DCIT., CIRCLE 8(1), HYDERABAD V. EAST INDIA PETROLEUM LIMITED, HYDERABAD

ITA 1087/HYD/2024

AI Insights

The case revolves around the appeal by the Deputy Commissioner of Income Tax against the order of the CIT(A), which had allowed depreciation on goodwill and interest deductions related to the amalgamation of M/s Rushikonda Petroleum Projects Private Limited (M/s RPPPL) with East India Petroleum Limited. The Revenue contested the CIT(A)'s decision, arguing that the goodwill should not be eligible for depreciation as it was not put to use in the business during the relevant financial year, and the interest on loans taken for acquiring shares was capital in nature and not for business purposes. The Tribunal examined the legal provisions, the nature of the transactions, and relevant case laws to arrive at its decision.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 29068 (ITAT-HYDERABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB-B
• Assessment Year: 2018-2019
• Other Referred Cases: CIT Vs. Smifs Securities Ltd., CIT Vs. Hewlett Packard India Sales Pvt. Ltd., Signode India Ltd. Vs. Dy.Commissioner of Income Tax, Mysore Minerals Limited Vs. CIT, S.A Builders Ltd. Vs. CIT, B.Nanji and Co. Vs. DCIT, DCIT Vs United Breweries Ltd., Trivitron Healthcare P.Ltd. Vs. CIT, Teksystems Global Services Pvt.Ltd. Vs.DCIT, M/s. Altimetrik India Pvt.Ltd, Vs. DCIT, M/s. Kewa Fragrances P.Ltd, M/s. Mylan Laboratories, M/s. Rushikonda Petroleum Projects Private Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M. NARMADA
• Assessee Lawyers: H. SRINIVASULU
• Keywords: Set aside; Capital asset; Revised return; Revenue expenditure; Depreciation; Capital expenditure; Capital Gains; Scheme of amalgamation
• Section: 32; 274; 37(1)

Judgement Text

" आयकर अपीलीय अधिकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘B’ Bench, Hyderabad Before Shri Manjunatha G., Accountant Member and Shri K.Narsimha Chary, Judicial Member आ.अपी.सं /ITA No.1087/Hyd/2024 (निर्धारण वर्ा/Assessment Year: 2018-19) Deputy Commissioner of Income Tax Circle-8(1)(incharge) Hyderabad Vs. East India Petroleum Limited Hyderabad [PAN : AAACE4494K] (Appellant) (Respondent) निर्धाररती द्वधरध/Assessee by: Shri H.Srinivasulu, AR रधजस् व द्वधरध/Revenue by: Ms.M.Narmada, CIT-DR सुिवधई की तधरीख/Date of Hearing: 16/01/2025 घोर्णध की तधरीख/Date of Pronouncement: 06/02/2025 आदेश / ORDER PER. MANJUNATHA G., A.M: This appeal filed by the Revenue is directed against order dated 19.08.2024 of the Commissioner of Income Tax (Appeals) [“Ld.CIT(A)”], National Faceless Appeal Centre (NFAC), Delhi, pertaining to A.Y.2018-19. 2. The brief facts of the case are that the assessee, engaged in the business of providing terminalling services to oil marketing companies for storage of bulk liquid products including fuels like high speed diesel, motor spirit, petroleum 2 ITA No.1087/Hyd/2024 East India Petroleum Limited products like gas condensate and naphtha and petrochemicals as well as liquefied gas fuels like butane, propane and liquefied petroleum gas (LPG) at Visakhapatnam Port, Andhra Pradesh, filed its return of income on 30.10.2018 for the A.Y.2018-19, declaring total income of Rs.31,38,15,690/-. The company, by name, M/s Rushikonda Petroleum Projects Private Limited (“M/s RPPPL”), having similar objects had been amalgamated with the assessee company w.e.f.01.04.2017, by virtue of an order of National Company Law Tribunal (“NCLT”), Hyderabad, vide order dated 11.01.2019 and as per the said order, the appointed date was from 01.04.2017 and by which, all the assets and liabilities of M/s RPPPL was taken over by the assessee company. On receipt of the order from NCLT, the assessee company has duly given effect to the said order and all the assets and liabilities as on 01.04.2017 were transferred and recorded in the books of accounts of the assessee company. Subsequently, to give effect to the amalgamation of M/s RPPPL and the assessee company, a revised return has been filed on 30.03.2019, declaring total income of Rs.Nil and refund tax claim of Rs.9,23,40,520/-. 3. The case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer noticed that the transferor company, M/s RPPPL was formed in the year 2016 and the only activity it did was to borrow money from Axis Finance Ltd. to acquire 51% shares of the assessee from Energy infra Limited, Mauritius. Further, M/s RPPPL, got merged into 3 ITA No.1087/Hyd/2024 East India Petroleum Limited assessee company w.e.f. 01.04.2017, by an order of NCLT dated 11.01.2019. This amalgamation has led to creation of artificial intangible asset in the form of goodwill of Rs.88,21,86,061/-, on which depreciation @25% amounting to Rs.22,05,65,250/- has been claimed. The Assessing Officer, further observed that as per the provisions of section 32 of the Income Tax Act, 1961 (“the Act”), depreciation on any asset is allowable, when it is actually put to use. Since the assessee company did not put to use, the asset in the business, it is not eligible for depreciation, therefore, called upon the assessee to explain as to why the depreciation cannot be disallowed. Similarly, the Assessing Officer noted that the assessee has debited interest of Rs.18,68,28,250/-. On amalgamation, the same loan liability has been taken over by the assessee and the assessee company has treated interest as revenue expenditure. Therefore, observed that, if this claim of interest expenditure is allowed, it would amount to allowing assessee company payment of interest on money borrowed for buying its own share capital. Therefore, called upon the assessee to explain as to why the interest expenditure shall not be disallowed. 4. In response, the assessee submitted that the company has filed revised return of income, incorporating the order passed by the NCLT on 11.01.2019, amalgamating M/s RPPPL with assessee company, from the appointed date 01.04.2017. As per the order of the NCLT, the scheme of amalgamation has been treated as ‘purchase method’ in terms of Accounting 4 ITA No.1087/Hyd/2024 East India Petroleum Limited Standard-14 (“AS-14”) issued by Institute of Chartered Accountants of India (“ICAI”) and accordingly, all assets and liabilities of the transferor company has been accounted in the books of accounts of the transferee company, i.e. assessee company, which resulted in taking over excess liabilities to the tune of Rs.88,21,86,061/- and the same has been treated as ‘goodwill’ in the books of accounts of transferee company, on which depreciation @25% has been claimed in terms of section 32 of the Act. The assessee had also explained the interest debited to Profit & Loss account towards loan borrowed from Axis Finance Ltd. and argued that as on the appointed date, M/s RPPPL was not having shares of assessee company and subsequently, the shares held by Energy Infra Limited, Mauritius had been purchased to consolidate the business and therefore, interest paid on said loan is in the nature of interest expenditure on loan borrowed for the purpose of the business of the assessee and same can be allowed as deduction u/s 32 of the Act. 5. The Assessing Officer, after considering the submissions of the assessee and also taking note of provisions of section 32 of the Act, observed that, in order to claim depreciation on any asset, the assessee must be owner of the asset and further, the asset must be used for the purpose of business or profession during the previous year. In the given case, amalgamation order has been passed on 11.01.2019, though w.e.f.01.04.2017 and therefore, the so called goodwill arising out of amalgamation 5 ITA No.1087/Hyd/2024 East India Petroleum Limited cannot be actually be called to have at all been used in the business for the F.Y.2017-18, relevant to A.Y.2018-19. Therefore, observed that the depreciation claimed on goodwill cannot be allowed as deduction. The Assessing Officer, further noted that had it been the case of the assessee that goodwill has been used during the year, the assessee would have claimed the depreciation in the original return, which the assessee has not claimed, therefore, rejected the arguments of the assessee and disallowed depreciation of Rs.22,05,65,250/-. The Assessing Officer, further noted that the assessee company had debited interest expenses on loan borrowed from Axis Finance Ltd and the same has been used for the purpose of acquiring share capital of assessee company from Energy Infra Limited, Mauritius and from the amalgamation, the entire loan liability has been taken over by the assessee company. Since the loan liability has been taken over by the assessee company, it is as good as assessee company has borrowed loan to acquire its shares, which cannot be said that interest paid on loan borrowed from Axis Finance Ltd. is for the purpose of business and therefore, disallowed entire interest expenditure u/s 37(1) of the Act. 6. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A) and challenged the additions made towards disallowance of goodwill and depreciation in light of the decision of Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. (2012) 348 ITR 302 6 ITA No.1087/Hyd/2024 East India Petroleum Limited (SC) and argued that depreciation arising on account of amalgamation is in the nature of an intangible asset and the same is eligible for depreciation u/s 32 of the Act. The assessee had also challenged the disallowance of interest expenditure u/s 37 of the Act, on the ground that the interest expenditure covered u/s 30 to 36 needs to be dealt with relevant provisions of the Act and cannot be dealt under the provisions of section 37(1) of the Act. Therefore, the Assessing Officer erred in disallowance of interest expenditure u/s 37(1). Further, interest on loan borrowed from Axis Finance Ltd. is for the purpose of business of the assessee, because, M/s RPPPL has borrowed loan from Axis Finance Ltd. for the purpose of acquiring share capital of assessee company from Energy Infra Ltd., Mauritius to consolidate business and because both the companies are having similar business activity and it really helps the assessee to achieve business advantage and therefore, it can be said that interest paid on loan is wholly and exclusively incurred for the purpose of business. The Ld.CIT(A) after considering the submissions of the assessee and also taking note of relevant provisions of law, held that goodwill arising on account of amalgamation, by virtue of order of NCLT dated 11.01.2019 with appointed date from 01.04.2017 is in the nature of intangible asset, on which, the assessee is entitled for depreciation u/s 32(1) of the Act and this principle is supported by the decision of Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd.(supra). Therefore, directed the Assessing Officer to delete the additions made towards disallowance of 7 ITA No.1087/Hyd/2024 East India Petroleum Limited depreciation on goodwill. The Ld.CIT(A), further observed that the loan borrowed from Axis Finance Ltd to the extent of Rs.116 crores was for the purpose of business of the assessee, which is evident from the loan utilised for acquiring share capital from Energy Infra Ltd., Mauritius, therefore, interest paid on loan borrowed from financial institutions for the purpose of business needs to be allowed u/s 36(1)(iii) of the Act. Therefore, directed the Assessing Officer to delete the addition made towards interest expenditure u/s 37(1) of the Act. 7. Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before the Tribunal. 8. The first issue that came up for consideration from Ground No.2 of Revenue’s appeal is deletion of addition made towards disallowance of depreciation on goodwill. The facts with regard to the issue are that the assessee company is engaged in the business of providing terminalling services to oil marketing companies for storage of bulk liquid products including fuels like high speed diesel, motor spirit, petroleum products like gas condensate and naphtha and petrochemicals as well as liquefied gas fuels like butane, propane and liquefied petroleum gas (LPG) at Visakhapatnam Port, Andhra Pradesh is a subsidiary of M/s RPPPL. M/s RPPPL was amalgamated with the assessee company by virtue of an order of the NCLT, Hyderabad, dated 11.01.2019 w.e.f. appointed date, i.e. 01.04.2017. As per the scheme of amalgamation approved by 8 ITA No.1087/Hyd/2024 East India Petroleum Limited the NCLT vide order dated 11.01.2019, all the assets and liabilities of the transferor company, M/s RPPPL become the properties of transferee company, i.e. assessee company. Clause 11.1and 11.2 of the Scheme provides that the transferor company is the holding company of the transferee company, upon sanction of the scheme, the inter-company shareholding will be cancelled and there will be no issue of any shares to the transferor company to the extent of the number of shares held by the transferor company in the transferee company and the shares held by the transferor company in the transferee company shall stand cancelled. Clause 12 of the Scheme further provides that, upon sanction of the Scheme, the transferee company shall after providing adjustment as per clause 12.2 and 12.3 record in its financial statements, the assets, liabilities and reserves of the transferor company at their respective book values, as appearing in the financial statements of the transferor company, immediately preceding the appointed date. Similarly, the balance of the Profit & Loss account of the transferee company shall be aggregated with the balance in Profit & Loss account of the transferor company or transferred to the general reserve in accordance with Accounting Standard (AS) 14 – Accounting for Amalgamations prescribed under Section 133 of the Companies Act, 2013 r.w.Rule 7 of the Companies (Accounts) Rules 2014 and the Companies (Accounting Standard) Amendment Rules, 2016 under the ‘Purchase Method’. As on the appointed date, the total value of the assets of the amalgamating company i.e. 9 ITA No.1087/Hyd/2024 East India Petroleum Limited M/s RPPPL was at Rs.4.4 crores, whereas, the total liabilities as on date was Rs.119.88 crores. Further, the equity share capital of the transferor company was at Rs.27.26 crores. Since the entire assets and liabilities of the amalgamating company has been taken over by the amalgamated company from the appointed date and to give effect to the order of the NCLT, all assets and liabilities of the transferor company has been incorporated / accounted in the books of transferor company, which resulted in taking over of excess liabilities to the tune of Rs.88,21,86,061/- and the same has been treated as goodwill in the books of accounts of the assessee company in accordance with AS-14/accounting for amalgamation. The assessee has treated excess liabilities taken over from the transferor company in amalgamation, by virtue of order of NCLT as goodwill and depreciation @25% has been claimed in terms of section 32(1)(ii) of the Act. The Assessing Officer disallowed depreciation on goodwill on the ground that the conditions prescribed for claiming depreciation u/s 32 of the Act on goodwill is not satisfied, in as much as goodwill has not been put to use in the business of the assessee, which is evident from the date of NCLT order, i.e., 11.01.2019 and the appointed date 01.04.2017 and from the above, it is undisputedly clear that the asset was not put to use and the conditions are not satisfied, therefore, rejected the claim of depreciation on goodwill and added back to the total income. 10 ITA No.1087/Hyd/2024 East India Petroleum Limited 9. The Ld.CIT-DR submitted that the Ld.CIT(A) erred in law and on facts to allow claim of depreciation on goodwill, created on account of balancing accounting entry i.e., the difference between net assets and liabilities taken over, in pursuance to amalgamation as goodwill, which is eligible for depreciation u/s 32(1)(ii) of the Act as intangible asset. The Ld.CIT-DR further submitted that as per section 32 and 5th proviso (now 6th proviso), depreciation on any asset including intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 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, 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, as the case may be, in the ratio of the number of days for which the assets were used by them. Therefore, claiming depreciation on balancing charge, arising on account of accounting under assets and liabilities taken over from the transferor company in pursuant to amalgamation cannot be treated as goodwill and depreciation u/s 32(1)(ii) cannot be allowed. In this regard, she relied upon the decision of ITAT Hyderabad in the case of Signode India Ltd. Vs. Dy.Commissioner of Income Tax 2021(3) 11 ITA No.1087/Hyd/2024 East India Petroleum Limited TMI 341. The Ld.CIT-LD.DR had also relied on the decision of Hon'ble Supreme Court in the case of Smifs Securities Ltd. (supra) and argued that in the said judgement, the question before the Hon'ble Supreme Court is, whether goodwill is intangible asset or not, and depreciation on goodwill is allowable or not, however, the Hon'ble Supreme Court has not dealt the issue in light of amalgamation between two companies and 5th proviso to section 32 of the Act, therefore, the Ld.CIT(A) erred in relying upon the decision of Hon'ble Supreme Court, while allowing relief to the assessee. Therefore, she submitted that the additions made by the Assessing Officer should be sustained. 10. The learned counsel for the assessee, Shri H.Srinivasulu, Advocate, on the other hand, supporting the order of the Ld.CIT(A), submitted that, the facts with regard to the scheme of amalgamation, approved by the NCLT, vide order dated 11.01.2019 was not disputed by the Assessing Officer. Further, before the approval of scheme of amalgamation, the NCLT has issued notices to Assessing Officer to file objections, if any, for the proposed amalgamation for which, the Assessing Officer, except stating that there is demand, has not raised any objection for the proposed scheme of amalgamation. Further, as per the scheme of amalgamation approved by the NCLT, the same has been treated as ‘purchase method’ in terms of AS-14 issued by ICAI / Accounting for amalgamation and as per said method, difference between assets and liabilities in case of 12 ITA No.1087/Hyd/2024 East India Petroleum Limited excess liabilities, the same shall be treated as goodwill and further in case of excess assets, the same shall be credited to capital reserve account. The assessee, while giving effect to NCLT order has accounted all assets and liabilities of the transferor company in the books of accounts of the assessee company, which resulted in excess liabilities taken over to the extent of Rs.88.2 crores and the same has been treated as goodwill and depreciation has been claimed. Further, the Assessing Officer never disputed the fact that the assessee company has taken over excess liabilities, by virtue of amalgamation and the same needs to be accounted as goodwill in terms of AS-14, but disallowed the depreciation claimed on goodwill, only on the ground that the asset has not been put to use, as required u/s 32 of the Act. However, the fact remains that, the concept of user has to be interpreted in the context of intangible assets, which means, the existence of goodwill arising from the amalgamation tantamounts to user and therefore, the word user should be interpreted in such a manner, it will enable the assessee to obtain the benefit intended by the legislature. In this regard, he relied upon the decision of Hon'ble Supreme Court in the case of Mysore Minerals Limited, 239 ITR 775 (SC). The learned counsel for the assessee further submitted that, there is no dispute with regard to the fact that the goodwill is an intangible asset within the meaning of section 32(1)(ii) of the Act and this fact has been reiterated by the Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd.(supra). Further, this fact has been 13 ITA No.1087/Hyd/2024 East India Petroleum Limited reiterated by the Hon'ble Supreme Court in the case of Hewlett Packard India Sales Pvt. Ltd. [2024] 463 ITR 329 (Kar). Therefore, from the ratios laid down by the Hon'ble Supreme Court, it is very clear that goodwill is an intangible asset in nature of any other business or commercial rights of similar nature, which is eligible for depreciation u/s 32(1)(ii) of the Act. The Ld.CIT(A), after considering the relevant facts has rightly allowed depreciation claimed on goodwill and therefore, the order of the Ld.CIT(A) should be upheld. In this regard, he relied upon the decision of ITAT Chennai in the case of Trivitron Healthcare P.Ltd. Vs. CIT [2022] 98 ITR (Trib.) 105 [ITAT (Chen)]. The assessee had also relied upon the decision of ITAT Hyderabad in the case of S&P Capital IQ (India) Private Limited Vs. ACIT in ITA-TP No.463/Hyd/2022 and the decision in the case of Texksystems Global Services Pvt.Ltd. Vs.DCIT in ITA No.290/Hyd/2023. 11. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered the relevant case laws referred to by both the parties in support of their arguments. There is no dispute with regard to the fact that the assessee has claimed deprecation on goodwill which was arisen, on account of amalgamation of M/s RPPPL with the assessee company, by virtue of an order of NCLT dated 11.01.2019 w.e.f appointed date 01.04.2017, by which, all assets and liabilities of the transferor company has been taken over by the transferee 14 ITA No.1087/Hyd/2024 East India Petroleum Limited company. The purpose and the terms of the scheme have been specified in documents submitted before the NCLT. In fact, the NCLT has passed an order and approved the scheme of amalgamation vide order dated 11.01.2019 and sanctioned the scheme of amalgamation. Further, the Assessing Officer has not raised any objection for the scheme of amalgamation. As per the scheme of amalgamation approved by the NCLT, all assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company from the appointed date and upon sanction of the scheme, the transferee company shall have to provide adjustment as per Clause 12.2 and 12.3 and recorded in its financial statements, the assets, liabilities and reserves of transferor company at their respective book values, as appearing in the financial statements of the transferor company immediately preceding the appointed date. Similarly, the balance of the Profit & Loss account of the transferor company is transferred to the general reserve, in accordance with AS-14 accounting for amalgamations, prescribed u/s 133 of the Companies Act, 2013, r.w.Rule 7 of the Companies (Accounts) Rules, 2014 and the Companies (Accounting Standard) Amendment Rules 2016 under the Purchase Method. The amalgamation is between the subsidiary company and the holding company, i.e., the holding company is amalgamated with subsidiary company. Therefore, the inter-company shareholding will be cancelled and there will be no issue of any shares to the transferor company, to the extent of the number of shares held by the transferor company. In other words, 15 ITA No.1087/Hyd/2024 East India Petroleum Limited amalgamation provides for taking over all assets and liabilities of the transferor company, without issuing any share capital to the shareholders of the transferor company. The assessee company has given effect to the order of the NCLT and recorded all assets and liabilities of transferor company in its books of accounts in their book value. Further, as on the appointed date i.e. 01.04.2017, net assets of the transferor company were at Rs.4,4025,742/-, whereas the total liabilities of transferor company were at Rs.119,87,67,193/-. The equity capital held by the holding company in the subsidiary company was Rs.27,25,55,390/-. The net result of transfer of all assets and liabilities resulted in excess liabilities taken over by the assessee company to the tune of Rs.88,21,86,061/- and the same has been treated as goodwill in terms of AS-14, on which the assessee has claimed depreciation. 12. In this factual background, if we examine the legal contentions raised by the Ld.CIT-DR in light of provisions of section 32(1)(ii) and 6th Proviso, provided therein, we need to examine, whether 5th proviso to section 32(1) of the Act restrict depreciation on goodwill, arising on account of amalgamation or it only restricts goodwill to the predecessor or successor company in case of amalgamation or demerger etc. The 5th proviso to section 32(1) of the Act, has been inserted by the Finance Act, 1996, to restrict claim of aggregate deduction, which is evident from memorandum of Finance Bill of 1996, as per which, in case of succession in business and amalgamation 16 ITA No.1087/Hyd/2024 East India Petroleum Limited of companies, predecessor of business and successor of amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on same assets, which in aggregate cannot exceed depreciation allowance, in any previous year at prescribed rates. Therefore, it is proposed to restrict aggregate deduction in a year, depreciation at the prescribed rate and apportion the same allowance in the ratio of number of days for which said assets were used by them. From the memorandum explaining Finance Bill, and purpose of introduction of 5th proviso to section 32(1) of the Act, it is very clear, as per which predecessor and successor in a scheme of amalgamation should not claim depreciation over and above normal depreciation allowable on a particular asset. In other words, in a scheme of amalgamation where existing assets of amalgamating company are acquired by amalgamated company, then while claiming depreciation after amalgamation, amalgamated company can claim depreciation only on the basis of number of days, a particular asset were used by them. Therefore, in our considered view, said proviso only determines amount of depreciation to be claimed in the hands of predecessor / amalgamating company and in hands of the successor or amalgamated company, only in the year of amalgamation based on the date of such amalgamation. However, it does not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation. Therefore, it is very clear from 5th proviso to section 32(1) of the Act, that once any asset, 17 ITA No.1087/Hyd/2024 East India Petroleum Limited including intangible asset, more particularly, goodwill is added to the respective block of assets of the amalgamated company, in the context of claim of depreciation in the hands of amalgamated company and such addition to the block of assets would not fall within the purview of the 5th proviso to section 32(1) of the Act. Effectively, scope of the said proviso is narrow as could be culled out for the purpose, for which said proviso was inserted in the statute as reflected in the Memorandum to the Finance Bill. To further clarify, 5th proviso to section 32(1) of the Act, with regard to depreciation on goodwill is restricted to assets, which belongs to amalgamating company and its application cannot be extended to the assets, which arise in the course of amalgamation to the amalgamated company. The intention of law was to extend the benefit available to the amalgamated company on succession and not to restrict depreciation on assets which generated in the course of succession. It is very clear from the proviso that it refers to depreciation allowable to the predecessor and successor in the case of succession and this should be understood as reference to the assets that belong both to the predecessor and successor and which can only once belonged to the predecessor company and it does not apply to the assets which were generated in the hands of amalgamated company for the first time, as a result of amalgamation as approved by the High Court. In our considered view, 5th proviso applies only to those assets which commonly exist between predecessor and successor, however, it does not apply to asset, which has been created or acquired 18 ITA No.1087/Hyd/2024 East India Petroleum Limited after amalgamation. The creation of new asset, by virtue of amalgamation like goodwill completely go out of reckoning of said proviso. 13. Having said so, let us come back to the issue on hand. In the present case, there is no dispute with regard to the fact that goodwill is not existing in the books of account of the amalgamating company. Further, depreciation on goodwill claimed by the assessee was first time recognized in the books of account of amalgamated company, in a scheme of amalgamation approved by the NCLT. As per said scheme of amalgamation, accounting treatment in the books of transferee company has been specified, as per which, transferee company shall account for merger in its books of account as per ‘purchase method’ of accounting prescribed under AS-14 issued by ICAI. As per AS-14 issued by the ICAI, all assets and liabilities recorded in the books of account of transferor company shall stand transferred and vested in the transferee company, pursuant to scheme and shall be recorded by the transferee company at their book value. The excess of or deficit in net asset value of the transferee company, after reducing aggregate face value of shares issued by the transferee company to the members of the transferor company, pursuant to the scheme and cost of investment in the books of the transferee company for the shares of transferor company held by it on the effective date be either credited to the capital reserve or debited to the goodwill account, as the case may be in the books of 19 ITA No.1087/Hyd/2024 East India Petroleum Limited transferee company. Such resultant goodwill, if any shall be amortized in the books of transferee company as per principles laid down in AS-14. Therefore, from the scheme of amalgamation and AS-14 issued by the ICAI, it is very clear that once amalgamation is in the nature of ‘purchase method’, then excess consideration paid over and above net asset value of transferor company shall be treated as goodwill and can be amortized in the books of accounts of the transferee company. In this case, net asset value of the transferor company (amalgamating company) was at Rs.115,47,41,451/-. Further, value of investments of transferee company i.e., in the present case, the assessee in the shares of transferor company (in the present case amalgamating company) was at Rs.27,25,55,390/- . The value of investments held by the assessee company in the shares of amalgamating company extinguishes after amalgamation and consequently difference between net asset value of amalgamating company and value of investment held by amalgamated company would become goodwill in the books of account of transferee company. In the present case, difference between net value of assets of amalgamating company and value of investments held by amalgamated company is at Rs.88,21,86,061/- and same would become goodwill in the books of account of amalgamated company. Therefore, in our considered view, accounting of goodwill and consequent depreciation claim on such goodwill in the books of account of the assessee company is nothing but purchase of goodwill and thus, the assessee has rightly claimed depreciation 20 ITA No.1087/Hyd/2024 East India Petroleum Limited on said goodwill in terms of section 32(1) of the Income Tax Act, 1961. This legal principle is supported by the decision of Hon'ble Supreme Court in the case of M/s. Smifs Securities Ltd. (2012) 348 ITR 302. This principle is also supported by the decision of the ITAT., Mumbai in the case of M/s. Kewa Fragrances P.Ltd in ITA No.334/Mum/2020 and also decision of the ITAT., Hyderabad Benches in the case of M/s. Mylan Laboratories in ITA No. 2335/Hyd/2018. The sum and substance of ratios laid down by the Hon’ble Supreme Court and the Tribunals are that goodwill arising on amalgamation is entitled for depreciation u/s.32(1) of the Income Tax Act, 1961. Further, the decision of DCIT Vs United Breweries Ltd. (supra) of ITAT, Bangalore Bench is distinguishable from facts of the present case, because in the case of DCIT Vs United Breweries Ltd.(supra), before amalgamation there was a goodwill in the books of account of amalgamating company. Further, in a scheme of amalgamation, goodwill has been revalued and shown higher value. The amalgamated company on succession has claimed higher depreciation on goodwill arose out of amalgamation. Under those facts, the Tribunal came to the conclusion that in terms of 5th proviso to section 32(1) of the Act, predecessor and successor company can claim depreciation on proportionate basis for number of days assets used by them, however, they cannot claim depreciation over and above normal depreciation allowable on a particular asset. 21 ITA No.1087/Hyd/2024 East India Petroleum Limited 14. In this case, there was no goodwill in the books of account of the amalgamating company and further, goodwill has been acquired by amalgamated company by paying consideration over and above net value of assets of amalgamating company. Therefore, in our considered view, case of the assessee squarely comes under ratio laid down by the Hon'ble Supreme Court in the case of M/s.Smifs Securities Ltd.(supra). In any way, in a subsequent decision, ITAT, Bangalore Bench in the case of M/s. Altimetrik India Pvt.Ltd, Vs. DCIT (2022) 137 taxmann.com 9 had considered an identical issue and after considering decision of the United Breweries Ltd. (supra) held that consideration paid by the amalgamated company over and above net assets of amalgamating company should be considered as goodwill arising on amalgamation and such goodwill is a capital asset eligible for depreciation. Therefore, from the above facts, it is very clear that in the given facts & circumstances of the case, the 5th proviso to section 32(1) has no application and further, in absence of any other possible view, view taken by the Assessing Officer while allowing depreciation on goodwill in the assessment proceedings, cannot be held to be erroneous or unsustainable under the law. 15. Coming back to another observation of the Assessing Officer. The Assessing Officer disallowed depreciation, mainly on the ground that the asset was not put to use in the business of the assessee and the conditions prescribed for claiming depreciation as per section 32(1) of the Act are not satisfied. 22 ITA No.1087/Hyd/2024 East India Petroleum Limited According to the Assessing Officer, in order to claim depreciation, the assessee must be owner of the asset and further, the asset must be used the for the purpose of business operation in the previous year. In the instant case, amalgamation order has been passed on 11.01.2019, though w.e.f. 01.04.2017, the so called goodwill cannot be actually be called to have at all been used in the business in the F.Y.2017- 18, relevant to A.Y.2018-19. Since the condition referred to u/s 32 is not satisfied, the claim of depreciation on such goodwill is not as per the provisions of section 32 of the Act. We find that the goodwill in the present case is not self generated or taken over from third person. The goodwill is created on account of amalgamation of two companies, by virtue of order of NCLT, by which all assets and liabilities of transferor company has been taken over by the transferee company and by giving effect to the said order of NCLT, the assessee has taken excess liabilities to the tune of Rs.88.2 crores and the same has been treated as goodwill. In other words, the goodwill is arisen for the first time, on account of amalgamation between two companies. Therefore, the term user u/s 32 of the Act should be interpreted in the context of intangible assets. The word user shall have a wider meaning in the context of intangible assets. The existence of goodwill arising from the amalgamation tantamount to user. Intangible assets are creation of human mind and do not have physical existence like plant, building, machinery etc. In the context of intangible assets, the word user has to be interpreted in a practical manner and if we go by the facts in the present 23 ITA No.1087/Hyd/2024 East India Petroleum Limited case, the goodwill comes into existence w.e.f. 01.04.2017, by order of NCLT, amalgamating two companies from the appointed date. Section 32 in the form of depreciation confers the benefit to the assessee and the word used should be interpreted in such a manner, which will enable the assessee to obtain the benefit intended by the legislature. And in this behalf, it is relevant to refer to the Hon'ble Supreme Court in the case of Mysore Minerals Limited Vs. CIT (supra). Therefore, we are of the considered view that the reasons given by the Assessing Officer to disallow the depreciation is totally incorrect, devoid of merit and thus, rejected. 16. Having said so, let us come back, whether goodwill is an intangible asset in nature of any other business or commercial rights similar nature, which is eligible for depreciation u/s 32 of the Act or not. This issue is no longer res-integra. Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. (supra) has considered an identical issue and held that 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 similar nature’. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. Similar view has been taken by the Hon'ble Supreme Court in the case of CIT Vs. Hewlett Packard India Sales Pvt Ltd. (supra), where, 24 ITA No.1087/Hyd/2024 East India Petroleum Limited the Hon’ble Supreme Court, by following its earlier decision in the case of CIT Vs. Smifs Securities Ltd. (supra) has upheld the order of Hon'ble Karnataka High Court, where, the Hon'ble High Court held goodwill is valuable asset eligible for depreciation. 17. The assessee had also relied upon the decision of ITAT Chennai in the case of Trivitron Healthcare P.Ltd. Vs. CIT (supra). The ITAT in the context of goodwill arising on account of amalgamation has considered the issue in light of provisions of section 31(1)(ii) and 6th proviso, provided therein and after considering the relevant facts held as under : 25 ITA No.1087/Hyd/2024 East India Petroleum Limited 26 ITA No.1087/Hyd/2024 East India Petroleum Limited 18. The assessee had also relied upon the decision of ITAT Hyderabad Benches in the case of Teksystems Global Services (P) Ltd.(supra), where, the Tribunal has considered an identical issue of depreciation on goodwill and after considering relevant facts, held as under : “10. We have gone through the record in the light of the submissions made on either side. On a perusal of the impugned orders, we noticed that the authorities suspected the genuineness of the BTA on the grounds that the said arrangement is not established to have resulted in any better business scenario or any fruitful outcome. Learned CIT(A) further observed that the BTA is a colourable device, created only to reduce the taxes, because the capital gain tax paid by the seller would be very marginal when compared to claim depreciation on goodwill. Further according to the learned 27 ITA No.1087/Hyd/2024 East India Petroleum Limited CIT(A), the valuation of the goodwill is based on un-audited and management certified financial statements and the consultants have not relied upon any comparative market data to arrive at the valuation of the fixed assets. 11. Learned AR brough to our notice through the statement of profit and loss that pursuant to the business acquisition, assessee earned incremental revenue of 87% from Rs. 91,53,20,147/- as on 31/03/2017 to Rs. 1,72,02,28,563/- as on 31/03/2018; whereas the profit before tax was Rs. 16,01,36,551/- as on 31/03/2017 and Rs. 1,52,00,09,378/- as on 31/03/2018. This statement further shows that the tax expense of the assessee was Rs. 5,90,00,000/- as on 31/03/2017 and Rs. 8,91,87,967/- as on 31/03/2018. These figures are showing the impact of business transfer and contradicting the observations of the learned CIT(A) that no better business scenario or fruitful outcome resulted from the business transfer. Even otherwise also, it is the prerogative of the business man to decide how to conduct the business and all the business decisions need not always result in profits or in better business scenario. 12. Coming to the observation of the learned CIT(A) that the capital gains tax paid by the seller would be very marginal as compared to the eligible depreciation to the assessee, learned AR submitted, with reference to the facts and figures, that the total tax impact on depreciation on good will comes to Rs. 55,76,696/- whereas the capital gains tax paid by the seller is Rs. 67,41,196/-. She submitted that considering the amendments introduced by the Finance Act, 2021, with effect from 01/04/2021, no depreciation is allowable on goodwill whether or not it is recorded in the books prior to the amendment and, therefore, the tax impact on depreciation claim would be far less than Rs.55,76,696/-. This is another factor which missed the attention of the learned CIT(A) from the books and, therefore, the learned CIT(A) was labouring under the impression that the capital gains tax paid by the transferor company would be very marginal as compared to the eligible depreciation. The impugned order, however, does not provide any basis for this observation of the learned CIT(A). 13. It remains an undisputed fact that the seller company is assessed to tax and the capital gains offered by it are 28 ITA No.1087/Hyd/2024 East India Petroleum Limited accepted without any adjustment. Assessee placed reliance on the decision of the Hon'ble High Court of Delhi in the case of Triune Projects Private Limited 77 taxmann.com 40 and the view taken by the Co-ordinate Bench of the Bangalore Tribunal in the case of I&B Seeds Pvt. Limited., 142 taxmann.com 274 for the principle that once the department accepted the capital gains in the hands of the seller, the said transaction cannot be doubted in the hands of the purchaser. These decisions bind us. 14. Viewing from any angle, the circumstances cited by the authorities to hold that the BTA is a colourable device created only to reduce the tax, does not hold water. We, therefore, while disagreeing with the authorities, return a finding that it is legitimate for the assessee to go for acquisition of IT services division of Allegis India and there is no material to make it a colourable device in the shape of any undue advantage derived by the assessee. We, accordingly, direct the learned Assessing Officer to allow the depreciation on goodwill. 15. Now coming to the depreciation on other tangible assets, it is disallowed on the ground that such assets were not put to use by the assessee during the year under consideration. When once we accept the BTA, it goes without saying that the assessee acquired the IT services division of Allegis India on a going concern basis. Submission made on behalf of the assessee that in the hands of the seller, depreciation in respect of such assets was allowed and in accordance with the provisions under the 6th proviso to section 32(1) of the Act is a verifiable fact. If such assets are considered for depreciation in accordance with law in the hands of the seller, the question of putting such assets to use by the assessee does not arise and only requirement is compliance with the 6th proviso to section 32(1) of the Act. 16. 6th proviso to section 32(1) of the Act reads that in any previous year, the aggregate deduction in respect of depreciation of the tangible assets allowable to the predecessor and successor in case of succession shall not exceed the deduction calculated at the prescribed rates as if the succession had not taken place, and such deduction shall be apportioned between the predecessor and successor in the ratio of the number of days for which the assets were 29 ITA No.1087/Hyd/2024 East India Petroleum Limited used by them. No record is available before us throwing light on the proportion of the depreciation claimed by the seller, but the assessee is entitled to claim such depreciation only in proportion to the number of days for which the asset held by it. We, therefore, deem it just and proper to cause verification of this fact and to allow such depreciation. 17. With this view of the matter, we set aside the issue relating to the depreciation on the other tangible assets to the file of the learned Assessing Officer to verify and allow depreciation as directed above. Ground No. 2 is allowed with the above directions.” 19. In view of this matter and considering the facts and circumstances of the case, we are of the considered view that the assessee is eligible for depreciation on goodwill created on account of amalgamation. The Assessing Officer without appreciating relevant facts, simply disallowed depreciation on goodwill. The Ld.CIT(A) has rightly deleted the additions made by the Assessing Officer. Therefore, we are inclined to uphold the findings of the Ld.CIT(A) and reject the grounds taken by the Revenue on this issue. 20. The next issue that came up for consideration from ground 3 and 4 of Revenue’s appeal is deletion of addition made towards disallowance of interest paid on loan borrowed from Axis Finance Ltd. The assessee company had borrowed loan from Axis Finance Ltd and paid interest of Rs.18,68,28,250/- for the financial year, relevant to the assessment year under consideration. The Assessing Officer, during the course of assessment proceedings observed that, on examination of the 30 ITA No.1087/Hyd/2024 East India Petroleum Limited amalgamating company i.e. financials of M/s RPPPL, it was seen that it had taken loan of Rs.116 crores from Axis Finance Ltd. for acquiring shares of the assessee company from M/s Energy Infra Limited, Mauritius and on this loan booked interest of Rs.18,68,28,250/- and debited to the Profit & Loss account. On amalgamation, the same loan liability has been taken over by the assessee and interest paid on said loan has been treated as revenue expenditure. The Assessing Officer further observed that, if interest claim is allowed, it will tantamount to allowing assessee company, payment of interest on money borrowed, for buying its own share capital, therefore, called upon the assessee to explain as to why the interest paid on loan shall not be disallowed. In response, the assessee submitted that the amalgamating company, M/s RPPPL has taken loan from Axis Finance Ltd. and utilised the loan proceeds for acquiring shares of the assessee company from M/s Energy Infra Limited, Mauritius. Further, at the time of amalgamation i.e. on the appointed date, M/s RPPPL was not holding shares of the assessee company. Further, it has acquired shares from Energy Infra Limited, Mauritius to have control over the business of the assessee company, because it gives benefit in the long run by curtailing other competitor to establish similar business, where the assessee is operating business in India. Therefore, any interest paid on loan for acquiring control over shares in any company partakes the nature of loans taken for the purpose of business and interest paid on the said loan needs to be allowed. The Assessing Officer, 31 ITA No.1087/Hyd/2024 East India Petroleum Limited however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, as per section 37 of the Act, expenditure should not be of capital nature in order to be admissible. Since the interest paid on loan borrowed for the purpose of acquiring shares of assessee company from third party is in the nature of capital expenditure and was not allowed as deduction, therefore, rejected the claim of the assessee and disallowed interest expenditure u/s 37 of the Act. 21. On appeal, the Ld.CIT(A) for the reasons stated in their appellate order, deleted the additions made by the Assessing Officer, by holding that the Assessing Officer has wrongly invoked the provisions of section 37(1) of the Act, because, when the loan is taken in the ordinary course of business and the said loan is utilised for acquiring controlling on interest in any company, which gives business advantage in the long run, then, the same cannot be considered as not for the purpose of business and therefore, invoking provisions of section 37(1) of the Act, when the particular expenditure covered under the specific provisions of section 30 to 36 is not in accordance with law. The Ld.CIT(A) further held that once the loan taken from any banks or financial institutions is for the purpose of business, then, interest paid on said loan should be allowed u/s 36(1)(iii) of the Act, therefore, directed the Assessing Officer to delete the additions made towards disallowance of interest paid on loans. 32 ITA No.1087/Hyd/2024 East India Petroleum Limited 22. The Ld.DR, submitted that the Ld.CIT(A) erred in deleting the additions made towards disallowance of interest, without appreciating the fact that there is no commercial or business activity in the amalgamating company and the assets held by the amalgamating company were only investment in shares of the amalgamated company, purchased during the previous year, which could not have given rise to any goodwill. The Ld.DR further submitted that the Ld.CIT(A) failed to appreciate that the loan liability of the amalgamating company was used for purchase of shares of the amalgamated company and therefore, no interest can be allowed on such usage of funds, as they are capital in nature and not for the purpose of business of either amalgamating company or amalgamated company. The Ld.CIT(A), without appreciating relevant facts, simply deleted the additions made by the Assessing Officer. 23. The Ld.AR on the other hand, submitted that first of all, the Assessing Officer erred in invoking section 37 and disallowing interest expenditure, because an item of expenditure covered u/s 30 to 36 cannot be covered u/s 37 of the Act. Further, as per the scheme of amalgamation, as approved by the NCLT, the assets and liabilities of amalgamating company shall become assets and liabilities of amalgamated company, with effect from the appointed dated and therefore, any interest paid on such loan becomes expenditure of the assessee company. Further, the loan borrowed from Axis Finance Ltd. is 33 ITA No.1087/Hyd/2024 East India Petroleum Limited for the purpose of business of assessee company, because, by acquiring shares from Energy Infra Limited, Mauritius, the assessee has prevented the other company to establish similar facility of storage of petroleum products, which gives competition in the market. Therefore, the arguments of the Ld.DR that the loan borrowed from bank is for the purpose of acquisition of shares and interest paid on such loans partakes the nature of capital expenditure and therefore, cannot be allowed is incorrect. In this regard, he relied upon the decision of Hon'ble Bombay High Court in the case of CIT Vs. Zuari Industries Ltd. [2020] 420 ITR 323(Bom). 24. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that M/s RPPPL was a holding company of the assessee company. Further, the assessee company shares were held by Energy Infra Limited, Mauritius. M/s RPPPL acquired the share of assessee company from Energy Infra Limited, Mauritius and for this purpose, taken loan from Axis Finance Limited, on which, interest has been debited in Profit & Loss account. Admittedly, as on appointed date, 1st April, 2017, M/s RPPPL was not holding shares of assessee company. Therefore, the issue of interest paid on loans, whether it is deductible u/s 36(1)(iii) of the Act is to be examined, in light of amalgamation between the two companies under the scheme of amalgamation. There is no dispute with regard to the scheme of amalgamation approved by 34 ITA No.1087/Hyd/2024 East India Petroleum Limited NCLT by order dated 11.01.2019 and as per the said scheme, all assets and liabilities of the transferor company becomes the assets and liabilities of the transferee company from the appointed date. The scheme further provides that immediately, after sanction of the scheme, the transferee company shall record all assets and liabilities, including the balance in Profit & Loss account, in their books of accounts. Going by the scheme of amalgamation, there is no dispute that whatever liabilities of the transferor company would become liabilities of the transferee company and consequently, any interest paid on said loans would become expenditure in the hands of the transferee company. Therefore, we are of the considered view that the Assessing Officer is erred in holding that the assessee has taken loan from banks, for the purpose of acquiring its own share capital and therefore, interest paid on said loan partakes the nature of capital expenditure and cannot be allowed as deduction. 25. Having said so, let us come back to the issue on merits. Admittedly, amalgamating company and the amalgamated company are in similar line of business, which is evident from the main clause in their MOA. Further, the shares of amalgamating company i.e. the assessee company were held by Energy Infra Ltd. Mauritius. To consolidated business operations and to prevent competition in the market, amalgamating company has acquired shares of assessee company from third party and for this purpose, has borrowed 35 ITA No.1087/Hyd/2024 East India Petroleum Limited loans from Axis Finance Limited. Once, the purpose of loan is to acquire shares of any company for taking controlling interest, in our considered view, the said loan becomes the borrowed capital for the purpose of business of the assessee and any interest paid on borrowed capital needs to be allowed as deduction u/s 36(1)(iii) of the Act. This legal principle is supported by the decision of Hon'ble Supreme Court in the case of S.A Builders Ltd., 299 ITR 01 (SC). This legal principle is also supported by the decision of Hon'ble Gujarat High Court in the case of B.Nanji and Co. Vs. DCIT [2020] 425 ITR 286 (Guj), where it has been clearly held that any loan borrowed to purchase shares, so as to have effective control, in order to expand its business, then the investment in shares was for expansion of business of the assessee and therefore, any loan borrowed for the purpose of purchase of shares would necessarily becomes the loan borrowed for the purpose of business of the assessee and any interest paid on such loan needs to be allowed u/s 36(1)(iii) of the Act. Similar view has been taken by Hon'ble Bombay High Court in the case of CIT Vs. Zuari Industries Ltd. (supra), though, once it was shown that the borrowing was for the business purpose, interest paid on such borrowing would allowable deduction. The sum and substance of ratios laid down by various courts including Hon'ble Supreme Court is that even if the loan is borrowed for controlling interest in any company by acquiring shares, then the said purchase of shares tantamount to expansion of business and therefore, any interest paid on borrowed capital for the purpose of business should be 36 ITA No.1087/Hyd/2024 East India Petroleum Limited allowed as deduction. In the present case, there is no dispute with regard to the fact that the amalgamated company has borrowed loan from Axis Finance Limited for the purpose of acquiring shares of assessee company, which was held by M/s Energy Infra Limited, Mauritius and therefore, in our considered view, interest paid on said loan is deductible u/s 36(1)(iii). The Assessing Officer, without appreciating relevant facts simply disallowed interest u/s 37(1) of the Act. The Ld.CIT(A), after considering the relevant facts has rightly deleted the addition. Therefore, we are inclined to uphold the order of the Ld.CIT(A) and reject the grounds taken by the Revenue. 26. In the result, appeal filed by the Revenue is dismissed. Order pronounced in the Open Court on 6th February, 2025. Sd/- Sd/- (K.NARSIMHA CHARY) JUDICIAL MEMBER (MANJUNATHA G.) ACCOUNTANT MEMBER Hyderabad, Dated 6th February, 2025 L.Rama, SPS 37 ITA No.1087/Hyd/2024 East India Petroleum Limited Copy to: S.No Addresses 1 The Deputy Commissioner of Income Tax, Circle-8(1) (incharge), 9th Floor, Signature Towers, Opp.Botanical Gardens, Kundapur, Hyderabad 2 M/s East India Petroleum Limited , 7-1-24/1, 2nd Floor, 202 Roxana Towers, Greenlands, Begumpet, Hyderabad 3 The Pr.CIT, Hyderabad 4 The DR, ITAT Hyderabad Benches 5 Guard File By Order "