PMV MALTINGS PVT LTD,NEW DELHI vs. ACIT CIRCLE-19(2), NEW DELHI

O R D E R PER AMITABH SHUKLA, A.M: These two appeals, preferred by the assessee for assessment year 2015-16and 2016-17, are directed against the orders of Commissioner of Income-Tax (Appeals)-7, New Delhidated 06.02.2019 and 24.06.2019 respectively. Through the aforementioned orders the Ld.First Appellate Authority has confirmed orders of Ld.AO passed u/s 143(3) dated 29.12.2017 and 28.12.2018 for assessment year 2015-16 and 2016-17respectively. Page 1 of 19 & 6906/Del/2019 Thereference to the word “Act” in this order hereinafter shall mean the Income Tax Act, 1961 as amended from time to time. 2.0 Both the appeals are centering around a common ground of denial of assessee’s claim of appreciation on goodwill. Hence, for the purposes of convenience the two appeals were heard and are being adjudicated by this common order.

3.0 The only issue raised through grounds of appeal, in the two appeals, is regarding denial of assessee’s claim of appreciation on goodwill. Briefly put, the assessee had claimed depreciation on goodwill of Rs.3,11,69,515/- and Rs.2,33,77,136/- in assessment year 2015-16 and 2016-17 which was denied by the Ld.AO. As per brief factual matrix of the case, the assessee company is, inter-alia, engaged in the business of manufacturing of malt, malt extract and other barley and other cereal products. During financial year 2013-14, it had acquired malt production units of Malt Company India Pvt Ltd (MCIPL). The impugned company had malt production units at Pataudi (Haryana) and Kashipur(Uttarakhand). In accordance with the scheme of arrangement, reorganization and demerger among MCIPL, appellant and their respective shareholders the said production units together will all rights, benefits, interest therein of MCIPL got vested in the appellant assessee w.e.f. 01.04.2013. This arrangement was approved by Hon’ble Delhi High Court in Page 2 of 19 & 6906/Del/2019 terms of its order dated 05.12.2018. The assessee’s claim for depreciation on the goodwill was rejected by the Ld.AO who made additions of Rs.3,11,69,515/- and Rs.2,33,77,136/- in assessment year 2015-16 and 2016- 17 respectively. The said decision of the Ld.AO was confirmed by the Ld.CIT(A) through its orders mentioned supra which are being contested through the present appeal. Before the lower authorities the assessee had submitted that its case of claim of depreciation on goodwill, is covered by the decision of Hon’ble Supreme Court in the case of Smifs Securities Limited 348 ITR 302. The principal argument of the lower authorities has been goodwill is not an intangible asset and hence not eligible for depreciation. It was further argued that the decision of Hon’ble Supreme Court in the case of Smifs Securities Limited supra is distinguished in as much as it concerns the case of amalgamation.

4.0 Per contra the Ld.DR relied upon the orders of lower authorities. The arguments taken by lower authorities were largely reiterated in support of their action.

5.0 The Ld.Counsel for the assessee reiterated its arguments made before the lower authorities. It was vehemently argued that the decision of denial of depreciation is based upon a misplaced understanding of the facts

Page 3 of 19 & 6906/Del/2019 and judicial precedents governing the issue. The Ld.Counsel fiercely contested that the goodwill is an intangible asset within the meanings of section 32 of the Act and that the same has been also held by Hon’ble Apex Court in the case of Smifs Securities Limited supra. It was contended that the goodwill had arisen and been determined as a sequel to the decision of Hon’ble Delhi High Court approving the demerger of MCIPL. It was accordingly requested to set aside the order of lower authorities.

6.0 We have heard rival submissions in the light of material available on records. Before proceeding further, we deem it appropriate to examine the statutory provisions of section 32 of the Act as under:-

“….Section - 32, Income-tax Act, 1961 - FA, 2025 Depreciation. 6 32. (1) 7[In respect of depreciation of- buildings 8, machinery 8, plant 8 or furniture, being tangible assets; (i) (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature 8, being intangible assets acquired on or after the 1st day of April, 1998, 9[not being goodwill of a business or profession,] owned 8, wholly or partly, by the assessee 8 and used 8 for the purposes of the business 8 or profession, the following deductions shall be allowed-]

Page 4 of 19 & 6906/Del/2019 10[(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 11;] 12[in the case of any block of assets, such percentage on the written (ii) down value thereof as may be prescribed 13:] 14[***] 15[Provided16[***] that no deduction shall be allowed under this clause in respect of- (a) any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975 17[but before the 1st day of April, 2001], unless it is used- (i) in a business of running it on hire for tourists ; or (ii) outside India in his business or profession in another country ; and (b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42 :] 18[Provided further that where an asset referred to in clause (i) or clause (ii) 19[or clause (iia)] 20[or the first proviso to clause (iia)], as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for Page 5 of 19 & 6906/Del/2019 a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) 21[or clause (iia)], as the case may be :] 22[Provided also that where an asset referred to in clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub- section in respect of such asset is restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year, then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset:] 23[Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998 but before the 1st day of April, 1999 and is put to use before the 1st day of April, 1999 for the purposes of business or profession, the deduction in respect of such asset shall be allowed on such percentage on the written down value thereof as may be prescribed…”

Page 6 of 19 7.0 The first question that deserves to be considered in the matter is as to how as the goodwill arisen in this case. It is the case of the assessee that the goodwill has arisen in view of the Delhi High Court directions dated 05.10.2012. Thus, the Hon’ble court while approving the demerger observed as under:- “…13. ACCOUNTING TREATMENT IN THE BOOKS OF PMV MALTINGS With effect from the appointed date and upon the scheme becoming effective. 13.1 The resulting company shall record the assets and liabilities of the Demerged undertaking of the demerged company transferred to and vested in it in pursuant to this scheme, at the respective book values (ignoring revaluation, if any), as appearing in the books of account of the demerged company at the close of the business of the immediately preceding the appointed date. 13.2 The resulting company shall credit to the share capital account in its books of account, the aggregate face value of the shares of the resulting company issued and allotted by it to the equity shareholders of the demerged company pursuant to clause error ! reference source not found of this scheme. 13.3 The difference, being the excess of the shares issued by the resulting company on demerger over the net value of assets and liabilities as recorded above of the demerged undertaking (after considering the impact Page 7 of 19 & 6906/Del/2019 of cancellation of shares as provided in clause error ! reference source not found) shall be credited to / adjusted in capital reserve account of the resulting company. In case of there being a shortfall, the same shall be debited by the resulting company to the goodwill account….” It is thus crystal clear that the goodwill has arisen on account of orders of the Hon’ble Delhi High Court. The Ld.Counsel has further submitted that the goodwill has been worked out strictly in accordance with accounting standard AS-10 promulgated by the Institute of Chartered Accounts of India. Thus, there is no controversy regarding the quantification of the amount of goodwill as well. 8.0 It has been noted that the word goodwill has not been specifically defined in section 32 of the Act. Hon’ble Courts and other judicial bodies are however unanimous in concluding that the term goodwill would fall within the ambit of phrase “…or any other business or commercial rights of similar nature, being intangible asset…”. 9.0 We have noted the issue per se is no more res integra after the decision of Hon’ble Apex Court in the case of Smifs Securities Ltd 348 ITR 302 supra. “…3. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) ofthe 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' shallmean-- [a] tangible assets, being buildings, machinery, plant or furniture;

Page 8 of 19 & 6906/Del/2019 [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any otherbusiness or commercial rights of similar nature."

7. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue hadpreferred an appeal to the High Court in which it had raised only the question as to whether goodwill is anasset under Section 32 of the Act. In the circumstances, before the High Court,

Page 9 of 19 & 6906/Del/2019 the Revenue did not file anappeal on the finding of fact referred to hereinabove….”. 10.0 The impugned decision of Hon’ble Apex Court in Smifs Security has echoed in the decision of Hon’ble Apex Court in the case of Aculife Healthcare 177 taxmann.com 79 wherein the SLP filed by the Revenue against the decision of Hon’ble Gujarat High Court, on similar facts, was dismissed. Further we have noted that Hon’ble Delhi High Court in its decision on nearly identical facts in the case of Eltek SGS Pvt Ltd as at 153 taxmann.com 263 , has relying upon Smif securities held as under :- “…6. As is manifest from the aforesaid judgment, it was categorically held that goodwill is an intangible assetwhich would clearly fall within the ambit of Explanation 3 to section 32(1) of the Act. It was in the aforesaidbackdrop that it ultimately upheld the depreciation claimed in terms of section 32.

Page 12 of 19 & 6906/Del/2019 was Nil. However, it has been valued by assessee at Rs.17,39,83,689/- and said amount has been paid by assessee. 13.3 Section 32(1) of the Act provides for depreciation in respect of trade mark owned wholly or partly by the assessee. In the present case, assessee has taken over the business of M/s. Indus Seeds and M/s. Sasya Gentech Pvt. Ltd. as a growing concern. 13.4 It is noteworthy to mention herein that 5th Proviso to section 32(1) of the Act restrict the total depreciation, which can be claimed in case of succession, etc. to the depreciation which would have been allowable and there has been no succession. The 5th Proviso to section 32(1) was inserted by Finance Act, 1996 to restrict the claim of aggregate deduction, which is evident from the memorandum of Finance Bill, 1996, which reads as under:- In cases of succession in business and amalgamation of companies, the predecessor of the business and successor the amalgamating company and amalgamated company as the case may be, are entitled to depreciation allowance on same assets which in aggregate exceeds depreciation allowance for Previous year at the prescribed dates. It is proposed to restrict the aggregate deduction in a year to the deduction computed at the prescribed rates and apportion the allowance in the ratio of number of days for which the assets were used by them. 13.5 Thus, it is evident that 5th proviso to Section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. 13.6 It is also pertinent to note that u/s 47(xiv) of the Act, any transfer of capital asset or intangible asset by a proprietorship concern to a company as a result of succession of the concern by a company is a recognized mode of transfer. Admittedly, the assessee had taken over proprietorship concerns and private company which are different entities and there were Page 13 of 19 & 6906/Del/2019 transfer of intangible asset by those two concerns to the assessee for a valuable consideration at Rs.17,39,83,689/-. 13.7 It is to be noted that clause (xiv) to section 47 does not apply to the facts of the present case on the following reasons:

1. 1. All the assets and liabilities of the proprietary concern were not transferred to the succeeding company which is otherwise a requirement under the above clause. Only the assets forming part of undertaking were transferred to the succeeding company, which means the assets which were left in the sole proprietorship. This is evident from the page no.271 of assessee paper book.

2. The above clause requires that the sole proprietor should not receive any consideration or benefit other than by way of allotment of shares in the company, where in the present case, the consideration is paid through banking channels.3. Besides, the seller has offered the above transaction for capital gains and paid the taxes accordingly. 13.8 Since the transaction is not covered under the above-mentioned clause of section 47, consequently fifth proviso of section 32 would also not be applicable in this case. Erroneous invocation of the explanation 3 to section 43(1) of the Act 13.9. In our opinion, the invoking of this Explanation 3 to section 43 of the Act by the AO in the present case is totally misplaced and not justified. The said explanation does not restrict the claim of depreciation on goodwill arising pursuant to a slump sale. It is applicable if the impugned goodwill has been appeared in the books of accounts of transferee and this goodwill never appeared in the books of seller. In our humble opinion, the explanation 3 to section 43 will be applicable only in cases where the assets were at any time used by any other person for the purpose of his business or profession, but in the present case, the asset in question, “goodwill which is arising due to the transfer of business, which is explained in earlier para and assets were not used by any other person”, therefore, it cannot be said that the said explanation is applicable to the present facts of the case. Goodwill arising on slump sale — eligible for depreciation

Page 14 of 19 & 6906/Del/2019 13.10. In this case, the AO did not principally contend against the position of the Appellant, that the goodwill recorded by it is an intangible asset eligible for depreciation under Section 32(1) of the Act. In our opinion, the claim of assessee is to be allowed on the following lines:-i. ii. iii. The said goodwill is in the nature of any other commercial or business right under the category of an intangible asset that is eligible for depreciation under section 32 of the Act. The issue whether Goodwill arising on transfer is eligible for depreciation or not, is no longer Res-Integra, and has been settled by the Hon'ble SC in the case of Smifs Securities Ltd. (348 ITR 302), wherein held that “in the present case, it is the valuation that is challenged and not the eligibility of depreciation on goodwill.” The position of law held by the Hon'ble SC constitutes the law of the land and is binding on all the lower authorities, in terms of Article 141 of the Constitution of India. In this regard, we place further reliance on the decision of the Hon'ble Karnataka High in the case of Manipal Universal Learning P. Ltd., 255 ITR 26, the facts and circumstances of which are similar to the present case, wherein the Hon'ble HC allowed the claim of depreciation on goodwill arising on acquisition of business under slump sale model, reiterating the decision of the Hon'ble SC in the case of Smifs Securities (Supra). Further, we place reliance on the following decisions, wherein it was principally held that goodwill is an intangible asset eligible for depreciation under section 32 of the Act in the context of business transfer through slump sale:Areva T & D India Ltd. 345 ITR 21 Truine Energy Services (P) Ltd. 65 taxmann.com 238 Toyo Engineering India India Limited TS-811-HC-2012 Volvo India Pvt. Ltd. TS-391-ITAT-2019 Dorma India Pvt. Ltd. TS-735-ITAT-2019 13.11. The sixth proviso to Section 32(1) of the Act also not applicable. It is applicable, only in case of assets already existing in the books of predecessor company on which predecessor company was claiming depreciation before slump purchase, and it is not applicable on assets recognized only by successor company pursuant to such slump purchase. The legislative intent behind the introduction of the said proviso was to curb the practice of claiming' depreciation on the 'same assets' by both the predecessor company and the successor company. This evident from the memorandum explaining the provisions of Finance Bill, 1996, which Page 15 of 19 & 6906/Del/2019 introduced the sixth proviso (erstwhile fifth proviso) to section 32(1) of the Act. Thus, a commonality of assets should exist between predecessor and the successor goodwill arising pursuant to acquisition belongs only to successor company. 13.12. Further, the Ahmedabad Bench of the Tribunal, in the case of Urmin Marketing Pvt. Ltd., 122 taxmann.com 40 rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger, on the basis of purchase consideration paid (which is determined based on a valuation report), and no goodwill from the books of the transferor is recorded by the transferee. Amendment by Finance Act 2021 clarifies the position on Goodwill depreciation 13.13. The Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an Assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. 13.14. Further, amendments were made in section 55 of the Act, in relation to the meaning of 'cost of acquisition' etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to April 1, 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. 13.15. Therefore, the intention of the legislature is that depreciation on goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be rejected……”

Page 16 of 19 & 6906/Del/2019 12.0 Upon consideration of the above judicial precedents we are of the considered view that the order of lower authorities is not based upon correct understanding and interpretation and facts of the case. The assessee has claimed goodwill on the basis of decision of Hon’ble High Court and determined in accordance with contemporaneous prescribed accounting standards. The judicial ratios laid down on the matter by the Hon’ble Apex Court in Smif Securities Ltd supra and which has been followed in several other decisions of High Courts and tribunals including Hon’ble Jurisdictional High Courts, clearly mandate that goodwill is an intangible asset eligible for allowance of depreciation to the assessee u/s 32 of the Act. Pertinently, the fact that depreciation on goodwill has been withdrawn by Finance Act 2021 w.e.f. AY-2021-22 would not have any bearing upon the present case as they pertain to earlier assessment years and the impugned amendment is not retrospective nature. Accordingly we set aside the order of lower authorities and direct the Ld.AO to allow the assessee its claim of depreciation on goodwill of Rs.3,11,69,515/- and Rs.2,33,77,136/- in assessment year 2015-16 and 2016-17 respectively. Accordingly all the grounds raised by the assessee vide 6906/Del/2019 are allowed. 13.0 In the result the appeal of the assessee for and 6906/Del/2019 are allowed. Order pronounced in open court on .26.09.2025. Sd/- Sd/- ANUBHAV SHARMA) (AMITABH SHUKLA ) JUDICIAL MEMBER ACCOUNTANT MEMBER *Sh Damodar Kutty Sr PS* Dated: 26.09.2025 Page 17 of 19