PMV Maltings Pvt Ltd, New Delhi V. ACIT Circle-19(2), New Delhi

ITA 3103/DEL/2019

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PMV Maltings Pvt. Ltd. appealed against the orders of the CIT(A) which disallowed the depreciation claimed on goodwill arising from a demerger. The company argued that under the provisions of the Income Tax Act applicable for the Assessment Years 2015-16 and 2016-17, depreciation on goodwill was allowable. The Tribunal considered the legal framework surrounding the treatment of goodwill in the context of demergers and the specific amendments to the Income Tax Act that came into effect after the relevant assessment years. The Tribunal concluded that the depreciation claimed was not in accordance with the law as it stood during the relevant assessment years, leading to the dismissal of the appeals.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131070 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-02-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 17-01-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 09-04-2019
• Other Referred Cases: CIT V. Smifs Securities Ltd (2012) 24 taxmann.com 222, United Beverage Ltd. Vs. ACIT in ITA No. 722/Bang./2014
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation; Capital Gains
• Section: 32

Judgement Text

Page | 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘F’, NEW DELHI Before Sh. N. K. Choudhry, Judicial Member Dr. B. R. R. Kumar, Accountant Member ITA No. 3103/Del/2019: Asstt. Year: 2015-16 ITA No. 6906/Del/2019: Asstt. Year: 2016-17 PMV Maltings Pvt. Ltd., Level 5, Caddle Commercial Hospitality, Aerocity, IGI Airport, New Delhi-110037 Vs ACIT, Circle-19(2), New Delhi (APPELLANT) (RESPONDENT) PAN No. AAECP9899F Assessee by : Ms. Aditi Gupta, Adv Revenue by : Sh. S. L. Verma, Sr. DR Date of Hearing: 18.01.2023 Date of Pronouncement: 03.02.2023 ORDER Per Dr. B. R. R. Kumar, Accountant Member: These appeals have been filed by the assessee against the orders of the ld. CIT(A)-7, New Delhi dated 06.02.2019 and 24.06.2019. 2. Since, the issues involved in both the appeals are identical, they were heard together and being adjudicated by a common order. 3. The assessee has raised the following grounds of appeal in ITA No. 3103/Del/2019 for Assessment Year 2015-16:- “1 (a) That the learned CIT(A) has erred in sustaining the disallowance of Rs. 3,11,69,515/- claimed as depreciation on goodwill by stating that goodwill is not covered under the definition of intangible assets under section 32 of the Act. (b) That further in this connection, the learned CIT(A) has not considered the decision of the Hon'ble Supreme Court in the case of CIT V. Smifs Securities Ltd (2012) 24 Page | 2 taxmann.com 222, wherein it was held that goodwill is a depreciable asset under section 32 of the Act and is eligible for depreciation.” 4. The assessee is engaged in the business as manufacturers and brewers, producers, importers, buyers and sellers, stores and stockists, suppliers and distributors, wholesale and retail dealers and workers in malt, malt extract and other barley and cereal products. The only issue to be adjudicated by this bench pertains to disallowance of depreciation u/s 32 on goodwill raised by the assessee post demerger. From the record we find that the assessee had created goodwill on account of demerger which is as under:- “13.3 The difference, being the excess of the shares issued by the resulting company on demerger over the net value of assets and liabilities as recorded above of the demerged undertaking (after considering the impact of cancelation of shares as provided in clause Error! Reference source not found.) shall be credited/ adjusted in Capital Reserve Account of the resulting company. In case of there being a shortfall, the same shall be debited by the resulting company to the goodwill account. “The assessee company has therefore created goodwill on account of demerged as under:- Amounts (Rs.) Total Assets transferred 1,31,01,77,069/- Total liabilities transferred 1,36,30,40,0982/- Excess of liabilities over assets 5,28,63,913/- Add:- Issue of share capital 11,34,73,500/- Less:- Cancellation of share capital 1,00,000/- Net Goodwill created in the books of the assessee company 16,62,37,413/- Copy of notes to account and fixed assets schedule of the assessee company and M/s. MCIL is enclosed herewith. The detail of the working of goodwill was also provided in the previous assessment year also. Page | 3 The assessee company has duly complied with the provisions as laid down under Explanation 7A to section 43(1) and Explanation 2B to section 43(6) and value is also arrived accordingly so the value of the Goodwill should not be treated as nil in the hands so the value of the Goodwill not be treated as Nil in the hands of the assessee company and should be taken at Rs. 16,62,37,413/-.” 