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

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘ C ’

BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER

I.T. A. No.722, 801 & 1065/Bang/2014 (Assessment Years : 2007-08 to 2009-10)

ITA No. Asst. Year Appellant Respondent 722/Bang/2014 2007-08 United Breweries Ltd. Addl. Commissioner UB Tower,UB City, 24, of Income Tax, Vittal Mallya Road, Range-12, Bangalore. Bangalore. PAN AAACU 6053C 801/Bang/2014 2007-08 Dy. Commissioner of Income United Breweries Ltd., Tax, Bangalore. Circle 12(5), Bangalore. 1065/Bang/2014 2008-09 United Breweries Ltd., D.C.I.T., Bangalore. Circle 12(5), Bangalore. 1066/Bang/2014 2009-10 United Breweries Ltd., Joint Comissioner of Bangalore. Income Tax, OSD, Circle 12(5), Bangalore.

Assessee By : Shri K.R. Pradeep, C.A. Respondent By : Shri Sanjay Kumar, CIT-III (D.R)

Date of Hearing : 15.9.2016. Date of Pronouncement : 30.9.2016.

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)

2 ITA Nos.722, 801, 1065 & 1066/Bang/2014 whereas the assessee has also filed the appeals for the Assessment Years

2008-09 & 2009-10 against the respective orders of the CIT (Appeals)

both dt.27.5.2014.

raised the following grounds :

3 ITA Nos.722, 801, 1065 & 1066/Bang/2014 3. This issue is also common in the assessee's appeal for the

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 :

4 ITA Nos.722, 801, 1065 & 1066/Bang/2014

under Section 14A of the Income Tax Act, 1961 (in short 'the Act') r.w.

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.

learned Departmental Representative and considered the relevant

material on record. The ld. DR has submitted that the CIT (Appeals) has

not examined the direct nexus of assessee's own fund and investment

5 ITA Nos.722, 801, 1065 & 1066/Bang/2014 made in this year and therefore the finding of the CIT (Appeals) is based

on the presumption that the borrowed fund has been utilized by the

assessee for the business purpose and not for the purpose of investment.

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.

submitted that the assessee's own fund is more than sufficient for the

investment in question. He has referred the details of the assessee's

own fund and investment for all these assessment years and submitted

that once the assessee's fund is more than the amount of investment

then no disallowance can be made under Section 14A on account of

interest. He has further pointed out that for the assessment years

2007-08 & 2008-09, the assessee has not received any dividend income

and therefore when there is no tax free income then no disallowance can

be made under Section 14A of the Act. The learned Authorised

Representative has further contended that for the Assessment Year

6 ITA Nos.722, 801, 1065 & 1066/Bang/2014 2007-08, the total investment as on 31.3.2007 was Rs.59,06,99,000

whereas the assessee's own fund was Rs.557,63,53,000. He has further

pointed out that the said investment was made in the earlier year and

there is no fresh investment during the Assessment Year 2007-08.

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 – ITA Nos.1145 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.

7 ITA Nos.722, 801, 1065 & 1066/Bang/2014 7. Having considered the rival submissions and relevant material on

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 ITA Nos.84 & 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?

8 ITA Nos.722, 801, 1065 & 1066/Bang/2014 prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method.

“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”.

9 ITA Nos.722, 801, 1065 & 1066/Bang/2014

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.

the Assessing Officer has to consider the objections of the assessee in the

light of decision of the Hon'ble Delhi High Court in the case of

Cheminvest Ltd. Vs. CIT (supra).

and therefore the question arises whether for the Assessment Year 2008-

09 when the assessee has not received any dividend income the

disallowance on account of interest expenditure can be made under

Section 14A r.w. Rule 8D. It is pertinent to note that the issue is more of

factual in nature and if it is found that the interest bearing fund has been

used by the assessee for the purpose of investment in the share then the

interest expenditure on such borrowed fund is otherwise not allowable

10 ITA Nos.722, 801, 1065 & 1066/Bang/2014 under Section 36(1)(iii) as well as 37 of the IT Act being not laid out

wholly and exclusively for the purpose of business of the assessee. Even

otherwise when there is no dividend income the said interest

expenditure is also not allowable under Section 57 of the Act as the

purpose of taking the loan is not claimed by the assessee for the

investment in shares. Therefore in any case, the interest expenditure on

the borrowed fund which is not utilized for the purpose of assessee’s

business is not an allowable claim. Therefore without going into the

controversy of whether the disallowance can be made under Section 14A

on account of interest expenditure when the assessee has not earned

any dividend income we would like to deal with the issue on the point

that whether the assessee was having sufficient fund for making the

investment in the shares and mutual funds. The assessee has filed the

following details of investments and its own funds as well as the dividend

income :

11 ITA Nos.722, 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

year the issue is common for the assessment year 2006-07 and therefore

to that extent it is remitted to the record of the Assessing Officer to

verify and decide as per the directions of the Tribunal. As it is apparent

from the details that for the Assessment Year 2008-09, there is a fresh

12 ITA Nos.722, 801, 1065 & 1066/Bang/2014 investment of Rs.45 Crores whereas there is an increase in the assessee's

own fund of more than about Rs.45 Crores. Similarly, for the A.Y. 2009-

10, there is increase in the investment of Rs.90 Crores whereas there is

an increase in the assessee's own fund of about Rs.400 Crores.

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

13 ITA Nos.722, 801, 1065 & 1066/Bang/2014 direction as given for the Assessment Year 2006-07. Since there is a

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.

disallowance of claim of depreciation on goodwill as well as valuation of

goodwill. The assessee is in the business of production and sale of Beer.

During the previous year relevant to assessment year under

14 ITA Nos.722, 801, 1065 & 1066/Bang/2014 consideration, the assessee's subsidiaries namely Karnataka Breweries &

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

15 ITA Nos.722, 801, 1065 & 1066/Bang/2014 assessee. The assessee explained before the Assessing Officer that while

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

16 ITA Nos.722, 801, 1065 & 1066/Bang/2014 would not be any goodwill. The Assessing Officer concluded that

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.

17 ITA Nos.722, 801, 1065 & 1066/Bang/2014 12. Before us, the ld. AR of the assessee has submitted that issue of

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

18 ITA Nos.722, 801, 1065 & 1066/Bang/2014 and valued of the tangible asset then without giving the correct value by

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.

Officer has clearly brought on record that there is no justification of the

valuation of the goodwill when the assessee has not acquired any

intangible asset from the KBDL and further the alleged license has not

been valued by the assessee. Therefore, the valuation of the said license

at a value of Rs.62.30 Crores under goodwill is not based on the actual

valuation of the alleged license. He has further contended that even

19 ITA Nos.722, 801, 1065 & 1066/Bang/2014 otherwise the claim of depreciation cannot be allowed in the hand of

the assessee more than the depreciation which would have been allowed in the hand of KBDL as per the 5th proviso to Section 32(1) of the IT Act.

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.

20 ITA Nos.722, 801, 1065 & 1066/Bang/2014 13.1 In a rejoinder the ld. AR of the assessee has submitted that when

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.

material on record. During the year under consideration the assessee

inter alia amalgamated its wholly owned subsidiary KBDL. The assessee

acquired the entire shareholding of the company from the shareholders

for consideration of Rs180.52 Crores. In the books of accounts, the

assessee has recorded the value of the assets on the basis of revaluation

done by the valuer and thereby shown the goodwill at Rs.62.30 Crores.

The Assessing Officer has not accepted the claim of depreciation on

21 ITA Nos.722, 801, 1065 & 1066/Bang/2014 goodwill by holding that the assessee has not acquired any intangible

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

22 ITA Nos.722, 801, 1065 & 1066/Bang/2014 consequently the valuation of all the assets are subjected to the

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

23 ITA Nos.722, 801, 1065 & 1066/Bang/2014 accounts of the assessee to Rs.62.30 Crores. The assessee has forcefully

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.

depreciation on the enhanced cost of goodwill in cases of succession /

24 ITA Nos.722, 801, 1065 & 1066/Bang/2014 amalgamation as it is restricted in the hand of successor or amalgamated

company only to the extent as apportioned between the amalgamating

and amalgamated company in the ratio of number of days for which the

assets used by them. Further the deduction shall be calculated at the

prescribed rate as if the amalgamation has not taken place. For ready

reference, we quote the provisions to section 32(1) as under :

“ 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 ITA Nos.722, 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.

26 ITA Nos.722, 801, 1065 & 1066/Bang/2014 Hence the claim of depreciation on the assets acquired under the

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

27 ITA Nos.722, 801, 1065 & 1066/Bang/2014 regarding the applicability of the 5th proviso to Section 32(1) of the Act in

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

28 ITA Nos.722, 801, 1065 & 1066/Bang/2014 judgment would not over-ride the provisions of 5th proviso to Section

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.

Sd/- Sd/- (S. JAYARAMAN) (VIJAY PAL RAO) Accountant Member Judicial Member

*Reddy gp