Sara Suppliers Private Limited, Ahmedabad V. The Asstt. Commissioner of Income Tax, Circle-4(1)(1), Ahmedabad

ITA 432/AHD/2022

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 8633 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Ahmedabad
• Next Hearing Date: 10-01-2024
• Assessment Year: 2016-2017
• Appeal Filed On: 14-11-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: FORTHEAPPELLANTAREPLACEDINACHAPTERDEALINGWITHTHECAPITAL; FORTHEASSESSEEBEFOREUSHASCHALLENGEDTHEVALIDITYOFTHE
• Assessee Lawyers: .BEFOREUS; FOLLOWINGTHEPOOLINGOFINTERESTMETHODOF; LEARNEDCOUNSELAPPEARINGINSUPPORTOFTHEAPPEALCONTENDEDTHATIT
• Keywords: Sale consideration of property below Jantri Value; Depreciation

Judgement Text

आयकरअपीलीयअधिकरण , अहमदाबादनयायपीी INTHEINCOMETAXAPPELLATETRIBUNAL, ‘’B’’BENCH,AHMEDABAD BEFORESHRIWASEEMAHMED,ACCOUNTANTMEMBER And SHRISIDDHARTHANAUTIYAL,JUDICIALMEMBER आयकरअपीलसं./ITANo.432/AHD/2022 धििाधरणवरध / Asstt.Year:2016-2017 SaraSuppliersPrivateLimited, 6,PatelAvenue, NearGurudwaraS.GHighway, Ahmedabad-380054. PAN:AASCS1052K Vs. TheAsst.Commissionerof IncomeTax, Circle-4(1)(1), Ahmedabad. (Applicant)(Respondent) Assesseeby:ShriTusharHemani,Sr.Advocatewith ShriParimalsinhB.Parmar,A.R Revenueby:ShriSudhenduDas,CIT.D.R सुिवाईकीतारीख /DateofHearing:11/01/2024 घोरणाकीतारीख/DateofPronouncement:21/02/2024 आदेश /ORDER PERWASEEMAHMED,ACCOUNTANTMEMBER: ThecaptionedappealhasbeenfiledattheinstanceoftheAssesseeagainst theorderoftheLearnedCommissionerofIncomeTax(Appeals),Ahmedabad, arisinginthematterofassessmentorderpassedunders.143(3)oftheIncome TaxAct,1961(here-in-afterreferredtoas"theAct")relevanttotheAssessment Year2016-2017. 2.Theassesseehasraisedthefollowinggroundsofappeal: ITAno.432/AHD/2022 A.Y.2016-17 2 1.TheLd.CIT(A),haserredinlawbyagreeingwiththeLd.AO’sorderindisallowing depreciationundersection32(1)oftheActongoodwillrecognisedpursuanttoamalgamation sanctionedbyHon’bleHighCourtofGujaratandalsoinrejectingprecedentsincludingthatof Hon’bleSupremeCourt,JurisdictionalGujaratHighCourtandJurisdictionalITAT,whereinit hasbeenheldthatgoodwillisadepreciationassetunderExplanation3(b)tosection32(1)of theAct.Itisthereforeprayedthatdepreciationongoodwillmaykindlybegranted. 2.TheLd.CIT(A),haserredinfactsandcircumstancesofthecaseandinlaw,theld.AOhas erredinpassingtheassessmentorderinthenameofSaraSuppliersPrivateLimited(SSPL) whichwasanon-existententityasonthedateofpassingtheAppellant’srelianceonvarious judicialprecedentsincludingthatofHon’bleSupremeCourt,JurisdictionalGujaratHighCourt andJurisdictionalITAT.AssessmentOrderpassedbytheLd.AOaswellasAppellateOrder passedbyCIT(A)ofnon-existingentityisbadinlawandliabletobequashed. 3.Yourappellantcraveslibertytoadd,toalter,modify,toamendortowithdraw/deleteany ofthegroundsofappealatanytime,onorbeforethehearingofappeal. 3.ThefirstissueraisedbytheassesseeisthatthelearnedCIT(A)erredin confirmingthedisallowanceofdepreciationongoodwillcreatedintheschemeof amalgamation. 4.Thenecessaryfactsarethattheassessee,aprivatelimitedcompany,is engagedinthebusinessofmanufacturingDecorativeLaminationSheetandPower Generationthroughwindmill.Onecompanynamely,M/sOlympicLaminationPvt Ltd(hereafterM/sOLPL)mergedwiththeassesseecompanywitheffectfrom1 st April2015inaschemeofamalgamationapprovedbytheHon’bleHighCourtof Gujaratvideorderdated29-01-2016.Subsequently,theassesseecompany convertedintolimitedliabilitypartnershipwitheffectfrom16-03-2016.Onthe dateofamalgamation,thebookvalueofthenetassts(assets-liabilities)ofthe amalgamatingcompanyi.e.M/sOLPLstoodatRs.56,49,86,034/-only.Theentire assetsandliabilitiesoftheamalgamatingcompanyweretransferredtothe assesseecompanyattheirbookvalue.Further,theamalgamatingcompanyM/s OLPLhadtotalissuedsharecapitalat16.5lakhshares,whichwasvaluedatRs. 1500pershareforthepurposeofamalgamationandsharesofassesseecompany valuedatRs.100pershare.Thus,thepurchaseconsiderationwasdecidedat15 shareofassesseecompanyfor1shareoftheamalgamatingcompanyi.e.M/s OLPL.Accordingly,theassesseecompanyissued2,47,50,000equitysharestothe ITAno.432/AHD/2022 A.Y.2016-17 3 shareholdersoftheamalgamatedcompanyatRs.100pershare(premiumofRs. 90/share).Inotherwords,theassesseecompanypaidpurchaseconsiderationof Rs.247.5crores.Consequently,theassesseecompanypaidpurchase considerationmorethannetassetsacquiredbyRs.191,00,13,965/- (247,50,00,000minus56,49,86,034/-)andtreatedtheexcessamountasgoodwill. Theassesseeinreturnofincomefiledfortheyearunderconsiderationclaimed depreciation@25%forRs.47,75,03,492/-ongoodwillcreatedintheschemeof amalgamation. 4.1Theassesseeduringtheassessmentproceedingsubmittedthatthe depreciationongoodwillwasclaimedinviewofthejudgmentofHon’bleSupreme CourtinthecaseofSmifsSecuritiesLtdreportedin348ITR302.Theassessee furthersubmittedthattheaccountingstandard14alsorecognizestheamount paidinexcesstonetassetstransferredasgoodwillandpermitstoamortizethe sameovertheperiod.Theassesseewithregardtoprovisionofproviso6to section32(1)oftheActsubmittedthatthesameareapplicableincasewhere amalgamationtakesplacebetweentheyearandwhereboththeamalgamating andsuccessorcompanyclaimdeprecationforpartoftheyearinpart.Likewise, theprovisionsofexplanation7tosection43(1)andexplanation6tosection43(6) oftheActregardingtheactualcostandwrittendownvalueoftheassetsacquired intheschemeofamalgamationarealsonotapplicableinthepresentfactsasthe goodwillonwhichdepreciationclaimedisnotanassettransferredfromthe amalgamatingcompanytoamalgamatedcompany.Assuch,theimpugned goodwillarisesinitsbooksaspertheschemeofamalgamationdulyapprovedby theHon’bleHighCourt.Therefore,theclaimofdepreciationbyitisjustifiableand needstobeallowedasdepreciationonintangibleassets. 4.2TheAOdisagreedwiththecontentionoftheassessee.AspertheAO,the schemeofamalgamationdulyapprovedbytheHon’bleHighCourtisnotin dispute,butsuchapprovaldoesnotgiverighttoclaimdeductionorallowancein ITAno.432/AHD/2022 A.Y.2016-17 4 thereturnofincomefiledundertheActwhichisotherwisenotallowableunder theprovisionofthisAct.TheAOalsofoundthatthefactsofthecaseofSmifs SecuritiesLtd(supra)aredistinguishablefromthefactsofthepresentcase.As such,inthecaseofSmifsSecuritiesLtd(supra)thequestionbeforetheHon’ble SupremeCourtwaslimitedtowhetherthegoodwillisanintangibleasseteligible fordepreciationundertheprovisionofsection32(1)oftheActornot.Inthecase ofSmifsSecuritiesLtd(supra),twoindependententitiesweremergedwhereasin thecaseofthepresentassesseeboththecompanyi.e.theamalgamatedandthe amalgamatinghavesameshareholdersanddirectors/keyperson.Assuch,two companiesofthesamegroupcompanymergedwithaviewtosynergiesthe groupresources. 4.3Theamalgamatedcompany,(theassesseecompany)andthe amalgamatingcompanyi.e.M/sOLPLwasnothavinganybusinessactivitysince thelast2financialyears.Inthebooksofamalgamatingcompany,themajority assetswereintheformoflandandbuildingwhichhavenocapacitytosynergize thebusinessofthegroupcompaniesinfuture. 4.4Theschemeofamalgamationwasdesignedinsuchawaywhichproduces premiumandgoodwillwithouttheinvolvementofcashflow.Furthermore,there werecertaininconsistency/contradictioninthevaluationreportpreparedbySSPA &Co.CharteredAccountantinthedeterminationoffairvalueofsharesofM/s OLPLwhichsuggestthatthevaluationreportwasmadeatthewhimsof managementwhichiscommoninordertocreategoodwillinthebooksofthe assessee.Assuch,theamalgamationschemewasnothingbutacolorabledevice. 4.5Subsequenttotheamalgamation,theassesseecompanyi.e.amalgamated companywasconvertedintolimitedliabilitypartnership(LLP)witheffectfrom16- 03-2016.Accordingly,theshareholdersbecomethepartnersintheLLPinwhose ITAno.432/AHD/2022 A.Y.2016-17 5 accountshugepartner’scapitalamountwascreditedinthebooksofaccountsof LLPinplaceofsharecapitalandpremiumwithoutinvolvinganycashflow. 4.6Therewasnogoodwilleitherinthebooksoftheassesseecompanyorin thebooksofM/sOLPL.Assuch,whatevergoodwillarose,intheschemeofthe amalgamation,wasbasedonrevaluationofsharesofM/sOLPLandconsideration wasalsopaidintheformoffreshsharecapital,hencenocostwasincurredbythe assesseeforsuchgoodwill.Therefore,theassesseewasnotentitledfor depreciationontheimpugnedgoodwillinpursuanceoftheprovisionsofsection 32oftheAct.Further,proviso6tosection32(1)oftheActrestrictsdepreciation onamalgamatedassetstotheextentitwasavailabletotheamalgamating company.Similarly,theprovisionofexplanation7tosection43(1)and explanation2(b)tosection43(6)(c)oftheActmandatethatactualcostandWDV ofassetstransferredintheschemeofamalgamationshouldbeequaltowhatwas inthebooksofamalgamatingcompany.Similarly,theprovisionsofsection 55(2)(a)(iii)oftheActprovidethatthevalueofanassetwhichhasbeenacquired withoutincurringanycostshouldbetakenatNIL.Thus,therewouldnotbeany possibilityofallowingthedeductionforthedepreciationontheassetsresultingon accountofrevaluationofassets. 4.7TheAOFurtherobservedthatasperAS-14,therearetwomethodsof accountingnamelypoolingofinterestmethodandpurchasemethodwhichare appliedforrecordingthetransactionarisingintheschemeofamalgamationof companies.Incasethecondition,inaschemeofamalgamationprescribedunder para3(e)ofAS14arefulfilled,thenpoolingofinterestmethodofaccounting shouldbeapplicable.Underthepoolingofinterestmethodanydifference betweenpurchaseconsiderationandbookvalueofassets&liabilitiesshouldbe recognizedasanamalgamationreserve.Assuchnoconceptofgoodwillis availableinthismethodofaccounting.Onthecontrary,intheeventifanyofthe conditionprescribedunderpara3(e)isnotfulfilled,insuchcase,theassetsand ITAno.432/AHD/2022 A.Y.2016-17 6 liabilitiesaretransferredatrevaluedpriceandanydifferencebetweenpurchase considerationandmarketvalueofassets&liabilitiesistoberecognizedas goodwillinthebooksofresultantcompany. 4.8Further,para8ofappendix-CofIndAS-103mandatespoolingofinterest methodforamalgamationofcommonlycontrolentities.Similarly,para9ofInd AS-103mandatesthatalltheassetsandliabilitiesshouldbetransferredatthe carryingamount.Likewise,para12ofIndAS-103mandatesthatanydifference betweenpurchaseconsiderationandbookvalueofassets&liabilitiesshouldbe recognizedascapitalreserve.TherelevantfindingoftheAOissummarizedas under: 1.Thetransfereecompanyisapapercompanywithnoworthwhileactivities. 2.Thetransferorcompanyisanestablishedcompanywithrevenuesandassets. 3.Theroleoftheemployeesbenefitexpenses,costofmaterialconsumed&other expenses,clearlyindicatingthatcompanywasdrivenbyitspromoter/Managementwhois common. 4.Boththecompaniesbelongtothesamegroup(RoyalGroup). 5.Theultimateshareholdingiswithingroupthroughfamilymembers. 6.Thedirectorsremainunchanged. 7.Nocashpayoutisinvolvedintheamalgamation.Onlysharesareissuedbyvaluingthe transferorcompanyatexorbitantpremium. 8.Thecontroleffectivelyvestswiththedirectorsofthetransferorcompanyitself. 9.Thereisnochangeineffectiveownershiporcontrol. 10.Inthismanner,thegoodwillisartificiallycreatedanddepreciationisclaimedtoreduce thetaxableincomeandavoidpayingtaxes.Thus,theassesseeisabletoachievewhatit otherwisecannotdo,i.e.insteadofrevaluationwhichisatax-neutralexerciseandwherein depreciationisnotallowable,aroundaboutwayofclaimingdepreciationthroughtheroute ofamalgamatingwithapapercompanyofsamegroupisresortedto. 11.Thevaluationisdoneinamannerwhichissuitabletothecompanytoaidtaxevasion. 4.9Inviewoftheaboveobservation,theAOheldthattheassesseehasnot incurredanycosttoacquiregoodwill.Also,suchgoodwillwasnottransferredfrom amalgamatingcompany.Therefore,thevalueofthesameforthepurposeof ITAno.432/AHD/2022 A.Y.2016-17 7 taxationistobetakenatNIL.Thus,depreciationonsuchgoodwillisnotallowable intheyearunderconsiderationandinsubsequentyears. 5.AggrievedbytheorderoftheAO,theassesseepreferredanappealbefore learnedCIT(A)whoconfirmedthedisallowanceofdepreciationongoodwillby observingthattheAOhasgivendetailedfindinginlengthhighlightingtheclaimof theassesseewhichwasnotallowable.Assuch,nocontrarymaterialwasbrought onrecordbytheassesseeduringappeal. 6.BeingaggrievedbytheorderofthelearnedCIT(A),theassesseeisin appealbeforeus. 7.ThelearnedARbeforeufiledapaperbookrunningfrompages1to336 andcaselawscompilationrunningfrompages1to121alongwiththesummary oftheargumentsrunninginto7pages.Itwascontendedbytheld.ARthatthe goodwillisarisingintheschemeofamalgamationwhichwasapprovedbythe Hon’bleGujaratHighCourtandthereforethesameshouldbeeligiblefor depreciation.ItwasalsopointedoutbythelearnedARthatconsiderationpaidby theassesseetotheamalgamatingcompanywasbasedonthevaluationreport whichwasdulydischargedbywayofissuingshares.ThelearnedARalso submittedthatallthefactsabouttheschemeofamalgamationrelatingtothe amalgamatedandamalgamatingcompanieswereavailablewiththerevenue authoritiesbuttherewasnoobjectionraisedbytherevenuebeforetheapproval oftheHon’bleGujaratHighCourt. 8.Ontheotherhand,thelearnedDRbeforeussubmittedthatthe amalgamatedcompanywasapapercompany,anditwasnotcarryingoutany activity.Likewise,therewasnogoodwillinthebooksoftheamalgamating companypriortotheamalgamationandthereforeitcannotbesaidthatgoodwill hasbeentransferredtotheassesseeinpursuanceoftheschemeofamalgamation. ThelearnedDRvehementlysupportedtheorderoftheauthoritiesbelow. ITAno.432/AHD/2022 A.Y.2016-17 8 9.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialavailableonrecord.Attheoutset,wenotethatthefactsofthepresent caseareidenticaltothefactsinvolvedinthecaseofKIFSInternationalLLPvs. DCITinITA557/AHD/2022fortheAY2016-17.Assuch,inthecaseofKIFS InternationalLLP,thetwocompaniesofagroupweremergedintheschemeof amalgamationapprovedbytheHon’bleHighCourt.Thepurchaseconsideration waspaidbytheamalgamatingcompanybyissuingsharestotheshareholderof amalgamatedcompanybasedonvaluationreportwithoutinvolvinganycash payments.Thepurchaseconsiderationmorethanthenetassetstransferredby theamalgamatingcompanywastreatedasgoodwillbytheamalgamated companyandthedepreciationwasclaimedonsuchgoodwill.TheAOandthe learnedCIT(A)disallowedtheclaimofdepreciationonidenticalreasoningasin thecaseofpresentassessee.TheissuecameupbeforethisTribunalinthe assessee’sappealandthebenchvideorderdated15 th September2023decided theissueinfavouroftheassessee.ThedetailedfindingsoftheTribunalare extractedasunder: 14.Wehaveheardtherivalcontentionsofboththepartiesandperusedthematerials availableonrecord.Itisprovidedundertheprovisionsofsection2(1B)oftheActthatina schemeofamalgamationalltheproperties&liabilitiesoftheamalgamatingcompanywould becometheassetsandliabilitiesoftheamalgamatedcompany.Similarly,itwasalsoprovided thattheshareholdersholdingnotlessthan75%invalueofthesharesintheamalgamating companyshouldbecometheshareholdersoftheamalgamatedcompany.Theprovisionof section2(1B)oftheActreadsasunder: (1B)"amalgamation",inrelationtocompanies,meansthemergerofoneormore companieswithanothercompanyorthemergeroftwoormorecompaniestoformone company(thecompanyorcompanieswhichsomergebeingreferredtoasthe amalgamatingcompanyorcompaniesandthecompanywithwhichtheymergeorwhichis formedasaresultofthemerger,astheamalgamatedcompany)insuchamannerthat— (i)allthepropertyoftheamalgamatingcompanyorcompaniesimmediately beforetheamalgamationbecomesthepropertyoftheamalgamatedcompany byvirtueoftheamalgamation; (ii)(ii)alltheliabilitiesoftheamalgamatingcompanyorcompaniesimmediately beforetheamalgamationbecometheliabilitiesoftheamalgamatedcompany byvirtueoftheamalgamation; (iii)(iii)shareholdersholdingnotlessthanthree-fourthsinvalueofthesharesin theamalgamatingcompanyorcompanies(otherthansharesalreadyheld thereinimmediatelybeforetheamalgamationby,orbyanomineefor,the amalgamatedcompanyoritssubsidiary)becomeshareholdersofthe amalgamatedcompanybyvirtueoftheamalgamation, ITAno.432/AHD/2022 A.Y.2016-17 9 otherwisethanasaresultoftheacquisitionofthepropertyofonecompanyby anothercompanypursuanttothepurchaseofsuchpropertybytheothercompanyor asaresultofthedistributionofsuchpropertytotheothercompanyafterthewinding upofthefirst-mentionedcompany; 14.1Intheschemeofamalgamation,twoormorecompaniesmergedandformanew company,oroneormorecompaniesmergedintoanexistingcompany.Asaresultof amalgamation,theamalgamatingcompanygetsdissolvedanditsbusinessalongwith assetsandliabilitiesistakenoverbytheamalgamatedcompany.Inreturnthe amalgamatedcompanypayspurchaseconsiderationtotheshareholderofamalgamating companybywayofissuingitsequityshare,othersecuritiesorbypayingcash.Normally, thecompaniesoptforamalgamationfornumerousreasons/objectiveswhichmayinclude theeliminationofthecompetition,better/effectiveutilizationoftheresources, better/effectivecontroloverthemarketetc. 14.2Thepurchaseconsiderationpaidbytheamalgamatedcompanytotheshareholdersof theamalgamatingcompanymaybemorethanthevalueofthenetassetstakenoveror sometimeitmaybelowerthanthenetassetstakenover.Assuchpurchaseconsideration tobepaidtotheamalgamatingcompanybytheamalgamatedcompanyisdetermined afterconsideringvariousinternalandexternalfactorswhichmayaffectfutureprofitability andgrowth.Suchfactorsincludepreviousearnings,futurepossibleearnings,location, technicalknow-how,customerbase,marketingnetworketc.Thus,itleadstoadifference betweenthenetvalueofassetstakenoverandpurchaseconsiderationpaid. 14.3Accountingstandard-14,issuedbytheICAIprescribestwomethodsofaccountingfor thetransactioncarriedoutintheschemeofamalgamationnamelypoolingofinterest methodandpurchasemethod.Iftheschemeoftheamalgamationfulfilstheconditionsof para3(e)oftheAccountingStandard-14,thenpoolingofinterestmethodshouldbe followedotherwisepurchasemethodofaccountingshouldbeapplied.Therelevantextract ofaccountingstandardreadsasunder: 7.Therearetwomainmethodsofaccountingforamalgamations: (a)thepoolingofinterestsmethod;and (b)thepurchasemethod 8.Theuseofthepoolingofinterestsmethodisconfinedtocircumstanceswhichmeet thecriteriareferredtoinparagraph3(e)foranamalgamationinthenatureofmerger. 14.4Underthepoolingofinterestmethodthedifferencebetweenpurchaseconsiderations andthenetassetstakenoverbytheamalgamatedcompanyisadjustedwithreserve.On theotherhand,inthecaseofpurchasemethodifpurchaseconsiderationexceedsnet valueofassetstakenoverthensuchdifferenceistobeasrecognizedasgoodwillorvise- versaascapitalreserve. 14.5Goodwillmaybedescribedastheaggregateofthoseintangibleassetsofabusiness whichcontributestoitssuperiorearningcapacityoveranormalreturnoninvestment.It mayarisefromsuchattributesasfavourablelocations,theabilityandskillofitsemployees andmanagement,qualityofitsproductsandservices,customersatisfactionetc. 14.6Para19ofAS-14describesgoodwillarisinginaschemeofamalgamationasextra amountpaidinanticipationoffutureincomeandsuggeststreatingthesameasanasset, henceprovideforsystematicamortizationofsameovertheperiodofusefullife.Thepara 19ofAS-14readsasunder: 19.Goodwillarisingonamalgamationrepresentsapaymentmadeinanticipationof futureincomeanditisappropriatetotreatitasanassettobeamortisedtoincomeon asystematicbasisoveritsusefullife.Duetothenatureofgoodwill,itisfrequently difficulttoestimateitsusefullifewithreasonablecertainty.Suchestimationis, therefore,madeonaprudentbasis.Accordingly,itisconsideredappropriateto amortisegoodwilloveraperiodnotexceedingfiveyearsunlessasomewhatlonger periodcanbejustified. 14.7Inthecaseinhand,theassesseecompanyhastakenoverthebusinessofoneofthe groupcompanies,namelyKSPL,withalltheassets,liabilities,andreserves.Inreturnthe ITAno.432/AHD/2022 A.Y.2016-17 10 assesseecompanyissuedits2sharesforoneshareofKSPLaspurchaseconsideration. Accordingly,theassesseecompanyissued2,54,54,560newsharesfor1,27,27,280/-shares ofKSPL@Rs.235/-havingfacevalueofRs.10eachandpremiumofRs.225/-each.Thus, theassesseecompanypaidpurchaseconsiderationofRs.598.18croresonly(2.54crorex Rs.235/-)againstthenetbookvalueoftheassetsandliabilitiestakenoverbyitat Rs.298,30,45,656/-onlyleadingtoadifferencebetweenNAVandpurchaseconsideration ofRs.308,87,75,944/-.Theassessee,byfollowingthepoolingofinterestmethodof accountingasprescribedunderAS-14recognizedsuchdifferenceasGoodwillinthebooks ofaccount.TheschemeofamalgamationwasapprovedbytheHon’bleGujaratHighCourt videorderdated21 st December2015whichwaseffectivefrom1-4-2015.Subsequently,the assesseeatthetimeoffilingreturnofincomeclaimeddepreciationonsuchgoodwillby treatingthesameasintangibleassetwhichwasdisallowedbytheAOandconfirmedby thelearnedCIT(A)byholdingitatNILvalueforthepurposeoftaxation. 14.8Undeniably,thepurchaseconsiderationpaidbytheassesseetotheshareholdersof thetransferor/amalgamatingcompanystandsatRs.598.18croresasevidentfromthe schemeofamalgamation.Therelevantclauseoftheschemeoftheamalgamationstands asunder: 23.1UponthisSchemebecomingeffective,TransfereeCompany-2shallwithoutany furtherapplicationordeed,issueandallotEquity.Sharesatpar,creditedasfullypaid up,totheextentindicatedbelowtotheshareholdersofTransferorcompany,holding sharesinTransferorcompanyandwhosenameappearintheRegisterofMemberson theAppointedDateortosuchoftheirrespectiveheirs,executors,administratorsor otherlegalrepresentativeorothersuccessorsintitleasmayberecognizedbythe respectiveBoardofDirectorsinthefollowingmanner: 2(Two)fullypaidEquitySharesofRs.1Q/-eachofTransferee.Company-2shallbe issuedandallotted,forevery1(.One)EquitySharesofRs.10/-eachheldin TransferorCompany. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXX 23.5UponSchemebeingeffectiveandonallotmentofnewEquitySharesby TransactionCompany-2,thesharecertificaterepresentingsharesheldinTransferor Companyshallstandautomaticallycancelled.ThenewEquitySharesshallbeissued byTransfereeCompany-2totheshareholdersofTransferorCompanyatapremiumof Rupeestwohunderedandtwentyfivepershare.ApprovalofthisSchemebythe shareholdersoftransfereecompany2shallbedeemedtobetheduecomplianceofthe provisionsofSection62andSection42oftheCompaniesAct,2013andotherrelevant andapplicableprovisionsoftheActfortheissueandallotmentofEquitySharesby TransfereeCompany-2totheshareholdersofTransferorcompany,asprovidedinthis Scheme. 14.9Hence,thepurchaseconsiderationexceedsthebookvalueofnetassetsacquiredby itbyRs.308,87,75,944/-asdiscussedabove.Theexcessamountwasrecordedas goodwillinthebooksoftheassessee.Admittedly,thattheassesseeincurredthecost morethanthenetbookvalueofassetsacquiredbyitintheschemeofamalgamation whichhasalsobeenapprovedbytheHon’bleGujaratHighCourtvideorderdated21 st December2015w.e.f.01stApril2015.Therelevantportionofthejudgmentreadsasunder: Thepetitionercompaniesarefurtherdirectedtolodgeacopyofthisorder,the scheduleofimmovableassetsoftheundertakingbeingtransferredundertheslump saletotheTransferee-1andthatoftheremainingundertakingoftheTransferee-2,as onthedateofthisorderandtheschemedulyauthenticatedbytheRegistrar,High courtofGujaratwithconcernedsuperintendentofstamps,forthepurposeof adjudicationofstampduty,ifany,onthesamewithin60daysfromthedateofthe order. ITAno.432/AHD/2022 A.Y.2016-17 11 ThePetitionercompaniesaredirectedtofileacopyofthisorderalongwithacopyof theschemewiththeconcernedRegistrarofCompanies,electronically,alongwithINC- 28inadditiontoaphysicalcopyasperrelevantprovisionsoftheAct. Filingandissuanceofdrawnuporderisherebydispensedwith. AllconcernedauthoritiestoactonacopyofthisorderalongwiththeSchemeduly authenticatedbytheRegistrar,HighCourtofGujarat.TheRegistrar,HighCourtof GujaratshallissuetheauthenticatedcopyofthisorderalongwiththeSchemeof expeditiouslyaspossible. 14.10Furthermore,itwasmentionedintheschemeofamalgamationthatthedifferenceif anybetweenthevalueoftheassetsacquiredbytheamalgamatedcompanyandthe considerationpaidshallberecordedeitherascapitalreserveorgoodwill.Therelevant portionoftheschemereadsasunder: Thedifference(excessordeficit),betweenthenetvalueofassetsoveraggregateface valueandpremiumamountfortheEquitySharesissuedbyTransfereeCompany- 2totheshareholdersofTransferorcompanypursuanttothisSchemeandaftergiving effecttoClause24.3beadjustedtoCapitalReserveorGoodwill,asthecasemaybein booksofTransfereeCompany-2. 14.11Atthisjuncture,itisalsoimportanttonotethattheHon’bleGujaratHighCourtin theimpugnedschemeofamalgamationwhileapprovinghasalsoobservedthatthe RegionalDirector,MinistryofCorporateaffairsvideletterdated3 rd December2015,has invitedobjectionsfromtheIncomeTaxDepartmentifanyintheschemeofamalgamation. ButtheIncomeTaxDepartmentdidnotreplywithinthetimelimitof15days,henceitwas assumedthattheIncomeTaxDepartmenthasnoobjectioninconnectionwiththe impugnedschemeofamalgamation.ThisfactcanbeverifiedfromtheorderoftheHon’ble HighCourt,therelevantfindingisreproducedasunder: ThenextobservationoftheRegionalDirectorvideparagraph2(e),pertainstothe letterdated3rdDecember2015sentbytheRegionalDirectortotheIncomeTax Departmenttoinvitingtheirobjections,ifany.Sincethestatutoryperiodof15days, asenvisagedbytherelevantcircularoftheMinistryofCorporateAffairsisover,itcan bepresumedthattheIncomeTaxDepartmenthasnoobjectiontotheproposed Schemeofarrangement.Thepetitionercompanieshaveagreedtocomplywiththe applicableprovisionsoftheIncomeTaxActandrules.Inviewofthesame,no directionarerequiredtobeissuedtothepetitionercompaniesinthisregard. 14.12Inthisconnection,wefurthernotethattheschemefortheamalgamationwas presentedbeforetheHon’bleGujaratHighCourtfortheapprovalinpursuancetothe provisionsofsection391to394AoftheCompaniesAct.Butonperusaloftheprovisionsof section391to394AoftheCompaniesAct,wenotethatthereisarequirementforinviting theobjectionfromthecentralgovernmentabouttheproposedschemeofamalgamation. Therelevantextractofthesectionreadsasunder: 394A.NOTICETOBEGIVENTOCENTRALGOVERNMENTFORAPPLICATIONSUNDER SECTIONS391AND394The1[Tribunal]shallgivenoticeofeveryapplicationmade toitundersection391or394totheCentralGovernment,andshalltakeinto considerationtherepresentations,ifany,madetoitbythatGovernmentbefore passinganyorderunderanyofthesesections.1.Substitutedfor`Court'bythe Companies(SecondAmendment)Act,2002(w.e.f.adateyettobenotified) 14.13Accordingly,wefindthattherewasnorequirementtoinviteobjectionsfromthe IncomeTaxDepartment.However,wefindthattheMCAhasissuedacircularNo.1/2014 dated15.01.2014directingregionaldirectorsofMinistryofCorporateAffairtoinvite commentsandinputsfromtheIncomeTaxDepartmentaswellasfromotherregulatory departmentbeforetheamalgamation.Therelevantcopyofthecircularrecessunder: GeneralCircularNo1/2014 F.No2/1/2014 Dated15thJanuary2014 ITAno.432/AHD/2022 A.Y.2016-17 12 Subject:Reportu/s394AoftheCompaniesAct,1956-Takingaccountsof comments/inputsfromIncomeTaxDepartmentandothersectoral RegulatorswhilefilingreportsbyRDs. Section394AoftheCompaniesAct,1956requiresserviceofanoticeontheCentral Governmentwherevercasesinvolvingarrangement/compromise(underSection391) orreconstruction/amalgamation(underSection394)comeupbeforetheCourtof competentjurisdiction.AsthepowersoftheCentralGovernmenthavebeendelegated totheRegionalDirectors(RDs)whoalsofilerepresentationsonbehalfofthe Governmentwherevernecessary. 2.Itistobenotedthatthesaidprovisionsisinadditiontotherequirementofthe reporttobereceivedrespectivelyfromtheRegistrarofCompaniesandtheOfficial LiquidatorunderthefirstandsecondprovisostoSection394(1).Ajointreadingof Sections394and394AmakesitclearthatthedutiestobeperformedbytheRegistrar andOfficialLiquidatorunderSection394andoftheRegionalDirectorconcerned actingonbehalfoftheCentralGovernmentunderSection394Aarequitedifferent. 3.AninstancehasrecentlycometolightwhereinaRegionalDirectordidnot projecttheobjectionsoftheIncomeTaxDepartmentinacaseunder Section394.Thematterhasbeenexaminedanditisdecidedthatwhileresponding tonoticesonbehalfoftheCentralGovernmentunderSection394A,theRegional DirectorconcernedshallinvitespecificcommentsfromIncomeTaxDepartmentwithin 15daysofreceiptofnoticebeforefilinghisresponsetotheCourt.Ifnoresponsefrom theIncomeTaxDepartmentisforthcoming,itmaybepresumedthattheIncomeTax DepartmenthasnoobjectiontotheactionproposedunderSection391or394asthe casemaybe.TheRegionalDirectorsmustalsoseeifinaparticularcasefeedback fromanyothersectoralRegulatoristobeobtainedandifitappearsnecessaryforhim toobtainsuchfeedback,itwillalsobedealtwithinalikemanner. 4.ItisalsoemphasizedthatitisnotfortheRegionalDirectortodecidecorrectnessor otherwiseoftheobjections/viewsoftheIncometaxDepartmentorotherRegulators. WhileordinarilysuchviewsshouldbeprojectedbytheRegionalDirectorinhis representation,iftherearecompellingreasonsfordoubtingthecorrectnessofsuch views,theRegionalDirectormustmakeareferencetothisMinistryfortakingupthe matterwiththeMinistryconcernedbeforefilingtherepresentationunderSection394A. 5.ThisCirculariseffectivefromthedateofissue. 14.14TheabovecircularissuedbytheMCAwascirculatedbytheCBDTamongitsofficers videF.No.279/MISC./M-171/2013-ITJ,dated11thApril2014whichreadsasunder: F.NO.279/MISC./M-171/2013-ITJ,Dated-11′′‘April,2014 GovernmentofIndia,MinistryofFinance,DepartmentofRevenue,C.B.D,T.,New Deihl Subject:Merger/Amalgamation/de-mergerObjectionsentertainedbyHigh Courts-reg. Iamdirectedtorefertotheabovementionedsubject. 2.Inarecantcaseofproposedamalgamation,itwasnotedthattheschemeof amalgamationwasdesignedseekingamalgamationwithretrospectivedatessoasto claimsetoffoflossesofloss-makingCompaniesagainsttheprofitsofprofitmaking Companiesofthegroupandthusimpactingadverselythemuchneededpublic revenue. ITAno.432/AHD/2022 A.Y.2016-17 13 ThisfactofproposedamalgamationwasnotbroughttothenoticeofIncomeTax DepartmenteitherbytheMinistryofCorporateAffairs(MCA)orRegistrarof Companies(ROC).TheDeportmenthadtofileaninterventionapplicationopposing suchamalgamationbeforetheHighCourtwhichwasrejectedonthegroundthatthe DepartmenthadnolocusstandiinthematterandthatRegionalDirector,MCAhas beendelegatedpowerinthisregard. 3.InthisconnectionCircularNo1/2014dated15.01.2014hasbeenissuedby MCAtoRegionalDirectorswhichlaysdownthatwhilefurnishinganyreportregarding reconstructionoramalgamationofcompaniesundertheCompaniesAct,comments andinputsfromtheIncomeTaxDepartmentmayinvariablybeobtainedsoasto ensurethattheproposedschemeofreconstructionoramalgamationhasnotbeen designedinsuchawayastodefraudtheRevenueandconsequentlybeingprejudicial topublicinterest.IthasfurtherbeensaidthattheRegionalDirectorswouldinvite specificcommentsfromtheIncomeTaxDepartmentwithin15daysofreceiptof noticebeforefilingresponsetotheCourt.Itisemphasisedthatthisistheonly opportunitywiththeDepartmenttoobjecttotheschemeofamalgamationifthesome isfoundprejudicialtotheinterestofRevenueandtherefore,itisdesiredthatthe comments/objectionsoftheDepartmentaresentbytheconcernedCITtoRegional Director,MCAforincorporatingtheminitsresponsetotheCourt,immediatelyafter receivinginformationaboutanyschemeofamalgamationorreconstructionetc. 4.ThisissueswithapprovalofMember(A&J). 14.15Fromtheabovecircular,itistranspiredthattheRevenuewasconsciousaboutthe factthattherewasthepossibilityofmisusingtheprovisionsoftheincometaxActinthe nameoftheschemeofamalgamationasprovidedundersection2(1B)causingprejudice totheRevenue.ButtheRevenue,despitehavingtheopportunityinitshanddidnotraise anyobjectionwithinthetimeallowedbytheMCAorsubsequentlybyraisingtheobjection intheimpugnedschemeofamalgamation.Thus,fromtheconductoftheRevenue,itis revealedthattherewasnogrievanceintheimpugnedschemeofamalgamation.Hadthere beenanygrievancetotheRevenue,thesamecouldhavebeenbroughttothenoticeof theregionaldirectoroftheMCA,thensuitableactionshouldhavebeeninitiatedagainst theimpugnedschemeoftheamalgamation.Inthisregard,wenotethatrecentlythe MumbaibenchofNCLTinoneofthepetitionsforamalgamationincaseofGabs InvestmentPvtLtd(Transferor)andAjantaPharmalimited(Transferee)inCPSNo.995 and996/2017hasnotapprovedtheschemeofamalgamationontheobjectionraisedby therevenue.Therelevantextractoftheorderreadsasunder: 36.Therationalegivenintheschemeamongothersthingsaretheproposed amalgamationofthetransferorcompanyintoTransfereeCompanybythescheme,as aresultofwhichtheshareholdersofthetransferorcompanyviz.thepromotersofthe transferorcompany(whoarealsothepromotersofthetransfereecompany)shall directlyholdsharesinthetransfereecompanyandthepromoterswouldcontinueto holdthesamepercentageofsharesintheTransfereecompanypreandpostmerger. 37.Theaboverationalepresentedbythepetitionercompanyiswithoutany Justification.Petitionerhastocomplywithallapplicablelaws.Bythisschemeof amalgamationandarrangementGabs/shareholdersofGabsareavoidingfulltax liabilitywhichisstrenuouslyobjectedbytheIncomeTaxDepartmentasdiscussed Supra.Anytransferofpropertyfromoneentitytootherhastobetreatedas sale/transferandthesamehastocomplywithapplicableprovisionsoflawincluding applicabletaxliability,stampduty.Intheinstantcase,thetransferorisaprivateLtd. companywhichisaseparatelegalentityandanytransferofsharestootherentity includingindividualsfromthelegalentitywouldattractapplicabletaxliability. Therefore,weareoftheconsideredviewthattheBenchcansanction/approvethe schemeonlyifitcomplieswithallapplicableprovisionsoftheAct,Rulesandifthe ITAno.432/AHD/2022 A.Y.2016-17 14 schemeisintheinterestofpublic,shareholderetc.However,thepetitionercompanies didnotprovidedetailswithregardtocomplianceoftaxliabilityraisedbytheIncome TaxDepartment,theirundertakingtopaythehugetaxliabilityaspointedoutbythe incomedepartmentetc. 38.FromtheaboveanalysisofthefinancialsofGabs,thebenchnotedthatwithan equitysharecapitalofonly1,91,100thepromoters/shareholdersofGabswhoarealso thecommonpromotersofAPL,bywayofthisproposedschemeofamalgamationand arrangementwouldgetthesharesofAPLworth?1477.50Crores(marketvalueason 31.03.2017)andthattoowithoutpayinganyIncomeTax,StampDutyetc.forwhich thebenchisoftheconsideredviewthatthesameisnotinthepublicinterest, thousandsofshareholdersofTransfereecompanyespeciallyretailshareholders.The marketvalueofthesamenumberofsharesasat31.03.2016was1,182.59Crores. 39.SinceIncomeTaxdepartment(IT)hasraisedstrongobjectionsabouttaxbenefit, taxavoidance,taxlossasdiscussedabove,weareoftheopinionthatitwouldbe www.taxguru.inadvisabletosettletheimportant/crucialissueofhugetaxliability beforesanctioningtheschemebytheTribunalratherthandisputingthesameata laterstageaftertheschemeissanctionedbytheTribunal.Itismandatoryasper section230(5)oftheCompaniesAct,2013,anoticeundersubsection(3)alongwith allthedocumentsinsuchformshallalsobesenttocentralgovernment,IncomeTax Authorities,RBI,SEBI,ROC,stockexchanges,OL,CCIandotherSectoralregulatorsor Authoritiesfortheirrepresentations.Inresponsetothenoticereceivedasperabove sectiontheIncomeTaxDepartmenthasraisedvalidobservation/objectionsasdetailed above,wefindmeritintheobjectionsraisedbyIncomeTaxDepartmentandweare alsoinclinedtoagreewiththeobjectionsraised. 14.16Fromtheabove,itisinferredthattheIncomeTaxDepartment,beingaggrieved withtheschemeofamalgamation,raisedtheobjection,whichwasdulyacceptedbythe NCLTandaccordingly,theschemeofamalgamationwasdisapprovedintheabovecase. 14.17Now,thequestionariseswhethertheschemeonceapprovedbytheHon’bleGujarat HighCourtafterreceivingnoobjectionfromtheIncomeTaxDepartment,theAO/revenue hasauthoritytochallengethesame.Whatistheinferencethatflowsfromacumulative considerationofalltheaforesaidcontendingfactsisthattherevenuecannotobjecttothe impugnedschemeofamalgamation.Itisbecause,itisimpliedthattherevenuehasgiven itsconsentintheimpugnedschemeofamalgamationbyraisingnoobjectioninresponse totheletterissuedbytheregionaldirectoroftheMCAasdiscussedabove.Furthermore, hadtherebeenanygrievancetotherevenue,thenitshouldhaveapproachedtheHon’ble HighCourtthroughtheregionaldirectoroftheMCA.Butitdidnotdoso.Assuchthe revenueononehandisissuingcircularstoitsofficerstoobjecttheschemeof amalgamationifitisfoundprejudicialtotheinterestofrevenuebutontheotherhandit remainssilentwhensuchopportunitywasaffordedtoitandraisingthesameissueduring theassessmentproceedingswhichinourconsideredviewisnotdesirable. 14.18Movingahead,thereisalsonodisputeintheamountofthepurchaseconsideration andtheNAVdeterminedbetweenthecompanies,asavailableintheschemeof amalgamation,whichwasapprovedbytheHon’bleGujaratHighCourtaswell.However, thelowerauthoritiesheldthevalueofgoodwillatNILforthepurposeoftaxationduring theassessmentproceedingsforthereasonsasdiscussedaboveintheirrespectiveorders. But,inthebackdropoftheabovediscussion,wearenotconvincedwiththeordersofthe authoritiesbelowonthispreliminaryissue. 15.Now,thenextquestionarisesforourconsiderationwhetherthevalueofgoodwill shouldbetakenatNILundertheprovisionofIncomeTaxActinthebooksof amalgamatedcompanyasnosuchgoodwillwasavailableinthebooksofamalgamating companypriortoamalgamationandsuchgoodwillemergedinthebooksofamalgamated companyonaccountofvaluationandrevaluationofbusinessasnocostincurredbythe amalgamatedcompanyforsuchgoodwill.Inthisconnection,weareinclinedtorefer ITAno.432/AHD/2022 A.Y.2016-17 15 certainprovisionsoftheActinthecontextoftheschemeofamalgamationasprovided undersection2(1B)oftheActasdetailedunder: Depreciation. 19 32.(1) 20 [Inrespectofdepreciationof— (i)XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (ii)know-how,patents,copyrights,trademarks,licences,franchisesorany otherbusinessorcommercialrightsofsimilarnature,beingintangible assetsacquiredonorafterthe1stdayofApril,1998, owned 21 ,whollyorpartly,bytheassessee 21 andusedforthepurposesofthe business 21 orprofession,thefollowingdeductionsshallbeallowed—] 22 [(i)XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (ii) 24 [inthecaseofanyblockofassets,suchpercentageonthewritten downvaluethereofasmaybeprescribed 25 :] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 38 [Providedalsothattheaggregatededuction,inrespectof depreciationofbuildings,machinery,plantorfurniture,beingtangible assetsorknow-how,patents,copyrights,trademarks,licences,franchisesor anyotherbusinessorcommercialrightsofsimilarnature,beingintangible assetsallowabletothepredecessorandthesuccessorinthecaseof successionreferredtoinclause(xiii)andclause(xiv)ofsection 47orsection170ortotheamalgamatingcompanyandtheamalgamated companyinthecaseofamalgamation,ortothedemergedcompanyand theresultingcompanyinthecaseofdemerger,asthecasemaybe,shall notexceedinanypreviousyearthedeductioncalculatedattheprescribed ratesasifthesuccessionortheamalgamationorthedemerger,asthecase maybe,hadnottakenplace,andsuchdeductionshallbeapportioned betweenthepredecessorandthesuccessor,ortheamalgamatingcompany andtheamalgamatedcompany,orthedemergedcompanyandthe resultingcompany,asthecasemaybe,intheratioofthenumberofdays forwhichtheassetswereusedbythem.] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Explanation2.—Forthepurposesofthis 40 [sub-section]“writtendown valueoftheblockofassets”shallhavethesamemeaningasinclause*(c) ofsub-section†(6)ofsection43.] 41 [Explanation3.—Forthepurposesofthissub-section,theexpressions “assets”and“blockofassets”shallmean— (a)tangibleassets,beingbuildings,machinery,plantorfurniture; (b)intangibleassets,beingknow-how,patents,copyrights,trademarks, licences,franchisesoranyotherbusinessorcommercialrightsof similarnature. 15.1Theaboveprovisionofsection32oftheActprovidesallowingthedepreciationtothe amalgamatedcompanyinthesamemannerwhichwouldhavebeenallowedtothe amalgamatingcompanyintheeventhadtherenotbeenanyamalgamation. 15.2Similarly,theactualcostoftheassetsacquiredintheschemeofamalgamationinthe handsoftheamalgamatedcompanywillcontinuetobethesameasitwouldhavebeenin thehandsoftheamalgamatedcompanyintheevent,hadtherenotbeenany amalgamation.Therelevantextractoftheexplanation7tosection43(1)readsasunder: Definitionsofcertaintermsrelevanttoincomefromprofitsandgainsof businessorprofession. ITAno.432/AHD/2022 A.Y.2016-17 16 43.Insections28to41andinthissection,unlessthecontextotherwiserequires 3 — 4 (1)“actualcost”meanstheactualcost 3 oftheassetstotheassessee,reduced bythatportionofthecostthereof,ifany,ashasbeenmet3directlyor indirectlybyanyotherpersonorauthority: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 14 [Explanation7.—Where,inaschemeofamalgamation,anycapitalassetis transferredbytheamalgamatingcompanytotheamalgamatedcompanyandthe amalgamatedcompanyisanIndiancompany,theactualcostofthetransferredcapital assettotheamalgamatedcompanyshallbetakentobethesameasitwouldhave beeniftheamalgamatingcompanyhadcontinuedtoholdthecapitalassetforthe purposesofitsownbusiness.] 15.3WefurthernotethattheWDVoftheassetsacquiredintheschemeofamalgamation inthehandsoftheamalgamatedcompanywillcontinuetobethesameasitwouldhave beeninthehandsoftheamalgamatingcompanyintheevent,hadtherenotbeenany amalgamation.Therelevantextractoftheexplanation2tosection43(6)(c)oftheAct readsasunder: (6)“writtendownvalue”means— XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 42 [Explanation2.—Whereinanypreviousyear,anyblockofassetsis transferred,— (a)XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (b)bytheamalgamatingcompanytotheamalgamatedcompanyina schemeofamalgamation,andtheamalgamatedcompanyisanIndian company, then,notwithstandinganythingcontainedinclause(1),theactualcostof theblockofassetsinthecaseofthetransferee-companyorthe amalgamatedcompany,asthecasemaybe,shallbethewrittendown valueoftheblockofassetsasinthecaseofthetransferor-companyorthe amalgamatingcompanyfortheimmediatelyprecedingpreviousyearas reducedbytheamountofdepreciationactuallyallowedinrelationtothe saidprecedingpreviousyear.] 15.4Aspersection32(1)oftheITAct'depreciation'istobecomputedon'actual cost'/'writtendownvalueoftheblockofassets'ascertainedinaccordancewiththe provisionsofsection43oftheAct.Further,areadingoftheaboveprovisionshowsthatin respectof'capitalassets'transferredbytheamalgamatingcompanytotheamalgamated company,thecost/writtendownvalueofthetransferredcapitalassettotheamalgamated companyshallbetakentobethesameasitwouldhavebeenhadtheamalgamating companycontinuedtoholdthecapitalassetforthepurposesofitsownbusiness. 15.5Acombinedreadingoftheaboveprovisionsrevealsthattheintentionofthe legislaturebehindtheintroductionoftheamalgamationschemewastoachievetax neutrality.Besidestheabove,theintentionofthelegislatureisalsoreflectingfromthe followingprovisions: i.Thereisnocapitalgaininthehandsoftheamalgamatingcompanyonthetransfer ofcapitalassetsintheschemeofamalgamationundertheprovisionsofsection47(vi) oftheAct. ii.Thecostofstock-in–tradeinthehandsoftheamalgamatedcompanyshallremain thesameasinthehandsoftheamalgamatingcompanyeitherascapitalassetor stockintradeasprovidedundersection43CoftheAct. iii.Provisionsrelatingtocarryforwardandsetoffofaccumulatedlossandunabsorbed depreciationallowanceinamalgamationordemerger,etcundertheprovisionsof section72AoftheAct. ITAno.432/AHD/2022 A.Y.2016-17 17 iv.Exemptionofcapitalgainsinthehandsofshareholdersofamalgamatingcompany ontransferofsharesofamalgamatingcompanyintheschemeofamalgamationunder theprovisionsofsection47(vii)oftheAct. v.Costofcapitalassetstobethesameasinthehandsofpreviousownerwhere capitalassetsbecametheassetsofthesuccessorasaresultoftransferundersection 47(vi)r.w.s.49(1)(iii)(e)oftheAct. vi.Costofsharesofamalgamatedcompanyinthehandsofshareholders,receivedas considerationfortransferofsharesofamalgamatingcompany,tobesameasthecost ofsharesofamalgamatingcompanyundersection49(2)oftheAct. 15.6Fromtheabove,theintentoftheLegislatureistomakeamalgamationataxneutral schemeforcompaniesaswellasfortheshareholdersandnottoprovideataxplanning mechanismtoeitherofthem.However,aconjointreadingoftheaboveprovisionsrevealsthat theassetswhichweretransferredbytheamalgamatingcompanytotheamalgamated companyintheprocessofamalgamationwerenotmadesubjecttothecapitalgaintax. Furthermore,the6thprovisotosection32oftheActhaslimitedtheamountofdepreciation availabletotheamalgamatedcompanypostamalgamationtotheextentoftheamountof depreciationwhichwouldhavebeenavailabletotheamalgamatingcompany,hadtherenot beenanyamalgamation.Indeed,therewasnoentryinthebooksofthe transferor/amalgamatingcompanyfortheintangibleassets/goodwillbeingself-generated assets.However,wenotethatalltherelevantprovisionsoftheActasdiscussedabovedeal withrespecttotheassetsavailable/recordedinthebooksofthetransferor/amalgamating company.Inotherwords,theassetswhichhavebeenacquiredbytheassesseeinthescheme ofamalgamationwouldcontinueatthebookvalueinthebooksoftheamalgamatedcompany. Thequestionariseswhetherthegoodwillshownbytheassesseeasdiscussedabovewas acquiredintheschemeofamalgamationfromtheamalgamatingcompany.Theanswerstands innegative.Itisbecausetherewasnoentryinthebooksofaccountsofthe amalgamating/transferorcompanyreflectingthevalueofgoodwill.Assuch,theamountof goodwillasclaimedbytheassesseerepresentsthedifferencebetweenthepurchase considerationandtheNAVacquiredbyit.Thepurchaseconsiderationpaidbytheassessee wasbasedonthevaluationreportasdiscussedaboveafterconsideringthevariousfactors. Thus,theassesseehasnotacquiredanygoodwillfromtheamalgamating/transferorcompany asalleged,accordinglytheprovisionsoftheActi.e.6provisotosection32,explanation7to section43(1),explanation2tosection43(6)(c)oftheActcannotbeappliedtothecaseon hand. 15.7Normally,theissue/questionofgoodwillariseswhenonecompanyisacquiredbyanother company.Inotherwords,whenonecompanytransfersitsbusinesstoanothercompany againsttheconsideration,thedifferencebetweenthenetvalueoftheassetsacquiredandthe purchaseconsiderationpaidbythetransfereeisregardedasgoodwill.Thesucceeding questionariseswhethersuchgoodwillacquiredbytheassesseeiseligiblefordepreciation undertheprovisionsofsection32oftheAct.Inthisconnection,weareinclinedtorefertothe provisionsofsection32(1)oftheActwhichreadsasunder: 32.(1)Inrespectofdepreciationof— (i)buildings,machinery,plantorfurniture,beingtangibleassets; (ii)know-how,patents,copyrights,trademarks,licences,franchisesoranyother businessorcommercialrightsofsimilarnature,beingintangibleassetsacquiredon orafterthe1stdayofApril,1998, owned,whollyorpartly,bytheassesseeandusedforthepurposesofthebusinessor profession,thefollowingdeductionsshallbeallowed— 15.8Onperusaloftheaboveprovisions,wenotethatthewordgoodwillhasnowherebeen mentioned.However,wenotethat,theHon’bleSupremeCourtinthecaseofCITvs.Smifs SecuritiesLtdreportedin348ITR302hasheldthatthegoodwillfallswithinthedefinitionof ITAno.432/AHD/2022 A.Y.2016-17 18 theassetsunderthecategoryofanyotherbusinessorcommercialrightsofsimilarnature.The relevantextractreadsasunder: Explanation3tosection32(1)statesthattheexpression'asset'shallmeanan intangibleasset,beingknow-how,patents,copyrights,trademarks,licences,franchises oranyotherbusinessorcommercialrightsofsimilarnature.Areadingofthewords 'anyotherbusinessorcommercialrightsofsimilarnature'inclause(b)ofExplanation 3indicatesthatgoodwillwouldfallundertheexpression'anyotherbusinessor commercialrightsofasimilarnature'.Theprincipleofejusdemgeneriswouldstrictly applywhileinterpretingthesaidexpressionwhichfindsplaceinExplanation3(b). (Para4) Inviewoftheabove,itisopinedthat'Goodwill'isanassetunderExplanation3(b)to section32(1).(Para5) 15.9Inviewoftheabovejudgment,thereremainsnoambiguitythatgoodwillispartand parcelofintangibleassets.Hence,theassesseeiseligiblefordepreciationongoodwill. 15.10Movingfurther,wenotethatforclaimingthedepreciation,amongotherconditionsas providedundersection32oftheAct,oneoftheconditionsisthattheassesseecanclaim depreciationonthegoodwillbeingintangibleassetifacquiredonorafter1stdayofApril1998. Inotherwords,theassesseecanclaimdepreciationonthegoodwillacquiredbyit.Thus,the controversyariseswhetherthegoodwillgeneratedintheschemeofamalgamationisacquired bythetransfereecompany.SuchcontroversyhasbeenansweredbytheHon’bleSupreme CourtinthecaseofSmifssecuritiesLtd(supra)byholdingasunder: Onemoreaspectneedstobehighlighted.Inthepresentcase,theAssessingOfficer, asamatteroffact,cametotheconclusionthatnoamountwasactuallypaidon accountofgoodwill.Thisisafactualfinding.TheCommissioner(Appeals)hascometo theconclusionthattheassesseehadfiledcopiesoftheordersoftheHighCourt orderingamalgamationoftheabovetwocompanies;thattheassetsandliabilitiesof 'Y'Ltd.weretransferredtotheassesseeforaconsideration;thatthedifference betweenthecostofanassetandtheamountpaidconstitutedgoodwillandthatthe assessee-companyintheprocessofamalgamationhadacquiredacapitalrightinthe formofgoodwillbecauseofwhichthemarketworthoftheassessee-companystood increased.ThisfindinghasalsobeenupheldbyTribunal.Thereisnoreasonto interferewiththefactualfinding.(Para6) 15.11WealsofindthattheHon’bleDelhiHighCourt,involvingidenticalfactsand circumstances,inthecaseofCITVs.M/sEltekSGSPvt.Ltd.inITANo.475-476/2022has decidedtheissueinfavouroftheassesseebyobservingasunder: 7.Beforeus,learnedcounselappearinginsupportoftheappealcontendedthatit wouldbetheprovisionsofSection49oftheActwhichwouldapplyandthatboththe CIT(Appeals)aswellastheITAThaveclearlyerredinholdingotherwise.Learned counselreferredtothedefinitionof“costofacquisition”asspeltoutinSection55(2) oftheActandwhichhaddefinedthatexpressiontoalsoincludegoodwillofabusiness orprofessionoratrademarkorbrandnameassociatedwiththebusinessorprofession oranyotherintangibleasset.Itisintheaforesaidcontextthatlearnedcounselforthe appellanthadsoughttorelyuponSection49andmoreparticularlySection49(1)(e) thereof.8.Theaforesaidsubmission,however,clearlylosessightofthefactthat Section47inexpresstermsexcludesthetransferofacapitalassetintermsofa schemeofamalgamation.WefurtherfindthattheprovisionsoftheActreferredtoby learnedcounselfortheappellantareplacedinaChapterdealingwiththe“Capital Gains”.ThatChapteritselfpertainstoprofitsorgainsarisingfromthetransferofa capitalasset.However,itiswellsettledthatatransferintermsofaschemeof amalgamationwhichissanctionedisaccomplishedbyoperationoflawasopposedto anactofparties.ItisinthatbackdropthatthedecisioninSmifsassumessignificance. ThejudgmentrenderedbytheSupremeCourtinSmifsclearlyrecognisesgoodwillto beanintangibleassetandonwhichdepreciationcanclearlybeclaimedintermsof ITAno.432/AHD/2022 A.Y.2016-17 19 Section32(1)oftheAct.9.Accordinglyandforalltheaforesaidreasons,wefindno meritintheinstantappeals.Theyshallconsequentlystanddismissed. 15.12Fromtheabove,thereremainsnoambiguitythatthegoodwillgeneratedinthescheme ofamalgamationisacquiredbytheassessee.Thus,inourconsideredviewtheassesseehas compliedwithalltheconditionsprovidedundersection32oftheAct.Accordingly,wearenot convincedbythefindingsoftheauthoritiesbelow. 16.ThenextallegationoftheAOisthattherewascontradictionandinconsistencyinthe valuationreportfiledbytheassessee.Admittedlythevaluationreportwaspreparedbythe SSPA&CO,afirmofcharteredaccountants.Thevaluationofthebusinessbeingatechnical matter,inourview,theassistanceoftheexpertisrequired.TheAOhimselfcannotdetermine suchvalue.Ifhewasnotsatisfiedwiththevaluationreport,thentheonlyrecourseavailable totheAOistoreferthemattertothetechnicalperson.Inholdingsowedrawsupportand guidancefromthejudgmentofthistribunalincaseofSynbioticsLtdvs.ACITreportedin [2016]48ITR(T)210(Ahd)whereitwasheldasunder: AssessingOfficerhasadoptedthevalueofRs.250persq.mtr.Onthebasisofthe saleinstancesrelatedtoresidentialareassituated2to3kms.awayfromtheproperty inquestion.Thereisnodisputewithregardtothefactthatpropertyinquestionisan industriallandwhichcannotbecomparedwiththeresidentialproperties.Admittedly, neithertheAssessingOfficernortheCommissioner(Appeals)calledforreportfrom theDepartmentalValuationOfficerandproceededtomaketheirownestimation.Itis incumbentupontheassessingauthoritytocallforreportfromDepartmentalValuation Officerforascertainingthefairmarketvalueoftheasset,intheeventheisnot satisfiedabouttheclaimoftheassessee.Boththeauthoritiesbelowarenotjustifiedin adoptingtherateastheassesseehadfurnishedareportfromanexpert,i.e., Governmentapprovedvaluer. 16.1ThesubsequentallegationoftheAOisthatboththecompaniesi.e.amalgamatedandthe amalgamatingcompanieswerecontrolledandmanagedbythesamegroupofpersonpreand postamalgamation.Thus,theissueariseswhetheritwasacolourabledeviceadoptedbythe assesseetocreategoodwillinthebooksofaccountsandclaimsuchhugeamountof depreciation.Inthisregardwenotethatboththecompanies,namelyKSPLandKIPLwere registeredon27 th January1995and27 th December2007respectivelywiththeMinistryof corporateaffairs.These2companieswerefilingseparateincometaxreturns.Boththe companiesbeingbodycorporatehaveaseparatelegalidentity.Allthesedetailswereduly disclosedintheschemeofamalgamationwhichwasdulyapprovedbytheHon’bleGujarat HighCourtvideorderdated21 st December2015. 16.2Wealsonotethatvideletterdated3 rd December2015theregionaldirectorofministryof corporateaffair(MCA)hasalsoinvitedcommentorobjectionfromtheIncomeTaxDepartment, butthedepartmentdidnotraiseanyobjectionwithrespecttoschemeofamalgamation.This factcanbeverifiedfrompara7(III)oftheorderoftheHon’bleHighCourtwhichisplacedon recordanddiscussedabove. 16.3Itisalsopertinenttomentionherethatallthenecessarydetailsaboutthemanagement ofbothcompaniesweredisclosedintheschemeofamalgamationandnothingwashidden. Theschemecontainedalltheinformationrelatedtopurchaseconsideration,itsvaluation, modeofpaymentandaccountingtreatment.TheHon’bleHighCourtapprovedsuchscheme afterinvitingobservationandcommentfromROC,MCA,andofficialliquidatorincludingthe incometaxdepartment.Thus,inthegivenfactandcircumstancesthereasonablenessofthe schemecannotbedoubted.Accordingly,noinferencecanbedrawnthattheassesseehas employedcolorabledeviceinordertorecordhighvalueofpurchaseconsiderationwhichis resultinggoodwill. 16.4Withoutprejudicetotheabove,wealsonotethattheRevenuehastoconsidercertain factsbeforearrivingatafindingwhetheraparticularseriesofthetransactionsisacolourable deviceornotastheprimaryonusisontheAOtofindout: ITAno.432/AHD/2022 A.Y.2016-17 20 (i)Whetherthepartiestothetransactionshaveconcealedorhiddenanyfactand/or whetherwhatisshowntobedonecouldhaveactuallyhappenedindifferenttimeorat differentplace: Ans:Regardingthefactsofthetransactions,wenotethatallthenecessaryfactswere dulydisclosedbytheassesseeintheschemeofamalgamation.Thefollowingfacts weredulydisclosed: a)Thepurchaseconsiderationbytheamalgamatedcompanytotheshareholdersof theamalgamatingcompanywasdulydisclosedintheschemeofamalgamation. b)Thevaluationofthebusinessoftheamalgamatingcompanywasbasedonthe approvedvaluationreport. c)Thefactofthecommoncontrolandmanagementofboththeamalgamatedand amalgamatingcompaniesweredisclosedintheschemeofamalgamationwhichwas alsonotedbytheHon’bleGujaratHighCourtandthisfactwasalsointheknowledge ofRevenue. Thus,weareoftheviewnofactswereconcealedorhidden. (ii)Whetheritcouldbeanormalbusinesspractice: Ans:Intoday’stimetheactivityofamalgamationisverycommonandprevailinginthe corporateworldforsynergizingresources,control,eliminatethecompetitionetc. (iii)Evenwhereindividualtransactionsofthedevicearelegal/legitimate,whether combinationofthesestepscreatesaneffectwhichisabnormalinthebusinessworld andcouldnothavebeenotherwiseundertakeninnormalcircumstances: Ans.Inthepresentcasetherewasnoreferencemadebytheauthoritiesbelow suggestingthatthetransactioniscarriedoutillegally.Asthetransactionsintheinstant casewerewithintheambitofthelawaspertheprovisionofsection2(1B)oftheAct. (iv)Theseindividualtransactionscreateaneffectwhichiscontrarytohuman probabilities: Ans.Thetransactionscarriedoutbythepartieswereverymuchnormaltransaction. (v)Whetheractionsofthepartiesfinallyareatvariancewiththetermsofthe agreement: Ans.Therewasnovarianceintheimpugnedtransactionwithregardtothetermsof theagreement. 16.5ItisalsoimportanttohighlightthefactthatthereisnoprohibitionundertheActfor disallowingthedepreciationonthegoodwillgeneratedintheschemeofamalgamation.There arecertainkindsoftransactions,prejudicialtotheinterestofRevenue,whichmayfallunder thepurviewoftheprovisionsofGeneralAnti-Avoidancerule(GAAR),POEM,andBEPS providedundersection95to102,section6(3)oftheActrespectivelyunderwhichthe impugnedtransaction(depreciationonthegoodwillinaschemeofamalgamation)canbe denied.Butsuchprovisionsarenotapplicablefortheyearunderconsideration. 16.6Thereisnodisputeaboutthefactthatthepaymentwasmadebytheassesseetothe shareholdersoftheamalgamatingcompanyintheformofsharesandnotthroughthecash payment.Butthepaymentthroughthesharesisavalidmodeofpayment.Inthisregardwe drawsupportandguidancefromthejudgmentofHon’bleDelhiHighCourtinthecaseofCIT vs.MiraEximLtdreportedin359ITR70whereinitwasheldasunder: Intermsoftheorderpassedundersection394oftheCompaniesAct, 1956therespondentcompanyacquiredtheimportedmotorcars.Thecarswerenot acquiredandtherespondentassesseewasnotownerofthemotorcarspriortothe saiddate.Onmergerofthethreeconcernswiththerespondentassessee,shareswere issuedasconsiderationtotheproprietorsofthebusinessconcerns.Thesharesissued wereconsiderationforthetransferoftheassets.Itisimmaterial,whethertherewas transferofanundertaking,includingtheblockofassets,whichalsoincludedthe importedmotorcars.[Para15] Itisclearthattherespondentassesseehadacquiredtheasset,i.e.,importedcars, afterthecutoffdate,i.e.,1-4-2001and,therefore,isentitledtodepreciationandthe bar/prohibitioninclause(a)toprovisotosection32(1)wouldnotapply.TheTribunal ITAno.432/AHD/2022 A.Y.2016-17 21 hasrightlydecidedtheissueinfavouroftherespondentassesseeandagainstthe revenue.[Para16] 16.7Itisalsopertinenttonotethatschemeoftheamalgamationcanbeapprovedunderthe provisionsofsection2(1B)oftheActwhereshareholdersholdingnotlessthan75%inthe valueofsharesoftheamalgamatingcompanybecometheshareholdersoftheamalgamated company.Itispossibleonlywhenthesharesareissuedtotheshareholdersofthe amalgamatingcompany.Accordingly,wearenotimpressedwiththefindingoftheAOthat therewasnocashpaymentfortheacquisitionofthegoodwillbytheassessee,ratheritwas recognizedinthebooksofaccountsbywayofaccountingentries.Thus,weholdthatthe impugnedtransactioncannotberegardedascolorabledevicemerelyonthereasoningthatthe assesseeclaimedthedepreciationonthegoodwillintheschemeofamalgamation. 16.8WealsonotethatthisTribunalincaseofUrminmarketing(P)Ltd.Vs.DCITreportedin 122taxmann.com40hasalreadydecidedtheissueinfavorofassesseeonthesimilarfacts andcircumstances. 16.9Itisimportanttonotethattherewasanamendmenttosection32,section2(11)ofthe ActandotherrelevantsectionsoftheIncomeTaxActfromtheFinanceAct2021,effective fromAY2021-22.Theamendmentwasbroughtintosection32oftheActtoexcludegoodwill fromdepreciableassets.Therelevantportionoftheamendmentsinsection32isreproduced asunder: 32.(1)97[Inrespectofdepreciationof— (i)xxxxxxxx (ii)know-how,patents,copyrights,trademarks,licences,franchisesoranyother businessorcommercialrightsofsimilarnature,beingintangibleassetsacquiredonor afterthe1stdayofApril,1998,[notbeinggoodwillofabusinessorprofession,] Explanation3.—Forthepurposesofthissub-section,23[theexpression"assets"]shall mean— (a)tangibleassets,beingbuildings,machinery,plantorfurniture; (b)intangibleassets,beingknow-how,patents,copyrights,trademarks,licences, franchisesoranyotherbusinessorcommercialrightsofsimilarnature2425[,not beinggoodwillofabusinessorprofession]. 16.10Therefore,nodepreciationisallowableongoodwillfromtheAY2021-22onwards. However,goodwillisnotexcludedfromcapitalassets.Thepurposeofexclusionofgoodwill fromthedepreciableassetsisthatitisseenthatGoodwill,ingeneral,isnotadepreciable assetandinfactdependinguponhowthebusinessruns;goodwillmayseeappreciationorin thealternativenodepreciationtoitsvalue.Therefore,theremaynotbeajustificationof depreciationongoodwill.Accordingly,thereisnoneedtoprovidefordepreciationongoodwill ofbusiness/professionlikeotherintangibleassetsorplant&machinery.Butsuchan amendmentisnotapplicablefortheyearunderconsideration. 16.11Inviewoftheaboveandafterconsideringthefactsintotality,wereversetheorderof theauthoritiesbelowanddirecttheAOtoallowtheclaimoftheassesseeforthedepreciation ontheimpugnedgoodwill.Hence,thegroundofappealoftheassesseeisallowed. 9.1Beforeus,nomaterialhasbeenplacedonrecordbytheRevenueto demonstratethatthedecisionofTribunalinthecasediscussedabovehasbeen setaside/stayedoroverruledbytheHigherJudicialAuthorities.Beforeus,no materialwasplacedonrecordpointingoutanydistinguishingfeatureinthefacts ofthecaseofcasediscussedaboveandthefactsofthecaseofthepresent assessee.Thus,respectfullyfollowingtheorderoftheTribunaldiscussedabove, weherebysetasidethefindingofthelearnedCIT(A)anddirecttheAOtoallow ITAno.432/AHD/2022 A.Y.2016-17 22 theclaimoftheassessee.Thus,thegroundofappealraisedbytheassesseeis herebyallowed. 10.Thesecondissueraisedbytheassesseeisthattheassessmentframedby theAOisinthenameofnon-existentassessee,thereforethesameneedstobe quashedasinvalid. 11.ThenecessaryfactsarethatM/sOLPLwasamalgamatedwiththegroup companynamelySaraSuppliersPvtLtd(hereafterM/sSSPL)witheffectfrom1 st April2015inaschemeapprovedbytheHon’bleHighCourtofGujaratvideorder dated29-01-2016.Subsequently,M/sSSPLafteramalgamationconvertedinto limitedliabilitypartnershipnamelySaraSupplierLLPwitheffectfrom16-03-2016. Theassessee,however,wassubjecttoscrutinyassessmentundersection143(3) oftheAct.TheAOframedtheassessmentvideorderdated27-12-2018inthe nameoferstwhilecompanynamelyM/sSSPL. 12.TheLd.ARfortheassesseebeforeushaschallengedthevalidityofthe assessmentorderframedbytheAOundersection143(3)oftheActdated27 th December2018onthereasoningthatitwasframedinthenameoferstwhile companywhichwasanon-existententityatthatpointoftime.Itwasalsopointed outbythelearnedARthatthefactabouttheconversionofthestatusofthe assesseefromprivatelimitedcompanytoLLPwasverymuchknowntotheAO whichisevidentfromtheassessmentorder. 13.Ontheotherhand,thelearnedDRvehementlysupportedtheorderofthe authoritiesbelow. 14.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Regardingthelegalityoftheorderframedbythe AOundersection143(3)theActvidedated27 th December2018,wenotethatthe ITAno.432/AHD/2022 A.Y.2016-17 23 AOonthefirstpageofhisorderhasmentionedthenameoftheassesseeM/s SSPLwhichwaserstwhilecompany.Thus,theassessmentorderwasframedin thenameofnon-existententity(M/s.SSPL),asM/sSSPLwasconvertedinto LimitedLiabilityPartnershipw.e.f.16 th March2016.Thisfacthasbeenrecognized bytheAOhimselfinhisorderdated27 th December2018.Therelevantfindingof theAOisreproducedhere-under: AfteramalgamationtheamalgamatedcompanywascovertedintoLimitedLiability Partnership(LLP)witheffectfrom16.03.2016andshareholderswereconvertedinto partners.Thesharecapitalandreserveandsurplushasbeendividedonthebasisof shareholdingpatterintothepartnerscapitalaccount.Fromthebooksofthepartnership firmmanifoldduetoconversionofcompanyintoLLP,buttheactualcashflowisNilto createsuchahugecapitalcreationinthebooksofcompanyconvertedintoLLP. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX ItisinterestingtoseethatafteramalgamationofOLPLwithSSPL,thecompanywas convertedintoLimitedLiabilityPartnership.WhileconversionofcompanyintoLLPthe assesseehascreditedtheentiresecuritypremiumintheratioofprofitshareratiointhe capitalaccountofpartnersofLLPandsuchcapitaliscreatedonlyonaccountof amalgamation.Hencethestoryoftheassesseecompanythatgoodwillwasgenuineand wasabonafidecreationofamalgamationholdslittlecredibility. 14.1Inviewoftheabove,itisseenthattheassessmenthasbeenframedby theAOinthenameofamalgamatedcompanywhichceasedtoexistand eventuallyconvertedtoLLP. 14.2TheHon'bleSupremeCourthasobservedandagreedinthecasePCITVs. MarutiSuzukiIndiaLimitedreportedin416ITR613totheratiolaiddowninthe caseofSaraswatiIndustrialSyndicateLtd.v.CIT[1990]53Taxman92/186ITR 278(SC),whereintheHon’bleApexcourtobservedthatoncetheamalgamationis sanctioned,theamalgamatingcompanyisdissolvedwithoutwindingup,interms ofSection394oftheCompaniesAct,1956.Theamalgamatingcompanyceasesto existintheeyesoflaw,thusbecomesnon-existent.Sinceitdoesnotexistinthe eyesoflaw,itcannotberegardedasa'person'underSection2(31)oftheAct againstwhomassessmentproceedingscanbeinitiatedoranorderpassed. Therefore,theassessingofficerdoesnothavejurisdictiontoissuesuchnoticeor passanyorderagainstanon-existententity.Therationalecanalsobeappliedto ITAno.432/AHD/2022 A.Y.2016-17 24 adeadindividual.Sinceadeceasedwouldnotbeconsideredasa'person'under theAct,thusanysuchnotice/orderissuedinthatnamewillbeinvalidorvoid. 14.3Beforeparting,itisimportanttonotethattheassesseeundeniablyhasfiled thereturnofincomeinthenameoferstwhilecompanyonlyandnotinthename oftheLLPeventhoughsucherstwhilecompanywasnotinexistence.Likewise, theappealwasalsopreferredbytheassesseebeforethelearnedCIT-Aandthe ITATagainsttheassessmentorderandlearnedCIT-Aorderinthenameofnon- existingcompany.However,theassesseeonthesubsequentdaterevisedform36 i.e.memoofappealwiththenameofexistingLLP.Apparently,theassesseewas atfaultforfilingthereturnofincomeandtheappealpapersbeforetherespective authoritiesinthenameoftheerstwhilecompany.Thus,thequestionarises whethertheassessmentordercanbeheldasnullandvoidasitwasmadeinthe nameofnon-existentcompanyinasituationwheretheassesseeitselfhasfiled thereturnofincome,appealsinthenameofnon-existentcompany.TheHon’ble GujaratHighCourtinthecaseofP.V.DOSHIVsCITreportedin113ITR22has answeredtheabovequestioninthemannerasdetailedbelow: forthesimplereasonthatasonecouldnotconferjurisdictionbyconsent,similarlyone couldnotbyagreementwaiveexclusivejurisdictionoftherentcourtsoverthebuildingsin question.Itistruethatsection254(4)intermsprovidesthatsaveasprovidedinsection256 (whichprovidesforthereferencetotheHighCourt),orderspassedbytheAppellate Tribunalonappealshallbefinal.Thatfinalityorconclusivenesscouldonlyariseinrespect oforderswhicharecompetentorderswithjurisdictionandiftheproceedingsof reassessmentarenotvalidlyinitiatedatall,theorderwouldbeavoidorderasperthe settledlegalpositionwhichcouldneverhaveanyfinalityorconclusiveness.Iftheoriginal orderiswithoutjurisdictionitwouldbeonlyanullityconfirmedinfurtherappeals.Ifthe essentialdistinctionisborneinmindinsuchcaseswhenthereissuchdefectofjurisdiction becausetheconditionstofoundjurisdictionareabsent,theTribunalalsowouldbe sufferingfromthesamedefectanditcouldnotconferanyjurisdictionontheIncome-tax Officerbymakingtheremandorder,becauseofthesettledlegalprinciplethatconsent couldnotconferjurisdictionwhenjurisdictioncouldbecreatedonlybyfulfilmentofthe conditionprecedentasinthepresentcase.Therefore,noquestionoffinalityofthe remandordercouldeverariseinthepresentcontext,ifthemandatoryconditionsfor foundingjurisdictionforinitiatingreassessmentproceedingwereabsent. 14.4Thus,themistakecommittedbytheassesseedoesnotempowerthe Revenuetoalsocommitthesamemistakeespeciallyinasituationwherethefact abouttheschemeofamalgamationandconversionoftheassesseeintoLLPwas ITAno.432/AHD/2022 A.Y.2016-17 25 knownbytheAOwhichisevidentfromtheassessmentorderdiscussedabove.In otherwords,thedepartmentwasawareofthecompletefactthatthecompany wasnolongerinexistence,yettheAOhasframedtheassessmentinthenameof non-existingcompany.Therefore,inthegivenfactsandcircumstances,the contentionofthelearnedDRfailsonthiscountthattheassesseehasalsomadea mistakeinfilingthereturnsofincomeandappealpapersinthenameofnon- existingcompany. 14.5WealsonotethatthisTribunalincaseofUrminmarketing(P)Ltd.Vs. DCITreportedin122taxmann.com40hasalreadydecidedtheidenticalissuein favorofassesseeonthesimilarfactsandcircumstances.Inviewoftheabove, weholdthattheassessmentframedundersection143(3)oftheActisnot sustainable.Hencethegroundofappealoftheassesseeisallowed. 15.Intheresult,appealoftheassesseeisherebyallowed. OrderpronouncedintheCourton21/02/2024atAhmedabad. Sd/- Sd/-Sd/- (SIDDHARTHANAUTIYAL)(WASEEMAHMED) JUDICIALMEMBERACCOUNTANTMEMBER (Tru(TrueCopy) Ahmedabad;Dated21/02/2024 Manish