5. The ld. AR vehemently argued that there is no legal lacuna in raising the goodwill. And as per the provisions of the Act existing further year applicable, depreciation on the goodwill is an allowable allowance. The amendment in the Act with regard to disallowance of depreciation was brought w.e.f. 01.04.2021 and the assessment before us pertains to Assessment Year 2014-15 and 2015-16 which are before the amendment in the Act. Hence, it was argued that depreciation on goodwill is legally allowable expenditure. The ld. AR further argued that the judgment quoted by the Revenue of United Beverage Ltd. Vs. ACIT in ITA No. 722/Bang./2014 pertains to the case of amalgamation whereas the case of the assessee pertains to demerger after the approval of the Hon’ble High Court. 6. Rebutting the arguments of the ld. AR, the Departmental Representative taken us through the provisions to Section 32(1) of the Income Tax Act, 1961 and argued that the issue of amalgamation or demerger stands on the same principle when the issue of depreciation in the further year is concerned in the post implementation of the Court order. 7. Heard the arguments of both the parties and perused the material available on record. 8. We find from the record, during the financial year 2013-14, the appellant had acquired malt production units of Malt Company India Pvt. Ltd. (MCIPL). Malt production Page | 4 units at Pataudi (Haryana) and Kashipur (Uttarakhand) were a part of MCIPL (the demerged company) till 31st March 2013. In accordance with the scheme of Arrangement, Reorganization& Demerger, the interest therein of MCIPL got vested in the assessee (the resulting company) w.e.f. 1 st April 2013 as per order of the Hon'ble High Court of Delhi dated 5th October 2012. In terms of such order, the difference between purchase consideration and net assets acquired (net assets = assets less liabilities) was recorded as goodwill in the books of the assessee company in F.Y. 2013-14 at value of Rs.16,62,37,413/- on which it claimed depreciation @ 25% as per Section 32 of the Income Tax Act, 1961 of Rs.4,15,59,353/- in A.Y. 2014-15. Thus, goodwill amounting to Rs 16,62,37,413/- was recognized in the books of the appellant during FY 2013-14. It was noticed by the AO that during the year, the assessee has claimed depreciation on goodwill @ 25% of opening WDV of Rs.12,46,78,060/- equivalent to Rs.3,11,69,515/-. 9. At the outset, we would like to make it clear that “Goodwill” is an intangible asset and depreciation is allowable on goodwill of an entity before the effective date of 1 st April 2021, wherein it was specifically held that the goodwill of a business or profession is no longer a depreciable asset and is specifically excluded from the definition of an asset for depreciation purposes. We would also make it clear that the Hon’ble Apex Court judgment in the case of Smiff Securities Ltd. 24 Taxmann 222 dealt with the issue as to whether the goodwill is an intangible asset as per Section 32(1) of the Act. The Hon’ble Apex Court held that goodwill is indeed an intangible asset. There is no Page | 5 controversy as to the nature of the asset and the depreciation thereof. In the instant case, the claim of goodwill on depreciation goes beyond the mere nomenclature of the goodwill. 10. Having said so, we have gone through the provisions of the Income Tax Act in allowing the depreciation on the goodwill as well as the aggregate deduction in respect of depreciation on goodwill is determined by the proviso below Section 32(1) of the Income Tax Act in case of amalgamation and demerger. The provision of Section 32(1) also imposes certain limits on the claim of depreciation. 11. In the instant case, the following assets and liabilities of production units at Pataudi (Haryana) and Kashipur (Uttarakhand) of MCIPL (the Demerged Company), stood vested in the appellant as on 1st April 2013: S. NO. Particulars Amount in Rs. I ASSETS Land 2,76,30,716 Buildings 13,69,61,629 Plant & Machinery 71,27,75,421 Other Fixed Assets 51,72,993 Capital Work in Progress 12,17,04,012 Non Current Investments 70,000 Long Term Loans and Advances 3,94,59,698 Inventories 5,68,79,984 Trade Receivables 15,04,66,263 Other Current Assets 5,90,56,353 Total Assets 1,31,01,77,069 II LIABILITIES Long Term Borrowings 1,05,96,54,849 Deferred Tax Liability 9,36,70,517 Long term provisions 10,35,325 Trade Payables 5,79,65,825 Other Current liabilities 15,06,16,758 Short term provisions 97,708 Total Liabilities 1,36,30,40,982 III Net Assets (-) 5,28,63,913 Page | 6 12. In consideration of the aforesaid assets and liabilities having so vested, the appellant issued 1,13,47,350 equity shares of Rs.10 each as fully paid-up to the shareholders of MCIPL. Accordingly, the issued, subscribed and fully paid up share capital of the appellant stood at Rs. 11,34,73,500/- as on 31.3.2014. 13. The provisions of Section 43(1) explanation 3 reads as under: “Explanation 3,— Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circumstances of the case." 14. The Act provides that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), 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 Page | 7 prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. It also provides that depreciation allowable in the case of succession, amalgamation or merger, demerger should not exceed the depreciation allowable had the succession not taken place. For the same reason, the case of amalgamation is not regarded as transfer for the purpose of capital gain as provided under Section 47(vi) of the Act and therefore such cases are exempted from capital gain which is otherwise chargeable to tax on transfer of assets. 15. The 5 th provision above the Explanation 1 pertaining to Section 32 reads as under: “[Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in "[clause (xiii), 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 or the demerger, as the case may be, had not taken place, and such deduction shall Page | 8 be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.] [Explanation 1.—Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.” 16. We have gone through the various provisions applicable to the company in case of demerger/amalgamation. 17. Demerger (Section 2(19AA)): means the transfer of one or more undertakings to any resulting company pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956 in such a manner that : • All the property/liability of the undertaking becomes the property/liability of the resulting company. • All the property/liabilities are transferred at book value (excluding increase in value due to revaluation). • The resulting company issues shares to the share holders of demerged company on a proportionate basis, except where resulting company is a share holder of the demerged company. Page | 9 • Share holders holding minimum 75% of the value of shares become share holders of the resulting company (other than shares already held therein immediately before the demerger by, or by a nominee for, the resulting company or its subsidiary). • The transfer of an undertaking is on a going concern basis. • The demerger is in accordance with the conditions notified under Section 72A(5) of IT Act, 1961. 18. Demerged Company: means the company whose undertaking is transferred to a resulting company pursuant to a demerger. 19. Resulting Company: means one or more companies (including wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and the resulting company in consideration of such transfer of undertaking, issues shares to the share holders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger. 20. Capital Gains (Sections 47(vi) and 47(vid)) Gains arising on transfer of a capital asset in a scheme of amalgamation/demerger to the amalgamated/resulting company being an Indian Company is exempt. 21. Depreciation in the year of amalgamation/demerger (Fifth proviso to Section 32(1)) Page | 10 • Depreciation to amalgamated company and amalgamating company in the year of amalgamation and depreciation to demerged company and the resulting company in the year of demerger shall be apportioned in the ratio of the number of days for which the assets were used. 22. Written Down Value (‘WDV’) (Sections 32 and 43(6)(c)) • WDV in the hands of amalgamated company shall be the WDV of the block of assets in the hands of the amalgamating company immediately before amalgamation. • WDV in the hands of the resulting company shall be the WDV of transferred assets of the demerged company immediately before demerger. • WDV in the hands of the demerged company shall be the WDV of the block of assets before demerger less WDV of assets transferred to the resulting company. 23. Therefore, by the virtue of proviso to Section 32(1), the depreciation in the hands of the assessee is allowable only to the extent, as if, demerger has not taken place. Therefore, the assessee being a demerger company cannot be allowed depreciation on the assets created as a consequence of the scheme which is more than the deprecation allowable earlier entity. Amalgamation and demerger are by nature meant for better business purposes and are generally revenue neutral. Page | 11 24. In the result, the appeals are hereby dismissed. Order Pronounced in the Open Court on 03/02/2023. Sd/- Sd/- (N. K. Choudhry) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 03/02/2023 *Subodh Kumar/AK, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR