MTANDT RENTALS LIMITED,THIRUVALLUR vs. ITO CORPORATE WARD 4(3), CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER

Assessee in this appeal filed against an order dated 23.08.2017 of ld. Commissioner of Income Tax (Appeals)-8, Chennai,

is aggrieved on disallowance of depreciation of �20,94,801/- claimed on goodwill.

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scheme of demerger approved by Hon’ble Jurisdictional High Court on 19th October, 2012 with effective date 1st January, 2012, had hived

off one of its division engaged in rental of equipment, to the assessee

company. M/s.Mtandt Ltd had three segments of business, depicted

hereunder:-

a) Sale of tools, equipments and safety products b) Sale of access machines and equipments; and c) Rental of access equipments (hereinafter referred to as the ‘’Demerged undertaking‘’ or ‘’Rental Division’’ or ‘’Renal Division Undertaking’’)

Through the scheme of demerger, the third segment of business was

transferred to the assessee company. Net worth of the rental division

of M/s. Mtandt ltd as on 31.12.2011 was �11,04,23,771/-, and this

was worked out as under:-

Value of fixed assets �35,75,09,580 Net Currents assets �16,73,67,750

�52,48,77,330 Total Value of assets Less: Liabilities : Secured Loans �20,34,70,533 Unsecured loans �2,53,64,267 Current liabilities �18,56,18,759 ------------------ �41,44,53,559

Net Worth �11,04,23,771

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Net worth of the assessee company as on 31.12.2011 was as under:-

Value of fixed assets �48,15,970 Net Currents assets �2,01,31,353

Total Value of assets �2,49,47,323

Less: Liabilities :

Unsecured loans �1,00,000 Current liabilities �2,38,71,410 ------------------ �2,39,71,410

Net Worth �9,75,313

Assessee company was incorporated with 1 lakh equity 3.

shares of �10/- each. Therefore value per share, as on 31.12.2011 of

the assessee company, came to �9.75 per share. Accordingly, as

consideration for the rental division of M/s.Mtandt Ltd taken over by

the assessee, it had to issue equity shares worth �11,04,23,771/-

@9.75 per share. Number of shares that had to be allotted to

M/s.Mtandt Ltd, on account of merger came to 1,13,25,515

(�11,04,23,770/9.75). Paid up capital of the demerged company

namely M/s. Mtandt Ltd was 12 lakhs shares of �10 each. Hence the

ratio of allotment of the shares to the share holders of M/s. Mtandt Ltd

was 1,13,25,515: 12,00,000. This came to 9.43: 1. In other words the

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assessee company had to issue 9.43 equity shares for every equity

share held by the shareholders M/s. Mtandt Ltd in M/s. Mtandt Ltd.

Since 9.43 had a decimal, assessee company allotted 10 fully paid up

equity shares for each share held by shareholders of M/s. Mtandt Ltd

in M/s. Mtandt Ltd. Thus, the value of the shares allotted came to

�12 Crores, against value of �11,04,23,771/- of the rental division

taken over. Balance sum of �95,76,229/- was treated by the assessee

as goodwill. Depreciation claimed by the assessee on such goodwill

for assessment year 2013-14 was allowed in a proceeding completed

u/s.143(1) of the Act. However claim of depreciation on the written

down value of such goodwill, was disallowed by the ld. Assessing

Officer for the impugned assessment year and such disallowance was

confirmed by the ld. Commissioner of Income Tax (Appeals). Ld.

Commissioner of Income Tax (Appeals) took a view that the value

fixed for rental division and share issue ratio was artificial.

Now before us, ld. Authorised Representative strongly 4.

assailing the orders of the lower authorities submitted that the

depreciation on goodwill was allowable by virtue of judgment of

Hon’ble Apex Court in the case of CIT vs. Smifs Securities Ltd, 348

ITR 302. According to him, there was nothing artificial in the claim of

depreciation. Ld. Counsel submitted that ld. Commissioner of Income

Tax (Appeals) did not correctly construe the judgment of Hon’ble Apex

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Court and had erroneously treated the goodwill accounted by the

assessee in its books as unrealistic and artificial. Submission of the ld.

Authorised Representative was that depreciation was unfairly

disallowed.

supported the orders of the authorities below.

We have considered the rival contentions and perused the 6.

orders of the authorities below. Reason why ld. C IT(A) disallowed the

claim of depreciation appears at para 5 of his order which is

reproduced hereunder:-

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purpose of acquiring he asset should be taken into account to modify the figure of actual cost in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange, irrespective of the date of actual payment in foreign currency.

In CIT Vs Doom Dooma India Ltd. (310 ITR 392) Supreme Court held that the words "depreciation actually allowed" mentioned in sec.43(6) (b) means depreciation actually granted i.e. in tea business only 40% of income is taxed and hence only proportionate depreciation can be treated as allowed which is to be deducted from WDV. Subsequently Expl.7 was inserted below sec. 43(6) by Finance (No.2) Act, 2009 w.ef 01-04.2010 so as to treat the entire depreciation computed as actually allowed. During the year assessee acquired by way of amalgamation the entire business of MPL - MPL did not have asset as goodwill in its balance sheet - High Court in its order merely gave approval to the amalgamation scheme and did not order to pay any specific amount of goodwill·- There was thus no cost of acquisition on account of goodwill to the assessee Mere accounting entries did not give a right to the assessee to claim depreciation on goodwill (intangible asset). Chowgule & Co. P. Ltd. Vs ACIT (ITAT, Panaji) 9 ITR (Trib) 21; 131 IT 545 Assets of firm taken over by assessee company - Assets revalued and depreciation claimed on enhanced value - Not allowed. CIT vs. Poulose and Mathen (Pvt) Lte (Ker) 236 ITR 416. If circumstances exist showing that a fictitious price has been put on the asst or there is collusion between the vendor and assessee and there has been inflation/ deflation of value for ulterior purposes, it is open to ITO to reject and ascertain the actual cost. JCIT Vs Mahindra Sona Lod. (ITA T, Mum) 96 ITD 303, Giizdar Kajora Coal Mines Ltd. Vs CIT (Supreme Court) 85 ITR 599

Depreciation - Actual cost - Conditional subsidy received from Rajasthari Government under the subsidized Housing Scheme for Industrial Workers shall be reduced from the cost u/s 4391) and depreciation to be worked out on the reduced amount Associated Stone Industries Kota Ltd. Vs CIT (Raj) 215 ITR 226 Dissolution of firm- Amount paid by continuing partners to

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retiring partners - Not part of cost of acquisition of asset of old firm for depreciation purpose.

CIT Vs Theatre SriRangaraj (Mad) 260 ITR 453 Assessee company received capital assets from its holding company- WDV to be worked on the basis of Expl.6 to sec.43(1) and sec.47(iv) -Chanqe in shareholdinq subsequently and before the close of the accounting year will not alter this legal position. DCIT Vs NTPC -SAIL Power supply Co. Ltd. 2011 -TIOL- 385-ITAT-DEL’’.

What was held by the Hon’ble Apex Court in the case of Smifs

Securities Ltd (supra) is reproduced hereunder:-

"Whether goodwill is an asset within the meaning of section 32 of the Income-tax Act, 1961, and whether depreciation on 'goodwill' is allowable under the said section ?" Answer 6. 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 the origin of such goodwill was given as under : "In accordance with the scheme of amalgamation of YSN Shares and Securities (P.) Ltd. with Smifs Securities Ltd. (duly sanctioned by the hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares and Securities (P.) Ltd. were transferred to and vest in the company. In the process goodwill has arisen in the books of the company." 7. It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities P. Ltd. (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.

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(a) tangible assets, being buildings, machinery, plant or furniture ;

(b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature :" 10. Explanation 3 states that the expression "asset" shall mean an intangible asset, being know-how, patents, copyrights, trade marks, 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). 11. In the circumstances, we are of the view that "goodwill" is an asset under Explanation 3(b) to section 32(1) of the Act. 12. 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) ("the 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 P. Ltd. 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 the Income-tax Appellate Tribunal ("the ITAT", for short). We see no reason to interfere with the factual finding. 13. One more aspect which needs to be mentioned is that, against the decision of the Income-tax Appellate Tribunal, the Revenue

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had preferred an appeal to the High Court in which it had 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. 14. For the aforestated reasons, we answer question No. (b) also in favour of the assessee.

In our opinion observation of the ld. Commissioner of Income Tax

(Appeals) that goodwill shown by the assessee in its books was an

unreal and artificially inflated one is incorrect. Assessee had worked

out the share swap ratio considering net worth of the rental division

of M/s.Mtandt Ltd transferred to it and divided such net worth with

value of its own share as on 31.12.2011. The valuation of the rental

division was supported by a certificate issued by a competent

Chartered Accountant and Revenue has not placed anything on

record to prove that the valuation was unfair or incorrectly done.

Thus, in our opinion goodwill which came into the books of the

assessee on account of rounding off of the decimal in share swap

ratio was not an artificial one. Issue of equity shares by the assessee

to M/s. Mtandt Ltd was not artificial but real. Even in the case of

Smifs Securities Ltd (supra) considered by Hon’ble Apex Court,

goodwill was result of an scheme of amalgamation which is not much

different from a scheme of demerger. In the circumstances, we are

of the opinion that the lower authorities fell in error in disallowing the

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claim of depreciation. Orders of the lower authorities are set aside. Depreciation claimed by the assessee stands allowed.

In the result, the appeal of the assessee is allowed. 7.

Order pronounced on Wednesday, the 30th day of May, 2018, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन)) (अ�ाहम पी. जॉज�) (N.R.S. GANESAN) (ABRAHAM P. GEORGE) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai �दनांक/Dated:30th May, 2018 KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF