MAXHEAL PHARMACEUTICALS (INDIA) LIMITED, MUMBAI V. ASSISSTANT COMMISSIONER OF INCOME TAX 12(3)(2), MUMBAI, MUMBAI

ITA 346/MUM/2024

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 3673 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-09-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 03-06-2024
• Assessment Year: 2016-2017
• Appeal Filed On: 23-01-2024
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHOK KUMAR AMBASTHA
• Assessee Lawyers: SUBHASH CHHAJED; DEEPIKA CHHAJED
• Keywords: Capital asset; Depreciation
• Section: 143(3); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘B‘ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI OMKARESHWAR CHIDARA, ACCOUNTANT MEMBER ITA No.346/Mum/2024 (Assessment Year :2016-17) Maxheal Pharmaceuticals (India) Limited, Mumbai 301, 3 rd Floor Maxheal House Bangur Nagar, Goregaon (W) Maharashtra Vs. Assistant Commissioner of Income Tax 12(3)(2), Mumbai PAN/GIR No.AAGCM0717K (Appellant) .. (Respondent) Assessee by Shri Subhash Chhajed & Shri Deepika Chhajed Revenue by Shri Ashok Kumar Ambastha Date of Hearing 04/06/2024 Date of Pronouncement 02/09/2024 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 30/11/2023 passed by NFAC, Delhi for the quantum of assessment passed u/s.143(3) for the A.Y.2016-17. 2. The assessee has raised the following grounds:- “1.On the facts and circumstances of the case and in law, Hon'ble CIT(A) has erred in confirming the disallowance of Depreciation of ITA No.346/Mum/2024 M/s. Maxheal Pharmaceuticals (India) Ltd. 2 Rs. 45,95,217/-claimed @ 25% on Goodwill of Rs. 1,83,80,868/- created in the books of account on amalgamation of M/s Ally Pharma Option Pvt. Ltd with the Assessee company, as per the Assessment order completed by the Ld. AO u/s 143(3) of the I.T. Act., 1961. 2 On the facts and circumstances of the case and in law, Hon'ble CIT(A) ought to have appreciated that goodwill is in the nature of any other commercial or business right under the category of an "Intangible Asset" eligible for depreciation u/s 32 of the Act . 3 On the facts and circumstances of the case and in law, Hon'ble CIT(A) has erred in not appreciating that the facts of the Appellant's case are squarely covered by the Judgement of Hon. Supreme Court in the case of CIT v. Smifs Securities Ltd. [TS-639- SC-2012] and therefore, the claim of Depreciation on goodwill is fully allowable under the law. 3. The brief facts qua the issue involved are that Assessee Company is engaged in the business of manufacturing and trading of pharmaceutical and products. The ld. AO noted that M/s. Ally Pharma Option Pvt. Ltd. was amalgamated with the assessee company under the scheme of amalgamation sanctioned by the Hon’ble Bombay High Court vide order dated 09/12/2016. As per the scheme, there was a goodwill which was calculated at Rs.1,83,80,868/-. The said goodwill was brought in the books as intangible asset and on such intangible asset, assessee has claimed depreciation @25% of Rs.45,95,217/-. In response to the show-cause notice, assessee filed a detailed reply which has been incorporated in the assessment order from pages 2-5. However, ld. AO relied upon the decision of the ITAT Bangalore Bench in the case of United Breweries Ltd. (TA-7201- ITAT-2016), disallowed the claim of depreciation. ITA No.346/Mum/2024 M/s. Maxheal Pharmaceuticals (India) Ltd. 3 4. The ld. CIT(A) too has confirmed the said disallowance. He after taking note of Section 32 of Section 47(vi) observed and held as under:- “6.9 A combined reading of the above provisions reveals that the intention of the legislature behind the introduction of the amalgamation scheme was to achieve tax neutrality Besides the above, the intention of the legislature is reflecting from the following provisions i.There is no capital gain in the hands of the amalgamating company on the transfer of capital assets in the scheme of amalgamation under the provisions of section 47(vi) of the Act ii.The cost of stock-in-trade in the hands of amalgamated company shall remain the same as in the hands of amalgamating company either as capital asset or stock in trade as provided under section 43C of the Act iii. Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger etc under the provisions of section 72A of the Act iv. Exemption of capital gains in the hands of shareholders of amalgamating company on transfer of shares of amalgamating company in the scheme of amalgamation under the provisions of section 47(vii) of the Act. v Cost of capital assets to be the same as in the hands of previous owner where capital assets became the assets of the successor as a result of transfer under section 47(vi) r ws. 49(1)(iii)(e) of the Act vi. Cost of shares of amalgamated company in the hands of shareholders, received as consideration for transfer of shares of amalgamating company, to be same as the cost of shares of amalgamating company under section 49(2) of the Act 6.10 From the above, it would appear that the intent of the Legislature is to make amalgamation a tax neutral scheme for ITA No.346/Mum/2024 M/s. Maxheal Pharmaceuticals (India) Ltd. 4 companies as well as for the shareholders and not to provide a tax planning mechanism to either of them 6.11 Now coming to the present facts of the case, it is clear that the goodwill is created on account of amalgamation. Thus in the backdrop of the above stated facts I am of the view that impugned transaction for claiming the deduction on account of the depreciation is an arrangement for claiming the higher depreciation which is unwanted under the provisions of law. Accordingly, this ground is DISMISSED.” 5. We have heard both the parties and also perused the relevant finding given in the impugned orders. As noted above, M/s. Ally Pharma Option Pvt. Ltd. was earlier operating as an integrated pharmaceutical organisation with its business comprising the entire value chain in the production, marketing and distribution of the pharmaceutical products. Pursuant to the scheme of amalgamation u/s. 391-394 of the Companies Act, 1956, Ally Pharma Option Pvt. Ltd. being a subsidiary of the assessee company was amalgamated and the Hon’ble Bombay High Court vide order dated 09/12/2016 approved the scheme of amalgamation and all the assets and liabilities (including reserves) including rights, Interests, titles, debts, outstanding, credits, benefits under income tax, excise, sales tax duties and obligations of Ally Pharma were transferred to and vested in the Company without consideration as on a going concern basis with effect from the appointed date of April 01, 2015. Before us, assessee had filed amalgamation scheme between Maxheal Pharmaceuticals (India) Ltd. and M/s.Ally Pharma Option Pvt. Ltd. wherein the accounting system was based on “Pooling of Interest Method” as prescribed under Accounting Standard- ITA No.346/Mum/2024 M/s. Maxheal Pharmaceuticals (India) Ltd. 5 14 which has been notified u/s.133 of the Companies Act 2013 r.w.r.7. As per Clause 11 of the scheme of amalgamation, the assets and liabilities including reserves of the transferor company i.e. M/s .Ally Pharma Option Pvt. Ltd. as on 1 st April 2015, (being the appointed date) was taken over by the assessee company at their carrying values as recorded in the financial statements of Ally Pharma Option Pvt. Ltd. One very important fact is that the entire equity share capital of Ally Pharma Option Pvt. Ltd. and the carrying amount for investment in the equity shares of Ally Pharma Option Pvt. Ltd. in the books of the assessee company stood cancelled. The relevant clause 11.3 for the sake of ready reference is reproduced hereunder:- “11.3. As stated in Clause 10 above, no new shares will be issued or allotted by the Transferee Company pursuant to this Scheme and the investments in the shares of the Transferor Company appearing in the books of accounts of the Transferee Company shall stand cancelled. Thus difference between the amount of investment in the shares of the Transferor Company appearing in the books of accounts of the Transferee Company as on the Appointed Date (eg „A‟) and the amount of issued, subscribed and paid up equity share capital standing credited in the books of accounts of the Transferor Company on the Appointed Date (eg. B') shall, if positive (viz A-B > 0) then such difference shall be debited to the Goodwill Account and if such difference is negative (viz A- B<0) then such difference shall be credited to the Capital Reserves in the books of the Transferee Company.” 6. Thus, the difference between carrying amount of investment of the assessee company in Ally Pharma Option Pvt. Ltd. and equity share capital of Ally Pharma Option Pvt. Ltd. was debited ITA No.346/Mum/2024 M/s. Maxheal Pharmaceuticals (India) Ltd. 6 by the company to its goodwill account. The calculation of goodwill as on 01/04/2015 was made as under:- Particulars Amount (Rs.) Carrying Value of Investment in Ally Pharma 4,73,35,068 Less: Equity Share Capital of Ally Pharma (2,89,54,200) Goodwill 1,83,80,868 7. Before us, ld. Counsel had filed the statement of fixed asset as on 31/03/2016 to show that assessee had disclosed the goodwill in the gross block at Rs.183,80,868/-. Accordingly, the goodwill was created as per the scheme of amalgamation sanctioned by the Hon’ble High Court and under prescribed accounting standard AS-14. 8. Now the issue before us is, whether the goodwill is an intangible asset on which depreciation should be allowed or not? Before us ld. Counsel had relied upon the judgment of the Hon’ble Supreme Court in the case of CIT vs. Smiff Securities Ltd. 348 ITR 302 which too had relied upon before the ld. AO and ld. CIT(A). The facts in the case of Sniff Securities in a summarized are that, in accordance with scheme of amalgamation of 'Y Ltd with assessee assets and liabilities of 'Y' Ltd were transferred to and vested in the assessee company. ITA No.346/Mum/2024 M/s. Maxheal Pharmaceuticals (India) Ltd. 7 According to assessee excess consideration paid by it over the value of net assets acquired of 'Y' Ltd should be considered as goodwill arising on amalgamation. The assessee's claim for depreciation on goodwill was rejected by the Assessing Officer on ground that goodwill was not an asset falling under Explanation 3 to section 32(1). The Hon’ble Supreme Court has answered the following questions after asserting and holding as under:- “Question No [b] "Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on goodwill is allowable under the said Section? Answer. In the present case, the assessee had claimed deduction of Rs. 54,85,430/- as depreciation on goodwill in the course of hearing, the explanation regarding origin of such goodwill was given as under: "In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Lid (duly sanctioned by Hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company in the process goodwill has arisen in the books of the company. 2. It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company) should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. 3. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act. 1961 [Act', for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: ITA No.346/Mum/2024 M/s. Maxheal Pharmaceuticals (India) Ltd. 8 "Explanation 3- For the purposes of this sub-section, the expressions assets and block of assets shall mean-(a) tangible assets, being buildings, machinery, plant or furniture, [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature" 4. Explanation 3 states that the expression asset shall mean an intangible asset, being know-how patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading 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 right of a similar nature The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(6): 5. In the circumstances, we are of the view that Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. 6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of came to the conclusion that no amount was actually paid on account of goodwill This is a factual fact, finding. The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies, that the assets and liabilities of M/s YSN Shares and Securities Private Limited were transferred to the assessee for a consideration, that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee- Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT, for short]. We see no reason to interfere with the factual finding. ITA No.346/Mum/2024 M/s. Maxheal Pharmaceuticals (India) Ltd. 9 9. Thus, the Hon’ble Supreme Court held that goodwill is an asset under the Explanation 3(b) to Section 32(1) and also held that difference between the cost of an asset and the amount paid constitutes goodwill in the process of amalgamation and assessee had acquired the capital right in the form of goodwill. Accordingly, allowability of depreciation was upheld. 10. We further note that the Hon’ble Jurisdictional High Court in the case of CIT vs. Aditya Birla Nuvo Ltd. in Income Tax Appeal No.1571 of 2014, judgment dated 23/02/2017 had answered the similar question of law in favour of the assessee that whether the Tribunal was right in allowing the depreciation and goodwill following the decision of the Hon’ble Supreme Court in the case of CIT vs. Sniffs Securities Ltd. (supra). Further, in another judgment, Hon’ble Bombay High Court in the case of CIT vs. Birla Global Finance Co. Ltd. (221 Taxman 126) also allowed depreciation claim of assessee’s goodwill pursuant to acquisition of material business of its associated concern by way of scheme of amalgamation ongoing concern basis. In that case also, the consideration agreed was higher than the difference in the value of intangible assets and liabilities which was discharged by the issue of shares. The excess consideration paid over the value of tangible assets and liabilities was nomenclatured as “business of commercial brand equity” which was reported as intangible asset and assessee claimed depreciation u/s.32 of the Act. ITA No.346/Mum/2024 M/s. Maxheal Pharmaceuticals (India) Ltd. 10 11. Now, there is an amendment w.e.f. A.Y.2021-22 wherein provision of Section 32 has been amended and it has been provided that “goodwill is not an intangible asset eligible for depreciation u/s.32. However, this amendment is applicable prospectively from A.Y.2021-22 onwards. Thus, prior to A.Y.2021-22, the judgment of Hon’ble Supreme Court in the case of Sniff Securities has to be followed. This view also supported by the decision of the Co-ordinate Bench in the case of Vodafone India Services Pvt. Ltd. vs. DCIT in ITA No.2241/Ahd/2018 order dated 18/12/2023. Thus, following the judgment of the Hon’ble Supreme Court and jurisdictional High Court before us which is a binding precedent, we hold that depreciation claimed on goodwill is allowable and accordingly, ld. AO is directed to allow depreciation. 12. In the result, appeal of the assessee is allowed. Order pronounced on 2 nd September, 2024. Sd/- (OMKARESHWAR CHIDARA) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 02/09/2024 KARUNA, sr.ps ITA No.346/Mum/2024 M/s. Maxheal Pharmaceuticals (India) Ltd. 11 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//