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Income Tax Appellate Tribunal, DELHI “G” BENCH: NEW DELHI
Before: SHRI ANUBHAV SHARMA & SHRI MANISH AGARWAL
The captioned appeals are filed by assessee against the different orders of Ld. CIT(A) u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of different assessment orders tabulated as under: ITA Nos. Sr. CIT(A) Order Assessment Assessment Order Nos. dated Order dated under section 1 20.03.2014 CIT(A)-28 147 r.w.s. 143(3) of [Assessment Year 2006-07] order dated the Income Tax Act, 28.12.2018 1961. 2.
27.03.2015 CIT(A)-25 147 r.w.s. 143(3) of [Assessment Year 2007-08] order dated the Income Tax Act, 06.03.2020 1961. 3.
31.01.2018 CIT(A)-25 250/143(3) r.w.s. 147 [Assessment Year 2008-09] order dated of the Income Tax Act, 31.01.2020 1961
The issues being common, interlinked and related to the same assessee for Assessment Years 2006-07 to 2008-09 therefore, all these appeals by the assessee have been heard together and accordingly, adjudicated by a common order.
First we take appeal of the assessee in [Assessment Year 2006-07].
1850/Del/2019 [Assessment Year 2006-07]
Brief facts of the case are that the assessee is a company, engaged in the business of manufacturing and trading of insect control and air care products. The return of the income for the year under appeal was filed on 30.11.2006, declaring total income NIL , 1470 &1122/Del/2020 after claiming deduction u/s 80IB & 80IC of the Act. The case of the assessee was picked up for scrutiny and the assessment order was passed u/s 143(3) of the Act dated 24.12.2009 wherein certain additions were made however, the same were claimed as allowed u/s 80IB & 80IC of the Act. Thereafter, reassessment proceedings were initiated in the case of assessee u/s 147 of the act and notice u/s 148 was issued on 17.11.2011. In response assessee filed return of income on 21.12.2011 stating that return of income already filed u/s 139(1) of the Act be treated as the return filed. Thereafter, no reassessment order was passed and another re- assessment notice was issued on 07.03.2013 u/s 148 of the Act for re-initiating the re-assessment proceedings u/s 147 of the Act. The assessee in response, again requested to consider the return filed u/s 139(1) as the return of income and requested for the supply of reasons recorded and filed objections before the AO. The said objections were disposed off by the AO vide order dated 13.03.2014 and thereafter, after considering the submissions of the assessee, the re-assessment order was passed on 30.03.2014 wherein income of the assessee was computed at NIL under Income Tax Act and book profit of the assessee was assessed at INR 69,62,80,147/- as against the book loss declared at INR 15,58,74,356/-.
Aggrieved against this order, the assessee preferred appeal before Ld.CIT(A) wherein the assessee has objected for re-opening of assessment and made submissions on the merits of the additions by the AO. Ld. CIT(A) vide impugned order dated 28.12.2018 passed for various AYrs, dismissed the contentions of the assessee.
, 1470 &1122/Del/2020 6. Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before the Tribunal by taking following grounds of appeal:- 1. “That on the facts and circumstances of the case and in law, the Ld. CTT(A) erred in upholding the action of the Ld. AO of initiation of proceedings under section 147 of the Act and assuming jurisdiction over the appellant for the year under consideration for reopening concluded assessment under section 143(3) of the Act on complete misconception of facts of case as well as in law. 1.1 That the Ld. CIT(A) has failed to appreciate and has also erred in law in approving the action of the Ld. AO of initiating and completing the reassessment proceedings despite there being no escapement of income for the year under consideration as per the alleged reasons recorded by the Ld. AO, either in law or in fact. 1.2 That the Ld. CIT(A) has failed to appreciate and has erred in law that the initiation of reassessment proceedings was barred by limitation in view of the proviso to section 147 of the Act on account of the reason that there was no failure on the appellant's part to disclose fully and truly all material facts necessary for assessment. 1.3 That the Ld. CIT(A) erred in law in not appreciating that the alleged reasons to believe recorded are merely in the nature of pretence and vague as no fresh tangible material surfaced after completion of original assessment proceedings. 1.4 That the Ld. CIT(A) erred in law in not appreciating that the initiation of reassessment proceedings was merely on the basis of change of opinion on the same set of facts which were existing and considered at the time of original assessment concluded under section 143(3) of the Act. 1.5 That the Ld. CIT(A) erred in law in not appreciating that the satisfaction to be recorded under section 151(2) of the Act by the Ld. CIT in present case is neither proper nor satisfactory which can pass through the judicial scrutiny as mandated in law.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the disallowance made by the Ld. AO in relation to the salary expenditure of expatriates amounting to Rs. 3,45.62,000/- pertaining to year under consideration merely on alleged ground that the debit notes were received in the subsequent FY 2006-07. 2.1 That the Ld. CIT(A) erred in law and fact in holding that under the mercantile system of accounting, a claim of expenditure could only be made on the basis of documentary evidence such as bills/vouchers/debit note etc., without appreciating that principle of prudence and matching concept as well as mercantile system of , 1470 &1122/Del/2020 accounting warrants that the expenditures ought to be claimed in the year to which it pertained.
3. That on the facts and circumstances of the case & in law, Ld. CTT(A) erred in upholding the adjustment done by the Ld. AO for a sum of Rs. 85,21,54.503/- in the book profits of the company for the purpose of computation of income under section 115.JB of the Act. 3.1 That the Ld. CIT(A) erred in confirming action of the Ld. AO of adjustment of amortisation of goodwill of Rs. 85,21,54,503/- under section 115JB of the Act without appreciating that such an adjustment does not fall under explanation 1 to section 115.JB of the Act. 3.2 That Ld. CIT(A) erred in confirming the findings of the Ld. AO that the Scheme of Amalgamation is in the nature of "Pooling of Interest" method as against the appellant's claim of "Purchase" method which was approved by the auditors of the company and was also in accordance with the scheme of amalgamation as approved by the Hon'ble High Court. 3.3 That on the facts and circumstances of the case and in law, Ld. CIT(A) erred in concluding that the Ld. AO is empowered to tinker with the Scheme of Amalgamation approved by the Hon'ble High Court. 3.4 That the Ld. CIT(A) has erred in disregarding the fact that "Purchase method" is a permissible method of accounting in cases of merger of wholly owned subsidiary under Accounting Standard-14 ("AS") and the goodwill so computed in accordance has to amortize as disclosed in Scheme of Amalgamation read with AS-14. 3.5 That the Ld. CIT(A) erred in upholding the alternative addition made by the Ld. AO in relation to amortisation of goodwill of Rs. 85,21,54,503/- as amount set aside as provision for diminution in the value of any assets under clause (i) of explanation 1 to section 115JB of the Act.
4. That the Ld. AO has erred on facts and in law in charging interest under section 234D of the Act. The grounds of appeal raised by the Appellant herein are without prejudice to each other. The Appellant reserves its right to add, alter, amend or withdraw any of the grounds of appeal or produce further documents either before or at the time of hearing of this Appeal.”
Ground of appeal Nos.1 to 1.5 raised by the assessee are in 7. respect to the re-opening of the assessment proceedings u/s 147 of , 1470 &1122/Del/2020 the Act. Since all these grounds of appeal are in relation to the re-opening of assessment therefore, they are taken together for consideration.
Before us, Ld.AR for the assessee submits that the reasons were recorded for issue of notice u/s 148 on 17.11.2011 which are placed at page 1 & 2 of the Paper Book. Ld.AR stated that in these reasons, the AO observed that assessee has claimed expenses to the tune of INR 3,45,62,000/- which were related to the prior period expenses and therefore, the income to the extent of this amount has escaped assessment. Thereafter, various replies were filed by the assessee during period from 08.10.2011 to 06.03.2013 wherein all the facts were brought to the notice of the AO. After considering the submissions, no re-assessment order was passed consequent to the re-assessment proceedings initiated u/s 147 of the Act by way of issue of notice u/s 148 of the Act on 17.11.2011. Ld. AR submits that thereafter, the AO issued second notice u/s 148 on 07.03.2013 for re-assessing the income of the assessee. The copy of the said notice is placed at page 29 in the written submission filed before us.
Ld. AR submits that after filing the return of income on 08.04.2013 in response to notice u/s 148, assessee sought reasons recorded before issue of notice u/s 148, which were supplied to the assessee and as per Ld.AR, the reasons so recorded contained one new issues with respect to the depreciation claimed besides the issue of prior period which was there in the earlier reasons recorded, based on which proceedings initiated in November 2011.
, 1470 &1122/Del/2020 He submits that from the perusal of the reassessment order, it could be seen that no addition was made for the new issue of depreciation raised in the reasons recorded before issue of notice on 07.03.2013. The copy of the reasons so recorded at page 5 to 7 filed by the assessee.
Ld.AR for the assessee submits that re-assessment proceedings initiated in terms of the notice issued on 17.11.2011 were not completed as no re-assessment order was passed by the AO and thereafter, again on the very same reasons, re-opening was done by way of issue of notice on 07.03.2013. He thus, prayed that the subsequent proceedings deserve to be hold bad in law and merely change of opinion. He further submits that from the perusal of approval memo supplied by the Department vide letter dated 1.01.2014, it could be seen that the approval granted by ld. CIT was mechanical and Ld. CIT(A) has simply mentioned “yes, I am satisfied” which further prove the non-application of mind in the instant case by Ld.CIT(A) at the time of granting approval. For this reliance is placed on the judgement of the Hon'ble Delhi High Court in the case of CIT vs: N.C. Cables Ltd., 391 ITR l1 (Del) and also various other decisions of the coordinate bench.
Ld.AR also submits that the assessee has already disclosed fully and completely all the material in the return of income filed wherein in the Annual Report of the assessee in the notes and accounts to the financial statements at page 11, the issue of prior period expenses was duly disclosed and there was no fact which , 1470 &1122/Del/2020 was concealed by the assessee. All these financial statements were submitted before the authorities during the course of assessment proceedings u/s 143(3) of the Act and were available when the AO alleged the escapement of income. He further submits that during the proceedings, it was stated that, there was no fresh material available with the AO at the time of recording satisfaction for issue of notice on 07.03.2013 therefore, he prayed that the re-assessment proceedings initiated, deserves to be hold bad in law and consequent order to be quashed.
On the other hand, Ld.CIT DR for the Revenue vehemently supported the orders of the lower authorities and submits that proper satisfaction was recorded at the time of re-opening of case in terms of notice issued on 07.03.2013 with respect to the earlier re-opening done on 17.11.2011, it is submitted that there were error and omissions in the reasons recorded, therefore, the AO dropped such proceedings and initiated such fresh proceedings. He further drew our attention to the copies of the invoices which were made basis for re-opening of assessment, according to which they were raised in subsequent AY i.e. in FY 2006-07 therefore, he submits that the provision made during the year under appeal with respect to such invoices is contrary and therefore, the assessee has failed to disclose truly and fully of material facts before the AO during the course of assessment proceedings. He thus submits that the assessment was rightly re-opened. He further submits that Ld.CIT(A) had dealt with each and every argument taken by the assessee with respect to re-opening of assessment which are , 1470 &1122/Del/2020 discussed by Ld. CIT(A) in para 16 to 17 of the order in page 42 to 45 and therefore, prayed for the confirmations of the orders of the lower authorities.
Heard the contentions of both the parties and perused the material available on record. In the instant case, there were more than one reassessment proceedings were initiated wherein one issue is common and for the other issue taken in subsequent reassessment proceedings, no addition was made. The sequence of proceedings so initiated is tabulated by the assessee in its written submission which reads as under:-
It is further seen that the reasons recorded before issue of notice u/s 148 of the Act on 17.11.2011, AO has recorded the following reasons:- “In original assessment u/s 143(3) was completed in December 2009 at an Income of 87399507/- against the returned income 22862335/-creating the demand of Rs. 22721095/-. Perusal of records revealed that an amount of Rs. 34562000/-was debited to Profit and loss account for claim received from S.C. Johanson Ltd. USA in April' 2006. As the claim was received in F.Y. 2006-07, the same should be debited in F.Y. 2006-07 (Α.Υ. 2007-08). The mistake has resulted in underassessment of income of Rs. 34562000/-involving short levy of tax of Rs. 15472647/-including interest. I have therefore, reason to believe that an amount of Rs. 34562000/- have escaped assessment within the meaning of section 147(c) of the IT Act, 1961. The escapement of the income has been by the reason of failure on the part of the assessee to disclose fully & truly, all material fact necessary for Since the assessment has been assessment. completed u/s , 1470 &1122/Del/2020 143(3) of the IT Act, 1961 and 4 years have since elapsed. The assessment record is being submitted for kind perusal and approval u/s 151(1) of the IT Act, 1961 for issuance of notice u/s 148 of the IT Act, 1961.”
From the perusal of the aforesaid reasons, it could be seen that reassessment proceedings were initiated for the reasons that expenses to the extent of INR 3,45,62,000/- were claimed in P & L Account based on the claim made by S.C. Johnson Ltd. USA in the month of April 2006. Therefore, the AO was of the opinion that the same were to be debited in FY 2006-07. Further these contained the claims for previous assessment years also. Thereafter, the re- assessment proceedings were again initiated in terms of the notice issued on 07.01.2013 and the reasons recorded before the issue of re-assessment notice are as under:-
From the perusal of the aforesaid reasons, it could be seen that there are two reasons of escapement of income recorded by AO; one reasons is similar which was taken earlier of expenses to the tune of INR 3,45,62,000/- regarding the claim made by the S.C. Johnson, USA. It is also seen that other issues taken by the AO of escapement of income is with respect to the vehicle depreciation and valuation under assessment of FBT however, no contrary view was taken on the said reasons in the re-assessment order passed as no addition was made on this account. In the re-assessment order , 1470 &1122/Del/2020 dated 20.03.2014, the only issue remained is with respect to the claim of salary by US Company for which the addition was made besides new issue of amortization of goodwill which is added to the book profit. It is seen that based on the very same reasons, proceedings u/s 148 of the Act were initiated on two occasions and on first occasion, the same were claimed as dropped by the revenue. As the time limit for completion of re-assessment order for the notice issued u/s 148 of the Act on 17.11.2011 should be completed on or before 31.03.2013 it could be presumed that the claim of the revenue is correct. There is no provision under the Act according to which re-assessment proceedings initiated could be merged with other re-assessment proceedings.
The arguments of Ld. CIT DR that there were certain mistakes which were rectified in subsequent proceedings initiated u/s 148 of the Act. However, from the perusal of the reasons recorded, we find that there is no reference of any mistake in the reasons recorded earlier by the AO based on which first notice u/s 148 issued on 17.11.2011 and no addition was made on the fresh issue raised in the reasons recorded for the second time. Therefore, contention of Ld. CIT DR is that there were certain errors and omissions in the reasons recorded before issue of notice on 17.11.2011 could not be accepted.
It is also a matter of record that assessee had disclosed all the material facts with respect to the claim made in the financial statement where Note No.11 to the balance sheet speaks about Page | 16 , 1470 &1122/Del/2020 such claim and a reference is also made for the claim pertaining to FYs 2003-04 to 2005-06 which were never made earlier. The relevant Note-11 is reproduced as under:-
, 1470 &1122/Del/2020 19. It could be seen that the assessee had bifurcated the amounts claimed as provision related to the claim of S. C. Johnson & Sons Inc., USA related to salary which includes 3,45,62,000/- pertaining to assessment year under appeal. The AO has failed to appreciate that such financial statements alongwith the relevant notes were available with the AO when the assessment was completed u/s 143(3) and thereafter no fresh and tangible material is referred in the reasons recorded for issue of notice for reassessment of the completed proceedings.
From the perusal of the reasons recorded as well as perusal of the observation of the AO in disposing the objections raised by the assessee, we find that there is no quarrel that assessee has not truly and fully disclosed all the material facts necessary for the purpose of assessment. In the original assessment proceedings, the AO after considering all the material has framed an opinion. There was nothing more to disclose and a person cannot be said to have omitted or failed to disclose something when, of such thing, he had no knowledge. Not only material facts were disclosed by the assessee but also they were fully scrutinized by the AO in the original assessment proceedings and figure of income as well as the deductions was worked out by the AO. The claim of S.C. Johnson & Sons Inc. was duly disclosed in the Notes on account which was available with the AO while framing the assessment. Now on the same material AO has tried to cover up the error and omission by way of reopening the assessment without any fresh material which is nothing but mere change of opinion. No new information and/ or , 1470 &1122/Del/2020 tangible material was found and the formation of any opinion based on same facts which were then available with the AO at the time of original assessment is not permissible.
The Hon’ble Apex Court in the case of CIT Vs. Kelvinator of India Ltd (supra) has laid down that “ the assessing officer has no power to review; he has the power to re-assess, but re-assessment has to be based on fulfilment of certain pre -condition and if the concept of ‘change of opinion’ is removed, then, in the garb of re- opening the assessment, the review would take place. One must treat the concept of ‘Change of opinion’ as an in-built test to check abuse of power by the assessing officer.”
Lastly, from the performa of the reasons recorded in Item No.13, it could be seen that Ld.CIT(A) had recorded satisfaction by simply observing “yes, I am satisfied”. This approval is mechanical approval wherein no proper satisfaction was recorded by Ld.CIT(A).
Hon’ble Supreme Court in case cited as CIT vs. S. Goyanka Lime & Chemical Ltd. – (2015) 64 taxmann.com 313 (SC) examined the identical issue as to according the sanction for reopening the assessment u/s 148 of the Act by merely recording “Yes. I am satisfied”. And held that reopening on the basis of mechanical sanction is invalid by returning following findings :-
Section 151, read with section 148 of the Income-tax Act,1961 - Income escaping assessment - Sanction for issue of notice (Recording of satisfaction) - High Court by impugned order held that where Joint Commissioner recorded satisfaction in mechanical manner and without Page | 19 , 1470 &1122/Del/2020 application of mind to accord sanction for issuing notice under. section 148, reopening of assessment was invalid - Whether Special Leave Petition filed against impugned order was to be dismissed - Held, yes [In favour of assessee] Search and Seizure-Procedure for black Assessment- Search was conducted at residential and business premises of Assessee and notice for block assessment u/s. 158-BC was issued- For block period, returns were filed that were processed u/s. 143 (1)- However, notice u/s. 148 was issued by AO, on basis of certain reasons recorded- Assessee objected to same before AO, that was rejected and assessment was completed u/ss. 143(3) and 147-CIT(A) found that reason recorded by Joint Commissioner of Income Tax, for according sanction, was merely recording ‘I am Satisfied'-Action for sanction was alleged to be without application of mind and to be done in mechanical manner-Held, while according sanction, Joint Commissioner, Income Tax only recorded Yes, I am satisfied"-Mechanical way of recording satisfaction by Joint Commissioner, that accorded sanction for issuing notice u/s. 147, was clearly unsustainable-On such consideration, both Appellate authorities interfered into matter- o error was committed warranting reconsideration-As far as explanation to S. 151, brought into force by Finance Act, 2008 was concerned, same only pertained to issuance of notice and not with regard to manner of recording satisfaction-Amended provision did not help Revenue-No question of law involved in matter, that warranted reconsideration- Revenue's Appeals dismissed.”
Hon’ble High Court of Delhi in case cited as SABH Infrastructure Ltd. vs. ACIT in WP (C) 1357/2016 order dated 25.09.2017 has issued guidelines to the Revenue authorities while deciding the issue of reopening u/s 147/148 of the Act. Operative part of which is reproduced as under:-
19. Before parting with the case, the Court would like to observe that on a routine basis, a large number of writ petitions are filed challenging the reopening of assessments by the Revenue under Sections 147 and 148 of the Act and despite numerous judgments on this issue, the same errors are repeated by the concerned Revenue authorities. In this background, the Court would like the Revenue to adhere to the following guidelines in matters of reopening of assessments: (i) while communicating the reasons for reopening the assessment, the copy of the standard form used by the AO for obtaining the Page | 20 , 1470 &1122/Del/2020 approval of the Superior Officer should itself be provided to the Assessee. This would contain the comment or endorsement of the Superior Officer with his name, designation and date. In other words, merely stating the reasons in a letter addressed by the AO to the Assessee is to be avoided; (ii) the reasons to believe ought to spell out all the reasons and grounds available with the AO for reopening the assessment - especially in those cases where the first proviso to Section 147 is attracted. The reasons to believe ought to also paraphrase any investigation report which may form the basis of the reasons and any enquiry conducted by the AO on the same and if so, the conclusions thereof; (iii) where the reasons make a reference to another document, whether as a letter or report, such document and/ or relevant portions of such report should be enclosed along with the reasons; (iv) the exercise of considering the Assessee’s objections to the reopening of assessment is not a mechanical ritual. It is a quasi- judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. No attempt should be made to add to the reasons for reopening of the assessment beyond what has already been disclosed.
The Hon'ble Delhi High Court in the case of CIT vs N.C. Cables Ltd. (supra) has observed as under:-
Reassessment-Issuance of Notice-Sanction for issue of Notice- Assessee had in its return for A Y 2001-02 claimed that sum of Rs. 1 Crore was received towards share application amounts and a further sum of Thirty Five Lakhs was credited to it as an advance towards loan-Original assessment was completed u/s 143(3)- However, pursuant to reassessment notice, which was dropped due to technical reasons, and later notice was issued and assessments were taken up afresh-After considering submissions of assessee and documents produced in reassessment proceedings, AO added back a sum of Rs.1,35,00,000/- - CIT(A) held against assessee an legality of reassessment notice but allowed assessee's appeal on merits holding that AO did not conduct appropriate enquiry to conclude that share inclusion and advance received were from bogus entities-Tribunal allowed assessee's appeal on merits- Revenue appealed against appellate order on merits- Assessee's cross appeal was on correctness of reopening of assessment- Tribunal upheld, assessee's cross- objections and dismissed Revenue's appeal holding that there was no Page | 21 , 1470 &1122/Del/2020 proper application of mind by concerned sanctioning authority u/s Section 151 as a pre-condition for issuing notice u/s 147/148-Held, Section 151 stipulates that CIT (A), who was competent authority to authorize reassessment notice, had to apply his mind and form opinion-Mere appending of expression 'approved' says nothing-It was not as if CIT (A) had to record elaborate reasons for agreeing with noting put up-At same time, satisfaction had to be recorded of given case which could be reflected in briefest possible manner-In present case, exercise appears to have been ritualistic and formal rather than meaningful, which was rationale for safeguard of approval by higher ranking officer-Revenue's appeal dismissed.
Similar view has been taken by the Co-ordinate Benches of the Tribunal in a number of cases where it had been held that merely giving approval by mentioning; "Yes, I am satisfied” that it is a fit case for reopening of assessment" is not a valid approval. Accordingly, the reassessment proceedings have been quashed. Since, in the instant case, both the superior authorities have merely given their approval in a mechanical manner without independent application of mind, therefore, respectfully following the decision of the jurisdictional High Court in the case of N.C. Cables (supra), we hold that the reassessment proceedings are bad in law.
In view of the facts and circumstances of the case and in our considered opinion, there is merely change of opinion on the part of the AO as no fresh material as referred which was came to his possession after completion of the assessment raised on which it could be said that assessee has not disclosed truly and fully all the material facts necessary for the assessment passed on which satisfaction could be recorded for the escapement of income. Further, the approval given by Ld. CIT(A) is evident from his observation of the approval memo, there is no application of mind , 1470 &1122/Del/2020 by Ld. CIT who simply noted “Yes, I am satisfied” without going further looking into matters on the merits of the issue and therefore, such approval being mechanical could not be made passed for re-opening the completed assessment accordingly, we hold the re-assessment proceedings as bad in law and consequent notice u/s 148 is hereby quashed.
Ground of appeal Nos. 1.1 to 1.5 raised by the assessee are accordingly, allowed.
Since we have allowed the appeal of the assessee on the legal ground therefore, other grounds of appeal became academic and not adjudicated.
In the result, appeal of the assessee is partly allowed.
1470/Del/2020 [Assessment Year 2007-08]
In the instant appeal, Ground of appeal No.1 taken by the assessee with respect to re-opening of assessment being not pressed thus, dismissed.
Ground of appeal Nos. 2 to 2.5 raised by the assessee are in relation to the addition of INR 1,03,26,96,924/- in the book profit of the assessee. As these grounds are inter-related and inter-linked therefore, the same are taken together for consideration.
Brief facts of the case are that the assessee company had one owned fully and subsidiary company in the name of KAPL who had Page | 23 , 1470 &1122/Del/2020 one subsidiary in the name of Roshni Appliances Pvt. Ltd. (“RAPL”) and both these companies, KAPL & RAPL were amalgamated with the assessee company in terms of scheme of amalgamation approved by Hon’ble Delhi High Court on 09.10.2006 with the appointed dated on 01.06.2005. As a result of this amalgamation, total investment by the assessee of INR 7,46,71,55,000/- as against net assessed value of INR 235 crores of these two companies were taken. The assessee companies has followed the purchase method for accounting such transactions and accordingly, the differential amount i.e. amount of investment in the subsidiary companies and the gross value of assets taken over as a result of amalgamation of the subsidiary companies is treated as “goodwill” in the books of accounts of the assessee which though eligible for deduction in the very first year as diminution in the value of investment in the year when the companies are amalgamated however, the management decided to amortize the same in five years in equal installments and accordingly, 1/5 of the same stood amortized in the books of accounts as depreciation. AO observed that treatment by the assessee of following “purchase method” is not correct and by applying “Pulling method of accounting” as prescribed in AS-14, he disallowed the amount of depreciation claimed in the P&L Account and added back the same to the book profits. It is relevant to state here that no such expenditure was claimed by the assessee in the computation of income under normal provision of the Act and only in book profits, same was claimed as expenditure.
, 1470 &1122/Del/2020 34. Against this, the appeal was filed before Ld.CIT(A) who dismissed the appeal of the assessee.
Thus, aggrieved by the order of Ld.CIT(A), the assessee preferred appeal before the Tribunal.
Before us, Ld.AR submits that the scheme of merger was duly approved by the Hon’ble High Court which is placed at pages 39 to 94 of the Paper Book volume 2 filed by the assessee. Ld.AR submits that the assessee had accounted for the goodwill in the books of accounts by following the “purchase method” and a detailed note in this regard was given in the Balance Sheet in Note No.4 wherein working of the goodwill at INR 5,11,28,82,000/- is given. Ld.AR further drew our attention to Item No.4(f) of the notes wherein the Auditor of the company clearly observed that as per Accounting Standard-14, accounting of this transaction could have been made as per pooling of interest method. However, since it had revenue neutral exercise in substance and would have no impact on the Profit & Loss Account, therefore, the accounting treatment was done by assessee following the purchase method which is also prescribed in AS-14 and thus the same deserves to be accepted. He further submits that the Hon’ble High Court in the scheme of amalgamation has approved the purchase method and quantification of the amounts were also stated. It is further submitted that if this adjustment is made in the book profit, the assessee is entitled to the MAT credit in the future years. According to Ld.AR, AO has failed to point out any defect and merely applied Page | 25 1470 &1122/Del/2020 other method. Ld.AR placed reliance on the judgement of Co- ordinate Bench of Mumbai Tribunal in the case of Toyo Engineering India Ltd. in wherein in similar type of claim of depreciation on Goodwill as the goodwill was recognized by using the purchase method. He also drew our attention to the common facts of the case of Toyo Engineering India Ltd. (supra) and of the assessee as tabulated in para 7.2.5 of the written submissions. He thus, submits that the adjustment made in the book profit declared by the assessee deserves to be deleted. The assessee also filed a detailed written submission in this regard containing various arguments which were made oral before us. The submissions so made by Ld.AR of the assessee is reproduced hereunder below for sake of convenience:-
, 1470 &1122/Del/2020 37. On the other hand, Ld.CIT DR for the Revenue submitted that the amalgamation was approved after the acquisition done by the assessee company and the Hon’ble High Court in the case of assessee’s own case, held that the AO cannot be open enquiries in this regard. He further submits that the treatment was done by the AO by following the Accounting Standard-14 in this regard wherein in the case of amalgamation, conditions are prescribed under which the pooling of interest method is to be followed. Ld. CIT DR further submits that action of the AO in making adjustments in the book profit is very well in its power therefore, the same deserves to be accepted. Ld. CIT(A) also filed a detailed written submission which is reproduced as under:-
, 1470 &1122/Del/2020 38. Ld.AR for the assessee filed a re-joinder to the submissions made by Ld.CIT DR which are as under:-
, 1470 &1122/Del/2020 39. Heard the contentions of both the parties and perused the material available on record. In the instant case, two companies namely, RAPL and KAPL were amalgamated with the assessee company with terms of the scheme of amalgamation approved by Hon’ble Delhi High Court. The assessee in its financial statement in Note No.4 titled as “amalgamation” has made a detailed note on the scheme and its accounting treatment given in the books of amounts which reads as under:-
It is further seen that the assessee has recognized the goodwill in the books of accounts in compliance to the Accounting Standard- 14 wherein the assessee has followed purchase method as detailed in AS-14. It is further seen that Note No.4F above, the Auditor has specifically mentioned the reason as to why the purchase method is preferred over the pulling of interest method.
The scheme of amalgamation was approved by Hon’ble Delhi High Court wherein Hon’ble High Court has considered all the aspects as detailed in the scheme by the assessee. Therefore, we do not find any error in the treatment given by the assessee in the , 1470 &1122/Del/2020 books of accounts which is based on the scheme approved by the Hon’ble High Court.
It is further seen in the case if pulling of interest method as prescribed in Accounting Standard-14 is followed, the necessary entry to the effect of loss on such amalgamation i.e. negative earnings is to be disclosed in the financial statement on the assets side of the Balance Sheet which has to be amortized in the books of account either in one go or as decided in five years. In such circumstances, there would be no change in the financial results of the assessee as under the payment method, the assessee has claimed depreciation on goodwill whereas under pulling of interest method, losses would be claimed in the Profit & Loss Account. Thus, in our considered opinion, as has been observed by the Statutory Auditors also, the accounting treatment either by purchase method or pulling of interest method would make no difference on the financial statements of the assessee company and therefore, when there is material difference if the assessee has preferred purchase method over the pulling of interest method.
In view of the above facts and by following judgment of Co- ordinate Bench of Bombay Tribunal in Toyo Engineering India Ltd. (supra), wherein under common and identical facts, the Co-ordinate Bench of Tribunal has held that the assessee is eligible for depreciation on goodwill therefore, we direct the AO to delete the adjustments made in the book profits of the assessee company.
, 1470 &1122/Del/2020 Ground of appeal Nos. 2 to 2.5 raised by the assessee are accordingly, allowed.
Ground of appeal No.3 raised by the assessee is with respect to charging of interest u/s 234B, 234C, 234D and 244 A of Act which are consequential in nature. AO is directed to charge the same on the income finally computed after giving effect to the order of the Tribunal.
In the result, appeal of the assessee is allowed.
[Assessment Year 2008-09]
This appeal is filed against the order of Ld.CIT(A) wherein in Ground of appeal No.1 is general in nature, needs no separate adjudication.
Ground of appeal No.2 to 2.4 raised by the assessee is with respect to the re-assessment proceedings which are not pressed during the course of hearing therefore, the same are dismissed.
Ground of appeal Nos. 3 to 3.2 raised by the assessee are with respect to the addition of INR 1,03,26,96,924/- made in the book profit declared u/s 115JB of the Act.
49. Before us, both the parties fairly admitted that the facts and issues are similar and identical to the facts of the case in ITA 1470 &1122/Del/2020 No.1850/Del/2019 [Assessment Year 2006-07] in Ground No.3. The respective sides have canvassed similar plea. In view of the similarity of facts, our decision in [Assessment Year 2006-07] would apply Mutatis Mutandis in the appeal also, filed by the assessee. Thus, Gorund of appeal Nos.3 to 3.2 raised by the assessee are allowed.
In the result, appeal of the assessee is allowed.
In the combined result, all appeals of assessee in [Assessment Year 2006-07] and in & 1122/Del/2020 [Assessment Years 2007-08 & 2008-09] are partly allowed.
Order pronounced in the open Court on 28.08.2025.