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Facts
The assessee company, post-amalgamation with MR Organosys P. Ltd. (which was later renamed to McFills Enterprises Pvt. Ltd.), recorded goodwill in its books arising from the excess consideration paid over net assets and claimed depreciation on it. The Assessing Officer disallowed this depreciation (totaling Rs. 17,67,63,728/-) and also made an addition of Rs. 2,57,082/- under Section 36(1)(va) for late deposit of employee contributions to provident fund/ESI. The CIT(A) subsequently allowed the assessee's appeal on both issues.
Held
The Tribunal, following the Supreme Court's decision in CIT vs. Smifs Securities Ltd., held that depreciation on goodwill arising from amalgamation is allowable when the consideration paid exceeds the net assets acquired. Consequently, the Revenue's appeals regarding goodwill depreciation were dismissed, upholding the CIT(A)'s decision. However, concerning the late deposit of employee contributions, the Tribunal, relying on Checkmate Services Pvt. Ltd. vs. CIT (SC), allowed the Revenue's appeal, thereby reversing the CIT(A)'s decision on this point.
Key Issues
1. Whether depreciation on goodwill arising from amalgamation is allowable when the consideration paid by the amalgamated company exceeds the net assets acquired. 2. Whether the Assessing Officer can disallow employee contributions to Provident Fund/ESI if deposited after the statutory due date but before the due date for filing the income tax return.
Sections Cited
37(1), 2(1B), 32(1), 49(1)(iii)(e), 43(6), 55(2), 36(1)(va), 2(18), 143(1), 143(2), 142(1), 43(1)
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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH
Before: Dr. BRR Kumar & Ms. Suchitra Kamble
आदेश/ORDER
Per Suchitra Kamble, Judicial Member:
These two appeals are filed against the order dated 06- 09-2022 passed by National Faceless Appeal Centre (NFAC), Delhi for assessment years 2017-18 & 2018-19.
& 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 “1. Whether the Ld.CIT (A) has erred in law and on facts in allowing the claim of depreciation of Rs.17,67,63,728/-on goodwill which has been acquired by the appellant company during the year under consideration on amalgamation of Micfills Enterprises Pvt. Ltd. with MR Organosys Pvt. Ltd. 7.
Whether the ld. CIT(A) erred in law and on facts in allowing the claim of depreciation on goodwill without actual allocation of the shares to the share holders of the transferor company whose value was considered for calculating the quantum of consideration paid by transferee company during the year under consideration and when the same was not incurred for the purpose of business attracting provisions u/s 37(1).
3. Whether the ld. CIT(A) erred in law and on facts in allowing the claim of depreciation on goodwill considering assessee's claim that he has followed purchase method of AS-14 even though the contours and characteristics suggests that they have followed pooling of interest method where consideration is paid over and above the net assets need to be credited into capital reserve and not as goodwill.
Whether the ld. CIT(A) erred in law and on facts in allowing the claim of goodwill of assessee considering assessee's claim that goodwill was generated during the process of amalgamation is only based on net consideration calculated by transferee company and is over and above the net assets of the transferor company without matching assets or rights constituting the goodwill transferred.
5. Whether the ld. CIT(A) erred in law and on facts in allowing the claim of depreciation on goodwill without considering the definition of actual cost of the assets to the assessee in case of amalgamation as given in explanation 7 to section 43(1) of the I.T. Act and other provisions related to the amalgamation specially section 2(1B), sixth proviso to section 32(1), section 49(1)(iii)(e) explanation 2 to section 43(6) and section 55(2).
6. Whether the ld. CIT(A) erred in law and on facts holding that department has not objected during the proceedings before the NCLT, when the scheme of arrangement itself indicates in para (c) ‘treatment of the scheme for the purpose of income Tax Act, 1961' which was duly approved by the Hon'ble NCLT that assessee should adhere to the provisions of Income Tax Act u/s. 2(18) and any terms or provisions of the scheme is/are found or interpreted to be inconsistent with the said provision will stand modified to the extent determined.
7. Whether the Ld CIT(A) has erred in law and on facts in deleting the addition of Rs. 2,57,082/- u/s 36(1)(va) in respect of late payment of employees contribution to Provident Fund/ESI? 2 & 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19
8. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.
It is, therefore, prayed that the order of ld. CIT(A) may be set aside and that of the Assessing Officer be restored.”
1) "Whether the Ld CIT(A) has erred in law and on facts in allowing the claim of depreciation of Rs 13,25,72,796/- on goodwill which has been acquired by the appellant company during the year under consideration on amalgamation of Mcfills Enterprises Pvt. Ltd with MR Organosys Pvt. Ltd. ?" (2) The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. (3) It is, therefore, prayed that the order of ld CIT(A) may be set aside and that of the Assessing Officer be restored.”
The return of income declaring total loss at Rs (-) 2,86,35,640/- was filed by the assessee company on 14.10.2017 vide e-filing acknowledgment number 243911521141017. The return was processed u/s 143(1) of the IT Act, 1961. The case was selected for complete scrutiny and a notice u/s 143(2) dated 29.09.2018 was served to the assessee. Thereafter, notices u/s. 142(1) of the Act along with specific questionnaire on reasons for selection was sent and further, show cause notice was issued on 05.11.2019 which was sent to the assessee. In response to notices issued, the assessee filed reply on various dates. The case was selected for complete scrutiny with one of the reasons of "Amalgamation or Demerger during the year”. In response to the notices issued u/s & 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 143(2) & 142(1), the assessee submitted its reply and filed details.
3.1 During the year under consideration, the assessee was engaged in the business of manufacturing Reactive Dyes. The Assessing Officer observed that during the year under consideration, the assessee has shown addition of intangible asset in the form of Goodwill of Rs. 70,70,54,913/- and claimed depreciation of Rs. 9,59,57,452/- @ 25% on the Goodwill so added in the block of intangible asset in the year under reference. Details were called for by the Assessing Officer to examine whether the claim of the assessee regarding creation of goodwill, its valuation and depreciation thereon is in accordance to provisions of Income Tax Act. The assessee has submitted details. The Assessing Officer after perusal of the balance sheet of assessee company for AY 2017-18, noticed that during the year under consideration, the Hon'ble National Company Law Tribunal (NCLT) vide order dated 06.06.2017, approved the scheme of amalgamation of between MR Organosys P Ltd. ('MROPL or transferee company) and Mcfills Enterprises P Ltd ('MEPL' or Transferor Company). Thereafter the name of MR Organoys P Ltd has been changed to Mcfills Enterprises P. Ltd, with effect from 17.07.2017. As a result of this scheme during the year under consideration the assessee issued 65,00,000 equity shares of Rs 10 each at a premium of Rs. 182/- and 65,000 6% non cumulative redeemable preference shares of Rs. 10/- each and created Share Capital pending Allotment of Rs. 124,86,50,000/-.
& 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 The Assessing Officer noted from the Balance Sheet (Fixed Assets) that during the year under consideration the assessee created goodwill of Rs. 70,70,54,913/- in the books of accounts by virtue of amalgamation of Mcfills Enterprises P Ltd (MEPL or Transferor Company) with MR Organosys P Ltd. ('MROPL or transferee company). The excess consideration discharged by MROPL, over book value of MEPL, was recorded as goodwill in the books of MROPL Transferee Company. The assessee claimed depreciation of Rs 9,59,57,452/- 25% on the goodwill so created as per Companies Act as evident in schedule of fixed assets.
3.2 The Assessing Officer observed that MR Organosys P. Ltd was earlier known as MR Soni Jewellers P. Ltd. and the name has been changed on 09.08.2016. The fact emerged out from 'the certificate of Incorporation pursuant to change of name' as submitted by assessee. The appointed date of scheme of amalgamation between MROPL and MEPL is 01.04.2016. Therefore, the Assessing Officer observed that before the appointed date of scheme of amalgamation, the company in existence was MR Soni Jewellers P. Ltd instead of MR Organosys P. Ltd. The MEPL was engaged in manufacturing of Reactive Dyes while MR Soni Jewellers P Ltd whose name was later on changed to MR Organosys P. Ltd was engaged in jewellery business. Further, MR Organosys P. Ltd had no operations in the field of Reactive Dyes. The MROPL is a company of meagre worth and doesn't have any operations at that point. This fact was mentioned in Para no. 6 of valuation certificate submitted & 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 by assessee. The relevant lines is "Management of MROPL intends to engage in the business of manufacturing and trading of dyes and chemicals. However, the company has not started significant business operations at present". Intangible assets and or goodwill in the books of both amalgamating and amalgamated company before and after amalgamation is as under:
Goodwill MEPL MROPL As on 01-04-2016 0 0 As on 31-03-2017 Not in existence 70,70,54,913/- (i.e. after the appointed date of amalgamation)
The scheme of amalgamation was approved by the Hon'ble National Company Law Tribunal (NCLT) vide order dated 06.06.2017 with appointed date as 01.04 2016. Immediately thereafter, the name of the company was converted from MR Organosys P Ltd to Mcfills Enterprises P Ltd. There is no major business operations done by MR Organosys P. Ltd as mentioned in assessee's submission dated 12.09.2019 in point no.2(b). There are no Brands owned or managed by MR Organosys P Ltd as mentioned in assessee's submission dated 12.09.2019 in point no.2(d). The amalgamation did not involve any cash payout at all. The shares were issued at a huge premium and share capital/net worth raised by way of series of accounting entries.
& 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 3.3 The Assessing Officer further held that under the scheme of amalgamation, the amalgamating company i.e. Mcfills Enterprises P. Ltd has valued goodwill of Rs 70,70,54,913/- in the books of accounts and depreciation @25% amounting to Rs 9,59,57,452/- was claimed by the successor/ amalgamated company (MR Organosys P Ltd.) As per 5th proviso to section 32(1) of the Income-tax Act the depreciation allowable in case of amalgamation shall not exceed the depreciation allowable had amalgamation would not have taken place. In other words, the allowance of depreciation to the successor/ amalgamated company in the year of amalgamation shall be on WDV of assets in books of amalgamating company and not on value recorded in the books of amalgamated company. Besides 'actual cost' for capital assets transferred by amalgamating company to amalgamated company, by virtue of Explanation 3 to section 43(1) shall be taken to be the same as it would have been of the amalgamating company had continued to hold the capital asset for the purposes of its own business. Similarly, WDV for capital assets transferred by amalgamating company to amalgamated company, by virtue of Explanation 2 to section 43(6) shall be the written down value of the block of assets as in the case of the transferor/ 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.
& 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 3.4 In the instant case, the Assessing Officer held that the intangible assets which were owned/held by the amalgamating company, prior to amalgamation at NIL cost, has to be taken at NIL cost only, in the hands of the amalgamated company. For taxation purposes, the value cannot be enhanced and depreciation cannot be allowed. If capitalization of goodwill as done in the books of the assessee and depreciation is allowed on this amount as claimed by the assessee, then Explanation (2) to Section 43(6) would be redundant. It is settled proposition of law that no words used in the statue are superfluous.
3.5 The assessee has submitted before the Assessing Officer that valuation was carried out by a firm of professional Chartered Accountant and was approved by the board of Director Making a valuation does not entitle assessee's claim acceptable. The claim of depreciation should be acceptable in the eyes of provisions of Law. There is no asset in the books of amalgamating company no such assets was utilised in the business prior to claim. The primary conditions are not fulfilled by the assessee to claim depreciation. The valuation of M R Organosys P Ltd was done on the basis of assets. NO future projection has been made strangely. More peculiar is that Mcfills Enterprise P Ltd amalgated with MR Organosys P. Ltd after getting approval from NCLT and soon after that it changed its name to Mcfills Enterprise P Ltd. These type of arrangement shows that the purpose of amalgamation was to avoid income tax. Tax planning is always acceptable but this type & 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 of tax avoidance is not healthy practice for economic growth of Nation. Given this scenario, the credibility of entire valuation report is questionable. Thus, even on facts it can be seen that the valuation report has several contradictions, discrepancies, and is inconsistent. It appears that the same has been prepared only to suit the interests of assessee to claim depreciation on goodwill. Thus huge amount of valuation of Goodwill is not justified.
3.6 The Assessing Officer held that by creating good-will of Rs. 70,70,54,913/- and thereafter claiming depreciation on the same in this year and subsequent years, assessee has reduced taxability on profit of Rs. 70,70,54,913/- and thereby evading total tax of Rs. 70 cr. (approx). The Assessing Officer further held that by way of tax avoidance exercise, a high value tax evasion is happened in this case by way of claiming excess depreciation. It is a new and sophisticated device to avoid tax by creating a paper company and subsequently transfer the well established existing business to it and not only create a huge amount as goodwill in its books of accounts but also claims 25% depreciation on it. If each and every company follows this mode of operation so that no one needs to pay any tax to the exchequer. In view of the above factual and legal position, the claim of deprecation on Goodwill of Rs. 17,67,63,728/- was disallowed under u/s 32(1) r.w.s. 43(1) r.w.s. 43(6)(c) r.w.s 49(1)(iii)(e) r.w.s. 55(2)(a) (ii) of the IT Act, 1961 by the Assessing Officer and clarified that depreciation on goodwill is not allowable in future years also.
& 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19
4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) allowed the appeal of the assessee.
The ld. D.R. submitted that this is a case where the assessee/amalgamating company did not have goodwill in its books of account as on date of acquisition by the assessee company. There was no valuation of goodwill for working out of the purchase consideration to be paid by the assessee to amalgamating company. In other words, the purchase consideration paid by the assessee did not factor the value of goodwill. This also shows that no consideration or specific amount was paid by the assessee to amalgamating company in respect of goodwill. The value claimed of amount attributed by the assessee to goodwill has no support as the above quantification was not based on any of recognized method prescribed by the ICAI or any accounting standard or valued by any expert or valuer. The ld. D.R. further submitted that there is no adjudication by the Hon’ble Apex Court in case of Smifs Securities Ltd. 348 ITR 302 on the issue of excess consideration over the value of net assets acquired during amalgamation to be treated as goodwill in the hands of the amalgamating company. Rule of sub-silentio applies as particular point of law involved in the decision is neither perceived by the Court nor present to its mind. The ld. D.R. further submitted that the applicability of 6th proviso to section 32(1) of the Income Tax Act, Explanation 7 to section 43, section 49(1)(iii)(e), Explanation & 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 2(b) to section 43(6)(c) and section 55(2)(a)(ii) of the Act to the present case. The ld. D.R. relied upon the decision of the Tribunal in case of United Brewery Ltd. vs. ACIT (2016) 76 taxmann.com 103 (Bangalore Tribunal). The ld. D.R. also relied upon the decision of the Tribunal in case of Millennium Engineers & Contractors Ltd. in order dated 30th October, 2023. The ld. D.R. also relied upon following decision of the Tribunal:
(a) M/s. Dosti Realty Ltd. in order dated 13- 04-2023 (b) Pfizer Ltd. in ITA 2108/Mum/2018 order dated 22-09-2023 (c) Borkar Packing Pvt. Ltd. vs. ACIT (2010) 131 TTJ 99 (Panji)
The ld. A.R. submitted that the scheme of arrangement was entered into between McFills Enterprises Pvt. Ltd. (transferor company) and MR Organosys Pvt. ltd. (transferee company). As per the said scheme, the transferor company was amalgamated with transferee company w.e.f. 01-04- 2016. Name of a transferee company was changed McFills Enterprises Pvt. Ltd. (i.e. assessee) post amalgamation. Entire consideration was to be discharged by transferee company by issuance of shares. The appointed date was 01-04-2016. The consideration was 1(one) fully paid 6% non-cumulative redeemable preferential shares of Rs. 10 of transferee company for every 100 (hundred) equity shares of transferee company and 1(one) fully paid equity shares of Rs. 10 of transferee company for every 1(one) equity share of transferee company. The ld. A.R. further submitted that all the assets and liabilities of the transferee company was 11 & 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 recorded by the transferee company by following Accounting Standard -14 as per clause 9.1 and clause 9.5. The difference i.e. excess or deficit of the deposit between the net value of assets over aggregate face value and premium of equity shares and face value of 6% non-redeemable preference shares by the transferee company to the share holders of the transferee company pursuant to this claim and after giving effect to clause 9.4 was adjusted to the capital reserve or goodwill. The aforesaid claim of arrangement has been duly approved by the competent authority i.e. National Company Law Tribunal vide order dated 06-06-2017. The valuation report in relation to shares of transferee company was duly obtained as per which value of shares of transferee company was determined at Rs. 192/- per share and the total consideration of shares of transferee company prior to amalgamation was 65,00,000/-. Thus, assessee company i.e. transferee company issued 65,00,000 equity shares of Rs. 10 each at premium of Rs. 182/- i.e. consideration of Rs. 1,24,80,00,000/- (65,00,000 x 192) and 65,000 non-redeemable preference shares of Rs. 10 each i.e. consideration of Rs. 6,50,000/-. Thus, total consideration was quantified at Rs. 124,86,50,000/- paid by transferee company i.e. assessee to the transferor company. Value of net assets of transferee company aggregate to the sum of Rs. 54,15,95,087/-. Accordingly, difference between net assets and total consideration was Rs. 70,70,54,913/- which was accounted for in the books of the assessee as goodwill. During the year under consideration, the assessee claimed depreciation of Rs. 17,67,63,728/- on the above & 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 referred good arising consequent to amalgamation. The Assessing Officer disallowed the same which was later on deleted by the CIT(A). The ld. A.R. submitted that the claim of depreciation on goodwill arising consequent to the claim of amalgamation duly approved by the competent authority being NCLT is allowable in the facts and circumstances of this case as well as in view of the settled legal position. The ld. A.R. relied upon the following decisions:-
(i) CIT vs. Smifs Securities Ltd. -(2012) 348 ITR 302 (SC); (ii) PCIT vs. Zydus Wellness Ltd.-(2017) 87 taxmann.com 82 (Guj); (iii) PCIT vs. Zydus Wellness Ltd. -SLP 29859 of 2018 (SC); (iv) Urmin Marketing P. Ltd. -(2020) 122 taxmann.com 40 (Ahd); (v) AIA Engineering Ltd. vs. DCIT-ITA 397/Ahd/2024 & (vi) Dow Chemical International P. Ltd. -169 taxmann.com 290 (Mum)
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the Assessing Officer has totally ignored the decision of Hon’ble Apex Court/NCLT which categorically approved the scheme of amalgamation/scheme of arrangement at which point the Revenue/A.O. has not objected the valuation report regarding the difference between the net acquisition of assets and total consideration. The same was recorded as goodwill by the assessee at the said point of time through valuation report. Looking into the decision of Hon’ble Apex Court in case of CIT vs. Smifs Securities Ltd. 348 ITR 302 in case of amalgamation if consideration paid by amalgamated company to the amalgamating company is more than the & 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 net assets acquired by it, then the differential amount shall be treated as goodwill and the amalgamated company shall be eligible for claim of depreciation on such goodwill. Thus, following the decision of Hon’ble Apex Court supra the CIT(A) has rightly allowed the depreciation on goodwill. There is no need to interfere with the findings of the CIT(A) and hence the ground nos. 1 to 6 of the Revenue’s appeal is dismissed.
As regards ground no. 7, the same is covered by the decision of Hon’ble Apex Court in case of Checkmate Services Pvt. Ltd. vs. CIT 448 ITR 518 against the assessee. Hence the same is allowed. Thus, ground no. 7 is allowed.
As regards ITA 402/Ahd/2022 filed by the Revenue in respect of assessment year 2018-19, there is only one ground which is identical to the ground nos. 1 to 6 of . Hence the said ground no. 1 is dismissed. Thus, is dismissed.
Order pronounced in the open court on 04-07-2025 Sd/- Sd/- (Dr. BRR Kumar) (Suchitra Kamble) Vice President Judicial Member 14 & 402/Ahd/2022 McFills Enterprises Pvt. Ltd., A.Y. 2017-18 & 2018-19 Ahmedabad : Dated 04/07/2025 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद