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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED&
IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER & Ms. MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./I.T.A. Nos. 682, 683 & 684/Ahd/2023 (�नधा�रण वष� / Assessment Years : 2016-17 to 2018-19) KIFS International LLP ACIT बनाम/ B-81, Pariseema Complex, Circle-5(2)(1), Vs. C. G. Road, Ellisbridge, Narayan Chambers Ahmedabad 380006 Building, Ashram Road, Ahmedabad [Presently with ACIT, Central Circle 1(4), 3rd Floor, Aaykar Bhavan, Ashrma Road, Ahmedabad �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAQFK2892L (Appellant) .. (Respondent) Shri Tushar Hemani, Sr. Advocate & Assessee by : Shri Parimalsinh B. Parmar, A.Rs. Revenue by : Shri Ritesh Parmar, CIT. DR & Shri Rajdeep Singh, Sr.DR (on 08.11.2023) & Shri Kamlesh Makwana, CIT.DR (on 30.01.2024) सुनवाई क� तार�ख / Date of 08/11/2023 & 30.01.2024 Hearing घोषणा क� तार�ख /Date of 08/02/2024 Pronouncement O R D E R PER Ms. MADHUMITA ROY - JM: The bunch of three appeals filed by the assessee are directed against the common order dated 14.08.2023 passed by Ld. Commissioner of Income Tax (Appeals)-11, Ahmedabad (in short ‘CIT(A)’) arising out of the orders dated
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 2 - 30.12.2018, 26.12.2019 & 30.04.2021 passed by the Assessing Officer (AO), Ahmedabad under Section 147 r.w.s. 143(3) & 143(3) r.w.s. 144B of the Income Tax Act, 1961, (hereinafter referred to as ‘the Act’) for Assessment Year 2016-17 to 2018-19. 2. Since all these appeals are relating to identical issues that too in respect of the same appellant, these are heard analogously and are being disposed of by this common order for the sake of convenience.
ITA No. 682/Ahd/2023 – A.Y. 2016-17 (Lead Case) 3. The brief facts leading to the case is this that (i) KIFS Securities Pvt. Ltd. (in short ‘KSPL’), (ii) KIFS International Pvt. Ltd. (in short ‘KIPL’) & (iii) KIFS Trade Capital Pvt. Ltd. (in short ‘KTPL’) entered into composite scheme of arrangement through which stock broking business undertaking of the said company, namely, KIFS Securities Pvt. Ltd. (in short ‘KSPL’) was transferred in slump sale to KTPL and other business undertakings was amalgamated with KIPL w.e.f. 1st April, 2015 which was approved by the Hon’ble Jurisdictional High Court of Gujarat by and under the order dated 21st December, 2015. Pursuant to the said scheme, the transferee company i.e. KIPL consideration determined as per valuation report of expert independent valuer, namely, SSPA & Co., Chartered Accountants, discharged by issuing shares of KIFS International Pvt. Ltd. to the shareholder KIFS. The appellant company accounted with purchase method as per Accounting Standard (AS) – 14, as per the accounting treatment preferred in the scheme. The excess consideration discharged by KIPL being shares issued to the shareholders of transferor company i.e. KSPL over the amount of net assets of KSPL recorded in the books of KIPL has been claimed to be the Goodwill in the books of
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 3 - KIPL in compliance with AS 14. The appellant company showed Goodwill of Rs.3,08,87,75,944/- for the year under consideration and depreciation was claimed at Rs.3,37,57,114/- which was disallowed by the Ld. AO on very many counts and further confirmed by the First Appellate Authority. Hence, the instant appeal before us.
According to the appellant disallowing depreciation by the Revenue authority under Section 32(1) of the Act on Goodwill recognized pursuant to the amalgamation sanctioned by the Hon’ble Jurisdictional High Court is not sustainable in the eye of law, particularly, in view of the judgment passed by the Hon’ble Supreme Court wherein it has been held that Goodwill being not tangible asset is eligible for depreciation under Explanation 3(b) to Section 32(1) of the Act.
In support of such, it was contended by the appellant before the authorities below and before us as well that pursuant to the conversion of KIPL into LLP in terms of Explanation 2C to Section 43(6) of the Act, the written down value of the Goodwill in the case of KIPL as on the date of conversion was treated as written down value of Goodwill for LLP. As per the Provision of law, the appellant claimed depreciation of Rs.3,37,57,114/- on Goodwill under Section 32 of the Act for proportionate number of days i.e. from 15th March, 2016 to 31st March, 2016 and the remaining depreciation for the year to the tune of Rs.73,84,36,872/- was claimed by KIPL. In fact, as the depreciation of Goodwill was disallowed by the Ld. AO in the case of KIPL by and under the order dated 30th December, 2018 passed under Section 143(3) of the Act, the same is also found to be inadmissible in the hands of the appellant before us.
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 4 - 6. Whereas in terms of the conversion of Private Limited Company into LLP as per Section 72A(vi) of the Act, the appellant treated brought forward unabsorbed depreciation of Rs.54,32,36,259/- of KIPL as unabsorbed depreciation of LLP and carried forward unabsorbed depreciation of Rs.56,50,35,510/-, in the return of income. As the claim of depreciation was not found to be allowable for KIPL, the Ld. AO has not allowed the carried forward of the said unabsorbed depreciation to the appellant. Before the authorities below, one of the grounds raised by the appellant is this that the assessment order was passed in the name of KIPL which is a non-existent entity and thus bad in law and thus liable to be quashed. This additional ground was, however, dismissed by the First Appellate Authority and before us, the Ld. Counsel appearing for the appellant pressed the matter only on merit.
It was submitted by the Ld. AR that the Goodwill had arisen in the books of KIPL in the course of the scheme of amalgamation of KSPL to KIPL which is eligible for depreciation under Section 32 of the Act, particularly, in view of the decision passed by the Hon’ble Supreme Court in case of Smifs Securities Ltd., reported in (2012) 348 ITR 302. Once the Goodwill forms part of the block of assets of KIPL under Section 32 of the Act, it would also form part of the block of assets of the appellant formed pursuant to the conversion of KIPL into LLP (Limited Liability Partnership) in terms of the conditions specified under Section 47(xiiib) of the Act. Furthermore, in terms of Explanation 2C to Section 43(6) of the Act, if the block of assets is transferred by a Private Company or unlisted public company to an LLP and the conditions specified in the proviso to clause (xiib) of Section 47 of the Act are satisfied, then, notwithstanding anything contained in clause (1), the actual
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 5 - cost of the block of assets in the case of the LLP shall be the written down value of the block of assets as in the case of the said company on the date of conversion of the company into the LLP. Under Depreciation @ 25% on goodwill of Rs. 308,87,75,944/- recognised in the books of KIPL comes to Rs 73,84,36,872/- as per section 32 of the Act. However, considering that KIPL was in existence only till 14 March 2016, on the basis of the provisions of sixth proviso to section 32(1)(ii) of the Act, KIPL claimed depreciation on goodwill amounting to Rs.73,84,36,872/- and the appellant claimed balance depreciation of Rs.337,57,114/- in proportion to the number of days during which KIPL and the appellant were in existence during AY 2016-17.
At the time of hearing of the instant appeal, Ld. Counsel appearing for the appellant submitted before us that the Ld. AO wrongly relied on the assessment order passed by the AO of the predecessor company KIPL and disallowed depreciation on goodwill with the observation that the main object of amalgamation was to create goodwill to claim depreciation. The scheme of arrangement was only a device for tax evasion and the claim of depreciation is not a genuine claim and therefore, not admissible. Whereas, it was further contended by the Ld. AR that the scheme was duly sanctioned by the Hon’ble Gujarat High Court only upon considering various aspects of the scheme and documents and also the representations received from different regulatory authorities which is not merely a formality but scrutinized the detailed step- wise process requiring approvals and/or clearances from various statutory authorities. In fact, the Board of Directors of respective companies approved the scheme. The companies filed application before the Hon’ble High Court and only upon perusal of the entire set of documents, notice was served upon the official liquidated to Income Tax Department on 3rd December, 2015 and
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 6 - further that no representation and/or query was received from the Income Tax Department and the official liquidator issued the report specifically stating that the affairs of the transferor company had been conducted within its object clause and had not been conducted in any manner prejudicial to the public interest. Affidavit to that effect was also filed by the RD. The companies filed an affidavit in response to said RD’s affidavit and finally upon considering the entire aspect of the matter, the Hon’ble Court sanctioned the Scheme on 21st December, 2015 holding that the arrangement is in the interest of the shareholders and creditors of all the companies as well as in public interest which is reflecting at paragraph 8 of the said order.
However, the case of the appellant was turned down and the same was confirmed by the Ld. CIT(A).
On the other hand, the Ld. DR vehemently argued against the claim of the appellant on the premise that depreciation on Goodwill in the case of the predecessor company KIPL was disallowed contending the main object of amalgamation was to create goodwill to claim depreciation and the Scheme of arrangement was only a device for tax evasion and thus such claim of depreciation is not a genuine one. He relied upon the orders passed by the authorities below.
We have heard the rival submissions made by the respective parties and we have also perused the relevant materials and also case laws relied available on record.
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 7 - 12. We find while rejecting the claim of depreciation on Goodwill made by the appellant, the Ld. CIT(A) observed as follows:
“4.2 During the course of appellate proceedings, the appellant has filed written submission (reproduced supra). The appellant in its ground requested to allow claim of depreciation on goodwill. It is also noticed that apart from various factual submissions, amalgamation order and related evidences, the appellant also relied upon the various case laws. 4.3 It is observed that similar claim of depreciation on Goodwill was denied by AO in A.Y.2016-17 in the case of KIFS International Pvt. Ltd being the first year in which such depreciation was claimed by appellant. The disallowance made by AO was upheld by CIT(A), NFAC vide order dated 25/11/2022 in DIN & Order No: ITBA/NFAC/S/250/2022- 23/1047645805(1). The observation made by CIT(A), NFAC is reproduced herein below 6.3 Ground No. 1 & 2 are pertain to depreciation on goodwill of Ra 73,84,36,872/- under section 32(1) of the IT Act, 1961 6.3.1 During the course of assessment proceedings, the Assessing Officer in his assessment order dated 30/12/2018 has stated that- 4.2 On analysis of the reply submitted by the assessee the following points emerged for further discussion 1. Depreciation on goodwill was claimed as per Explanation 3 of section 32. 2. Explanation 7 to section 43 of the Act is not applicable since goodwill as an asset does not exist or appear in the Balance Sheet of the amalgamating company 3. Provisions of scheme 43(6) of the Act is not applicable since there was no asset by way of goodwill appearing in the amalgamation company and therefore where the asset itself does not exist the question of claiming depreciation and getting the WDV of the asset does not arise. 4. The goodwill was arisen to the amalgamated company on account of potential growth/profits possibilities envisaged by the amalgamated company on account of merger of the two companies. But in this case, the KSIPL does not have any Grand Name, Customer base, intellectual asset or tangible asset necessary for future growth of the company. Therefore to take a view that these are self generated asset in the case of amalgamating company is completely incorrect proposition. The assessee has further contended that the potential has been quantified by experts 5. The scheme was approved by the Gujarat High Court and the Fair Market Value of equity shares was worked out by expert valuer Ort the basis of the exchange ratio, the excess value-of-shares issued vis-à-vis the asset/liability has been determined as goodwill.
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 8 - 6. The goodwill was created in the books as per AS-14 7. The assessee also relied on the following judicial pronouncements: 1. CIT v Smifs Securites Ltd (SC)(2012) 348 ITR 302 (SC) 2. Vimalchal Print & Pack Pvt Ltd v DCIT (Guj) 5. Rebuttal of assessee's contentions: 51. The contention of the assessee has been considered carefully but not found acceptable. At the outset it is clarified that there is no dispute that the Scheme of Amalgamation was approved by the Gujarat High Court The scheme was brought up and approved by the Hon'ble High Court as per the provisions of Companies Act. However the Assessing Officer has the liberty to check the allowability of deductions claimed on the self created assets on account of the revaluation of the assets of the transferor company due to amalgamation, within the purview of Income Tax Act. It is important to understand here that the amalgamation is not questioned by the Department, what is under challenge is the colourable device through which goodwill has been created by entities of the same group leading to claim of artificial depreciation and consequent tax evasion. Merely the fact that Hon'ble High Court has approved amalgamation in this case does not gives assessee an allbi for all its claims. Nor does the same means that the contentions and claims of the assessee cannot be questioned by the Department. To be more specific, would have been alright if the assessee had amalgamated but not claimed any depreciation on goodwill There have been several instances in the past where Courts have held that if any deduction is not actually claimed, the Department cannot question it. In this case, the amalgamation was we.f. 01.04.2013. The accounts were finalized in 2016 and return of income of KIFS International Pvt. Ltd was actually filed on 15.10.2016. Thus, the claim of depreciation on a non- genuine claim of the assessee is definitely not covered by the decision of the Hon'ble Gujarat HC which is only on the sole point of amalgamation with primary focus on compliance of Companies Act and that the interests of creditors and others are protected. It can by no stretch of imagination be used for perpetuating a tax fraud. Besides, the case laws relied upon by the assessee viz (CIT vs Smifs Securities Lid, 348 ITR 302 (SC)) are distinguished on facts and Jaw. Even otherwise, the contentions of the assessee are rebutted on facts and law in the forthcoming paragraphs: 5.2 Distinction of CIT vs Smifs Securities Ltd, 348 ITR 302 (SC) In the case of Smits Securities Ltd., the Supreme Court held that goodwill is an intangible asset eligible for depreciation under the provisions of section 32 of the IT Act. In this case 'goodwill' had arisen as a result of amalgamation of two companies. The difference between the consideration for amalgamation and the net book value of assets of the amalgamating company was regarded as goodwill and depreciation was claimed thereon. The taxpayer argued that the extra consideration was paid towards the reputation which the amalgamating company was enjoying in order to
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 9 - retain its existing clientele. This was noted as a finding of fact and was not appealed by the revenue before the High Court. 5.2.1. In brief, the following factors are distinguishing vis-à-vis the case of Smits Securities Ltd: 1. The decision in Smifs Securities was only on the limited issue of whether goodwill was entitled to depreciation and whether it fell within the provisions of S.32. Other aspects such as S.43 were never dealt by the Hon'ble Court. This is clear from the finding given by Hon'ble Apex Court itself in its order. "One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue 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. The valuation of goodwill was a finding of fact and which was accepted by both CIT(A) and ITAT, It was never a subject matter of appeal before the High Court or Supreme Court, as stated earlier. It is a settled position that a case is an authority, for what it decides, and not for what logically follows from it. Reference may be made to the following: 2. In the case of Smits Securities Ltd (a renowned independent entity) in acquired the business of YSN Shares & Securities (P) Ltd, a well- established independent entity. However, in our case, the existing business of a group company has been amalgamated with a paper company of the same group only by issue of shares and without any material change in shareholding. 3. In the case of Smits Securities there was cash outflow to generate goodwill. However, in the instant case, the assessee has issued shares at huge share premium to the same share holders of the group. 4. In the case of Smits Securities the amalgamation was between two well established companies and the share holding pattern has changed after amalgamation. But in the instant case the transferee company was a paper company. 5. In the case of Smifs Securities there was substantial change in the clientele, vendors, profitability, etc. of the resulting company. However, in the instant case no such changes happened. 6. In the case of Smifs Securities, before amalgamation both the companies were having its own transferee company is existence and client base, profile, etc. However, here the is a paper company with no worthwhile activities 7. In the case of Smits Secunties, due to amalgamation the management and control of the amalgamated company change into third parties. However, in the instant case no such change in the management and control took place. Both the transferor and transferee company were managed and controlled by same group of directors, shareholders
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The website of Smits clearly shows that the company had a legacy of over 100 years. (screenshot placed below). Also, the transaction was between 2 uncontrolled independent entities. ----------- 1. In State of Orissa vs. Sudhanau Sekhar Misra (AIR 1968 SC 647), the Hon'ble Apex Court observed as under: "A decision is only an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in it". 1. In Ambica Quarry Works vs State of Gujarat & others (1987) 1 SCC 213 (vide para të) the Hon'ble Supreme Court observed. The ratio of any decision must be understood in the background of the facts of that case. It has been said long time ago that a case is orify an authenty for what it actually decides, and not what logically follows from it 2. In Bhavnagar University vs. Palitana Sugar Mills Pvt. Ltd (2003) 2 SC 111. the Hon'ble Apex Court observed, "It is well settled that a little difference in facs or additional facts may make a lot of difference in the precedential value of a decision 1. In Bharat Petroleum Corporation Ltd. & another vs. N.R.Vairamanis another (AIR 2004 SC 4778), it was held by Hon'ble Supreme Court that a decision cannot be relied on without disclosing the factual situation. In the same Judgment the Court also observed: "Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are neither to be read as Euclid's theorems nor as provisions of the statute and that too taken out of the context. These observations must be read in the context in which they appear to have been stated. Judgments of Courts are not to be construed as statutes."
