UNITED BREWERIES LTD.,,BANGALORE vs. ADDL..C.I.T., BANGALORE

O R D E R P e r B e n c h :

Cross appeals for the Assessment Year 2007-08 are directed against the order dt.21.3.2014 of Commissioner of Income Tax (Appeals)

2008-09 & 2009-10 against the respective orders of the CIT (Appeals) both dt.27.5.2014.

Assessment Year 2008-09 & 2009-10. The grounds raised for the Assessment Year 2008-09 in the appeal filed by the assessee are as under :

Rule 8D of Income Tax Rules. For the Assessment Year 2007-08, the CIT (Appeals) has deleted disallowance on the ground that the borrowed fund has been utilized by the assessee for the business purpose and therefore the assessee has not used the borrowed fund for the purpose of investment in question. The CIT (Appeals) has also relied upon the order passed on the investment issue of disallowance under Section 14A for the Assessment Year 2006-07.

He has further submitted that for the Assessment Year 2006-07, the Tribunal has set aside the order of the CIT (Appeals) vide order dt.24.11.2014 and remitted the issue to the record of the Assessing Officer for reconsideration of the issue without applying Rule 8D.

Therefore no disallowance is called for under Section 14A on account of interest expenditure. As regards the disallowance on account of administrative expenses, the ld. AR has submitted that when there is no dividend for the Assessment Years 2007-08 & 2008-09 and in view of the judgment of Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT 378 ITR 33, no disallowance can be made under Section 14A of the Act. He has submitted that this Tribunal by following the judgment of Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (supra) has taken a similar view. He has relied upon the following decisions : i) Amita Verma Vs. ACIT – ITAT Delhi – to 1149 & 1275/Del/2013 Dt.27.4.2016. ii) Kingfisher Finvest India Ltd. Vs. Addl. CIT – ITAT, Bangalore – ITA No.1368/Bang/2012 Dt.17.10.2014. iii) Alliance Infrstructure Projects Pvt. Ltd. Vs. DCIT – ITAT, Bangalore – ITA Nos.220 & 1043/Bang/2013 Dt.12.09.2014. record, we note that there is no fresh investment during the assessment year under consideration except Rs.50,000. Therefore the issue of disallowance under Section 14A on account of interest expenditure is dependent on the finding on this issue for the Assessment Year 2006-07.

The Tribunal in assessee's own case for the Assessment Year 2006-07 has remitted this issue in & 85/Bang/2014 vide order dt.24.11.2014 in paras 6 & 7 as under :

“ 6. With the assistance of the learned representatives, We have duly considered the rival contentions and gone through the record carefully. The Hon'ble Delhi High Court in the case of Maxopp Investments Ltd (Supra) has held that Rule 8D is applicable from assessment year 2008-09, that does not mean that prior to the introduction of this Rule, no amount can be considered as incurred for the purpose of earning tax free income. The disallowance has to be made, first examining the accounts of the assessee and if the Assessing Officer is satisfied that the accounts do not depict true picture, then he can work out the disallowance on the basis of a reasonable and acceptable method of apportionment. The learned CIT (A) ought to have not deleted the disallowance in Toto, rather ought to have examined whether any disallowance is possible or not. In other words, she should have examined whether any expenditure attributable to earning exempt income can be identified for disallowance u/s 14A of the Act. She has simply observed that Rule 8D is not applicable, therefore, addition by the Assessing Officer is deleted. The observations of the Hon'ble Delhi High Court in the case of Maxopp Investments Ltd. Vs CIT reported in 347 ITR 272 (Del.) is worth to note, it read as under:

“How is Section 14A to be worked for the period prior to the introduction of Rule 8D?

The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A.

So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section14A (1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment”.

There is no quarrel on the point that Rule 8D is applicable only from the Assessment Year 2008-09 onwards and therefore the same is not retrospective and not applicable for the year under consideration. Hence in view of the order of this Tribunal for the Assessment Year 2007-08, the issue of disallowance under Section 14A is set aside to the record of the Assessing Officer with the similar direction.

11 801, 1065 & 1066/Bang/2014 Description 2007-08 (Rs.) 2008-09 2009-10 (Rs.) (Rs.) 14A disallowance 18,143,882 31,704,922 100,568,338 under Rule 8D(2)(ii) & (iii) Own Funds 5,576,353,000 6,112,597,000 10,815,479,000 Total Investments 590,699,000 1,040,709,000 1,940,957,000 Investments made 50,000 450,000,000 900,258,000 during the year Investments made -- 450,000,000 -- during the year for acquiring controlling interest / strategic purpose Investments in Mutual -- -- 900,258,000 Funds during the year Investments from 590,699,000 1,040,709,000 1,940,957,000 which no dividend has been received Total Dividend -- -- 4,89,53,951 from mutual funds Exempt Dividend -- -- 48,953,951

Therefore for these two assessment years though there is an increase in the investment as the assessee made fresh investment however the corresponding increase in the assessee's own fund is much more than the amount of investment made during these two assessment years.

Accordingly, we are of the view that so far as fresh investment is concerned the assessee’s own fund is more than sufficient to cover them and therefore to that extent no disallowance is called for under Section 14A on account of interest expenditure. As records the old investment which was made prior to the Assessment Year 2007-08, the issue has a direct bearing of the finding and final outcome on this issue for the Assessment Year 2006-07. Since the said issue is also set aside to the record of the Assessing Officer therefore the issue of disallowance of interest expenditure under Section 14A of the Act to the extent of old investment is set aside to the record of the Assessing Officer with same dividend income for the Assessment Year 2009-10 therefore the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (supra) was not applicable for the Assessment Year 2008-09 regarding disallowance of administrative expenditure being 0.5% of the average investment. The ld. AR of the assessee has submitted that the investment for the purpose of disallowance of administrative expenditure should be considered only on which the assessee has earned dividend from mutual funds. Thus the ld. AR has submitted that only Rs.90 Crores and Rs.2,58,000 can be considered as investment for the purpose of disallowance as per Rule 8D(2)(iii). Accordingly, we direct the Assessing Officer to recompute the disallowance as per Rule 8D(2)(iii) by considering the investment in mutual funds which has yielded dividend income.

During the previous year relevant to assessment year under Distillery Ltd. (KBDL), London Draft Pubs Pvt. Ltd. (LDPPL) and London Pillsner Breweries Pvt. Ltd. (LPBPL) were amalgamated with the assessee. The assessee claimed depreciation of Rs.15,57,54,392 on goodwill of Rs.62,30,17,566. Thus goodwill was shown as a result of merger / amalgamation of KBDL. Therefore this dispute is confined only with respect to the valuation of the assets recorded by the assessee in its books post amalgamation which were taken from KBDL. The Assessing Officer asked the assessee to explain how this goodwill came to be added to the fixed assets. It was explained that goodwill arose on account of acquiring KBDL for a purchase consideration exceeding fair value of tangible assets and other net current assets from that company. KBDL became a wholly owned subsidiary of the assessee in the preceding year by virtue of acquisition of shares of the said company from shareholders for a consideration of Rs.180.52 Crores. During the year under consideration KBDL got amalgamated with the assessee as per the order of the Hon'ble High Court. Consequently all assets and liabilities as on 1.4.2006 were taken over into account for the tax purpose by the entering the tangible assets i.e. land, building and plant and machinery in its books the Fair Market Value (FMV) as on that date one entered. The assessee has also produced the valuation report of the valuer who has computed the FMV of the tangible assets on the basis of replacement method and after reducing the depreciation from the replacement price, the FMV has been arrived by the valuer Sri A. V. Sethi & Associates. Thus the difference between the fair value and consideration was shown as goodwill. The Assessing Officer did not accept the contention of the assessee and observed that the instead of fair value of asset based on the replacement value of the asset adopted in the valuation report the Fair Market Value (FMV) of assets should have been adopted in the books of accounts and consequently the valuation of the goodwill would be reduced by Rs.24.48 Crores. The Assessing Officer has also observed that on the land valuation, the valuer has adopted the guidance rate without considering the sale incidents of comparable land. Thus the Assessing Officer observed that if the replacement of cost of building, plant and machinery and higher value of land is taken to the books, there differential amount being shown as goodwill cannot be considered as amount paid for brewing license as the assessee has not got the valuation of the license. Accordingly, the Assessing Officer has disallowed the depreciation on the goodwill on the ground that there is no goodwill if proper valuation is assigned to the tangible asset and land.

On appeal, the CIT (Appeals) has concurred with the decision of the Assessing Officer by considering the fact that the value of the goodwill in the books of the KBDL is only Rs.7.45 Crores which has been shown by the assessee at Rs.62.30 Crores. The CIT (Appeals) was of the view that when the financial results of the KBDL shows that there was a profit of Rs.2.14 Crores for the Assessment Year 2004-05 and loss of Rs.1.89 Crores for the Assessment Year 2005-06 then the assessee has failed to justify the valuation of goodwill estimated at Rs.62.30 Crores with reference to the average profit. Thus the CIT (Appeals) held that there is no justification for adopting the balance figure of excess consideration over the net asset without admitting to support the said valuation. depreciation on goodwill is concerned, the same is covered by the judgment of Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. 252 CTR 233 (SC). He has further submitted that valuation of goodwill is nothing but the differential figure between the consideration and the FMV of the tangible asset and therefore the claim of depreciation cannot be denied on the ground that there is no goodwill and the assessee has failed to show the justification for excess consideration excluding the value of tangible assets. He has referred to the valuation report and submitted that valuer has adopted the replacement cost method and after allowing the depreciation for a period during which the assets were already under use, the FMV has been arrived. In support of his contention he has relied upon the judgment of Hon'ble Bombay High Court in the case of Chowgule & Co.

