DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 3(1)(1), AHMEDABAD vs. RECKITT BENCKISER HEALTHCARE INDIA PRIVATE LIMITED , HARYANA

Facts of the Case

1 The assessee is engaged in the business of manufacturing and sale of healthcare and personal care products. It operates through two principal undertakings, namely, the Pharmaceutical Undertaking, which includes the Baddi Unit eligible for deduction under section 80-IC of the Act, and the Cosmetic Undertaking, which caters to various personal care products. The ITA No.1245/Ahd/2025 and 3 Others corporate structure of the assessee undergone significant changes over the years. Initially, Reckitt Benckiser Investments India Pvt. Ltd. (RBIIPL), a company incorporated in India during FY 2010–11, acquired 100% shares of Paras Pharmaceuticals Ltd. (PPL) from its then shareholders at a consideration of Rs.3272.80 crores. RBIIPL was funded by Reckitt Benckiser (Singapore) Pte. Ltd. (RB Singapore), which infused approximately Rs.3274 crores into RBIIPL by way of equity contribution. Upon acquisition, the name of PPL was changed to RBHIPL (the present appellant). Subsequently, a composite scheme of arrangement was filed before the Hon’ble Punjab and Haryana High Court for the merger of RBIIPL into RBHIPL with effect from 1st July 2011 and simultaneous demerger of the personal care division into a separate entity, Halite Personal Care India Pvt. Ltd., effective from 1st March 2012. The said scheme was approved by the Hon’ble High Court on 18th April 2012. 4.2 For the assessment year 2012-13, the assessee filed its original return of income on 29.11.2012 declaring a total income of Rs.67,86,62,066/- and book profit under section 115JB of Rs.138,96,15,026/-. Thereafter, a revised return was filed on 31.03.2014 declaring a loss of Rs.498,53,50,971/- under the normal provisions, with the book profit remaining unchanged. The case was selected for scrutiny and notice under section 143(2) was issued. During the course of assessment proceedings, the assessee furnished detailed explanations and submissions. Aggrieved by the said assessment, the assessee preferred an appeal before the CIT(A), who granted relief on all the above issues. The Revenue is now in appeal before us against the order of the CIT(A).

Grounds Relating to Depreciation on Goodwill

1 In these four connected appeals filed by the Revenue, one of the principal issues for consideration pertains to the disallowance of depreciation claimed on goodwill under section 32(1)(ii) of the Act. In the assessment orders for A.Ys. 2012–13, 2013–14 and 2020–21, the Assessing

2 In addition, for A.Ys. 2020–21 and 2022–23, the Revenue has further challenged the action of the CIT(A) in deleting the disallowance relating to brought forward unabsorbed depreciation, which was held to be available for set off against current year income. The Assessing Officer had restricted the set off by adopting a revised figure of brought forward depreciation, whereas the CIT(A), based on the past assessments and records, directed allowance of the full amount as claimed by the assessee. The specific amounts involved in each year are tabulated below: Assessment Year Ground Relating to Depreciation on Goodwill Ground Relating to Brought Forward Depreciation 2012–13 Rs.6,61,91,21,210/- — 2013–14 Rs.4,96,43,40,908/- — 2020–21 Rs.66,26,59,520/- Rs.2,65,61,88,427/- 2022–23 — Rs.1,26,54,00,107/-

3 We now take up the Revenue’s ground challenging the deletion of disallowance of depreciation on goodwill.

4 During the course of assessment proceedings, the AO noted that the assessee had claimed depreciation of Rs.6,61,91,21,210/- on goodwill. This goodwill was stated to have arisen pursuant to the scheme of amalgamation of Reckitt Benckiser (India) Ltd. (RBIL) with the assessee company. The AO observed that the scheme was approved by the Hon’ble High Court of Gujarat with effect from 01.04.2011. The AO made detailed inquiries into ITA No.1245/Ahd/2025 and 3 Others the nature of the goodwill and the manner in which depreciation was claimed. The AO questioned the allowability of depreciation on such goodwill and issued a show-cause notice to the assessee. In response, the assessee submitted that the claim was squarely covered by the decision of the Hon’ble Supreme Court in CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)] and several other judicial pronouncements holding that goodwill is an intangible asset eligible for depreciation under section 32(1)(ii).

5 During the course of assessment proceedings, the assessee was asked to furnish the computation and working of goodwill which was eventually furnished vide assessee’s letter dated 19.01.2016. The assessee submitted that goodwill was recognized in the books of RBHIL (merged entity) on account of amalgamation with RBIPFL. The total goodwill recognized was Rs.32,63,74,84,841/-, out of which Rs.6,16,10,00,000/- was transferred to another entity (Hattie) as part of a demerger. Thus, the net goodwill retained in RBHIL was claimed at Rs.26,47,64,84,841/-. However, the assessee did not explain the basis for arriving at these figures. On analysis of the submissions and financial records, the AO found that no tangible or identifiable goodwill was acquired by RBHIL as a result of the amalgamation with RBIPFL. RBIPFL had no business operations except holding shares in RBHIL (then PPL). It had neither manufactured nor traded in any goods nor had any customer base or business activity. Its only asset was investment in equity shares of PPL. The entire investment activity, including purchase of 90,51,516 shares of PPL, was carried out from funds raised by issuing shares to RBISPL (Singapore). These shares were later cancelled as per clause 4.2.11 of the amalgamation scheme approved by Hon’ble Punjab and Haryana High Court. The AO observed that there was no transfer of business, customer base, or identifiable intangible asset from RBIPFL to RBHIL, which could give rise to goodwill. The business of the assessee remained unchanged post-amalgamation. The gross profit ratio actually declined over the years — from 61.24% (2010–11) to 49.69% (2012–13), contradicting any argument of enhancement in business value. The AO

6 The AO further analysed whether depreciation could be allowed on the so-called goodwill, assuming (without admitting) that goodwill had arisen. He referred to section 32(1)(ii) of the Act, which allows depreciation on intangible assets such as know-how, patents, trademarks, licences, and commercial rights of similar nature, provided they are: • acquired by the assessee, • owned, wholly or partly, • and used for the purposes of business. 5.7 In the present case, the AO concluded that: • No asset was acquired by RBHIL on amalgamation. • Even if goodwill existed, it was self-generated by RBHIL, as the goodwill represented difference between the market value of its own shares and face value at which RBIPFL acquired them. • The asset was not used since nothing was transferred or came into use. • Therefore, depreciation was not allowable, even on legal and functional criteria. 5.8 The AO emphasized that the assessee is essentially trying to claim depreciation on its own self-generated goodwill, which is not permissible in law. He relied on AS-26, which clearly states:

9 He also referred to the Supreme Court decision in CIT v. B.C. Srinivasa Setty (128 ITR 294), where it was held that cost of self-generated

10 The AO distinguished the assessee’s case from the Supreme Court’s ruling in CIT v. Smifs Securities Ltd. (348 ITR 302). He noted that in Smifs Securities, the issue before the Court was only whether goodwill was eligible for depreciation, not whether goodwill had actually arisen. There, goodwill was held to be a capital right acquired pursuant to transfer of business. In the present case, however, no business or asset was transferred, and thus the genesis of goodwill itself is absent.

11 The AO concluded that reliance on Smifs Securities is misplaced, as it does not apply to a situation where the existence of goodwill is itself fictitious or manufactured.

12 The AO also considered various case laws relied upon by the assessee, including decisions in: • Toyo Engineering India Ltd. v. DCIT – Mumbai HC [TS-811-HC-2012] read with Mumbai ITAT [TS-665-ITAT-2014) • Triune Energy Services P. Ltd. v. DCIT – Delhi HC [65 TAXMANN.COM 288] • Areva T&D India Ltd. v. DCIT - Delhi HC [20 taxmann.com 29] • Commissioner of Income-tax v. RFCI Ltd. – Himachal Pradesh HC – [57 taxmann.com 17]

13 The AO held that all these cases were distinguishable on facts, as the genesis of goodwill in those cases was not in dispute, unlike the present one. He observed that mere approval of amalgamation and recording of goodwill in books does not ipso facto entitle the assessee to depreciation. Summarising his findings, the AO recorded the following: a. There was no transfer of customer base or patronage on amalgamation. b. No increase in brand value or client base of amalgamated entity. c. No improvement in financial indicators post-amalgamation.

14 Before the ld. CIT(A), it was submitted by the assessee that the Assessing Officer had incorrectly examined the allowability of depreciation on goodwill by confining his analysis to the commercial worth or customer base of RBIPPL (the amalgamating company), while the actual goodwill arose in the books of the amalgamated company RBHIPL on account of identifiable consideration paid by RBIPPL to unrelated shareholders for acquiring 100% shares of RBHIPL in a secondary transaction. It was explained that the consideration paid by RBIPPL represented value not merely of tangible assets but also of various intangible assets, such as brands, trademarks, distribution networks, know-how, and other business or commercial rights associated with the underlying business of RBHIPL. Upon amalgamation of RBIPPL with RBHIPL, the excess of such identifiable consideration over the book value of net assets of RBHIPL was accounted as goodwill in the books of the amalgamated company, as per the Scheme of Amalgamation duly sanctioned by the Hon’ble High Court of Punjab and Haryana. The assessee submitted that such goodwill was not self-generated but represented acquired goodwill on which depreciation was allowable under section 32(1)(ii).

16 The assessee also submitted that full disclosure regarding the recognition of goodwill was made under Note 36 of its audited financial statements for the year ended 31.03.2012, and the same had been duly certified by the statutory auditors, approved in the general meeting of the shareholders, and filed with the