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Facts
The assessee, a corporate entity involved in water treatment systems, claimed brought forward losses and unabsorbed depreciation from a merged entity, CBTPL, after an amalgamation. The Assessing Officer completed the assessment under Section 143(3). Subsequently, the PCIT initiated revision proceedings under Section 263, alleging that the assessment order was erroneous and prejudicial to the revenue due to excess depreciation claimed on goodwill, stemming from the non-consideration of certain trade receivables that the PCIT believed were transferred to the assessee. The assessee contended that these trade receivables belonged to a division of CBTPL (Municipal Solid Waste Division) which was not part of the merger with the assessee.
Held
The Tribunal found that the Assessing Officer had conducted a thorough inquiry into the depreciation claim on goodwill during the original assessment proceedings. It was established that only the Industrial Solid Waste Division of CBTPL merged with the assessee, and the disputed trade receivables pertained to the Municipal Solid Waste Division, which was not transferred to the assessee. Therefore, the Tribunal concluded that the PCIT's premise for invoking Section 263 was based on a factual misconception, and the original assessment order was neither erroneous nor prejudicial to the interest of the Revenue.
Key Issues
Whether the PCIT had valid jurisdiction under Section 263 to revise an assessment concerning depreciation on goodwill, when the Assessing Officer had already conducted a detailed inquiry and the PCIT's factual basis for the revision regarding the transfer of trade receivables from a non-merged division was incorrect.
Sections Cited
263, 142(1), 143(2), 143(3), 43B, 36(1)(va)
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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, VP & SHRI GIRISH AGRAWAL, AM
O R D E R Per Saktijit Dey, VP:
The present appeal has been filed by the assessee, against the order dated 19.03.2024, passed by Principal Commissioner of Income Tax (‘PCIT’ for short), Mumbai u/s. 263 of the Income Tax Act, 1961 (‘the Act’ for short), for the assessment year (A.Y.) 2018-19.
Briefly, the facts are, the assessee, a resident corporate entity, is stated to be engaged in the business of manufacturing and trading of Water treatment systems, Water pollution control equipment and Bio filters and resource recovery systems. For the assessment year under dispute, the assessee filed its return of income on 30.11.2018, declaring income of Rs.2,36,22,600/-. proceedings, Assessing Officer (AO) issued notices u/s. 142(1) and 143(2) of the Act, calling for various information from the assessee. While examining the issues in course of the assessment proceedings, the A.O. noticed that the assessee has claimed brought forward losses of Rs.10,87,13,901/- and unabsorbed deprecation of Rs.1,65,62,869/-.
He, therefore, called upon the assessee to justify such claim with documentary evidence.
In response to the query raised by the A.O., the assessee submitted that as per the scheme of Amalgamation sanctioned by National Company Law Tribunal (‘NCLT’ for short), Mumbai Branch on 02.11.2018, the assets and liabilities of business unit of Concord Blue Technology Private Limited (‘CBTPL’ for short) were transferred to and vested with assessee w.e.f. 01.04.2017. It was submitted by the assessee that upon merger of CBTPL with the assessee during the year, the business losses/unabsorbed depreciation of CBTPL from A.Ys. 2014-15 to 2017-18 got transferred to the assessee, which have been claimed in the impugned assessment year.
4. After examining the submissions of the assessee and verifying the documentary evidences, the A.O. ultimately completed the assessment u/s. 143(3) of the Act vide order dated 15.04.2021, determining the total income at Rs.3,07,74,710/-, after making couple of statutory disallowances u/s. 43B and 36(1)(va) of the Act.
After completion of assessment as aforesaid, ld. PCIT, in exercise of powers u/s. 263 of the Act, called for and examined the assessment records of the assessee. While doing so, he was of the view that the assessment order is erroneous and prejudicial to the interest of the Revenue due to the following reasons. Ld. PCIT observed that as per considered as ‘Goodwill’, which amounted to Rs.15,48,23,374/-. The goodwill so generated was capitalized and depreciation @ 25% amounting to Rs.3,87,05,844/- was claimed by the assessee. However, ld. PCIT observed, as per record of CBTPL, trade payable of Rs.80,31,286/- and trade receivable of Rs.9,46,42,705 (net trade receivable being Rs.8,66,11,419/-), also pertains to the undertaking taken over by the assessee. He was of the view, non-consideration of trade receivable has resulted in excess claim of ‘Goodwill’ to that extent resulting in excess allowance of depreciation to the tune of Rs.2,16,52,855/-.
Having held such view, ld. PCIT issued a show cause notice to the assessee to explain why the assessment order should not be treated as erroneous and prejudicial to the interest of Revenue and revised. In response to the show cause notice, the assessee made a detailed submission, pointing out that the trade receivable considered for exercising jurisdiction u/s. 263 of the Act, pertains to a different division of CBTPL dealing with Government & Municipal Wastes, which did not merge with the assessee.
Therefore, the trade receivables were never transferred to the assessee as part of scheme of Amalgamation. The ld. PCIT, however, was not fully convinced with the submission of the assessee. Ultimately, he passed the impugned order, setting aside the assessment order, with a direction to make a thorough enquiry on the issue of claim of deprecation on Goodwill and reassess the income, after providing an opportunity of being heard to the assessee. assessment proceedings, A.O. has specifically enquired into the claim of depreciation on goodwill. In this context, he drew our attention to notice dated 25.02.2021 issued by A.O. He submitted, in response to the query raised, the assessee not only justified the claim of deprecation, but also furnished the supporting documentary evidences. He submitted, after getting fully satisfied with the submissions made and documentary evidences furnished, the A.O. allowed assessee’s claim. Thus, he submitted, the assessment order passed cannot be considered to be either erroneous and prejudicial to the interest of the Revenue so as to vest jurisdiction with ld. PCIT to invoke section 263 of the Act.
Drawing our attention to the order of NCLT, ld. Counsel submitted, CBTPL had two divisions, one is Municipal Solid Waste Division and, second one is Industrial Sold Waste Division. He submitted, as per the scheme of Amalgamation approved by NCLT, the assets and liabilities of Industrial Solid Waste Division got transferred to the assessee. He submitted, the assets and liabilities of Municipal Solid Waste Division were not transferred to the assessee as part of scheme of Amalgamation. Thus, he submitted, the trade receivable, which is the subject matter of proceedings u/s. 263 of the Act, since relates to Municipal Solid Waste Division, was never transferred to the assessee. In this context, ld. Counsel drew our attention to copy of Board Resolution dated 19.12.2023 and the book value of net of assets of CBTPL immediately before demerger as on 31.03.2017. Thus, he submitted, under pure misconception of facts, ld. PCIT has wrongly invoked jurisdiction u/s. 263 of the Act, though, in reality, the Thus, he submitted, the order passed u/s. 263 of the Act, being invalid, should be quashed.
The learned Departmental Representative ('ld. DR' for short) strongly relied upon the observations of the ld. PCIT.
We have considered rival submissions and perused the materials on record. There cannot be any doubt that the exercise of jurisdiction u/s. 263 of the Act is with reference to claim of depreciation on goodwill. As discussed earlier, in terms with a scheme of Amalgamation sanctioned by NCLT, the assessee acquired the assets and liabilities of CBTPL w.e.f 31.03.2017. The part of assets acquired under the scheme of Amalgamation included goodwill of Rs.15,48,23,374/-. Undisputedly, in the return of income for the impugned assessment order, the assessee had claimed deprecation on goodwill, which worked out to Rs.3,87,05,844/-. It is observed, in course of assessment proceeding, the A.O. in notice dated 25.02.2021, specifically enquired into the claim of deprecation on goodwill, seeking the following information:
2. Please furnish the audited balance sheet of the merged company M/s CBTL and the assessee company for AY 2017-18 showing the liability and assets as on 31.03.2017.
The depreciation claimed on intangible assets @ 25% of Rs. 38705844/- on goodwill on merger is proposed to be disallowed as you have failed produced any evidentiary documents in support of the assets purchased during the year. Please justify the value of the goodwill at Rs. 154823374/- on merger with the documentary evidence failing which the depreciation claimed is not allowable for the year.
Please furnish the details of the assets and liabilities as on 31.03.2017 merged with the company as on 01.04.2017 for AY 2018-19. 5. Please furnish the details of unabsorbed depreciation and business losses of M/s CBTL carry forwarded to the assessee company as on 01.04.2017 on merger with the assessee company.
In response to the query raised, the assessee furnished its reply on 01.03.2021, explaining in detail the scheme of Amalgamation and the assets and liabilities acquired on merger of CBTPL. From the reply furnished before the A.O. on 23.03.2021, it can be seen that the assessee had very clearly stated that as per the scheme of Amalgamation, the assets and liabilities of Industrial Solid Waste business unit of CBTPL were transferred and vested with the assessee. Whereas, post-merger, CBTPL continued with the business of Municipal Solid Waste Management. In support of such contention, the assessee had furnished the scheme of Amalgamation, minutes of board meeting of CBTPL as well as the details of assets and liabilities appearing in the books of CBTPL before demerger.
