COROMANDEL INTERNATIONAL LIMITED,HYDERABAD vs. DCIT., CIRCLE-2(2), HYDERABAD

The assessee has raised the following grounds of appeal: 1. General: a. That on the facts and circumstances of the case, the appellate order u/s 250 of the Income-tax Act, 1961 (the Act), dated 24 February 2025 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (hereinafter referred as 'Ld. CIT'), in so far as it is prejudicial to the Appellant, is contrary to law, facts and circumstances of the case. b. The Ld. CIT has erred in law and on facts in passing the impugned order dated 24 February 2025 without considering the written submission filed by the Appellant on 21 February 2025, in response to the Issue letter, dated 12 February 2025 which had allowed the Appellant to furnish response within 10 days from the date of receipt of issue letter. 2. Non-grant of depreciation on goodwill on amalgamation a. The Ld. CIT has grossly erred in law and on facts in denying the Appellant's claim for depreciation on goodwill arising out of the amalgamation of erstwhile companies with the Appellant, merely on the ground that the claim was not made in the return of income and did not form part of the assessment order. b. The Ld. CIT failed to appreciate that the allowance of depreciation is not a matter of discretion but a statutory imperative as per Explanation 5 to Section 32 of the Act. c. The Ld. CII further erred in disregarding the binding legal position under Explanation 5 to Section 32 of the Act which explicitly provides that depreciation shall be deemed to have been claimed and allowed, irrespective of whether it is actually claimed by the Assessee in the return of income. d. The denial of depreciation on goodwill, being a recognized depreciable intangible asset under Section 32(1)(ii), on account of a procedural lapse, is in clear contravention of statutory provisions and settled judicial principles, and therefore untenable in law. 3. Denial of set-off of loss of Dahej Unit with profits of other business units a. The Ld. CIT has erred in law and on facts in upholding by not allowing the set-off of business loss amounting to 2,04,89,277 pertaining to the Dahej Unit (being a unit of erstwhile Sabero Organics Gujarat Limited, amalgamated with the Appellant during the year under consideration), merely on the ground that the claim was not made in the return of income filed by the Appellant. b. The Ld. CIT failed to appreciate that the entire business loss at the Dahej Unit arose solely on account of depreciation computed as per section 32 of the Act. Denial of such business loss effectively amounts to denial of depreciation, which is a statutory imperative as per Explanation 5 to section 32 of the Act and allowed irrespective whether it was specifically claimed by the Assessee in the return of income. c. The Ld. CIT has erred in applying the ratio of the Hon'ble Supreme Court's decision in Goetze (India) Ltd. v. CIT [2006] 157 Taxman 1 (SC), without appreciating that the said judgment is limited to the powers of the Assessing 4. Disallowance of claim under section 35(2AB) of the Act:

The brief facts of the case are that the assessee is engaged in the business of manufacture and sale of fertilizers and allied products. The assessee filed its return of income for the Assessment Year 2015–16 on 30.11.2015 declaring a total income of Rs.555,48,82,600/-. The case of the assessee was selected for scrutiny under CASS and accordingly notice under section 143(2) of the Income Tax Act, 1961 (“the Act”) was issued by the Learned Assessing Officer (“Ld. AO”) on 13.04.2016. During the course of assessment proceedings, the assessee raised a fresh claim before the Ld. AO which had not been made in the return of income, namely a claim for set-off of loss of Dahej unit amounting to Rs.2,04,89,278/- against the income of other units of the assessee. The Ld. AO, relying upon the decision of the Hon’ble (SC), rejected the said claim holding that a fresh claim which was not made in the return of income cannot be entertained during the course of assessment proceedings. Finally, the Ld. AO completed the assessment of the assessee under section 143(3) of the Act on 20.12.2017 making an addition of Rs.1,17,93,630/- on account of disallowance under section 14A of the Act, while allowing the claim of the assessee on account of depreciation on non-compete fees and depreciation on royalty amounting to Rs.3,74,68,790/- and Rs.75,34,379/- respectively, and assessed the total income of the assessee at Rs.552,16,73,095/-. 5. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal. At the outset, the Learned Authorised Representative (“Ld. AR”) submitted that Ground No.1 of the appeal is general in nature and Ground No.4 of the appeal is not pressed. Accordingly, Ground No.1 and Ground No.4 of the assessee are dismissed as no separate adjudication is required on the same. 6. Ground No.2 of the assessee relates to the claim of depreciation on goodwill arising out of amalgamation of certain companies with the assessee. The brief facts relating to this issue are that during the Financial Year 2013–14, Liberty Phosphate Limited and Liberty Urvarak Limited were amalgamated with the assessee with the appointed date of 01.04.2013 pursuant to schemes sanctioned by the respective Hon’ble High Courts. Subsequently, during the Financial Year 2014–15, Sabero Organics Gujarat Limited was also amalgamated with the assessee with the appointed date of 01.04.2014. It was submitted that in both amalgamations the excess of consideration paid over the net assets acquired represents goodwill arising on amalgamation. However, the assessee followed the pooling of interest method and adjusted the excess amount against its General Reserve account instead of recognising the same as goodwill in its books of account. It is an admitted position that the assessee did not capitalise the said amount as an intangible asset in its books of account, did not add the same to the block of intangible assets for tax purposes, did not compute any Written Down Value in respect thereof and did not claim depreciation in the return of income either for Assessment Year 2014–15 or for the year under appeal. The assessee also did not raise such claim before the Ld. AO during the assessment proceedings. 7. During the appellate proceedings before the Ld. CIT(A), the assessee for the first time raised an additional ground claiming depreciation under section 32(1)(ii) of the Act on the alleged goodwill arising from the aforesaid The Ld. AR submitted that excess consideration paid over the net assets acquired constitutes goodwill and that goodwill is an intangible asset eligible for depreciation under section 32(1)(ii) of the Act. In this regard, the Ld. AR placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd. (348 ITR 302) wherein it has been held that goodwill is an asset within the meaning of section 32 of the Act and depreciation on goodwill is allowable. It was further contended by the Ld. AR that accounting treatment is not decisive for tax purposes and that depreciation should be allowed in view of the law laid down by the Hon’ble Supreme Court holding that goodwill is an asset eligible for depreciation under section 32 of the Act. The Ld. AR further relied upon Explanation 5 to section 32 of the Act and submitted that depreciation is allowable whether or not the assessee has claimed the deduction while computing its total income. It was also submitted that a legal claim can be raised before appellate authorities even if the same was not made in the return of income. Reliance was placed on the decision of the coordinate bench of the Tribunal in the case of S&P Capital IQ India Pvt. Ltd. Vs. ACIT (158 taxmann.com 12) and ACIT Vs. FLSmidth Pvt. Ltd. (ITA No.1682/CHNY/2024), wherein under similar circumstances the Tribunal allowed the claim of depreciation on goodwill. Accordingly, the Ld. AR submitted that the claim of the assessee for depreciation on goodwill arising on amalgamation may be allowed. 9. The Learned Departmental Representative (“Ld. DR”), on the other hand, supported the order of the Ld. CIT(A). It was submitted that the present case is not merely one of non-claim of depreciation but a case where the asset itself was never brought into the block of intangible assets. The Ld. DR submitted that the assessee consciously adjusted the excess consideration against the Coromandel International Limited Vs. DCIT Page 6 of 17

On perusal of above, it is evident that, the Written Down Value is computed by taking the opening Written Down Value of the block, adding the actual cost of assets acquired during the year and reducing the depreciation allowed. Thus, the statutory framework contemplates that for an asset to be eligible for depreciation it must first enter the block of assets, and its actual cost must be recognised for the purposes of computing the Written Down Value. In the present case it is an admitted and undisputed fact that in both amalgamations for A.Y. 2014-15 and A.Y. 2015-16 the assessee did not recognise the excess consideration as goodwill in its books of account. The same has also not been added to the block of assets for tax purposes for calculation of depreciation. Instead, the assessee adjusted the said amount against its General Reserve account. Consequently, the alleged goodwill was neither capitalised as an intangible asset nor brought into the block of intangible assets for the purposes of section 43(6) of the Act. It is also not in dispute that the assessee did not determine any actual cost attributable to goodwill and did not compute any Written Down Value in respect thereof either in Assessment Year 2014–15 or in the year under appeal. The alleged goodwill therefore never entered the depreciation framework of the assessee. Further, the Ld. AR sought to rely upon Explanation 5 to section 32 of the Act and contended that depreciation is allowable whether or not the assessee has claimed the deduction in computing its total income. In this regard we have gone through the Explanation 5 to Section 32 of the Act, which is to the following effect: “Explanation 5.— For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;” 13. On perusal of the above, we are of the considered view that, the said Explanation does not assist the case of the assessee. Explanation 5 merely clarifies that depreciation cannot be denied where an asset already forms part of the block of assets merely because the assessee has not claimed the deduction in the return of income. However, the said Explanation presupposes the existence of an asset forming part of the block of assets. In the present case the alleged goodwill was never brought into the block of assets and therefore the basic condition for the operation of Explanation 5 itself is absent. 14. We also find that the reliance placed by the assessee on the decision of the Hon’ble Supreme Court in Smifs Securities Ltd. does not advance its case in the factual context of the present matter. The said decision recognises that goodwill constitutes an intangible asset eligible for depreciation. However, the allowability of depreciation remains subject to the statutory computation mechanism contained in sections 32 and 43(6) of the Act. In the present case the assessee itself did not recognise the alleged goodwill as an asset and did not bring the same into the depreciation block in the year of amalgamation. Therefore, the ratio of the said decision cannot be applied in the absence of compliance with the statutory computation mechanism governing depreciation. We further observe that in so far as the claim of depreciation relatable to the amalgamation effective from 01.04.2013 pertaining to Financial Year 2013–14 (Assessment Year 2014–15) is concerned the same suffers from an additional legal infirmity. Admittedly the alleged goodwill was never capitalised and no depreciation was claimed in Assessment Year 2014–15. It is also not the case of the assessee that the assessment for Assessment Year 2014–15 is pending or has been reopened. Thus the assessment for that year has attained finality. General Reserve and did not recognise the same as goodwill in its books of account in earlier year and followed the same accounting principle in the year under consideration. The computation of income filed along with the return of income was consistent with this treatment. Once the assesse has consciously adopted a particular accounting principle in earlier year and adopted the same in the year under consideration, the assessee can’t be allowed to deviate from the consistent accounting principle for the first time at the appellate stage. The assessee has relied upon the decisions of the coordinate benches of the Tribunal in the case of S&P Capital IQ India Pvt. Ltd. Vs. ACIT (supra) and ACIT Vs. FLSmidth Pvt. Ltd. (supra) wherein depreciation on goodwill in case of amalgamation was allowed by the Tribunal placing reliance upon the decision of the Hon’ble Supreme Court in CIT Vs. Smifs Securities Ltd. (supra). However on a careful examination of the said decisions we find that the facts in those cases were different from the case of the present case. In those cases there 16. Without prejudice to above, before parting with the issue we also consider it appropriate to record certain additional observations arising from the factual matrix of the present case. The facts on record reveal that the assessee has not paid any consideration directly to the amalgamating companies towards acquisition of goodwill. Under the scheme of amalgamation the assessee has merely taken over the assets and liabilities of the amalgamating companies at their respective book values. The alleged goodwill claimed by the assessee has not arisen on account of any independent payment made to the amalgamating companies for acquisition of goodwill. Instead the assessee has sought to recognise goodwill by accounting the difference between the consideration paid for acquisition of the shares of the amalgamating companies and the net worth of such amalgamating companies. We have also carefully gone through para nos. 5 to 8 of the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. (supra), which is to the following effect: “5. In the circumstances, we are of the view that 'Goodwill' is an asset-under Explanation 3(b) to Section 32(1) of the Act. 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 amount was actually paid on account of goodwill. This is a factual tinding. The Commissioner of Income Tax (Appeals) ['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 Private Limited 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 Income Tax Appellate Tribunal ['ITAT, for short]. We see no reason to interfere with the factual finding. 7. 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 Coromandel International Limited Vs. DCIT Page 12 of 17

1 On perusal of above, we find that in para no. 5 the Hon’ble Supreme Court observed that goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. However, in para nos. 6 and 7 the Hon’ble Supreme Court declined to examine the factual aspects of the case since the Revenue had not raised any such factual issue before the Hon’ble High Court. Accordingly, the said judgment settles the legal proposition that goodwill is capable of being treated as a depreciable asset under section 32 of the Act but does not lay down that goodwill must necessarily arise in every amalgamation irrespective of the factual circumstances. In the present case the alleged goodwill has been recognised by the assessee on account of the excess amount paid for acquisition of the shares of the amalgamating companies over the net worth of such companies. The said excess payment represents consideration paid to the shareholders of the amalgamating companies for acquisition of their shareholding and does not represent any payment made to the amalgamating companies for acquisition of goodwill. In this regard, we have gone through the provisions of section 47(vii) of the Act, which is to the following effect: “ (vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if— (a)the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company except where the shareholder itself is the amalgamated company, and (b)the amalgamated company is an Indian company;

2 On perusal of above, it is evident that the transfer of shares of the amalgamating company by the shareholders in a scheme of amalgamation in some specified cases, has been specifically excluded from the ambit of capital 16.3 Further, we have also gone through the fifth proviso to section 32 of the Act, which is to the following effect: “Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being 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 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 or the demerger, 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, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.” Explanation 2 to section 43(6) of the Income Tax Act, 1961 (“the Act”), which is to the following effect: “[Explanation 2.—Where in any previous year, any block of assets is transferred,— (a) by a holding company to its subsidiary company or by a subsidiary company to its holding company and the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied; or (b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.]”

5 On perusal of above, we find that the said Explanation provides that where any block of assets is transferred by an amalgamating company to the amalgamated company in a scheme of amalgamation in some specified cases, the written down value of the block of assets in the hands of the amalgamated company shall be taken to be the same as the written down value of the block of assets in the hands of the amalgamating company immediately before such amalgamation. Thus, the combined effect of these provisions is that the amalgamated company steps into the shoes of the amalgamating company for the purpose of depreciation and the overall depreciation allowable in the year of amalgamation cannot exceed the depreciation that would have been Coromandel International Limited Vs. DCIT Page 15 of 17