Pvt. Ltd. Vs. Addl. CIT (2016) 95 CCH 0021 (Mum HC) as well as the decision of the Hyderabad Bench of the Tribunal in the case of A.P. Paper Mills Ltd. Vs. ACIT Dt.4.11.2009 in ITA No.218/Hyd/2006. Thus the ld.AR has submitted that when the assessee has produced the valuation report the Assessing Officer the rejection of the valuation report is not justified.

He has further submitted that the Assessing Officer has not determined the correct valuation if the valuation report produced by the assessee was doubted or found to be incorrect. The Assessing Officer has assigned more value to the tangible asset which means the depreciation on the tangible asset has been accepted on the higher valuation. The method adopted by the value is well accepted method of valuation and therefore without giving any valuation by the Assessing Officer the claim of depreciation cannot be rejected only by doubting the valuation of the assessee.

He has referred to the assessment order and submitted that the Assessing Officer has considered the said proviso while disallowing the claim of depreciation. The CIT (Appeals) has confirmed the action of the Assessing Officer and therefore the claim of depreciation is not allowable as per the 5th proviso to Section 13(2)(i) of the Act. The ld. DR has also referred to the Expln. 3 to Section 43(1) and submitted that the Assessing Officer has the power to examine the valuation of the assets acquired by the assessee if these assets were already in use for business purpose and if the Assessing Officer is satisfied that the main purpose of transfer of such assets was the reduction of the liability to Income-tax then the actual cost of the asset to the assessee shall be such an amount as the Assessing Officer determines. Therefore the Assessing Officer has rightly determined the valuation of the goodwill at NIL and the assessee has failed to substantiate the valuation of the goodwill. The ld. DR has relied upon the orders of the authorities below. the assets are introduced in the books of the assessee being the balancing figure of excess consideration over the value of the tangible assets then 5th proviso to Section 32(1) is not applicable. He has further submitted that in all the cases before the Hon'ble Supreme Court as well as Hon'ble High Courts, the revenue has not raised this objection of restricting the claim of depreciation by applying 5th proviso to Section 32(1) of the Act. Therefore the revenue cannot raise this objection when it was not raised in the other cases before the Hon'ble Supreme Court and Hon'ble High Courts.

The Assessing Officer has not accepted the claim of depreciation on assets in pursuant to the amalgamation of its subsidiary with the assessee and therefore as per the Assessing Officer the goodwill was not at all in existence. It is pertinent to note that the Assessing Officer has the jurisdiction and power to examine the valuation of the assets as per Expln.3 to Section 43(1) of the Act which reads as under:

“43 (1) ….. Explanation 1 - …….. Explanation 2 - …….. Explanation 3.—Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case.”

As it is clear from the Expln.3 to Section 43(1) that if the Assessing Officer is satisfied that the main purpose of the transfer of such assets was the reduction of liability to income tax by claiming depreciation on the enhanced cost then the actual cost to the assessee shall be determined by the Assessing Officer. In the case on hand, since there is an amalgamation of the subsidiary with the assessee therefore all the assets which came to the assessee are already in use by the subsidiary and verification of the Assessing Officer as per Expl.3 of Section 43(1) of the Act. However, the Assessing Officer chose to examine the valuation of goodwill alone in order to disallow the claim of depreciation on the enhanced value of goodwill. We find that the Assessing Officer has not adopted any prescribed or well accepted method for valuation or actual cost of the goodwill in the hands of the assessee but he has doubted the valuation of the tangible assets and was of the view that the assessee has deflated the valuation of the tangible assets by the method of cost of replacement instead of FMV. The scope and objective of the Expl.3 of Section 43(1) of the Act is to check the excess claim of depreciation by enhancing cost of assets acquired which were already in use by other person. Therefore in case of valuation of goodwill the Assessing Officer ought to have examined the valuation of all the assets taken over by the assessee under the amalgamation and thereby to determine the actual cost to the assessee for the purpose of claim of depreciation. In this case there is no doubt that the value of the goodwill was shown in the books of the KBDL at Rs.7.45 Crores which has been enhanced in the books of contended that the valuation of the goodwill is nothing but only the differential value between the consideration and FMV of the tangible assets. Thus the ld. AR has contended that Assessing Officer cannot disturb the valuation of the goodwill when it is a differential amount between the consideration and the FMV of the tangible assets. If such claim of goodwill and depreciation is allowed then it would render the provisions of Expln. 3 to Section 43(1) of the Act redundant, otherwise in every case of transfer, succession or amalgamation the party would claim excessive depreciation by assigning arbitrary value to the goodwill.

Therefore the entire assets taken over by the assessee under the amalgamation are subjected to the Expl.3 of Section 43(1) of the Act and if the Assessing Officer finds that the assessee has claimed excess claim of depreciation by enhancing the cost of goodwill then actual cost of goodwill can be determined only by considering the actual cost of the other assets so acquired under amalgamation.

“ Section 32. (1) In respect of depreciation of— (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, 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— (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) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: ........... ........... Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 25 801, 1065 & 1066/Bang/2014 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.”

This proviso provides that depreciation allowable in the case of succession, amalgamation or merger, demerger should not exceed the depreciation allowable had the succession not taken place. In other words, the allowance of depreciation to the successor / amalgamated company in the year of amalgamation would be on the written down value of the assets in the books of the amalgamating company and not on the cost as recorded in the books of amalgamated company. The case of amalgamation is not regarded as transfer for the purpose of capital gain as provided under Section 47(vi) of the Act and therefore such cases are exempted from capital gain which is otherwise chargeable to tax on transfer of assets. In the case on hand the business of the subsidiary was transferred to the assessee by way of amalgamation therefore it would not be regarded as transfer of asset for the purpose of capital gain. scheme of amalgamation is restricted only to the extent if such amalgamation has not taken place. The Assessing Officer made a reference to 5th proviso to Section 32 in para 5.7 as under :

“ 5.7 As highlighted above, the company paid Rs.180.52 Crores in the preceding year as consideration for acquiring shares of KBDL from original owners and thereby KBDL became a subsidiary last year. Thus, the consideration paid is for shares but not for individual assets. IN this year, KBDL which had earlier become subsidiary got amalgamated with the assessee company. As per 5th proviso under section 32(1)(ii), the aggregate deduction in respect of depreciation on any tangible or intangible assets allowable to amalgamating company and the amalgamated company shall not exceed the deduction calculated at the prescribed rates as if the amalgamation had not taken place and such deduction shall be apportioned between these companies in the ratio of period of usage of assets. In view of this explanation, KBDL was not claiming any goodwill as an asset eligible for depreciation. If amalgamation is not considered, there would not be any deduction of depreciation on goodwill. Therefore, under this provision also, the assessee is not eligible for depreciation on goodwill.”

However the Assessing Officer has proceeded to hold the value of the goodwill as shown by the assessee is not justified. It is pertinent to note that once the claim of depreciation is restricted under the 5th proviso to section 32(1)(ii) then the valuation issue become irrelevant. The CIT (Appeals) has also concurred with the view of the Assessing Officer para 5.4 as under :

“ 5.4 It is also highlighted both in the assessment order and remand report that no depreciation on goodwill was claimed by KBDL before amalgamation. Therefore, as per the 5th proviso to Section 32(1)(ii), the appellant is not entitled to depreciation. This is a valid and relevant argument and appellant has not offered any rebuttal to this contention of the A.O.”

It is not the case of the assessee that the subsidiary has claimed any depreciation of goodwill. Therefore by virtue of 5th proviso to Section 32(1), the depreciation on the hands of the assessee is allowable only to the extent if such succession has not taken place. Therefore the assessee being amalgamated company cannot claim or be allowed depreciation on the assets acquired in the scheme of amalgamation more than the depreciation is allowable to the amalgamating company. As regards the decision of Hon'ble Supreme Court in the case of CIT Vs. Smiff Securities Ltd. (2012) 348 ITR 302, the said ruling of the Hon'ble Supreme Court is only on the point whether the goodwill falls in the category of intangible assets or any other business or commercial rights of similar nature as per the provisions of section 32(1) of the Act. Therefore there is no quarrel on the issue that goodwill is eligible for depreciation. However the said 32(1) of the Act which restricts the claim in the cases specified thereunder. The consideration paid by the assessee for acquiring the shareholding of the subsidiary in the earlier years is not relevant for the issue of depreciation on the assets taken under amalgamation and for the purpose of 5th proviso to Section 32(1) of the Act. Accordingly, in view of the above facts and circumstances of the case as well as the above discussion, we hold that the claim of depreciation in the hands of the assessee is subjected to the 5th proviso to Section 32(1) of the Act.

Accordingly, this issue is decided against the assessee.

Order pronounced in the open court on 30th Sept.,2016.