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

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.

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.

Aggrieved with the same, the assessee is in appeal before this Tribunal. 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.

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 Page 5 of Coromandel International Limited Vs. DCIT General Reserve and never capitalised the same as goodwill. Consequently, the alleged goodwill never formed part of the block of intangible assets and no Written Down Value was determined. It was further contended that depreciation under the block of assets system cannot be allowed in isolation without determining the foundational components of the block and therefore the claim of the assessee deserves to be rejected. She also submitted that the reliance placed by the assessee on the decision of the coordinate bench of the Tribunal in the case of S&P Capital India Pvt. Ltd. Vs. ACIT (supra) and ACIT Vs. FLSmidth Pvt. Ltd. (supra) are not applicable to the facts of the present case. Accordingly, she prayed before the Bench to dismiss the Ground No. 2 of the assessee.

We have heard the rival submissions and perused the material available on record including the judicial precedents relied upon. The principal issue involved in the present ground relates to the claim of depreciation on alleged goodwill stated to have arisen on amalgamation of certain companies with the assessee. At the outset, it may be observed that the legal proposition that goodwill constitutes an intangible asset eligible for depreciation under section 32(1)(ii) of the Act stands settled by the decision of the Hon’ble Supreme Court in CIT Vs. Smifs Securities Ltd.(supra). However, the present controversy does not concern the eligibility of goodwill as a depreciable asset in principle. The issue which arises for our consideration is whether depreciation can be allowed in the year under appeal when the assessee admittedly never recognised the alleged goodwill as an asset and never brought the same into the block of intangible assets in the year in which the amalgamation took place. In this regards, it is important to visit the provisions of depreciation contained under section 32(1)(ii) of the Act, which is to the following effect : “Sec. 32(i) x x x x (ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—] Page 6 of Coromandel International Limited Vs. DCIT [(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed] (ii) 70[in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:] 11. On perusal of above, it is abundantly clear that under this statutory scheme depreciation operates under the block of assets concept introduced by section 43(6) of the Act and is allowable on the Written Down Value of a block of assets. The block of assets has been defined under section 43(6) of the Act, the relevant portion of which is to the following effect : “Sec-43(6) "written down value" means— (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force: [Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, "depreciation actually allowed" shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the pur-poses of the said clause (vi);] [(c) in the case of any block of assets,— (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,— (A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and [(C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced— (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and Page 7 of Coromandel International Limited Vs. DCIT (b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value;] (ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).]

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:

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.

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. Under the scheme of sections 32 and 43(6) of the Act the Written Down Value of a block of assets in a particular year is derived from the closing Written Down Page 9 of Coromandel International Limited Vs. DCIT Value of the immediately preceding year. If no asset was brought into the block and no actual cost was recognised in the earlier year, the opening Written Down Value for the subsequent year cannot be altered by introducing such asset for the first time in a later year. Entertaining such a claim would necessarily require recomputation of the depreciation schedule of an earlier year which has already attained finality. Such an exercise cannot be undertaken in appellate proceedings in subsequent assessment year. Even otherwise we may observe that, assuming for the sake of argument that the excess consideration arising on amalgamation could be regarded as goodwill eligible for depreciation under section 32(1)(ii) of the Act, the assessee would still not be entitled to depreciation in the year under appeal in the absence of the asset having been brought into the block of intangible assets in the year of amalgamation. Since the assessee admittedly did not determine any actual cost or Written Down Value in the relevant year the statutory computation mechanism required for allowing depreciation does not come into operation in the year under appeal.

In so far as the amalgamation effective from 01.04.2014 is concerned, the assessee had consciously adjusted the excess consideration against 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 Page 10 of Coromandel International Limited Vs. DCIT was no consistent accounting principle was adopted in the earlier year. In these circumstances, we are of the considered view that the assessee cannot at the appellate stage seek to introduce such asset into the depreciation framework for the first time. Therefore, we find no infirmity in the order of the Ld. CIT(A) in rejecting the claim of depreciation on goodwill. Accordingly, the Ground No.2 raised by the assessee is dismissed.

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.

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 Page 11 of Coromandel International Limited Vs. DCIT 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.

However, in the present case we have dismissed the ground no. 2 of the assesee on a different set of facts as per our observation recorded at para nos. 6 to 15 of this order. Our observation given under para nos. 16 to 16.5 are without prejudice to our findings given for dismissal of ground no.2 of the assessee at para nos.6 to 15 of this order.

Ground No.3 of the assessee relates to denial of set-off of loss of the Dahej SEZ Unit against profits of other business units. The Ld. AR submitted that Sabero Organics Gujarat Limited was amalgamated with the assessee with effect from 01.04.2014 and pursuant thereto the SEZ unit at Dahej became part of the assessee-company. It was submitted that while filing the return of income the assessee computed the income of the Dahej unit at a net profit of Rs.1,07,51,221/-. However depreciation amounting to Rs.3,97,27,182/- relating to the said unit was inadvertently not claimed in the return of income. The Ld. AR submitted that during the course of assessment proceedings a revised computation was filed claiming the said depreciation and contended that upon allowing such depreciation the Dahej unit would result in a business loss of Rs.2,04,89,277/- which is liable to be set-off against the profits of other business units under section 70 of the Act. The Ld. AO rejected the claim relying on the decision of the Hon’ble Supreme Court in Goetze (India) Ltd.(supra), holding that a fresh claim cannot be entertained without filing a revised return. It was further submitted that the restriction laid down by the Hon’ble Supreme Court in Goetze (India) Ltd. (supra) applies only to the powers of the Assessing Officer Page 15 of Coromandel International Limited Vs. DCIT and does not curtail the powers of appellate authorities. Accordingly, the Ld.AR prayed before the Bench to allow ground no.3 of the assessee.

Per contra, the Ld. DR supported the orders of the lower authorities and submitted that the assessee had not claimed such depreciation in the return of income and therefore the Ld. AO rightly rejected the claim. The Ld. DR further relied upon the decision of the Hon’ble Supreme Court in the case of PCIT v. Wipro Ltd. 446 ITR 1 and submitted that the claim of loss cannot be entertained in the absence of a proper claim in the return of income.

We have heard the rival submissions and perused the material available on record. In our considered view the restriction laid down by the Hon’ble Supreme Court in Goetze (India) Ltd. (supra) applies only to the powers of the Assessing Officer and does not affect the powers of appellate authorities under the Act. Further Explanation 5 to section 32 of the Act provides that depreciation shall apply whether or not the assessee has claimed the deduction while computing its total income. Therefore, if depreciation is otherwise allowable under the Act, it cannot be denied merely because the assessee did not claim the same in the return of income. However, we also note that the claim of depreciation and the resultant computation of loss of the Dahej unit have not been examined by the Ld. AO on merits. Since the allowability of depreciation involves verification of factual aspects such as the existence of depreciable assets, their use for the purposes of business and the determination of Written Down Value, we deem it appropriate to restore this issue to the file of the Ld. AO. Accordingly, the order of the Ld. CIT(A) on this issue is set aside and the matter is restored to the file of the Ld. AO for the limited purpose of verifying the claim of depreciation relating to the Dahej unit and recomputing the income in accordance with law after providing adequate opportunity of being heard to the assessee. In so far as the reliance placed by the Revenue on the decision of the Hon’ble Supreme Court in PCIT v. Wipro Ltd. (supra) is concerned, the said decision relates to carry forward of loss without filing a return under section 139(1) r.w. section 139(3) of the Act. However, the present case relates to intra- Page 16 of Coromandel International Limited Vs. DCIT year set-off of loss and therefore the said decision is distinguishable. Accordingly Ground No.3 of the assessee is allowed for statistical purposes.

In the result the appeal of the assessee is partly allowed for statistical purposes.