Thus, from the aforesaid facts, it is very much clear that in course of assessment proceeding, the A.O. had enquired in detail regarding the claim of depreciation on goodwill. It is further evident, as on 31.03.2017, just prior to demerger, the book value of net asset of CBTPL was as under:
Particulars Book value of retained Book value of demerged Comments undertaking (in INR) undertaking (in INR) Assets: Fixed Assets 2,29,54,536 Non-current 25,000 investments Long-term loans and 62.500 advances Short-term loans and 3,65,06,230 INR 3,32,70,700 advances classified as Long- term loans and advances in RSS books Cash and bank balances 79,305 Trade receivables 9,46,42,705 Liabilities: Long-term borrowings (1,75,00,000) Short-term borrowings (6,87,76,297) INR 20,76,100 reclassified as Long- term borrowings in RSS books Deferred tax liabilities (80,842) (net) Long-term provisions (1,93,641) Short-term provisions (34,90,236) (8,06,603) Trade payables (80,31,286) Other current liabilities (9,41,93,262) INR 82,63,786 reclassified as Short- term borrowings in RSS books Net Assets 8,31,21,183 (12,19,23,074)
Whereas, as per the minutes of meeting of Board of Directors of CBTPL held on 29.12.2017, a copy of which is placed in the paper book, it is quite evident that only the Industrial Solid Waste Division was transferred to the assessee as per scheme of Amalgamation/arrangement approved by NCLT. On a careful scrutiny of Board Resolution of CBTPL, kept in juxtaposition to the book value of the net assets CBTPL as on 31.03.2017, it is very much clear that only the assets and liabilities of Industrial Solid Waste Division were transferred to the assessee. Further, the trade receivables not only pertained to the Municipal Solid Waste Division, but they never got transferred to the assessee. The following part of the Board Resolution would clarify the factual position beyond doubt:
MINUTE BOOK Page No…………… Held at …………………… on ……………. Time ………….. "RESOLVED THAT pursuant to the provisions of the Companies Act, 2013 and Rules made thereunder, consent of the Board be and is hereby accorded to transfer the entire Industrial Solid Waste Division of the Company to Rochem Separation Systems (India) Private Limited through a scheme of arrangement Le. Demerger based on the below mentioned segregation of assets and liabilities: Balance sheet by Segment as at 31 March 2017 Amounts in INR Audited-31st March Municipal Solid Waste Industrial Solid Waste 2017 Division Division EQUITY AND LIABILITIES Shareholders funds
Share capital 3,49,00,000 3,49,00,000 Reserves and surplus (7,37,01,892) (7,37,01,892) (3.88,01,892) (3.88,01,892) Capital Reserve Non-current liabilities Long-term borrowings 1,75,00,000 1,75,00,000 Deferred tax liabilities 80,842 80,842 (net) Long-term provisions 1,93,641 1,93,641 1,77,74,483 1,77,74,483 Current liabilities Short-term borrowings 6,87,76,297 6,87,76,297 Trade payables 80,31,286 80,31,285 Other current liabilities 9,41,93,262 9,41,93,262 Short-term provisions 42,96,839 34,90,236 8,06,603 17,52,97,685 1,15,21,522 16.37,76,162 TOTAL 15,42,70,276 (2,72,80,370) 18,15.50,645 ASSETS Non-current assets Fixed Assets Tangible assets 2,28,57,050 2,28,57,050 Intangible assets 97,486 97,486 2,29,54.536 2,29,54,536 Assets Non-current 25,000 25,000 Investments Long-term loans and 62,500 62,500 advances Other non-current assets 87,500 87,500 Current assets Inventories Trade receivables 9,46,42,705 9,46,42,705 Cash and bank balances 79,305 79,305 Short-term loans and 3,65,06,230 3,65,06,230 advances 13,12,28,240 9,46,42,705 3,65,85,535
Thus, facts on record clearly demonstrate that allegation of transfer of trade receivable of Municipal Solid Waste Division to the assessee is totally unfounded and rather contrary to the facts and materials on record. In contrast, the Board Resolution of CBTPL and other facts and materials, clearly establish that the trade receivable pertaining to Municipal Waste Division, was never transferred to the assessee under the scheme of Amalgamation. Thus, in our considered opinion, ld. PCIT has completely wrong notion that the trade receivable relating to Municipal Waste Division has been transferred to the assessee. At this stage, it is relevant to observe, on carefully going through the impugned order of the ld. PCIT, it can be seen that in course of proceeding u/s. 263 of the Act, the assessee, in fact, had attempted to remove the factual misconception in the mind of the revisionary authority. It is further relevant to observe, ld. PCIT was also partially convinced with the submissions of the assessee, which is evident from his observations made in paragraph 6.1.1 of the impugned order. However, by simply observing that the assessee was able to adduce partial evidence, ld. PCIT has proceeded to revise the assessment order. Thus, in our view, exercise of power u/s. 263 of the Act, in the facts of the present appeal, is unsustainable. In our considered opinion, the A.O. after conducting full length enquiry and due diligence has completed the assessment, accepting assessee’s claim of deprecation. Therefore, in the given facts and circumstances of the case, the assessment order cannot be treated as ‘erroneous and prejudicial to the interest of the Revenue’. Resultantly, we quash the impugned order passed u/s. 263 of the Act and restore the order of assessment.
In the result, the appeal is allowed.
Order pronounced in the open court on 21.01.2025 Sd/- Sd/- (Girish Agrawal) (Saktijit Dey) Accountant Member Vice President Mumbai; Dated : 21.01.2025 Roshani, Sr. PS (A.Y. 2018-19) Rochem Separations Systems India Private Limited vs. Pr. CIT Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,