The Scheme of amalgamation was sanctioned by the Bombay High Court on 07.10.2005 and by the Madras High Court on 07.02.2006. The appointed date mentioned in the Scheme of amalgamation was 26.07.2002. Later, Madras High Court on 12.03.2008 sanctioned dissolution of Franklin Templeton AMC Limited without winding up.
6.4 To sum up, in the present case, two distinct and disjoint events have taken place at different periods, -
The Franklin Templeton AMC Limited (formerly known as PAMC) which was 100% subsidiary of the appellant company, was amalgamated with the appellant company. The Scheme of amalgamation was sanctioned by jurisdictional High Courts in the year 2005 and 2006. This was an amalgamation of a 100% owned subsidiary with its parent company (the appellant).
6.5 On a careful perusal of the Scheme of amalgamation, it is noted that all the assets and liabilities of the subsidiary company stood transferred to the parent company on the appointed date, because of amalgamation. However, in the said Scheme of amalgamation, there is no mention of any consideration being paid by the parent company (i.e., the appellant company) to the subsidiary company in relation to the amalgamation. In the instant case, since no consideration has been paid for transfer of assets and liabilities of the subsidiary company to the parent company, at the time of amalgamation, there
6.6 The Accounting Standard AS-14, notified under the Companies (Accounting Standard) Rules, deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves. The AS-14 describes two types of amalgamation, viz. an amalgamation in merger, and an amalgamation in the nature of purchase.
6.7 As per AS-14, an amalgamation is considered to be an amalgamation in the nature of merger when all the following conditions are satisfied, -
All the assets and liabilities of the transferor company become, after amalgamation, the assets, and liabilities of the transferee company.
Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.
The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become
The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.
No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.
The Accounting Standard AS-14 further prescribes that an amalgamation in the nature of merger should be accounted for under the pooling of interests’ method. The pooling of interest method provides that in preparing the transferee company's financial statements, the assets, liabilities, and reserves (whether capital or revenue or arising on revaluation) of the transferor company should be recorded at their existing carrying amounts and in the same form as at the date of the amalgamation. In pooling of interest method, the difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share
6.8 As per AS-14, an amalgamation is regarded as an amalgamation in the nature of purchase when any one or more of the above conditions is not satisfied. An amalgamation in the nature of purchase should be accounted for under the purchase method. The purchase method provides that in preparing the transferee company's financial statements, the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or, alternatively, the consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation. In purchase method, any excess of the amount of the consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognized in the transferee company's financial statements as goodwill arising on amalgamation.
6.9 In the present case, the Franklin Templeton AMC Limited (formerly known as PAMC), which was 100% subsidiary of the appellant company. has been amalgamated with the appellant company, as per the Scheme of amalgamation. which was sanctioned by jurisdictional High Courts. In other words, this was an amalgamation of a 100% owned subsidiary with its parent company (the appellant company). All the assets and liabilities of the transferor company have become the assets and liabilities of the transferee
6.10 At this juncture, it is pertinent to recall that the Accounting standard AS-14 prescribes, only in the case of amalgamation in the nature of purchase, that any excess of the amount of the consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognized in the transferee company's financial statements as goodwill arising on amalgamation. The amalgamation, in the present case, being an amalgamation in the nature of merger, should be accounted for under the pooling of interests’ method as per AS-14, which does not provide for excess of the consideration being recognized as goodwill in the transferee company's financials.
6.11 The appellant has contended that Para 2.5 of the Scheme of amalgamation provides that difference between the cost of investment of the transferee company in the transferor company and the book value of all assets and properties and debts and
6.12 To sum up, the moot point which requires adjudication in the instant case is whether or not an intangible asset in the nature of Goodwill, within the meaning of Section 32 of the Act, could be said to have arisen as a result of the amalgamation of Franklin Templeton AMC Limited (formerly known as PAMC) with the appellant company, in accordance with the sanctioned Scheme of amalgamation. Having regard to the facts and circumstances of the case, in view of the discussion in the preceding paragraphs, I find that no such intangible asset in the nature of Goodwill, for the purposes of Section 32 of the Act, could be said to have arisen as a result of the said amalgamation.
6.13 In this regard, it is important to draw the distinction that the issue in the present case is not whether depreciation could be allowed on intangible asset in the nature of Goodwill, as per the provisions of section 32 of the Act. On this point, I am in agreement with the finding reverted by the AO that the ratio of the Supreme Court decision in the case of CIT VS Smifs Securities Ltd (supra) is not at all
"6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no
One more aspect which needs to be mentioned is that. against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact (emphasis supplied) referred to hereinabove."
In view of the facts and circumstances of the case, and having regard to the prevailing position of law applicable on such facts, I find that the disallowance of claim of depreciation on Goodwill has been correctly made by the AO, as no such intangible asset in the nature of Goodwill, for the purposes of Section 32 of the Act, had arisen to the appellant company as a result of the amalgamation. Accordingly, the disallowance of Rs. 1.47.05,938/- made by the AO on
He further submitted the appeal filed by the revenue for assessment year 2010 – 11 before the Honourable Bombay High Court on 26/7/2018 in case of the assessee arising out of ITA number 2657 of 2018 which is pending for disposal. He referred to the challenge made by the principal Commissioner of income tax – 6, Mumbai in the above case. He submitted that only challenge made by the learned principal Commissioner of income tax is with respect to the applicability of fifth proviso to Section 32 (1) of the income tax act. He referred to” points to be urged” placed at page number 9 of the above appeal. Therefore, he submitted that even the revenue has not challenged that assessee is not entitled to depreciation on the goodwill arising out of the above amalgamation and it challenges only applicability of fifth proviso of Section 32 (1) of the income tax act. Therefore, the principal Commissioner of income tax has also accepted that assessee is entitled to depreciation on goodwill arising out of the amalgamation. He further submitted that now maybe revenue cannot oppose this appeal.
Therefore, judicial discipline demands that we must follow the orders of the coordinate bench in assessee‟s own case for earlier years on the same issue.
It is also the fact that when the learned principal Commissioner of income tax challenged the order of the coordinate bench before the Honourable Bombay High Court for assessment year 2000 – 11, the only ground raisedis with respect to the applicability of fifth proviso of Section 32 (1) of the income tax act. We do not find any challenge to the allowability of depreciation itself on such accounting of Goodwill.
However, the facts stated in the appeal of the revenue for assessment year 2010 – 11 before the Honourable Bombay High Court shows the litigation in the earlier years on the same issue as Under: -
“Assessment year 2006 – 07, 2007 – 08, 2008 – 09, 2009 – 10: -the case was selected for scrutiny for the above years and the assessment orders have been passed. The case is not pending before any appellate authority as the issue raised in assessment orders have been settled before the Honourable ITAT. The ITAT orders for the above-
Assessment year 2010 – 11: assessment order was passed u/s 143 (3) read with Section 144C (3) of the income tax act, 1961 on 11/3/2013. The ITAT vide order dated 6/10/2015 was also passed an order in favour of the assessee. Which is in challenge before the Honourable High Court.
Assessment year 2011 – 12: the case was selected for scrutiny and assessment orders has been passed. The assessee claimed depreciation on the amount of Goodwill for the first time in the revised return for assessment year 2011 – 12, however the claim was not allowed by the AO for the said year the issue was pending before the ITA which was later decided on 21/6/2019 in ITA number 1597/M/2017 along with miscellaneous application number 219/M/2019.
Assessment year 2012 – 13, 2013 – 14 and 2014 – 15: the assessee claimed depreciation on the amount of goodwill in the return for the above-
Assessment year 2015 – 16: the assessee claimed depreciation on the amount of goodwill in the return for the above-mentioned years the assessment proceedings were pending at the time of filing of the appeal before the Honourable Bombay High Court.”
We have also carefully perused the orders of the coordinate benches. For assessment year 2005 – 2006 the issue was decided in ITA number 4068/2011 on 3/8/2016 wherein assessee raised an additional ground of appeal for allowability of depreciation on goodwill. Vide paragraph number 8 this ground was considered. The coordinate bench in paragraph number 8.4 categorically held that „it is further noted that the judgement of Honourable Supreme Court in the case of CIT versus Smifs securities Ltd 348 ITR 302 (SC) clearly laid down the principle that the depreciation is admissible on amount of goodwill.” It further held in the same paragraph „our viewpoints support from the judgement of Honourable Delhi High Court in the case ofTriune energy services private limited versus DCIT 65 taxman.com 285 (Delhi) wherein identical issue was involved, in similar facts and circumstances.” It further considered the decision of the coordinate bench in
Therefore, it is apparent that the issue has been sent back to the file of the learned assessing officer in earlier years. The learned departmental representative as well as the learned authorized representative did not press on any other direction which could have prevented us in following the decision of the coordinate bench in earlier years in assessee‟s own case on the same issue. Therefore, in all fairness we also send this matter back to the file of the learned assessing officer as directed by the coordinate bench in earlier years.
Accordingly ground number 1 along with all its sub grounds are allowed for statistical purposes and sent back to the file of the learned AO for fresh adjudication.
Ground number 2 is with respect to not granting of credit for taxes paid on regular assessment amounting to ₹ 675,500/–. We sent back this issue back to the file of the learned assessing officer to grant credit to the assessee after proper verification as the learned CIT – A did not
Accordingly appeal of the assessee is allowed for statistical purposes.
Oder pronounced in the open court on 18.10.2022.
Sd/- Sd/- (RAHUL CHAUDHARY) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 18.10.2022 Sudip Sarkar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT DR, ITAT, Mumbai 5. 6. Guard file. BY ORDER, True Copy//
Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai