Real Eco-Energy Limite(formerly Realrealty Management co. Ltd), Ahmedabad V. The ITO, ward-3(1)(3), Ahmedabad

ITA 1209/AHD/2019

AI Insights

Real Eco-Energy Limited appealed against the orders of the CIT(A)-9, Ahmedabad, which confirmed the disallowance of depreciation on goodwill amounting to Rs.32,60,276 and other related penalties and interests. The case revolved around the valuation of goodwill in the context of an amalgamation scheme approved by the Hon'ble High Court of Gujarat. The Tribunal examined whether the consideration paid for the shares, which included a premium, was valid for recognizing goodwill and allowing depreciation under the Income Tax Act. The Tribunal found that the lower authorities erred in disregarding the approved valuation and the legal framework governing the amalgamation.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 129247 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 01-02-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 22-07-2019
• Other Referred Cases: Purbanchal Power Co. Limited vs. DCIUT \\u2013 ITA No.201/Kol/2010, Ashwin Vanaspati Industries vs. CIT (2002) 255 ITR 26 (Gujarat), Mangal Textile Mills P. Limited vs. UOI (2002) 2002 taxmann. com 1665 (Gujarat), Smifs Securities Limited vs. CIT, 348 ITR 302 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Principle of natural justice; Valuation report; Scheme of amalgamation; TDS
• Section: 32; 143(2)

Judgement Text

ITA No.1209/Ahd/2019 Assessment Year: 2013-14 Page 1 of 6 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “SMC” BENCH, AHMEDABAD BEFORE Ms. SUCHITRA KAMBLE, JUDICIAL MEMBER ITA No.1209/Ahd/2019 Assessment Year: 2013-14 Real Eco-Energy Limited, vs. Income Tax Officer, (formerly Real Realty Management Ward – 3(1)3), Ahmedabad. Company Limited), 4 th Floor, Karm Corporation House, Opp. Vikramnagar, Ambli-Bopal Road, S.G. Highway, Ahmedabad. [PAN – AAACH 3865 P] (Appellant) (Respondent) Assessee by : Shri Tushar Hemani, Sr. Advocate & P.B. Parmar, AR Revenue by : Shri Ramesh Kumar, JCIT Date of hearing : 02.02.2023 Date of pronouncement : 22.02.2023 O R D E R This appeal is filed by the Assessee against order dated 12.06.2019 passed by the CIT(A)-9, Ahmedabad for the Assessment Year 2013-14. 2. The Assessee has raised the following grounds of appeal :- “1. The learned CIT(A) has erred in law and on facts in confirming the action of AO of making a disallowance u/s.32 of the Act of Rs.32,60,276/- being depreciation on goodwill. 2. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and principles of natural justice and therefore deserves to be quashed. 3. The learned CIT(A) has erred in law and on facts of the case in confirming action of the ld. AO in levying interest u/s.234A/B/C of the Act. ITA No.1209/Ahd/2019 Assessment Year: 2013-14 Page 2 of 6 4. The learned CIT(A) has erred in law and on facts of the case in confirming action of the ld. AO in initiating penalty u/s,.271(1)(c) of the Act.” 3. The assessee company filed original return of income for A.Y. 2013-14 on 30.09.2013 declaring total income of Rs.nil. The return of income was selected for scrutiny and notice under Section 143(2) of the Income Tax Act, 1961 was issued on 04.09.2014. In response to the notices issued, the Ld. AR of the assessee attended the assessment proceedings from time to time and filed the details. The Assessing Officer observed that the details regarding nature of business, share holding, details of amalgamation and demerger of the assessee company, unsecured loans, expense, depreciation, deduction, TDS compliance etc. were called for and the same was submitted by the assessee. The Assessing Officer further submitted that the assessee company filed original return of income on 30.09.2013 declaring total income of Rs.nil after the set off of brought forward losses against current year income of Rs.15,05,936/- i.e. business income of Rs.14,47,916/- and capital gain of Rs.58,020/-. Thereafter the assessee company filed revised return of income dated 10.10.2014 declaring current year loss of Rs.17,54,340/- i.e. business loss of Rs.18,12,360/- and capital gain of Rs.58,020/-. The assessee company viz. Hillock Agro Foods (India) Limited had applied for scheme of demerger of its flour/agro division into Deepvandana Tradelink Pvt. Ltd. and reorganisation of share capital of assessee company viz. Hillock Agro Foods (India) Ltd. and amalgamation of Real Reality Management Co. Pvt. Ltd. with assessee company viz. Hillock Agro Foods (India) Ltd. on 13.04.2011 and 011 filed petition on 16.05.2011. The scheme was approved by Hon’ble High Court of Gujarat vide order dated 01.11.2012 with appointed date as on 01.07.2010 and the assessee company field copy of High Court order with Registrar of Companies on 07.02.2013. As per scheme of agreement, the amalgamation and demerger is effective from 07.02.2013. As per the scheme of amalgamation, the name of assessee company viz. Hillock Agro Foods (India) Ltd. was changed to Real Realty Management Company Limited. Since the scheme is effective from 07.02.2013, the effect has been given in F.Y. 2012-13 i.e. A.Y. 2013-14. The Assessing Officer disallowed the scheme of goodwill and depreciation on goodwill to the extent of Rs.2,50,14,091/- as thereby observing that no goodwill has actually arisen as the consideration paid does not exceed the assets received. The Assessing Officer further made disallowance of goodwill on deferred tax liability to the extent of ITA No.1209/Ahd/2019 Assessment Year: 2013-14 Page 3 of 6 Rs.1,25,95,905/-. The Assessing Officer also made disallowance of depreciation of Rs.32,60,276/- thereby stating that the depreciation claimed on goodwill will be disallowed as no goodwill has actually arisen. The Assessing Officer further rejected the slump sale of the Agro Foods Division. The Assessing Officer further directed that the assessee was required to furnish copy of ITR, computation of income, assessment order if any in respect of set off of losses for A.Y. 2005-06 which were not considered as no details were filed during the course of assessment for A.Y. 2012-13. 4. Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. 5. As regards to ground no.1 related to confirming addition of Rs.32,60,276/- made under Section 32 of the Act in respect of depreciation on goodwill, the Ld. AR submitted that the assessee’s name was changed to Real Reality Management Co. Pvt. Ltd., the appointed date was 01.07.2010, effective date was 07.02.2013, net assets taken over by the assessee were Rs.4,57,97,909/-, profit of Real Reality Management Co. Pvt. Ltd. from 01.07.2010 to 31.03.2012 was Rs.10,68,113/-, consideration paid was Rs.7,08,12,000/-. Thus, the Ld. AR submitted that goodwill to be recognised was worked out at Rs.2,60,82,204/- and goodwill was to be recognised as per AS-14. Thus, while taking into account this, the Ld. AR submitted that consideration was paid by issuing 36,00,000 fully paid equity shares of Rs.10/- each at a premium of Rs.9.67 per share i.e. total price per share was Rs.19.67. The Ld. AR submitted that the assessee’s claim in respect of depreciation was of Rs.32,60,276/- on goodwill which was denied by the Assessing Officer broadly on account that there was no goodwill at all as consideration per share can be taken at Rs.10/- per share and share premium of Rs.9.67 per share is to be ignored. Thus, the value of consideration as per the Assessing Officer was Rs.3,60,00,000/- (36,00,000 shares as per Rs.10/- per share) as against which value of net assets was taken less. Hence, the Assessing Officer concluded that there was no goodwill and consequently depreciation on goodwill was denied. Such action of denying depreciation on goodwill has been confirmed by the CIT(A) as well. The Ld. AR submitted that consideration of Rs.19.67 per share as per the scheme of amalgamation was duly sanctioned by the Hon’ble High Court of Gujarat. The scheme of amalgamation as per which the shares are to be issued by the assessee at Rs.19.67 i.e. face value of Rs.10/- plus premium ITA No.1209/Ahd/2019 Assessment Year: 2013-14 Page 4 of 6 Rs.9.67 was approved by Board of Directors of both the companies, share holders of both the companies and the Hon’ble High Court of Gujarat. Under such circumstances, the Ld. AR submitted that the Assessing Officer has no authority in the eye of law to question or tinker with consideration of shares and adopt the value at Rs.10/- per share as against Rs.19.67 per share approved in accordance with law. The Ld. AR relied upon the decision of Purbanchal Power Co. Limited vs. DCIUT – ITA No.201/Kol/2010. Ld. AR further submitted that valuation of shares was supported by valuation report as well as Fairness Valuation Report and neither the Assessing Officer nor the CIT(A) has dislodged such report by bringing on record opinion of any other expert. Hence, the ld. AR submitted that the contents of the said valuation report cannot be disbelieved. The Ld. AR relied upon the decision of Hon’ble Gujarat High Court in the case of Ashwin Vanaspati Industries vs. CIT (2002) 255 ITR 26 (Gujarat) and Mangal Textile Mills P. Limited vs. UOI (2002) 2002 taxmann. com 1665 (Gujarat). Thus, the Ld. AR submitted that the Assessing Officer was not justified in adopting value of shares at a value different than value emanating from valuation report, fairness valuation report as well as order of Hon’ble High Court of Gujarat. The Ld. AR further submitted that amalgamation in question was between two unrelated parties and no case of colourable device was made out against the assessee by the Assessing Officer. The genuineness of the underlying transaction has not been questioned. The Ld. AR further submitted that under such circumstances, the Assessing Officer was not justified in questioning or tinkering with consideration of shares and adopt value of Rs.10/- per share as against Rs.19.67 per share approved in accordance with law. The Ld. AR submitted that as per paragraph no.8.4 of the order of Hon’ble High Court of Gujarat, transfer of assets pursuant to the scheme of amalgamation shall be accounted for in accordance with AS-14. Amalgamation is in the nature of purchase and hence as per Paragraph no.37 of AS- 14 any excess of the amount of consideration over the value of the net assets of transferor company acquired by the transferee company should be recognised in transferee company’s financial statements as goodwill arising on amalgamation. Assessee has accounted for goodwill as per order of Hon’ble High Court of Gujarat as well as AS-14. Hence, accounting treatment of goodwill arising on amalgamation is in accordance with law. Therefore, the assessee is eligible for claiming depreciation on goodwill i.e. intangible asset as per Income Tax Act, 1961. The Ld. AR relied upon the decision of Hon’ble Apex Court in the case of Smifs Securities Limited vs. CIT, 348 ITA No.1209/Ahd/2019 Assessment Year: 2013-14 Page 5 of 6 ITR 302 (SC). The Ld. AR further submitted that detailed working as well as justification for reduction of net assets by deferred tax liability was already placed before the CIT(A). From such working and justification, it was evident that the assessee had taken over deferred tax liability i.e. a liability to be discharged in future, in the course of amalgamation. Hence, the same is rightly connected with the business of the assessee and deserves to be reduced from net assets. As per paragraph no.4.1 of Scheme of amalgamation, the transferor company shall carry on and be deemed to have carried on the business and activities and shall be deemed to have held and stood possessed of and shall hold and stand possessed of the said undertakings, for and on account of and in trust for the transferee company. In view of such clause, the assessee had rightly added profit of Real Realty Management Company Private Limited for the period from 01.07.2010 to 31.03,2012 to the figure of goodwill. In view of the above, it is evident that computation of goodwill as well as accounting treatment of goodwill are in accordance with the scheme of Act as well as the prescribed accounting practice. Consequently claim of depreciation on goodwill arising on amalgamation must be allowed. 6. The Ld. DR relied upon the Assessment Order and the order of the CIT(A). Ld. DR submitted that the CIT(A) has categorically given the finding at paragraph no.3.1 after taking cognisance of the Assessment Order and held that the Assessing Officer has examined justification for paying the consideration of shares at Rs.19.67 for 36,00,000 equity shares and rightly observed/held that when the premium of Rs.9.67 was not at all received from the existing share holders at the face value of Rs.10/- only, then the same cannot be taken into account and properly rejected the said valuation. The CIT(A) further observed that the transaction itself was not regarded as goodwill and, therefore, the depreciation was rightly rejected. 7. Heard both the parties and paused all the relevant material available on record. It is pertinent to note that the appointed date was 01.07.2010 and the effective date was 07.02.2013 as per the scheme of amalgamation sanctioned by the Hon’ble High Court of Gujarat. The consideration which was paid by issuing 36,00,000 fully paid equity shares of Rs.10/- each at a premium of Rs.9.67 per share was already sanctioned by the Hon’ble High Court as per amalgamation scheme. Board of Directors as well as share holders of both the companies has also approved the same ITA No.1209/Ahd/2019 Assessment Year: 2013-14 Page 6 of 6 and, therefore, aspect of goodwill whether included in the said consideration was not disputed at any stage. The goodwill was integral part of the amalgamation scheme and, therefore, the valuation itself cannot be doubted by Assessing Officer when it has been properly sanctioned and approved by the company as well as by the Hon’ble High Court. The reference of Hon’ble Apex Court in the case of Smifs Securities Limited (supra) is applicable in the present case as the assessee is eligible for claiming depreciation on goodwill as goodwill has been taken into account while determining the face value of the shares which is treated as consideration in the scheme of amalgamation. Hence, appeal of the assessee is allowed. 8. In the result, appeal filed by the assessee is allowed. Order pronounced in the open Court on this 22 nd day of February, 2023. Sd/- (SUCHITRA KAMBLE) Judicial Member Ahmedabad, the 22 nd day of February, 2023 PBN/* Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad