CLASSIC STRIPES P.LTD,MUMBAI vs. DCIT 6(2), MUMBAI

3.2. The ld. CIT(A) confirmed the disallowance of depreciation on goodwill arising in the case of the assessee by observing that the goodwill arose on account of market value of immovable assets which were higher than their book value, whereas, as per the order of the Hon’ble Bombay High Court sanctioning the scheme of merger, goodwill shall be recorded on account of difference on book value on net assets taken over and face value of equity shares issued as allotted. The ld. CIT(A) reproduced 6.1 to 6.3 of the order of the Hon’ble Bombay High Court sanctioning the claim of merger which reads as under:-

" 6.1 CSL shall upon the arrangement becoming effective, record the assets and liabilities of the safety Products Division of FSPL vested in it pursuant to this scheme, at the respective book values, ignoring revaluation, if any as appearing in the books of FSPL at the close of business of the day immediately preceding the Appointed date. 6.2. CSL shall credit to the share Capital Account in its books of account, the aggregate face value of the equity shares of CSL issued and allotted by it to the equity shareholders of FSPL pursuant to this Scheme. 6.3. The different between the book value of net assets of Safety Products Division of FSPL and the face value of equity shares and allotted shall be credited by CSL to the General Reserve Account or debited to the Goodwill Account, as the case may be.”

3.3. The ld. CIT(A) observed that there was no transfer of intangible assets from the Safety Division of Forma Sports Pvt. Ltd. to the assessee. The transfer is of only movable and immovable assets. Further, the Hon’ble High Court’s order is that the assessee shall record the goodwill on account of difference of book value of net assets of Safety Products division of FSPL and face value of equity shares issued and allotted. Further, the assets and liabilities shall be recorded at book value by ignoring revaluation. This clearly indicates that the assessee has to record the goodwill of the basis of book value of the net assets of Safety division of FSPL. This type of goodwill is not approved by the Hon’ble Mumbai High Court in the scheme of arrangement of between these parties. Further, the case laws relied on by the assessee are in the case where goodwill is accounted on account of excess consideration paid by the assessee over the value of net assets acquired. But, in the instant case, the goodwill arose on account of market value of assets acquired from the Safety division of FSPL. With the aforesaid observations, the ld. CIT(A) upheld the action of the ld. AO in disallowing the depreciation claimed on goodwill.

“In the present case, the assessee had claimed deduction of Rs. 54,85,430/- as depreciation on goodwill. In the course of hearing, the explanation regarding origin of such goodwill was given as under: "In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company."

2. It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [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.

3. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 ['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."

4. Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).

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 finding. 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.

4.1. Respectfully following the aforesaid Supreme Court decision, we hold that assessee is entitled for depreciation of Rs.4,56,72,382/- claimed @25% on goodwill valued at Rs.18,26,89,529/-.

4.2. Yet another issue involved in this appeal is that assessee had not claimed its depreciation on goodwill in the return filed by it. However, during the course of assessment proceedings, based on the advice of Tax Consultant and based on the decision of Hon’ble Supreme Court referred to supra, the assessee claimed depreciation on goodwill by way of filing revised computation of income before the ld. AO as the time limit for filing revised return had expired. We find that the ld. AO had ignored the said revised computation by observing that any valid claim could be entertained only if it is claimed in the return of income. We find this action was upheld by the ld. CIT(A). In this regard, we find that the Co- ordinate Bench of Ahmedabad Tribunal had an occasion to address this very same issue in the case of CIT vs Zydus Wellness Ltd., reported in 162 ITD 604 wherein, by placing reliance on the decision of Hon’ble Bombay High Court in the case of CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd., reported in 349 ITR 336, the Tribunal held as under:-

“34. We observe that pursuant to the scheme of arrangement approved by Hon. Gujarat High Court in Asst. Year 2008-09 i.e. Zydus Wellness Ltd. acquired the Consumer Products Division of Cadila Healthcare Ltd. including the Brands 'Sugar-free' and 'Ever Youth' and related intangible assets of the said business, which came to be accounted for as "Goodwill" in the books of accounts of Zydus Wellness Ltd. The value of the said Goodwill, acquired at Rs.28.76 crores, stood duly reflected in the Annual Accounts of the Company for F.Y.2008-09 as the excess of the agreegate face value of the Equity Shares issued over the excess of the Assets and Liabilities. At the time of filing of return income in Asst. Year 2010-11 the issue of claiming of depreciation on goodwill was debatable and uncertain. It was only after the judgment of Hon. Supreme Court in the case of CIT vs. Smiffs Securities Ltd. (supra) wherein Hon. Court had an occasion to deal with the issue of claiming depreciation on goodwill, similar to the case of assessee wherein goodwill was paid on account of amalgamation. Hon. Court held as under :- "Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. "

by the assessee in seeking modification of the order of ' assessment passed by the Income Tax Officer." ' Asst. Year 2010

11. (B) It is clear, therefore, that an assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional claims before them. The appellate authorities have the discretion whether or not to permit such additional claims to be raised. It cannot, however, be said that they have no jurisdiction to consider the same. They have the jurisdiction to entertain the new claim. That they may choose not to exercise their jurisdiction in a given case is another matter. The exercise of discretion is entirely different from the existence of jurisdiction. [Para 11] Further the observation of the Supreme Court in the case of Jute Corpn. of India Ltd. (supra) to the effect 'if the ground so raised could not have been raised at that particular stage when the return was filed or when the : assessment order was made....' or 'that the ground became available on account of change of circumstances or law,' does not curtail the ambit of the jurisdiction of the appellate authorities stipulated earlier. They do not restrict the new/additional grounds that may be taken by the assessee before the appellate authorities to those that were not available when the return was filed or even when the assessment order was made. The appellate authorities, therefore, have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The first part viz., 'if the ground so raised could not have been raised at that particular stage when the return was filed or when the assessment order was made....' clearly relate to cases where the ground was available when the return was filed and the assessment order was made but 'could not have been raised' at this stage. The words are 'could not have been raised' and not 'were not in existence'. Grounds which were not in existence when the return was filed or when the assessment order was made fall within the second category viz., where 'the ground became available on account of change of 'circumstances or law.'[Paras 12 and 13] : It was then submitted by Mr. Gupta that the Supreme Court had taken a different view in Goetze (India) Ltd (supra). We are unable to agree. The decision was rendered by a Bench of two learned Judges and expressly refers to the judgment of the Bench of three learned Judges in National Thermal Power Comp. Ltd. (supra). The question before the Court was whether the appellant-assessee could make a claim for deduction, other than by filing a revised return. After the return was filed, the appellant sought to claim a deduction by way of a letter before the Assessing Officer. The claim, therefore, was not before the appellate authorities. The deduction was disallowed by the Assessing Officer on the ground that there was no provision under the Act to make an amendment in the return of income by modifying an application at the assessment stage without revising the return. The Commissioner of Income-tax (Appeals) allowed the assessee's appeal. The Tribunal, however, allowed the department's appeal. In the Supreme Court, the assessee relied upon the judgment in National Thermal Power Co. Ltd. (supra) contending that it was open to the assessee to raise the points of law even before the Tribunal. The Supreme Court held:- "4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs." (Para 22) It is clear to us that the Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. (Para -: 23)" The Appellant, therefore, prays that in any case, your Honour, as the first appellate authority is empowered to entertain the Appellant's claim for Depreciation on Goodwill, respectfully following the ratio of the Apex Court in the case of Smijfs Securities (supra)."

4.3. Respectfully following the aforesaid decision, the grounds raised by the assessee with regard to claim of depreciation on goodwill are allowed. Needless to mention that the assessee would be entitled for this depreciation year on year on recurring basis on the written down value of each year.

5. The last issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in not allowing depreciation on capital assets purchased and used by the assessee in the facts and circumstances of the case.

5.1. We have heard rival submissions and perused the materials available on record. We find that assessee had made purchase of capital goods amounting to Rs.43,94,251/- from M/s. Deep Enterprises and Mahabir Enterprises. The assessee provided the copies of invoices, delivery challans and bank statements during the course of assessment proceedings. The items purchased were aluminium frames which were regularly required for fixing the screen printing cloth to print the self adhesive films. The ld. AO observed that the aforesaid two suppliers i.e., M/s. Deep Enterprises and M/s. Mahabir Enterprises names appeared in the list of suspicious parties in the website of Sales Tax department of Govt. of Maharashtra classifying them as hawala dealers. The ld. AO sought to make verification of the veracity of those suppliers. For this purpose, he directed the assessee to purchase the parties before him for examination. Since, there was a lapse of three years from the time of transaction that took place between the assessee and those suppliers, the assessee could not produce those parties in person before the ld. AO. The assessee submitted that it had made purchases of capital goods of Rs.14 Crores and consumables of Rs.80 Crores during the year under consideration and it was practically impossible for them to keep track of all the parties from whom the goods were purchased. It was submitted that once the goods are delivered by the concerned suppliers and payments made to them, the assessee cannot be expected to keep track of all the suppliers that too, after a lapse of three years from the date of transaction.

5.2. The assessee submitted that from the bank statement of the assessee which was submitted before the ld. AO, it could be seen that the payments were made to the suppliers by crossed account payee cheques. The assessee also submitted the copy of ledger account of M/s. Deep Enterprises and Mahabir Enterprises as appearing in its books. We find that the aluminium frames that were purchased were duly utilized in the business of the assessee and finished product generated thereon, had been sold and hence, duly reported by the assessee. Hence, there cannot be any dispute on the same. However, the assessee was not able to prove beyond doubt, the suspicion that arose in the minds of the revenue in respect of these parties appearing to be in the negative list of sales tax department of Government of Maharashtra. In these circumstances, it could be safely concluded that assessee could have purchased these capital goods amounting to Rs.43,94,251/- from the grey market in order to save the liability of VAT. Since the items purchased were capital goods, which is not in dispute, hence, we hold that the depreciation attributable to that VAT portion alone should be disallowed in the hands of the assessee. Needless to mention that assessee could be entitled for depreciation on these capital assets on recurring basis year on year on the basis of return down value of each year. Accordingly, grounds raised by the assessee in this regard are partly allowed.

6. In the result, appeal of the assessee is partly allowed.

Order pronounced on 07/08/2020 by way of proper mentioning in the notice board.