ADP INDIA PRIVATE LIMITED,CHENNAI vs. DEPUTY COMMISSIONER OF INCOME TAX CORPORATE CIRCLE 1(1), CHENNAI

The ld. DR Ms. R. Anita, Addl. CIT has submitted that the claim of depreciation on goodwill, created on account of balancing accounting entry i.e., the difference between net assets and liabilities taken over, in pursuance to amalgamation as goodwill, has been claimed as eligible for depreciation under section 32(1)(ii) of the Act as intangible asset. The ld. DR further submitted that as per section 32 and 5th proviso (now 6th proviso), depreciation on any asset including intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 of the Act or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year, the deduction calculated at the prescribed rates, as if, the succession or the amalgamation, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, as the case may be, in the ratio of the number of days for which the assets were used by them. Therefore, claiming depreciation on balancing charge, arising on account of accounting under assets and to 2672 & 2698/Chny/2024 liabilities taken over from the transferor company in pursuant to amalgamation cannot be treated as goodwill and depreciation under section 32(1)(ii) of the Act cannot be allowed. The ld. DR strongly relied on the order of the ITAT Bangalore in the case of United Breweries Limited. The ld. DR also submitted that the intention of the amendments is to put a rest to the long pending litigation and provide clarity on tax treatment of depreciation claimed on goodwill as could be evident from the Budget Speech and Memorandum to Finance Bill, 2021 that the Government intends to avoid excessive benefits claimed by the taxpayers. Thus, the ld. DR has submitted that the additions made by the Assessing Officer and confirmed by the CIT(A) should be sustained.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered the relevant case laws referred to by both the parties in support of their arguments. There is no dispute with regard to the fact that the assessee has claimed deprecation on goodwill which was arisen, on account of amalgamation of M/s ADP Solutions India Private Limited with the assessee company, by virtue of an order of NCLT dated 19.06.2017 w.e.f appointed date 01.04.2015, by which, all assets and liabilities of the transferor company has been taken over by the transferee company. The purpose and the terms of the scheme have been specified in documents submitted before the NCLT. In fact, the NCLT has approved and to 2672 & 2698/Chny/2024 sanctioned the scheme of amalgamation vide order dated 19.06.2017. Further, the Assessing Officer has not raised any objection for the scheme of amalgamation. As per the scheme of amalgamation approved by the NCLT, all assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company from the appointed date and upon sanction of the scheme, the amalgamation has been accounted for under the purchase method as prescribed by Accounting Standard (AS)-14 notified by Ministry of Corporate Affairs under the relevant sections 230 to 240 of the Companies Act, 2013 and the specific provisions of the scheme. Accordingly, all the assets and liabilities of the amalgamating company as on 1st April, 2015 have been recorded by the assessee company at their respective fair market value (FMV). The assessee company discharged the purchase consideration equivalent to the fair market value of the assets of ADP Solutions India Pvt. Ltd. based on the valuation report obtained by the assessee company from an independent valuer. In nutshell, the net asset value of ADP Solutions India Pvt. Ltd. was at ₹.20,97,38,667/- as on the appointed date (01.04.2015). The purchase consideration was valued by an independent valuer at ₹.45,48,21,150/- and paid by the assessee by issuing equity shares to the shareholders of ADP Solutions India Pvt. Ltd., which was valued at ₹.193.13 per share having face value of Rs.10 each and premium of ₹.183.13 per share. Accordingly, the assessee issued 23,55,000 equity shares to the shareholders of ADP to 2672 & 2698/Chny/2024 Solutions India Pvt. Ltd., resulting in excess payment of ₹.24,50,82,483/- over the assets and liabilities taken over by the assessee and the same has been treated as goodwill in terms of AS-14, on which the assessee has claimed depreciation @ 25%.

With regard to the legal objection of the CIT(A) at page 38 of the impugned order, in light of provisions of section 32(1)(ii) and 6th Proviso (now), provided therein, it has to be examined, whether 5th proviso to section 32(1) of the Act restrict depreciation on goodwill, arising on account of amalgamation or it only restricts goodwill to the predecessor or successor company in case of amalgamation or demerger etc. The 5th proviso to section 32(1) of the Act, has been inserted by the Finance Act, 1996, to restrict claim of aggregate deduction, which is evident from memorandum of Finance Bill of 1996, as per which, in case of succession in business and amalgamation of companies, predecessor of companies, predecessor of business and successor of amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on same assets, which in aggregate cannot exceed depreciation allowance, in any previous year at prescribed rates. Therefore, it is proposed to restrict aggregate deduction in a year, depreciation at the prescribed rate and apportion the same allowance in the ratio of number of days for which said assets were used by them. From the memorandum explaining Finance Bill, and purpose of introduction of 5thproviso to section to 2672 & 2698/Chny/2024 32(1) of the Act, it is very clear, as per which predecessor and successor in a scheme of amalgamation should not claim depreciation over and above normal depreciation allowable on a particular asset. In other words, in a scheme of amalgamation where existing assets of amalgamating company are acquired by amalgamated company, then while claiming depreciation after amalgamation, amalgamated company can claim depreciation only on the basis of number of days, a particular asset were used by them. Therefore, in our considered opinion, said proviso only determines amount of depreciation to be claimed in the hands of predecessor / amalgamating company and in hands of the successor or amalgamated company, only in the year of amalgamation based on the date of such amalgamation. However, it does not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation. Therefore, it is very clear from 5thproviso to section 32(1) of the Act, that once any asset, to the respective block of asset including intangible asset, more particularly, goodwill is added to the respective block of assets of the amalgamated company, in the context of claim of depreciation in the hands of amalgamated company and such addition to the block of assets would not fall within the purview of the 5th proviso to section 32(1) of the Act. Effectively, scope of the said proviso is narrow as could be culled out for the purpose, for which said proviso was inserted in the statute as reflected in the Memorandum to the Finance Bill. To further clarify, 5th proviso to to 2672 & 2698/Chny/2024 section 32(1) of the Act, with regard to depreciation on goodwill is restricted to assets, which belongs to amalgamating company and its application cannot be extended to the assets, which arise in the course of amalgamation to the amalgamated company. The intention of law was to extend the benefit available to the amalgamated company on succession and not to restrict depreciation on assets which generated in the course of succession. It is very clear from the proviso that it refers to depreciation allowable to the predecessor and successor in the case of succession and this should be understood as reference to the assets that belong both to the predecessor and successor and which can only once belonged to the predecessor company and it does not apply to the assets which were generated in the hands of amalgamated company for the first time, as a result of amalgamation as approved by the High Court. In our opinion, 5th proviso applies only to those assets which commonly exist between predecessor and successor, however, it does not apply to asset, which has been created or acquired after amalgamation. Thus, we make it clear that 5th proviso to section 32(1) of the Act has no application in the event of creation of new asset, by virtue of amalgamation like goodwill and accordingly, the contention of the CIT(A) stands rejected.

In the present case, there is no dispute with regard to the fact that goodwill does not exist in the books of account of the amalgamating company. Further, depreciation on goodwill claimed by the assessee was to 2672 & 2698/Chny/2024 first time recognized in the books of account of amalgamated company, in a scheme of amalgamation approved by the NCLT. As per said scheme of amalgamation, accounting treatment in the books of transferee company has been specified, as per which, transferee company shall account for merger in its books of account as per ‘purchase method’ of accounting prescribed under AS-14 issued by ICAI. As per AS-14 issued by the ICAI, all assets and liabilities recorded in the books of account of transferor company shall stand transferred and vested in the transferee company, pursuant to scheme and shall be recorded by the transferee company at their book value. The excess of or deficit in net asset value of the transferee company, after reducing aggregate face value of shares issued by the transferee company to the members of the transferor company, pursuant to the scheme and cost of investment in the books of the transferee company for the shares of transferor company held by it on the effective date be either credited to the capital reserve or debited to the goodwill account, as the case may be in the books of transferee company. Such resultant goodwill, if any shall be amortized in the books of Transferee Company as per principles laid down in AS-14. Therefore, from the scheme of amalgamation and AS-14 issued by the ICAI, it is very clear that once amalgamation is in the nature of ‘purchase method’, then excess consideration paid over and above net asset value of transferor company shall be treated as goodwill and can be amortized in the books of accounts to 2672 & 2698/Chny/2024 of the transferee company. In this case, net asset value of the transferor company (amalgamating company) was at ₹.20,97,38,667/-. Further, value of investments of transferee company i.e., in the present case, the assessee in the shares of transferor company (in the present case amalgamating company) was at ₹.45,48,21,150/-. The value of investments held by the assessee company in the shares of amalgamating company extinguishes after amalgamation and consequently difference between net asset value of amalgamating company and value of investment held by amalgamated company would become goodwill in the books of account of Transferee Company. In the present case, difference between net value of assets of amalgamating company and value of investments held by amalgamated company is at ₹.24,50,82,483/- and same would become goodwill in the books of account of amalgamated company. Therefore, in our opinion, accounting of goodwill and consequent depreciation claim on such goodwill in the books of account of the assessee company is nothing but purchase of goodwill and thus, the assessee has rightly claimed depreciation on said goodwill in terms of section 32(1) of the Act. This legal principle is supported by the decision of Hon'ble Supreme Court in the case of Smifs Securities Ltd. (supra). This principle is also supported by the recent orders of the ITAT., Hyderabad Benches in the case of DCIT v. East India Petroleum Limited in dated 06.02.2024 as well as Mumbai Benches order in the case of Gati Kintetesu Express Pvt.

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 amalgamation. It was claimed that the extra consideration was paid towards the reputation which the amalgamating company was enjoying in order to retain its existing clientele.

The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to section 32(1) of the Income-tax Act, 1961 ("the Act", for short). We quote hereinbelow Explanation 3 to section 32(1) of the Act: "Explanation 3.- For the purposes of this sub-section, the expressions 'assets' and block of assets' shall mean - (a) tangible assets, being buildings, machinery, plant or furniture ; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.”

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 amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income-tax (Appeals) ("the CIT(A)", for short) has come to the conclusion that the authorised representatives had filed copies of the orders of the High Court ordering amalgamation of the above two companies ; that the assets and liabilities of M/s. YSN Shares and Securities P. Ltd. were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased. This finding has also been upheld by the Income-tax Appellate Tribunal ("the ITAT", for short), We see no reason to interfere with the factual finding.

One more aspect which needs to be mentioned is that, against the decision of the Income-tax Appellate Tribunal, 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 referred to hereinabove.

For the afore-stated reasons, we answer question No. (b) also in favour of the assessee.

Further, the case law relied on by the CIT(A) at page 35 of the impugned order in the case of DCIT Vs United Breweries Ltd. (TS-553- ITAT-2016 (Bang) of ITAT, Bangalore Bench is distinguishable from facts of the present case, for the reason that in the case of DCIT Vs United Breweries Ltd.(supra), before amalgamation there was a goodwill in the books of account of amalgamating company. Further, in a scheme of amalgamation, goodwill has been revalued and shown higher value. The amalgamated company on succession has claimed higher depreciation on goodwill arose out of amalgamation. Under those facts, the Tribunal came to 2672 & 2698/Chny/2024 to the conclusion that in terms of 5th proviso to section 32(1) of the Act, predecessor and Successor Company can claim depreciation on proportionate basis for number of days assets used by them, however, they cannot claim depreciation over and above normal depreciation allowable on a particular asset.

In the present case, there was no goodwill in the books of account of the amalgamating company and further, goodwill has been acquired by amalgamated company by paying consideration over and above net value of assets of amalgamating company. Therefore, in our considered view, case of the assessee squarely comes under ratio laid down by the Hon'ble Supreme Court in the case of Smifs Securities Ltd. (supra). The ITAT, Bangalore Bench in the case of Altimetrik India Pvt. Ltd, Vs. DCIT (2022) 137 taxmann.com 9 had considered an identical issue and after considering decision of the United Breweries Ltd. (supra) held that consideration paid by the amalgamated company over and above net assets of amalgamating company should be considered as goodwill arising on amalgamation and such goodwill is a capital asset eligible for depreciation. Therefore, from the above facts and circumstances, it is very clear that in the given facts and circumstances of the case, the 5thproviso to section 32(1) of the Act have no application. to 2672 & 2698/Chny/2024

With regard to the observations in para 5.4 at page 4 & 5 of the assessment order, the Assessing Officer disallowed depreciation, mainly on the ground that the asset was not put to use in the business of the assessee and the conditions prescribed for claiming depreciation as per section 32(1) of the Act are not satisfied. According to the Assessing Officer, in order to claim depreciation, the assessee must be owner of the asset and further, the asset must be used for the purpose of business operation in the previous year. In the instant case, amalgamation order has been passed on 19.06.2017, though comes into effect from the appointed date i.e. 01.04.2015, the so-called goodwill cannot actually be called to have at all been used in the business in the F.Y.2015-16, relevant to A.Y.2016-17. Since the condition referred to under section 32 of the Act is not satisfied, the claim of depreciation on such goodwill is not as per the provisions of section 32 of the Act. We find that the goodwill in the present case is not self-generated or taken over from third person. The goodwill is created on account of amalgamation of two companies, by virtue of order of NCLT, by which all assets and liabilities of transferor company has been taken over by the transferee company and by giving effect to the said order of NCLT, the assessee has taken excess liabilities to the tune of ₹.24,50,82,483/- and the same has been treated as goodwill. In other words, the goodwill is arisen for the first time, on account of amalgamation between two companies. Therefore, the term “owned” under section 32 of to 2672 & 2698/Chny/2024 the Act should be interpreted in the context of intangible assets. The word “owned” shall have a wider meaning in the context of intangible assets. The existence of goodwill arising from the amalgamation tantamounts to user. The intangible assets are creation of human mind and do not have physical existence like plant, building, machinery etc. In the context of intangible assets, the word “owned” has to be interpreted in a practical manner and if we go by the facts in the present case, the goodwill comes into existence w.e.f. 01.04.2015, by order of NCLT, amalgamating two companies from the appointed date. Section 32 of the Act in the form of depreciation confers the benefit to the assessee and the word “owned” should be interpreted in such a manner, which will enable the assessee to obtain the benefit intended by the legislature. And in this behalf, it is relevant to refer to the judgement of the Hon'ble Supreme Court in the case of Mysore Minerals Limited v. CIT 239 ITR 775(SC). Therefore, we are of the opinion that the reason given by the Assessing Officer to disallow the depreciation is totally incorrect, devoid of merit and thus, rejected.

The assessee had also relied upon the decision of ITAT Chennai in the case of Trivitron Healthcare P. Ltd. Vs. CIT (supra). The ITAT in the context of goodwill arising on account of amalgamation has considered the issue in light of provisions of section 32(1)(ii) and 6th proviso, provided therein and after considering the relevant facts held as under: 11. The 5th proviso to section 32(1) of the Act, has been inserted by the Finance Act, 1996, to restrict claim of aggregate deduction which is evident from to 2672 & 2698/Chny/2024

In view of this matter and considering the facts and circumstances of the case, we are of the considered opinion that the assessee is eligible for depreciation on goodwill created on account of amalgamation. The Assessing Officer without appreciating relevant facts, simply disallowed depreciation on goodwill, which was confirmed by the CIT(A). Thus, we set aside the order of the CIT(A) and the addition made by the Assessing Officer stands deleted for all the assessment years under consideration. to 2672 & 2698/Chny/2024

The next ground raised by the assessee in ground Nos. 3.1 to 3.6 for the assessment year 2016-17 is relating to addition under section 56(2)(viib) of the Act.

As per the Note No. 25 of their financials, the assessee had allotted 23,55,000 equity shares of face value of ₹.10/- per share at premium of ₹.193/- to M/s. ADP Solutions India Private Limited on their merger with the assessee. The assessee claimed that the share premium is based on the valuation as on 1st April, 2015 performed by an independent valuer. The Assessing Officer show-caused the assessee to provide the valuation report based on which share premium fixed. After considering the submissions of the assessee, the Assessing Officer fixed the fair market value of shares under Rule 11UA of the Income Tax Rules, 1962 at ₹.69.58/- only. Thus, the Assessing Officer disallowed the difference of share premium of ₹.123.42 [₹.193 – ₹.69.58] per share under section 56(2)(viib) of the Act in respect of 23,55,000 equity shares at ₹.29,06,54,100/- and added to the total income of the assessee. On appeal, the CIT(A) confirmed the addition.

On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee, by filing FC-GPR filed with Reserve bank of India for allotment of shares to the overseas shareholders in pages 176 to 186 of paper book set II, submitted that the provisions of section to 2672 & 2698/Chny/2024 56(2)(viib) of the Act is not applicable in assessee’s case for the reason that the shares were issued to the non-resident shareholders of ADP Solutions Private Limited. Further, by filing valuation report at page 60 of the paper book set II, the ld. Counsel for the assessee has submitted that the value of the shares has been determined by a Chartered Accountant as per discounted cash flow method [DCF method] which is one of the methods prescribed under Rule 11UA of the Income Tax Rules. By relying upon various case law, the ld. Counsel for the assessee prayed to delete the addition towards disallowance made under section 56(2)(viib) of the Act.

The ld. DR relied on the orders of the authorities below.

We have heard both the sides, perused the materials available on record. M/s. ADP Solutions India Private Limited was amalgamated with assessee company by a scheme of amalgamation sanctioned by the NCLT vide order dated 19.06.2019 with effect from the appointed date of 1st April, 2015. According to the Assessing Officer at para 8.1 of the assessment order, the assessee had allotted 23,55,000 equity shares of face value of ₹.10/- per share at premium of ₹.193/- to M/s. ADP Solutions Private Limited on their merger with the assessee. However, the Assessing Officer determined the fair market value of shares at ₹.69.58/- and the difference of ₹.123.42 per share was brought to taxation by making disallowance to 2672 & 2698/Chny/2024 under section 56(2)(viib) of the Act in respect of 23,55,000 equity shares. It is not in dispute that the assessee issued shares to non-resident as per FC-GPR filed with Reserve bank of India for allotment of shares to the overseas shareholders placed on record [pages 176 to 186 of paper book set II]. Thus, the point at issue is whether the provisions of section 56(2)(viib) of the Act applies to non-resident or not. For ready reference, the relevant clause (viib) to section 56(2) of the Act is reproduced hereinbelow: (viib) “where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: 23. A plain reading of the above clause (viib) to section 56(2) of the Act, it is amply clear that the above provision applies to only a resident. In the present case, the assessee issued shares to the non-resident shareholders of ADP Solution India Private Limited as could be evident from FC-GPR filed with Reserve Bank of India for allotment of shares to the overseas shareholders is evident from pages 176 to 186 of paper book set II. In view of this fact, it is amply clear that the provisions of section 56(2)(viib) of the Act have no application to the case of the assessee in the assessment year under consideration.

In fact, in order to bring the non-residents under the provisions of section 56(2)(viib) of the Act, clause (viib) to section 56(2) of the Act has to 2672 & 2698/Chny/2024 been amended vide Finance Act, 2023 w.e.f. 01.04.2024. Therefore, it is clear that prior to amendment vide Finance Act, 2023, the provisions of section 56(2)(viib) of the Act have no application to the non-resident shareholders to whom the shares were issued by the taxpayers.

Under the above facts and circumstances, the addition made by the Assessing Officer and confirmed by the CIT(A) is unwarranted. Accordingly, we delete the addition made by the Assessing Officer and allow the grounds raised by the assessee for the assessment year under consideration.

The next ground raised by the assessee in ground Nos. 4.1 to 4.4 for the assessment year 2016-17 is relating to addition of ₹.95,57,391/- made towards disallowance of expenses under section 40(a)(i) of the Act.

The Assessing Officer required the assessee to submit the party-wise foreign payments made with tax deducted at source. Accordingly, on perusal of the details furnished by the assessee, the Assessing Officer has noted that the assessee deducted tax at source under section 195 of the Act for the payments of ₹.4,85,00,041/-. But, as per clause 34a, Form 3CD, the assessee’s statutory Chartered Accountant has certified that the assessee deducted tax at source under section 195 of the Act to an extent of ₹.3,89,42650/-. The assessee was asked to reconcile the same. Since the assessee could not furnish any supporting document, the Assessing to 2672 & 2698/Chny/2024 Officer disallowed the differential amount of ₹.95,57,391/- [₹.4,85,00,041 - ₹.3,89,42650] and added to the total income of the assessee.

On appeal, before the CIT(A), the assessee furnished the reconciliation of the difference between the foreign currency payments as per the financial statements and Form 3CD along with Form 27Q as well as tax payment challan and prayed for grant of relief. However, without acknowledging the details furnished by the assessee of party-wise break up of foreign currency payments made, the CIT(A) simply confirmed the disallowance made by the Assessing Officer under section 40(a)(i) of the Act.

Before us, by filing the reconciliation of the difference between the foreign currency payments as per the financial statements and Form 3CD along with Form 27Q as well as tax payment challan from page 189 to 216 of the paper book set II, the ld. Counsel for the assessee prayed for grant of relief.

The ld. DR fairly conceded that the matter may be remanded to the file of the Assessing Officer for verification.

Having heard both the parties and upon perusal of page 30 of the impugned order, we find that the assessee has submitted the reconciliation of the difference between the foreign currency payments as per the financial statements and Form 3CD along with Form 27Q as well as tax to 2672 & 2698/Chny/2024 payment challan as Annexure 5 before the CIT(A) and prayed for grant of relief and the CIT(A) has not acknowledged the same and confirmed the addition made by the Assessing Officer. Accordingly, we set aside the order of the CIT(A) on this issue and remand the matter to the file of the Assessing Officer for fresh adjudication after verification of the details as may be filed by the assessee. The assessee is also directed to furnish the details as was furnished before the Tribunal. Thus, the grounds raised by the assessee are allowed for statistical purposes.

In the result, the appeal in , 2672 & 2698/Chny/2024 are allowed. Order pronounced in the open court on 21st May, 2025 at Chennai.