Thus, the provisions which are relevant to the issue in hand, given the fact that these were not argued before the court, could not be extended on the points which were not argued or evaluated at all. (A detailed discussion on this is made in subsequent paragraphs).
5.2.2. In view of the above, a blind reliance on the decision of Smits Securities Ltd without appreciating the basic difference in facts is not called for. The case of the assessee is totally different from that of Smifs Securities Ltd.
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ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 40 - 13. We find that upon considering various documents in detail as submitted by the companies, the regulatory authorities and the official liquidator, the Hon’ble High Court credited their sanction to the scheme upon due application of mind appreciating the same as genuine and in public interest. Further that, when a scheme is entered into with the objective of avoiding taxes, the Court of law would never sanction finding it opposed to public interest which is to be kept at the forefront. In this regard, the appellant relied upon following judgments: 1. judgment passed by the Hon’ble High Court of Gujarat in case of Wood Polymers Ltd., reported in [1977] 109 ITR 177, 2. Judgment passed by the Hon’ble High Court of Madhya Pradesh in case of Kriti Plastics (P.) Ltd. (1993) 78 Comp. Cas. 138., 3. Judgment passed by the Hon’ble Supreme Court in case of J. K. (Bombay) Pvt. Ltd. vs. New Kesar-e-Hind Spinning and Weaving Co., reported in 1971 AIR 1041, 4. Judgment passed by the Hon’ble Madras High Court in the case of Pentamedia Graphics Ltd. vs. ITO, reported in [2011] 236 CTR 204, 5. Judgment passed by the Hon’ble High Court of Bombay in case of Sadanand Varde vs. State of Maharashtra, reported in [2001] 247 ITR 609; & 6. Wrigley India (P.) Ltd. vs. ACIT, reported in [2011] 142 TTJ 23. 14. The judgment passed by the Co-ordinate Bench in the case of ACIT vs. Gautam Sarabhai Trust No.23 [2002] 81 ITD 677 was also considered by us as the same was relied upon by the Ld. AR. Apart from that, the CBDT Circular/Directive dated 11th April, 2014 was also relied upon wherein
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 41 - direction has been imposed while furnishing any report regarding re- construction or amalgamation of companies under the Companies Act, comments and inputs from the Income Tax Department may invariably be obtained so as to ensure that the proposed scheme of re-construction or amalgamation has not been designed in such a way so as to defraud the Revenue and consequently being prejudicial to public interest. In terms of said Circular, since within the 15 days being prescribed time period, no objection has been forthcoming from the Income Tax Department being the Revenue Authority, the Revenue authority does not have any power to raise objection against the said scheme at this stage as the main contention made by the Ld. AR. The crux of the case of the appellant is found as follows: i. The scheme of amalgamation of KSPL into KIPL was duly sanctioned by the order of the Hon’ble Gujarat High Court and the same is binding on all the authorities. ii. No objection was raised by the Income Tax Department when time was provided by the Hon’ble High Court to that effect and therefore the Revenue department is estopped / barred to raise any further objection that the scheme was to avail the benefit of depreciation on Goodwill. Considering the ratio laid down by different High Courts on the identical issue, the scheme sanctioned by the Hon’ble Jurisdictional High Court cannot be said to be a device of tax avoidance and consequently Goodwill arising on account of such scheme of amalgamation also cannot be held to be non-genuine. iii. Neither the Goodwill said to be created artificially to claim depreciation nor the decision of the Hon’ble Court could be questioned.
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 42 - 15. As relied upon the judgment passed by the High Court of Madras in case of CIT vs. Parry and Company Limited in Tax Cas Appeal No. 2439 of 2008 has also been considered by us, wherein it has been held that when the transaction is within the parameters of law, the same cannot be said to be fraudulent, neither a colourable device. Further that, Hon’le Supreme Court has held in case of CIT vs. A. Raman & Co., reported in (1968) 67 ITR 11 that the tax payer may do planning to reduce its tax liability, provided provisions of law are complied with.
Accordingly, we find KSPL had implemented the scheme in accordance with the relevant provisions of Companies Act, 1956 and also in compliance with Section 2(1B) of the Income Tax Act, 1961. The Ld. AO of the predecessor company KIPL cannot question the underlying motive of the scheme and bound to allow depreciation arising on goodwill arising as a consequence of the Scheme sanctioned by the Hon’ble High Court.
We have further considered the argument advanced by the Ld. AR that the Ld. AO relied on assessment order passed by the AO of the predecessor company (KIPL) and disallowed depreciation on Goodwill by not accepting the ratio laid down in the case of CIT vs. Smifs Securities Ltd., reported in [2012] 348 ITR 302 (SC) wrongly considering the Explanation (7) to Section 43(1) and Explanation (2) to Section 43(6) of the Act, to this effect that the actual cost of goodwill should be regarded as Nil for KIPL and consequently Nil for the appellant and the amount of goodwill on which the appellant has sought depreciation is merely revaluation of an existing asset. He, therefore, relied upon the judgment passed by the Hon’ble Supreme Court in case of Smifs Securities Ltd. (supra). Apart from that, he has further relied upon the
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 43 - judgment passed in the case of PCIT vs. Zydus Wellness Ltd. (SLP (Civil) Diary No(s). 29859/2018 and CIT vs. Zydus Wellness [2017] 87 Taxmann.com 82 (Guj.), Vimlachal Print and Pack Limited vs. DCIT (Tax Appeal No. 182 of 2014) (Guj.), Urmin Marketing P. Ltd. vs. DCIT, reported in [2020] 122 taxmann.com 40 (Ahd-Trib.), Aricent Technologies (Holdings) Ltd. vs. DCIT in ITA No. 2671/Del/2014.
Whatever facts had been pleaded by the Ld. AR has been verified by us and found to be true. The further fact as has been submitted before us by the Ld. AR that the issue on depreciation of Goodwill as disallowed by the Revenue in the case of KIPL has ultimately been allowed by the Co-ordinate Bench in ITA No.557/Ahd/2022 for A.Y. 2016-17. A copy whereof has also been annexed with the paper book filed before us. In that view of the matter, the claim of depreciation made by the appellant before us on the same Goodwill for remaining period from 15.03.2016 to 31.03.2016 deserves to be allowed as was the ultimate submission made by the Ld. Counsel appearing for the appellant which has also been considered by us. We have carefully gone through the order passed by the Co-ordinate Bench. While dealing with this particular aspect of the matter and granting relief by directing the Ld. AO to allow the claim of depreciation on the Goodwill as made by the appellant therein, the following observation was made:
“14. We have heard the rival contentions of both the parties and perused the materials available on record. It is provided under the provisions of section 2(1B) of the Act that in a scheme of amalgamation all the properties & liabilities of the amalgamating company would become the assets and liabilities of the amalgamated company. Similarly, it was also provided that the shareholders holding not less than 75% in value of the shares in the amalgamating company should become the shareholders of the amalgamated company. The provision of section 2 (1B) of the Act reads as under: (1B) "amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 44 - to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that— (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsi-diary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company; 14.1 In the scheme of amalgamation, two or more companies merged and form a new company, or one or more companies merged into an existing company. As a result of amalgamation, the amalgamating company gets dissolved and its business along with assets and liabilities is taken over by the amalgamated company. In return the amalgamated company pays purchase consideration to the shareholder of amalgamating company by way of issuing its equity share, other securities or by paying cash. Normally, the companies opt for amalgamation for numerous reasons/objectives which may include the elimination of the competition, better/effective utilization of the resources, better/effective control over the market etc. 14.2 The purchase consideration paid by the amalgamated company to the shareholders of the amalgamating company may be more than the value of the net assets taken over or some time it may be lower than the net assets taken over. As such purchase consideration to be paid to the amalgamating company by the amalgamated company is determined after considering various internal and external factors which may affect future profitability and growth. Such factors include previous earnings, future possible earnings, location, technical know-how, customer base, marketing network etc. Thus, it leads to a difference between the net value of assets taken over and purchase consideration paid. 14.3 Accounting standard-14, issued by the ICAI prescribes two methods of accounting for the transaction carried out in the scheme of amalgamation namely pooling of interest method and purchase method. If the scheme of the amalgamation fulfills the conditions of para 3(e) of the Accounting Standard-14, then pooling of interest method should be followed otherwise purchase method of accounting should be applied. The relevant extract of accounting standard reads as under: 7. There are two main methods of accounting for amalgamations: (a) the pooling of interests method; and (b) the purchase method.
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 45 - 8. The use of the pooling of interests method is confined to circumstances which meet the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger. 14.4 Under the pooling of interest method the difference between purchase considerations and the net assets taken over by the amalgamated company is adjusted with reserve. On the other hand, in the case of purchase method if purchase consideration exceeds net value of assets taken over then such difference is to be as recognized as goodwill or vise-versa as capital reserve. 14.5 Goodwill may be described as the aggregate of those intangible assets of a business which contributes to its superior earning capacity over a normal return on investment. It may arise from such attributes as favourable locations, the ability and skill of its employees and management, quality of its products and services, customer satisfaction etc. 14.6 Para 19 of AS-14 describes goodwill arising in a scheme of amalgamation as extra amount paid in anticipation of future income and suggests treating the same as an asset, hence provide for systematic amortization of same over the period of useful life. The para 19 of AS-14 reads as under: 19. Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it is considered appropriate to amortise goodwill over a period not exceeding five years unless a somewhat longer period can be justified. 14.7 In the case in hand, the assessee company has taken over the business of one of the group companies, namely KSPL, with all the assets, liabilities, and reserves. In return the assessee company issued its 2 shares for one share of KSPL as purchase consideration. Accordingly, the assessee company issued 2,54,54,560 new shares for 1,27,27,280/- shares of KSPL @ Rs. 235/- having face value of Rs. 10 each and premium of Rs. 225/- each. Thus, the assessee company paid purchase consideration of Rs. 598.18 crores only (2.54 crore x Rs. 235/-) against the net book value of the assets and liabilities taken over by it at Rs. 298,30,45,656/- only leading to a difference between NAV and purchase consideration of Rs. 308,87,75,944/-. The assessee, by following the pooling of interest method of accounting as prescribed under AS-14 recognized such difference as Goodwill in the books of account. The scheme of amalgamation was approved by the Hon’ble Gujarat High Court vide order dated 21st December 2015 which was effective from 1-4-2015. Subsequently, the assessee at the time of filing return of income claimed depreciation on such goodwill by treating the same as intangible asset which was disallowed by the AO and confirmed by the learned CIT (A) by holding it at NIL value for the purpose of taxation. 14.8 Undeniably, the purchase consideration paid by the assessee to the shareholders of the transferor/ amalgamating company stands at Rs. 598.18 crores as evident from the scheme of amalgamation. The relevant clause of the scheme of the amalgamation stands as under:
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 46 - 23.1 Upon this Scheme becoming effective, Transferee Company-2 shall without any further application or deed, issue and allot Equity . Shares at par, credited as fully paid up, to the extent indicated below to the shareholders of Transferor company, holding shares in Transferor company and whose name appear in the Register of Members on the Appointed Date or to such of their respective heirs, executors, administrators or other legal representative or other successors in title as may be recognized by the respective Board of Directors in the following manner: 2 (Two) fully paid Equity Shares of Rs. 1Q/- each of Transferee. Company-2 shall be issued and allotted, for every 1 (.One) Equity Shares of Rs. 10/- each held in Transferor Company. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXX 23.5 Upon Scheme being effective and on allotment of new Equity Shares by Transaction Company-2, the share certificate representing shares held in Transferor Company shall stand automatically cancelled. The new Equity Shares shall be issued by Transferee Company-2 to the shareholders of Transferor Company at a premium of Rupees two hundered and twenty five per share. Approval of this Scheme by the shareholders of transferee company2 shall be deemed to be the due compliance of the provisions of Section 62 and Section 42 of the Companies Act, 2013 and other relevant and applicable provisions of the Act for the issue and allotment of Equity Shares by Transferee Company-2 to the shareholders of Transferor company, as provided in this Scheme. 14.9 Hence, the purchase consideration exceeds the book value of net assets acquired by it by Rs. 308,87,75,944/- as discussed above. The excess amount was recorded as goodwill in the books of the assessee. Admittedly, that the assessee incurred the cost more than the net book value of assets acquired by it in the scheme of amalgamation which has also been approved by the Hon’ble Gujarat High Court vide order dated 21st December 2015 w.e.f. 01st April 2015.The relevant portion of the judgment reads as under: The petitioner companies are further directed to lodge a copy of this order, the schedule of immovable assets of the undertaking being transferred under the slump sale to the Transferee-1 and that of the remaining undertaking of the Transferee-2, as on the date of this order and the scheme duly authenticated by the Registrar, High court of Gujarat with concerned superintendent of stamps, for the purpose of adjudication of stamp duty, if any, on the same within 60 days from the date of the order. The Petitioner companies are directed to file a copy of this order along with a copy of the scheme with the concerned Registrar of Companies, electronically, along with INC-28 in addition to a physical copy as per relevant provisions of the Act. Filing and issuance of drawn up order is hereby dispensed with. All concerned authorities to act on a copy of this order along with the Scheme duly authenticated by the Registrar, High Court of Gujarat. The Registrar, High Court of Gujarat shall issue the authenticated copy of this order along with the Scheme of expeditiously as possible.
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 47 -
14.10 Furthermore, it was mentioned in the scheme of amalgamation that the difference if any between the value of the assets acquired by the amalgamated company and the consideration paid shall be recorded either as capital reserve or goodwill. The relevant portion of the scheme reads as under: The difference (excess or deficit), between the net value of assets over aggregate face value and premium amount for the Equity Shares issued by Transferee Company-2 to the shareholders of Transferor company pursuant to this Scheme and after giving effect to Clause 24.3 be adjusted to Capital Reserve or Goodwill, as the case may be in books of Transferee Company-2. 14.11 At this juncture, it is also important to note that the Hon’ble Gujarat High Court in the impugned scheme of amalgamation while approving has also observed that the Regional Director, Ministry of Corporate affairs vide letter dated 3rd December 2015, has invited objections from the Income Tax Department if any in the scheme of amalgamation. But the Income Tax Department did not reply within the time limit of 15 days, hence it was assumed that the Income Tax Department has no objection in connection with the impugned scheme of amalgamation. This fact can be verified from the order of the Hon’ble High Court, the relevant finding is reproduced as under: The next observation of the Regional Director vide paragraph 2(e), pertains to the letter dated 3rd December 2015 sent by the Regional Director to the Income Tax Department to inviting their objections, if any. Since the statutory period of 15 days, as envisaged by the relevant circular of the Ministry of Corporate Affairs is over, it can be presumed that the Income Tax Department has no objection to the proposed Scheme of arrangement. The petitioner companies have agreed to comply with the applicable provisions of the Income Tax Act and rules. In view of the same, no direction are required to be issued to the petitioner companies in this regard. 14.12 In this connection, we further note that the scheme for the amalgamation was presented before the Hon’ble Gujarat High Court for the approval in pursuance to the provisions of section 391 to 394A of the Companies Act. But on perusal of the provisions of section 391 to 394A of the Companies Act, we note that there is a requirement for inviting the objection from the central government about the proposed scheme of amalgamation. The relevant extract of the section reads as under: 394A. NOTICE TO BE GIVEN TO CENTRAL GOVERNMENT FOR APPLICATIONS UNDER SECTIONS 391 AND 394 The 1 [Tribunal] shall give notice of every application made to it under section 391 or 394 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing any order under any of these sections. 1. Substituted for `Court' by the Companies (Second Amendment) Act, 2002 (w.e.f. a date yet to be notified). 14.13 Accordingly, we find that there was no requirement to invite objections from the Income Tax Department. However, we find that the MCA has issued a circular No. 1/2014 dated 15.01.2014 directing regional directors of Ministry of Corporate Affair to invite comments and inputs from the Income Tax Department as well as from other regulatory department before the amalgamation. The relevant copy of the circular recess under: General Circular No 1/2014 F.No 2/1/2014
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 48 - Dated 15th January 2014 Subject: Report u/s 394A of the Companies Act, 1956- Taking accounts of comments/inputs from Income Tax Department and other sectoral Regulators while filing reports by RDs. Section 394A of the Companie Act, 1956 requires service of a notice on the Central Government wherever cases involving arrangement/compromise (under Section 391) or reconstruction / amalgamation (under Section 394) come up before the Court of competent jurisdiction. As the powers of the Central Government have been delegated to the Regional Directors (RDs) who also file representations on behalf of the Government wherever necessary. 2. It is to be noted that the said provisions is in addition to the requirement of the report to be received respectively from the Registrar of Companies and the Official Liquidator under the first and second provisos to Section 394(1). A joint reading of Sections 394 and 394A makes it clear that the duties to be performed by the Registrar and Official Liquidator under Section 394 and of the Regional Director concerned acting on behalf of the Central Government under Section 394A are quite different. 3. An instance has recently come to light wherein a Regional Director did not project the objections of the Income Tax Department in a case under Section 394. The matter has been examined and it is decided that while responding to notices on behalf of the Central Government under Section 394A, the Regional Director concerned shall invite specific comments from Income Tax Department within 15 days of receipt of notice before filing his response to the Court. If no response from the Income Tax Department is forthcoming, it may be presumed that the Income Tax Department has no objection to the action proposed under Section 391 or 394 as the case may be. The Regional Directors must also see if in a particular case feedback from any other sectoral Regulator is to be obtained and if it appears necessary for him to obtain such feedback, it will also be dealt with in a like manner. 4. It is also emphasized that it is not for the Regional Director to decide correctness or otherwise of the objections/views of the Income tax Department or other Regulators. While ordinarily such views should be projected by the Regional Director in his representation, if there are compelling reasons for doubting the correctness of such views, the Regional Director must make a reference to this Ministry for taking up the matter with the Ministry concerned before filing the representation under Section 394A. 5. This Circular is effective from the date of issue.
14.14 The above circular issued by the MCA was circulated by the CBDT among its officers vide F. No. 279/MISC./M-171/2013-ITJ, dated 11th April 2014 which reads as under: F.NO.279/MISC./M-171/2013-ITJ, Dated- 11″‘ April, 2014 Government of India,Ministry of Finance, Department of Revenue, C.B.D,T., New Deihl
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 49 - Subject: Merger/Amalgamation/de-merger Objections entertained by High Courts -reg. I am directed to refer to the above mentioned subject. 2. In a recant case of proposed amalgamation, it was noted that the scheme of amalgamation was designed seeking amalgamation with retrospective dates so as to claim set off of losses of loss-making Companies against the profits of profit making Companies of the group and thus impacting adversely the much needed public revenue. This fact of proposed amalgamation was not brought to the notice of Income Tax Department either by the Ministry of Corporate Affairs (MCA) or Registrar of Companies (ROC). The Deportment had to file an intervention application opposing such amalgamation before the High Court which was rejected on the ground that the Department had no locus standi in the matter and that Regional Director, MCA has been delegated power in this regard. 3. In this connection Circular No 1/2014 dated 15.01.2014 has been issued by MCA to Regional Directors which lays down that while furnishing any report regarding reconstruction or amalgamation of companies under the Companies Act, comments and inputs from the Income Tax Department may invariably be obtained so as to ensure that the proposed scheme of reconstruction or amalgamation has not been designed in such a way as to defraud the Revenue and consequently being prejudicial to public interest. It has further been said that the Regional Directors would invite specific comments from the Income Tax Department within 15 days of receipt of notice before filing response to the Court. It is emphasised that this is the only opportunity with the Department to object to the scheme of amalgamation if the some is found prejudicial to the interest of Revenue and therefore, it is desired that the comments/objections of the Department are sent by the concerned CIT to Regional Director, MCA for incorporating them in its response to the Court, immediately after receiving information about any scheme of amalgamation or reconstruction etc. 4. This issues with approval of Member (A&J). 14.15 From the above circular, it is transpired that the Revenue was conscious about the fact that there was the possibility of misusing the provisions of the income tax Act in the name of the scheme of amalgamation as provided under section 2(1B) causing prejudice to the Revenue. But the Revenue, despite having the opportunity in its hand did not raise any objection within the time allowed by the MCA or subsequently by raising the objection in the impugned scheme of amalgamation. Thus, from the conduct of the Revenue, it is revealed that there was no grievance in the impugned scheme of amalgamation. Had there been any grievance to the Revenue, the same could have been brought to the notice of the regional director of the MCA, then suitable action should have been initiated against the impugned scheme of the amalgamation. In this regard, we note that recently the Mumbai bench of NCLT in one of the petitions for amalgamation in case of Gabs Investment Pvt Ltd (Transferor) and Ajanta Pharma limited (Transferee) in CPS No. 995 and 996/2017 has not approved the scheme of amalgamation on the objection raised by the revenue. The relevant extract of the order reads as under: 36. The rationale given in the scheme among others things are the proposed amalgamation of the transferor company into Transferee Company by the scheme, as a result of which the share holdersoft he transferor company viz. the promoters
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 50 - of the transferor company (who are also the promoters of the transferee company) shall directly hold shares in the transferee company and the promoters would continue to hold the same percentage of shares in the Transferee company pre and post merger. 37. The above rationale presented by the petitioner company is without any Justification. Petitioner has to comply with all applicable laws. By this scheme of amalgamation and arrangement Gabs/shareholders of Gabs are avoiding full tax liability which is strenuously objected by the Income Tax Department as discussed Supra. Any transfer of property from one entity to other has to be treated as sale/transfer and the same has to comply with applicable provisions of law including applicable tax liability, stamp duty. In the instant case, the transferor is a private Ltd. company which is a separate legal entity and any transfer of shares to other entity including individuals from the legal entity would attract applicable tax liability. Therefore, we are of the considered view that the Bench can sanction/approve the scheme only if it complies with all applicable provisions of the Act, Rules and if the scheme is in the interest of public, shareholder etc. However, the petitioner companies did not provide details with regard to compliance of tax liability raised by the Income Tax Department, their undertaking to pay the huge tax liability as pointed out by the income department etc. 38. From the above analysis of the financials of Gabs, the bench noted that with an equity share capital of only 1,91,100 the promoters/share holders of Gabs who are also the common promoters of APL, by way of this proposed scheme of amalgamation and arrangement would get the shares of APL worth ?1477.50 Crores (market value as on 31.03.2017 ) and that too without paying any Income Tax, Stamp Duty etc. for which the bench is of the considered view that the same is not in the public interest, thousands of shareholders of Transferee company especially retail shareholders. The market value of the same number of shares as at 31.03.2016 was 1,182.59 Crores. 39. Since Income Tax department (IT) has raised strong objections about tax benefit, tax avoidance, tax loss as discussed above, we are of the opinion that it would be www.taxguru.in advisable to settle the important/crucial issue of huge tax liability before sanctioning the scheme by the Tribunal rather than disputing the same at a later stage after the scheme is sanctioned by the Tribunal. It is mandatory as per section 230 (5) of the Companies Act, 2013, a notice under sub section (3) along with all the documents in such form shall also be sent to central government, Income Tax Authorities, RBI, SEBI, ROC, stock exchanges, OL, CCI and other Sectoral regulators or Authorities for their representations. In response to the notice received as per above section the Income Tax Department has raised valid observation/objections as detailed above, we find merit in the objections raised by Income Tax Department and we are also inclined to agree with the objections raised. 14.16 From the above, it is inferred that the Income Tax Department, being aggrieved with the scheme of amalgamation, raised the objection, which was duly accepted by the NCLT and accordingly, the scheme of amalgamation was disapproved in the above case. 14.17 Now, the question arises whether the scheme once approved by the Hon’ble Gujarat High Court after receiving no objection from the Income Tax Department, the AO/revenue has authority to challenge the same. What is the inference that flows from a cumulative consideration of all the aforesaid contending facts is that the revenue cannot
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 51 - object to the impugned scheme of amalgamation. It is because, it is implied that the revenue has given its consent in the impugned scheme of amalgamation by raising no objection in response to the letter issued by the regional director of the MCA as discussed above. Furthermore, had there been any grievance to the revenue, then it should have approached the Hon’ble High Court through the regional director of the MCA. But it did not do so. As such the revenue on one hand is issuing circulars to its officers to object the scheme of amalgamation if it is found prejudicial to the interest of revenue but on the other hand it remains silent when such opportunity was afforded to it and raising the same issue during the assessment proceedings which in our considered view is not desirable. 14.18 Moving ahead, there is also no dispute in the amount of the purchase consideration and the NAV determined between the companies, as available in the scheme of amalgamation, which was approved by the Hon’ble Gujarat High Court as well. However, the lower authorities held the value of goodwill at NIL for the purpose of taxation during the assessment proceedings for the reasons as discussed above in their respective orders. But, in the backdrop of the above discussion, we are not convinced with the orders of the authorities below on this preliminary issue. 15. Now, the next question arises for our consideration whether the value of goodwill should be taken at NIL under the provision of Income Tax Act in the books of amalgamated company as no such goodwill was available in the books of amalgamating company prior to amalgamation and such goodwill emerged in the books of amalgamated company on account of valuation and revaluation of business as no cost incurred by the amalgamated company for such goodwill. In this connection, we are inclined to refer certain provisions of the Act in the context of the scheme of amalgamation as provided under section 2(1B) of the Act as detailed under: Depreciation. 1932. (1) 20[In respect of depreciation of— (i) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (ii) know-how, patents, copyrights, trademarks, 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 21, wholly or partly, by the assessee 21 and used for the purposes of the business 21 or profession, the following deductions shall be allowed—] 22[(i) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (ii) 24[in the case of any block of assets, such percentage on the written down value thereof as may be prescribed 25:] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 38[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) and clause (xiv) of section 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
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 52 - 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.] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
this 40[sub-section] Explanation 2.—For the purposes of “written down value of the block of assets” shall have the same meaning as in clause *(c) of sub-section †(6) of section 43.] 41[Explanation 3.—For the purposes of this sub-section, the expressions “assets” and “block of assets” shall mean— (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. 15.1 The above provision of section 32 of the Act provides allowing the depreciation to the amalgamated company in the same manner which would have been allowed to the amalgamating company in the event had there not been any amalgamation. 15.2 Similarly, the actual cost of the assets acquired in the scheme of amalgamation in the hands of the amalgamated company will continue to be the same as it would have been in the hands of the amalgamated company in the event, had there not been any amalgamation. The relevant extract of the explanation 7 to section 43(1) reads as under: Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires 3— 4(1) “actual cost” means the actual cost 3 of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met3 directly or indirectly by any other person or authority: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 14[Explanation 7.—Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business.] 15.3 We further note that the WDV of the assets acquired in the scheme of amalgamation in the hands of the amalgamated company will continue to be the same as it would have been in the hands of the amalgamating company in the event, had there not been any amalgamation. The relevant extract of the explanation 2 to section 43(6)(c) of the Act reads as under: (6) “written down value” means— XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 53 - 42[Explanation 2.—Where in any previous year, any block of assets is transferred,— (a) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.] 15.4 As per section 32(1) of the IT Act 'depreciation' is to be computed on 'actual cost'/'written down value of the block of assets' ascertained in accordance with the provisions of section 43 of the Act. Further, a reading of the above provision shows that in respect of 'capital assets' transferred by the amalgamating company to the amalgamated company, the cost/written down value of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been had the amalgamating company continued to hold the capital asset for the purposes of its own business. 15.5 A combined reading of the above provisions reveals that the intention of the legislature behind the introduction of the amalgamation scheme was to achieve tax neutrality. Besides the above, the intention of the legislature is also reflecting from the following provisions: i. There is no capital gain in the hands of the amalgamating company on the transfer of capital assets in the scheme of amalgamation under the provisions of section 47(vi) of the Act. ii. The cost of stock-in –trade in the hands of the amalgamated company shall remain the same as in the hands of the amalgamating company either as capital asset or stock in trade as provided under section 43C of the Act. iii. Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc under the provisions of section 72A of the Act. iv. Exemption of capital gains in the hands of shareholders of amalgamating company on transfer of shares of amalgamating company in the scheme of amalgamation under the provisions of section 47 (vii) of the Act. v. Cost of capital assets to be the same as in the hands of previous owner where capital assets became the assets of the successor as a result of transfer under section 47(vi) r.w.s. 49(1)(iii)(e) of the Act. vi. Cost of shares of amalgamated company in the hands of shareholders, received as consideration for transfer of shares of amalgamating company, to be same as the cost of shares of amalgamating company under section 49(2) of the Act. 15.6 From the above, the intent of the Legislature is to make amalgamation a tax neutral scheme for companies as well as for the shareholders and not to provide a tax planning mechanism to either of them. However, a conjoint reading of the above provisions reveals that the assets which were transferred by the amalgamating company to the amalgamated
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 54 - company in the process of amalgamation were not made subject to the capital gain tax. Furthermore, the 6th proviso to section 32 of the Act has limited the amount of depreciation available to the amalgamated company post amalgamation to the extent of the amount of depreciation which would have been available to the amalgamating company, had there not been any amalgamation. Indeed, there was no entry in the books of the transferor/amalgamating company for the intangible assets/ goodwill being self-generated assets. However, we note that all the relevant provisions of the Act as discussed above deal with respect to the assets available/recorded in the books of the transferor/amalgamating company. In other words, the assets which have been acquired by the assessee in the scheme of amalgamation would continue at the book value in the books of the amalgamated company. The question arises whether the goodwill shown by the assessee as discussed above was acquired in the scheme of amalgamation from the amalgamating company. The answer stands in negative. It is because there was no entry in the books of accounts of the amalgamating/transferor company reflecting the value of goodwill. As such, the amount of goodwill as claimed by the assessee represents the difference between the purchase consideration and the NAV acquired by it. The purchase consideration paid by the assessee was based on the valuation report as discussed above after considering the various factors. Thus, the assessee has not acquired any goodwill from the amalgamating/transferor company as alleged, accordingly the provisions of the Act i.e. 6 proviso to section 32, explanation 7 to section 43(1), explanation 2 to section 43(6)(c) of the Act cannot be applied to the case on hand. 15.7 Normally, the issue/question of goodwill arises when one company is acquired by another company. In other words, when one company transfers its business to another company against the consideration, the difference between the net value of the assets acquired and the purchase consideration paid by the transferee is regarded as goodwill. The succeeding question arises whether such goodwill acquired by the assessee is eligible for depreciation under the provisions of section 32 of the Act. In this connection, we are inclined to refer to the provisions of section 32(1) of the Act which reads as under: 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— 15.8 On perusal of the above provisions, we note that the word goodwill has nowhere been mentioned. However, we note that, the Hon’ble Supreme Court in the case of CIT vs. Smifs Securities Ltd reported in 348 ITR 302 has held that the goodwill falls within the definition of the assets under the category of any other business or commercial rights of similar nature. The relevant extract reads as under: Explanation 3 to section 32(1) states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of 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 rights of a similar nature'. The principle of ejusdem
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 55 - generis would strictly apply while interpreting the said expression which finds place in Explanation 3 (b). (Para 4) In view of the above, it is opined that 'Goodwill' is an asset under Explanation 3(b) to section 32(1). (Para 5) 15.9 In view of the above judgment, there remains no ambiguity that goodwill is part and parcel of intangible assets. Hence, the assessee is eligible for depreciation on goodwill. 15.10 Moving further, we note that for claiming the depreciation, among other conditions as provided under section 32 of the Act, one of the conditions is that the assessee can claim depreciation on the goodwill being intangible asset if acquired on or after 1st day of April 1998. In other words, the assessee can claim depreciation on the goodwill acquired by it. Thus, the controversy arises whether the goodwill generated in the scheme of amalgamation is acquired by the transferee company. Such controversy has been answered by the Hon’ble Supreme Court in the case of Smifs securities Ltd (supra) by holding as under: 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 (Appeals) has come to the conclusion that the assessee had filed copies of the orders of the High Court ordering amalgamation of the above two companies; that the assets and liabilities of 'Y' 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 Tribunal. There is no reason to interfere with the factual finding. (Para 6) 15.11 We also find that the Hon’ble Delhi High Court, involving identical facts and circumstances, in the case of CIT Vs. M/s Eltek SGS Pvt. Ltd. in ITA No. 475-476/2022 has decided the issue in favour of the assessee by observing as under: 7. Before us, learned counsel appearing in support of the appeal contended that it would be the provisions of Section 49 of the Act which would apply and that both the CIT (Appeals) as well as the ITAT have clearly erred in holding otherwise. Learned counsel referred to the definition of “cost of acquisition” as spelt out in Section 55(2) of the Act and which had defined that expression to also include goodwill of a business or profession or a trademark or brand name associated with the business or profession or any other intangible asset. It is in the aforesaid context that learned counsel for the appellant had sought to rely upon Section 49 and more particularly Section 49(1)(e) thereof. 8. The aforesaid submission, however, clearly loses sight of the fact that Section 47 in express terms excludes the transfer of a capital asset in terms of a scheme of amalgamation. We further find that the provisions of the Act referred to by learned counsel for the appellant are placed in a Chapter dealing with the “Capital Gains”. That Chapter itself pertains to profits or gains arising from the transfer of a capital asset. However, it is well settled that a transfer in terms of a scheme of amalgamation which is sanctioned is accomplished by operation of law as opposed to an act of parties. It is in that backdrop that the decision in Smifs assumes significance. The judgment rendered by the Supreme Court in Smifs clearly recognises goodwill to be an intangible asset and on which depreciation can clearly be claimed in terms of Section 32(1) of the
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 56 - Act. 9. Accordingly and for all the aforesaid reasons, we find no merit in the instant appeals. They shall consequently stand dismissed. 15.12 From the above, there remains no ambiguity that the goodwill generated in the scheme of amalgamation is acquired by the assessee. Thus, in our considered view the assessee has complied with all the conditions provided under section 32 of the Act. Accordingly, we are not convinced by the findings of the authorities below. 16. The next allegation of the AO is that there was contradiction and inconsistency in the valuation report filed by the assessee. Admittedly the valuation report was prepared by the SSPA & CO, a firm of chartered accountants. The valuation of the business being a technical matter, in our view, the assistance of the expert is required. The AO himself cannot determine such value. If he was not satisfied with the valuation report, then the only recourse available to the AO is to refer the matter to the technical person. In holding so we draw support and guidance from the judgment of this tribunal in case of Synbiotics Ltd vs. ACIT reported in [2016] 48 ITR(T) 210 (Ahd) where it was held as under: Assessing Officer has adopted the value of Rs. 250 per sq. mtr. On the basis of the sale instances related to residential areas situated 2 to 3 kms. away from the property in question. There is no dispute with regard to the fact that property in question is an industrial land which cannot be compared with the residential properties. Admittedly, neither the Assessing Officer nor the Commissioner (Appeals) called for report from the Departmental Valuation Officer and proceeded to make their own estimation. It is incumbent upon the assessing authority to call for report from Departmental Valuation Officer for ascertaining the fair market value of the asset, in the event he is not satisfied about the claim of the assessee. Both the authorities below are not justified in adopting the rate as the assessee had furnished a report from an expert, i.e., Government approved valuer. 16.1 The subsequent allegation of the AO is that both the companies i.e. amalgamated and the amalgamating companies were controlled and managed by the same group of person pre and post amalgamation. Thus, the issue arises whether it was a colourable device adopted by the assessee to create goodwill in the books of accounts and claim such huge amount of depreciation. In this regard we note that both the companies, namely KSPL and KIPL were registered on 27th January 1995 and 27th December 2007 respectively with the Ministry of corporate affairs. These 2 companies were filing separate income tax returns. Both the companies being body corporate have a separate legal identity. All these details were duly disclosed in the scheme of amalgamation which was duly approved by the Hon’ble Gujarat High Court vide order dated 21st December 2015. 16.2 We also note that vide letter dated 3rd December 2015 the regional director of ministry of corporate affair (MCA) has also invited comment or objection from the Income Tax Department, but the department did not raise any objection with respect to scheme of amalgamation. This fact can be verified from para 7 (III) of the order of the Hon’ble High Court which is placed on record and discussed above. 16.3 It is also pertinent to mention here that all the necessary details about the management of both companies were disclosed in the scheme of amalgamation and nothing was hidden. The scheme contained all the information related to purchase consideration, its valuation, mode of payment and accounting treatment. The Hon’ble High Court approved such scheme after inviting observation and comment from ROC, MCA, and official liquidator including the income tax department. Thus, in the given fact and circumstances
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 57 - the reasonableness of the scheme cannot be doubted. Accordingly, no inference can be drawn that the assessee has employed colorable device in order to record high value of purchase consideration which is resulting goodwill. 16.4 Without prejudice to the above, we also note that the Revenue has to consider certain facts before arriving at a finding whether a particular series of the transactions is a colourable device or not as the primary onus is on the AO to find out: (i) Whether the parties to the transactions have concealed or hidden any fact and/or whether what is shown to be done could have actually happened in different time or at different place: Ans: Regarding the facts of the transactions, we note that all the necessary facts were duly disclosed by the assessee in the scheme of amalgamation. The following facts were duly disclosed: a) The purchase consideration by the amalgamated company to the shareholders of the amalgamating company was duly disclosed in the scheme of amalgamation. b) The valuation of the business of the amalgamating company was based on the approved valuation report. c) The fact of the common control and management of both the amalgamated and amalgamating companies were disclosed in the scheme of amalgamation which was also noted by the Hon’ble Gujarat High Court and this fact was also in the knowledge of Revenue. Thus, we are of the view no facts were concealed or hidden. (ii) Whether it could be a normal business practice: Ans: In today’s time the activity of amalgamation is very common and prevailing in the corporate world for synergizing resources, control, eliminate the competition etc. (iii) Even where individual transactions of the device are legal/ legitimate, whether combination of these steps creates an effect which is abnormal in the business world and could not have been otherwise undertaken in normal circumstances: Ans. In the present case there was no reference made by the authorities below suggesting that the transaction is carried out illegally. As the transactions in the instant case were within the ambit of the law as per the provision of section 2(1B) of the Act. (iv) These individual transactions create an effect which is contrary to human probabilities: Ans. The transactions carried out by the parties were very much normal transaction. (v) Whether actions of the parties finally are at variance with the terms of the agreement:
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 58 - Ans. There was no variance in the impugned transaction with regard to the terms of the agreement. 16.5 It is also important to highlight the fact that there is no prohibition under the Act for disallowing the depreciation on the goodwill generated in the scheme of amalgamation. There are certain kinds of transactions, prejudicial to the interest of Revenue, which may fall under the purview of the provisions of General Anti-Avoidance rule (GAAR), POEM, and BEPS provided under section 95 to 102, section 6(3) of the Act respectively under which the impugned transaction (depreciation on the goodwill in a scheme of amalgamation) can be denied. But such provisions are not applicable for the year under consideration. 16.6 There is no dispute about the fact that the payment was made by the assessee to the shareholders of the amalgamating company in the form of shares and not through the cash payment. But the payment through the shares is a valid mode of payment. In this regard we draw support and guidance from the judgment of Hon’ble Delhi High Court in the case of CIT vs. Mira Exim Ltd reported in 359 ITR 70 wherein it was held as under: In terms of the order passed under section 394 of the Companies Act, 1956 the respondent company acquired the imported motor cars. The cars were not acquired and the respondent assessee was not owner of the motor cars prior to the said date. On merger of the three concerns with the respondent assessee, shares were issued as consideration to the proprietors of the business concerns. The shares issued were consideration for the transfer of the assets. It is immaterial, whether there was transfer of an undertaking, including the block of assets, which also included the imported motor cars. [Para 15] It is clear that the respondent assessee had acquired the asset, i.e., imported cars, after the cut off date, i.e., 1-4-2001 and, therefore, is entitled to depreciation and the bar/prohibition in clause (a) to proviso to section 32(1) would not apply. The Tribunal has rightly decided the issue in favour of the respondent assessee and against the revenue. [Para 16] 16.7 It is also pertinent to note that scheme of the amalgamation can be approved under the provisions of section 2(1B) of the Act where shareholders holding not less than 75% in the value of shares of the amalgamating company become the shareholders of the amalgamated company. It is possible only when the shares are issued to the shareholders of the amalgamating company. Accordingly, we are not impressed with the finding of the AO that there was no cash payment for the acquisition of the goodwill by the assessee, rather it was recognized in the books of accounts by way of accounting entries. Thus, we hold that the impugned transaction cannot be regarded as colorable device merely on the reasoning that the assessee claimed the depreciation on the goodwill in the scheme of amalgamation. 16.8 We also note that this Tribunal in case of Urmin marketing (P) Ltd. Vs. DCIT reported in 122 taxmann.com 40 has already decided the issue in favor of assessee on the similar facts and circumstances. 16.9 It is important to note that there was an amendment to section 32, section 2(11) of the Act and other relevant sections of the Income Tax Act from the Finance Act 2021, effective from AY 2021-22. The amendment was brought into section 32 of the Act to
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 59 - exclude goodwill from depreciable assets. The relevant portion of the amendments in section 32 is reproduced as under: 32. (1) 97[In respect of depreciation of— (i)xxxxxxxx (ii)know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature98, being intangible assets acquired on or after the 1st day of April, 1998, 99[not being goodwill of a business or profession,] Explanation 3.—For the purposes of this sub-section, 23[the expression "assets"] shall mean— (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 nature2425[, not being goodwill of a business or profession]. 16.10 Therefore, no depreciation is allowable on goodwill from the AY 2021-22 onwards. However, goodwill is not excluded from capital assets. The purpose of exclusion of goodwill from the depreciable assets is that it is seen that Goodwill, in general, is not a depreciable asset and in fact depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value. Therefore, there may not be a justification of depreciation on goodwill. Accordingly, there is no need to provide for depreciation on goodwill of business/profession like other intangible assets or plant & machinery. But such an amendment is not applicable for the year under consideration. 16.11 In view of the above and after considering the facts in totality, we reverse the order of the authorities below and direct the AO to allow the claim of the assessee for the depreciation on the impugned goodwill. Hence, the ground of appeal of the assessee is allowed. 19. We find that the Hon'ble Supreme Court in the case of Smifs Securities (supra) has now settled the legal position that difference between the total consideration paid and the amount of net assets acquired constitutes goodwill eligible as an asset for claiming depreciation under Explanation 3(b) of section 32(1) of the Act This has not been controverted by the Ld. AO as well. In the instant case, the business of KSPL was acquired by KIPL by way of a court approved scheme of amalgamation and it is for this acquisition of business, KIPL had discharged the consideration in form of issue of equity shares to the shareholders of KSPL. In order to determine the consideration, the enterprise
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 60 - value of the business undertaking of KSPL was arrived at Rs. 289.30 crores on the basis of the valuation report obtained from SSPA & Co. Chartered Accountants, which represents the fair value to be paid for acquiring the business undertaking as a whole Including all tangible assets and intangible assets. KSPL was engaged in stock broking business as well as other business relating to depository participant. The company had a strong customer base. Furthermore, the company also had a wide network and efficient technological process & systems. These benefits represent ‘any other business or commercial rights of similar nature being intangible assets’ as referred to in section 32(1) of the Act which is eligible for depreciation under the Act. The amount of consideration (in form of issue of shares) paid in excess of net assets of KSPL is attributable to such intangible benefits which is nothing but represents payment towards goodwill. The excess consideration discharged by KIPL over net assets of KSPL represents the amount paid by KIPL towards acquisition of bundle of business and commercial rights which represents goodwill. In the absence of such intangible asset, KIPL would have to commence the business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the appellant got an up and running business. Such excess payment thus denotes goodwill which in no way can be regarded as outcome of revaluation of any amount. Considering the ratio laid down by the Hon'ble Supreme Court in case of Smits Securities (supra) thus, KIPL is eligible for depreciation on goodwill recognized in course of the Scheme under section 32 of the Act and as a consequence, the Appellant is also eligible to claim depreciation under section 32 of the Act as the case made out by the appellant appears to have merit and deserves to be allowed.
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 61 - This particular aspect of the matter has not been considered by the Ld. CIT(A) in its proper perspective rather he was not correct in forming an opinion that the main object of amalgamation was to create to claim depreciation and the scheme of arrangement was only a device of tax evasion and such claim of depreciation was not a genuine one, giving a complete go by to the sanction given on 21.12.2015 by the Hon’ble Jurisdictional High Court upon considering various aspects of the Scheme, the documents and also the representations received from different regulatory authorities including the report of the Official Liquidator and Income Tax department and furthermore, the affidavit filed by the RD, holding that the arrangement is in the interest of the shareholders and the creditors of all the companies as well as in public interest which is evident at Paragraph No.8 of the order so passed by the Hon’ble Gujarat High Court.
We further find that depreciation on goodwill claimed by the predecessor for the period from 01.04.2015 to 14.03.2016 has been allowed by the ITAT. Accordingly, the claim of depreciation by the appellant on the very same goodwill for remaining period (from 15.03.2016 to 31.03.2016) deserves to be allowed by following order of ITAT passed in the case of the predecessor. Thus, respectfully relying upon the order passed by the Co- ordinate Bench, we allow the appeal preferred by the appellant with a direction upon the Ld. AO to allow the claim of depreciation on goodwill made by the appellant. The appeal preferred by the appellant is, thus, allowed.
In the result, appeal preferred by the appellant is allowed.
ITA Nos. 682 to 684/Ahd/2023 (KIFS International LLP vs. ACIT) A.Ys.– 2016-17 to 2018-19 - 62 - 21. The decision in ITA No. 682/Ahd/2023 for A.Y. 2016-17 shall also apply mutatis mutandis in ITA Nos. 683/Ahd/2023 & 684/Ahd/2023.
In the combined result, all three appeals filed by the appellant are allowed.
This Order pronounced on 08/02/2024
Sd/- Sd/- (WASEEM AHMED) (MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 08/02/2024 S. K. SINHA True Copy आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)- 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad