KIFS International LLP (since KIFS International Pvt. Ltd. converted into KIFS International LLP), Ahmedabad V. The Dy. CIT, Circle-2(1)(2) Now Asstt. CIT, Circle-2(1)(1), Ahmedabad

ITA 557/AHD/2022

AI Insights

The case revolves around the appeal by KIFS International LLP against the orders of the Commissioner of Income Tax (Appeals) and the Assessing Officer, which disallowed depreciation on goodwill recognized from an amalgamation sanctioned by the Gujarat High Court. The primary legal contention was whether the goodwill recognized in the books post-amalgamation was eligible for depreciation under Section 32(1) of the Income Tax Act, 1961. The Tribunal also addressed the procedural validity of the assessment order, which was issued in the name of KIFS International Pvt. Ltd., a non-existent entity post-amalgamation.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 135838 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 19-07-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 08-12-2022
• Other Referred Cases: PCIT vs. Maruti Suzuki India Limited, Saraswati Industrial Syndicate Ltd. v. CIT, P.V. DOSHI vs. CIT, Urmin Marketing (P) Ltd. vs. DCIT, Synbiotics Ltd. vs. ACIT, CIT vs. Spice Entertainment Ltd., CIT vs. M/s Eltek S.G.S. Pvt. Ltd.
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: FORTHEAPPELLANTHAD
• Assessee Lawyers: THEREVENUE; ISSUINGITSTWO; FOLLOWINGTHEPOOLINGOF; .BEFOREUS; LEARNEDCOUNSELAPPEARINGINSUPPORTOFTHEAPPEALCONTENDEDTHATITWOULD
• Keywords: Depreciation; Fair market value; TDS

Judgement Text

आयकरअपीलीयअधिकरण , अहमदाबादनयायपीी INTHEINCOMETAXAPPELLATETRIBUNAL, ‘’D’’BENCH,AHMEDABAD BEFORESHRIWASEEMAHMED,ACCOUNTANTMEMBER And SHRISIDDHARTHANAUTIYAL,JUDICIALMEMBER आयकरअपीलसं ./ITANo.557/AHD/2022 धििाधरणवरध/Asstt.Year:2016-17 KIFSInternationalLLP(since KIFSInternationalPvt.Ltd. convertedintoKIFS InternationalLLP), B-81,PariseemaComplex, C.GRoad, Ellisbridge, Ahmedabad-380006. PAN:AACCD8537A Vs. D.C.I.T, Circle-2(1)(2), (NowAsst.C.I.T, Circle2(1)(1), Ahmedabad. (Applicant)(Respondent) Assesseeby:ShriTusharHemani,Sr.Advocate withShriParimalsinhB.Parmar Revenueby:Dr.DarsiSumanRatnam,C.I.T,D.R सुिवाईकीतारीख/DateofHearing:20/07/2023 घोरणाकीतारीख /DateofPronouncement:15/09/2023 आदेश /ORDER PERWASEEMAHMEDACCOUNTANTMEMBER: ThecaptionedappealhasbeenfiledattheinstanceoftheAssesseeagainst theorderoftheLearnedCommissionerofIncomeTax(Appeals),Ahmedabad,(in ITAno.557/AHD/2022 Asstt.Year2016-17 2 short“Ld.CIT(A)”)arisinginthematterofassessmentorderpassedunders. 143(3)oftheIncomeTaxAct1961(here-in-afterreferredtoas"theAct") relevanttotheAssessmentYear2016-17. 2.Theassesseehasalsoraisedthefollowinggroundofappeal.Theyreadas under: 1.TheId.CIT(A)haserredinlawbyagreeingwiththeLd.AO'sorderindisallowing depreciationundersection32(1)oftheActongoodwillrecognizedpursuanttoamalgamation sanctionedbyHon'bleHighCourtofGujaratandalsoinrejectingtheappellant'srelianceon variousjudicialprecedentsincludingthatofHon'bleSupremeCourt,JurisdictionalGujarat HighCourtandJurisdictionalITAT,whereinithasbeenheldthatgoodwillisadepreciable assetunderExplanation3(b)tosection32(1)oftheAct.Itisthereforeprayedthat depreciationongoodwillmaykindlybegranted. 2.TheId.CIT(A)haserredinfactsandcircumstancesofthecaseandinlaw,theId.AOhas erredinpassingtheassessmentorderinthenameofKIFSInternationalPrivateLimited ('KIPL')whichwasanon-existententityasonthedateofpassingtheassessmentorder.The Id.CIT(A)rejectedAppellant'srelianceonvariousjudicialprecedentsincludingthatofHon'ble SupremeCourt,JurisdictionalGujaratHighCourtandJurisdictionalITAT.AssessmentOrder passedbyLd.AOaswellasAppellateOrderpassedbyCIT(A)ofnon-existingentityisbadin lawandliabletobequashed. 3.Yourappellantcraveslibertytoadd,toalter,tomodify,toamendortowithdraw/delete anyofthegroundsofappealatanytime,onorbeforethehearingofappeal. 3.First,wetakeupthesecondgroundofappealraisedbytheassessee challengingthevalidityoftheassessmentonthereasoningthatitwasframedin thenameofnon-existentcompany. 4.Thefactsinbriefarethattherearethreecompanies,descriptionofthe companiesisdetailedasunder: a)KIFSSecuritiesPvtLtd.(KSPL)wasacompanyincorporatedon27 th January1995,underthecompaniesAct1956andprimarilyengagedinthe stockbrokingbusinessaswellasotherbusinesspertainingtodepository participantandportfoliomanagementserviceetc.Apartfromthestock brokingundertaking,KIFSsecuritiesPvtLtd.isalsoactingasaholding companyforKIFSgroupofcompanies. ITAno.557/AHD/2022 Asstt.Year2016-17 3 b)KIFSTradeCapitalPrivateLtd.(KTCPL)isacompanyincorporatedon 29 th October2012underthecompaniesAct1956forthepurposeof carryingoutinvestmentadvisoryactivities. c)KIFSinternationalPvtLtd.(KIPL)isacompanyincorporatedon27 th December2007undertheCompaniesAct1956forthepurposeofdealing commodities.(EarlierKnownasDevtradelinkPvtLtd.).ThenameofDev TradelinkPvtLtdwaschangedtoKIFSInternationalPvtLtdbeforethedate ofamalgamation. 4.1Allthesecompaniesasmentionedabovearepartofthesamegroup(KIFS group).Allthesecompaniesareowned,controlled,andmanagedbytheKIFS familygroupmembers.Abovementionedcompaniesenteredacompositescheme ofarrangementundertheprovisionsofsection391to394ofthecompaniesAct 2013.TheschemeofarrangementwasplacedbeforetheHon’bleGujaratHigh Courtasdetailedunder: -SlumsaleofstockbrokingbusinessundertakingofKSPLtoKTCPL -AmalgamationofotherbusinessundertakingsofKSPLwithKIPL. 4.2TheHon’bleGujaratHighCourtapprovedtheabove-mentionedscheme videorderdated21-12-2015effectivefromtheappointeddate31-03-2015in respectofSlumsaleofstockbrokingbusinessundertakingofKSPLtoKTCPLand 01-04-2015inrespectofAmalgamationofotherbusinessundertakingsofKSPL withKIPL. 4.3Subsequently,w.e.f.15 th March2016,theresulting/amalgamatedcompany i.e.M/sKIFSInternationalPvtLtd(KIPL)convertedintolimitedliability partnership. 4.4Theassessee,however,intheyearunderconsiderationwassubjectto scrutinyassessmentundersection143(3)oftheAct.TheAOframedthe ITAno.557/AHD/2022 Asstt.Year2016-17 4 assessmentorderdated30 th December2018undersection143(3)oftheActin thenameoftheerstwhilecompanynamelyM/sKIFSInternationalPvt.Ltd. 5.TheLd.ARbeforeushasfiledtwopaperbooks.Onepaperbook, containingdocumentsfiledbeforethelowerauthorities,runningfrompages1to 488andotherlegalpaperbookrunningfrompages1to54,besidesthechartof7 pagescontainingthelineofarguments.Theld.ARhaschallengedthevalidityof theassessmentorderframedbytheAOundersection143(3)oftheActdated30 th December2018onthereasoningthatitwasframedinthenameoferstwhile companywhichwasanon-existententityatthatpointoftime.Itwasalsopointed outbythelearnedARthatthefactabouttheconversionofthestatusofthe assesseefromprivatelimitedcompanytoLLPwasverymuchknowntotheAO whichisevidentfromtheassessmentorder. 6.Ontheotherhand,theLd.DRhasstronglyobjectedthegroundofappeal ofassesseeonthereasoningthattheassesseefileditsoriginalandrevisedreturn ofincomeinthenameoftheerstwhilecompanydespitethefactthatthe companywasconvertedintoLLP.Besidestheabovetheassesseeinallthe correspondenceduringtheassessmentproceedings,appellateproceedings includingtheappealformbeforethelearnedCITaandtheITAThasusedthe nameoftheerstwhilecompany.Theassesseehasdonesodespitehavingthefull knowledgeaboutthechangeinthestatusofthecompany.ThelearnedARin supportofhiscontentionhasdrawnourattentiononvariouspagesofthepaper bookwherethenameoftheerstwhilecompanywasused. 7.ThelearnedARinhisrejoinderfairlyadmittedthattheassesseeindeedhas madethemistakesbyfilingtheoriginalreturnandrevisedreturnofincome includingtheappealformsbeforevariousforumsusingtheerstwhilename inadvertently.Butthemistakecommittedbytheassesseedoesnotconferany powertotherevenueforframingtheassessmentinthenameofdeadperson particularlyinthesituationwhentheRevenueisawareofthefactaboutthe ITAno.557/AHD/2022 Asstt.Year2016-17 5 changeinthestatusoftheassesseecompany.ThelearnedARinsupportofhis contentionhasreliedonthejudgementofHon’bleGujaratHighCourtinthecase ofP.V.DOSHIVsCITreportedin113ITR22reportedin113ITR22. 8.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Regardingthelegalityoftheorderframedbythe AOundersection143(3)theActvidedated30 th December2018,wenotethatthe AOonthefirstpageofhisorderhasmentionedthenameoftheassesseeM/s KIFSInternationalPvtLtd.whichwaserstwhilecompany.Thus,theassessment orderwasframedinthenameofnon-existententity(M/s.KIFSInternationalPvt. Ltd.),asM/sKIFSInternationalPvtLtdwasconvertedintoLimitedLiability Partnershipw.e.f.15 th March2016.ThisfacthasbeenrecognizedbytheAO himselfinhisorderdated30 th December2018.TherelevantfindingoftheAOis reproducedhere-under: TheschemeofamalgamationwasapprovedbytheHon’bleGujaratHCvideorderdated 21-12-2015withappointeddateas01.04.2015.Beforetheamalgamation,thenameofthe companywasconvertedfromDevTradelinikPLtd.ToKIFSInternationalPLtd.Further KIFSInternationalPLtd.wasconvertedtoLimitedLiabilityPartnership(LLP)witheffect from15.03.2016. 8.1Inviewoftheabove,itisseenthattheassessmenthasbeenframedby theAOinthenameofamalgamatingcompanywhichceasedtoexistandnotin thenameoftheamalgamatedcompanywhicheventuallyconvertedtoLLP. 8.2TheHon'bleSupremeCourtobservedandagreedinthecasePCITVs. MarutiSuzukiIndiaLimitedreportedin416ITR613totheratiolaiddown inSaraswatiIndustrialSyndicateLtd.v.CIT[1990]53Taxman92/186ITR278 (SC),whereintheHon’bleApexcourtobservedthatoncetheamalgamationis sanctioned,theamalgamatingcompanyisdissolvedwithoutwindingup,interms ofSection394oftheCompaniesAct,1956.Theamalgamatingcompanyceasesto existintheeyesoflaw,thusbecomingnon-existent.Sinceitdoesnotexistinthe eyesoflaw,itcannotberegardedasa'person'(underSection2(31)ofTheAct) ITAno.557/AHD/2022 Asstt.Year2016-17 6 againstwhomassessmentproceedingscanbeinitiatedoranorderpassed. Therefore,theassessingofficerdoesnothavejurisdictiontoissuesuchnoticeor passanyorderagainstanon-existententity.Therationalecanalsobeappliedto adeadindividual.Sinceadeceasedwouldnotbeconsideredasa'person'under TheAct,thusanysuchnotice/orderissuedinthatnamewillbeinvalidorvoid. 8.3Beforeparting,itisimportanttonotethattheassesseeundeniablyhasfiled thereturn/revisedreturnofincomeinthenameoferstwhilecompanyonlyand notinthenameoftheamalgamated/LLPeventhoughsucherstwhilecompany wasnotinexistence.Likewise,theappealwasalsopreferredbytheassessee beforethelearnedCIT-AandtheITATagainsttheassessmentorderandlearned CIT-Aorderinthenameofnon-existingcompany.However,theassesseeonthe subsequentdaterevisedform36i.e.memoofappealwiththenameofexisting company.Apparently,theassesseewasatfaultinfilingthereturn/revisedreturn ofincomeandtheappealpapersbeforetherespectiveauthoritiesinthenameof theerstwhilecompany.Thus,thequestionariseswhethertheassessmentorder canbeheldasnullandvoidasitwasmadeinthenameofnon-existentcompany inasituationwheretheassesseeitselfhasfiledthereturnofincome,appealsin thenameofnon-existentcompany.TheHon’bleGujaratHighCourtinthecaseof P.V.DOSHIVsCITreportedin113ITR22hasansweredtheabovequestionin themannerasdetailedbelow: forthesimplereasonthatasonecouldnotconferjurisdictionbyconsent,similarlyone couldnotbyagreementwaiveexclusivejurisdictionoftherentcourtsoverthebuildingsin question.Itistruethatsection254(4)intermsprovidesthatsaveasprovidedinsection 256(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. ITAno.557/AHD/2022 Asstt.Year2016-17 7 8.4Thus,themistakecommittedbytheassesseedoesnotempowerthe Revenuetoalsocommitthesamemistakeespeciallyinasituationwherethefact abouttheschemeofamalgamationandconversionoftheassesseeintoLLPwas knownbytheAOwhichisevidentfromtheassessmentorder.Inotherwords,the departmentwasawareofthecompletefactthatthecompanywasnolongerin existence,yettheAOhasframedtheassessmentinthenameofnon-existing company.Therefore,inthegivenfactsandcircumstances,thecontentionofthe learnedDRfailsonthiscountthattheassesseehasalsomadeamistakeinfiling thereturnsofincomeandappealpapersinthenameofnon-existingcompany. 8.5WealsonotethatthisTribunalincaseofUrminmarketing(P)Ltd.Vs. DCITreportedin122taxmann.com40hasalreadydecidedtheidenticalissuein favorofassesseeonthesimilarfactsandcircumstances.Therelevantportionof theorderisreproducedasunder: Wehaveheardboththepartiesandperusedthematerialsavailableonrecordbeforeus, especiallytheimpugnedordersandthecaselawcitedthereinandalsocitedbythe learnedARoftheassesseeasdiscussedaforesaid. 9.NowcomingtothelegalityoforderframedbytheAOundersection143(3)readwith section144CoftheActvideorderdated27thDecember2018,inthisregardwenotethat theAOonthefirstpageofhisorderhasmentionedthenameofM/s.UrminMarketing(P.) Ltd.whichwaserstwhilecompany.Thusitisclearthattheassessmentorderwasframed inthenameofnon-existententity(M/s.UrminMarketing(P.)Ltd.)astheM/s.Urmin Marketing(P.)Ltd.wasamalgamatedwithM/sUrminFlavoroma(P.)Ltd.w.e.f.1stApril 2015bytheorderoftheHon'bleGujaratHighCourtdated5-1-2016andsubsequentlythe nameofM/sUrminFlavoroma(P.)Ltd.waschangedandconvertedintoLimitedLiability Partnershipw.e.f.21stMarch2016.ThisfacthasbeenrecognizedbytheAOhimselfinhis orderdated27thDecember2018.TherelevantfindingoftheAOisreproducedhereunder: "3.1.Duringtheyearunderconsideration,theHon'bleHighCourtvideorderdated27-7- 2015,hasapprovedtheschemeofamalgamationofM/sUnicornPackers(P.)Ltd.(UPPL) withM/sUrminMarketing(P.)Ltd.(UMPL).ThereafterM/sUrminMarketing(P.)Ltd. (UMPL)wasamalgamatedwithanothercompanynamelyM/sUrminFlavoroma(P.)Ltd. witheffectfrom1-4-2015.LateronthenameofM/sUrminFlavoroma(P.)Ltd.was changedtoM/sUnicornPackaging(P.)Ltd.witheffectfrom1-3-2015.This companyi.eM/sUnicornPacking(P.)Ltd.lateronconvertedintoanLLPinthenameof M/sUnicornPackagingLLP,witheffectfrom21-3-2016. 3.2.DuringtheyearunderconsiderationpursuanttoanorderpassedbytheHon'bleHigh CourtofGujaratdated27thJuly,2015,M/sUnicornPackers(P.)Ltd.(UPPL)(engagedin thebusinessofpackers)hasbeenamalgamatedwithM/sUrminMarketing(P.)Ltd. (UMPL).Theappointeddateofamalgamationis1stApril2014.Theamalgamated companyhasissued4,50,00,000equitysharesagainst90000/-equitysharesof amalgamatingcompanyi.e.500sharesforeveryoneshare,asperReportofValuationof SharesbyRBSACapitalAdvisorsLLP.,accordinglysharesintheratioof500:1issuedwhich ITAno.557/AHD/2022 Asstt.Year2016-17 8 areofRs.123.50/-pershare(facevalueRs.10/-andsharepremiumRs.113.5/-per share). 3.3.ItisseenfromtheBalanceSheetason31-3-2015,(FixedAssets)thatduringtheyear underconsiderationtheassesseehascreatedgoodwillofRs.468,73,56,913/-inthebooks ofaccountsbyvirtueofamalgamationofM/sUnicornPackers(P.)Ltd.(UPPL)(hereinafter calledasUPPLorTransferorCompany)withUrminMarketing(P.)Ltd.(UMPLor TransfereeCompany).TheexcessconsiderationdischargedbyUMPL,overbookvalueof UPPLTransferorCompany,wasrecordedasgoodwillinthebooksofUPPL,Transferee Company.Intermsofthescheme,AlltheassetsofUPPLtransferredtoandvestedin UMPLpursuanttotheSchemehavebeenrecordedatthebookvalueandalltheliabilities ofUPPLtransferredtoandvestedinUMPLpursuanttotheSchemehavebeenrecordedat thebookvalue.ThedifferenceofRs.4,68,73,56,913/-betweennetvalueofassetsover considerationhasbeendebitedtogoodwillaccountinthebooksofthecompany." 10.TheAOvideletterdated25-1-2017bearingNo.ITO/Wd.4(1)(4)/AHD/Advance Tax/2016-17hasalsorequestedtotheUPPLformakingtheadvancepaymentoftax.The copyoftheletterisplacedonpage51ofthepaperbook.Similarly,thefactofintimating thenon-existenceofthecompanyUPPLanditsconversionintoLLPwasbroughttothe noticetoAOvideletterdated6-2-2017.Thecopyoftheletterisplacedonpage52ofthe paperbook. 11.Likewise,theassesseevideletterdated13-3-2018undersection154oftheAct requestedtheAOforthegrantofcreditofthetaxedpaidbyallthecompaniestothe accountoflimitedliabilitypartnership.Thecopyoftheletterisplacedonpages53&54of thepaperbook. 12.Inthesameway,theassesseevideletterdated27-9-2018,addressedtotheDCIT Cir(4)(1)(1)oftheActhasrequestedforrectificationandcancellationofdemandfornot grantingfulltaxcredit.Thecopyoftheletterisplacedonpages55to56ofthepaper book. 13.Similarly,theform26GeneratedbytheTDSCentralProcessingCellshowingthecredit oftaxwasissuedinthenameofUPPL.Thecopyoftheletterisplacedonpages55to56 ofthepapersbook. 14.Itisundisputedfactthatatthetimeofissueofnoticedated8thApril2016under section143(2)oftheAct,thecompanyi.e.M/sUrminMarketing(P.)Ltd.wasnotnon- existentwhichcanbeverifiedfromthefactsasdiscussedabove.But,theassessment orderwasframedafteramalgamationandconversionintoLLPinthenameofM/s.Urmin Marketing(P.)Ltd.whichdidnotexistattherelevantpointoftime. 15.WefurthernotethattheDepartmentwasawareabouttheamalgamationofthe companyandfurtherconversionintoLLPbeforeframingtheassessmentorderasthe assesseeintimatedtothedepartmentaswellasHon'bleHighCourtalsocalledforthe commentsfromtheDepartmentontheproposedschemeofamalgamation.Thuswecan saythattheprovisionofsection292BoftheActwillnotbeapplicabletotheassesseeasit isnotacurabledefect/mistake. 16.Inthisregardwewouldliketotakeanoteofthepositionoflawlaiddownbythe Hon'bleSupremeinthecasePr.CITv.MarutiSuzukiIndiaLtd.[2019]107taxmann.com 375/265Taxman515/416ITR613.ThefactsinthiscasearethatSuzukiMotors Corporation,andMarutiSuzukiIndiaLtd.(inshortMSIL)constitutedajointventurewith shareholdingof70%and30%.SuchjointventurewasincorporatedasSuzukiMotorIndia Ltd.Subsequentlyw.e.f.8thJune2005itsnamewaschangedtoSPIL.On28thNovember 2012SPILhasfileditsreturnofincome.Uptothisdatenoamalgamationhadtakenplace. On29thJanuary2013aschemeforamalgamationofSPILandMSILwasapprovedbythe Hon'bleHighCourtw.e.f.1stApril2012.Thetermsofapprovalschemeprovidedthatall liabilityanddutiesofthetransferorcompanyshallstandtransferredtothetransferee company.Onschemebeingcomingintoeffect,thetransferorcompanywastostand dissolvedwithoutwindingup.Theschemestipulatedthattheorderofamalgamationwill notbeconstruedasanordergrantedexemptionfromthepaymentofstampdutyortaxes, oranyothercharges,ifanypayableinaccordancewithlaw.TheAOhasinitiatedthe ITAno.557/AHD/2022 Asstt.Year2016-17 9 assessmentproceedingsbyissuanceofnoticeundersection143(2)on26thSeptember 2013followedbyanoticeundersection142(1)oftheActtotheamalgamatingcompany. MSILparticipatedintheassessmentproceedingsoferstwhileamalgamatingentityi.e.SPIL throughitsauthorizedrepresentativeandofficers.Theassessmentwasframed.Thereafter duringtheappellateproceedingsbeforetheTribunaltheassesseetookanobjectionthat finalassessmentorderwaspassedon31-10-2016inthenameofSPILwhichwas amalgamatedwithMSIL.Theassesseetookanobjectionthattheassessmentorderhas beenpassedinthenameofcompanywhichceasedtoexistandtherefore,theassessment orderisvoidabinitio.ThispleaoftheassesseewasacceptedbytheTribunal.Thisorder oftheTribunalwasupheldbytheHon'bleHighCourt.Ultimatelyissuetravelledupto Hon'bleSupremeCourt.Whiletakingcognizanceofthesubmissions,andtheproposition laiddowninvariousHighCourts'decisions,theHon'bleSupremeCourtmadethefollowing observations: "19.Whileassessingthemeritsoftherivalsubmissions,itisnecessaryattheoutsetto adverttocertainsignificantfacetsofthepresentcase: (i)Firstly,theincomewhichissoughttobesubjectedtothechargeoftaxforAY 2012-13istheincomeoftheerstwhileentity(SPIL)priortoamalgamation.This isonaccountofatransferpricingadditionofRs.78.97crores; (ii)Secondly,undertheapprovedschemeofamalgamation,thetransfereehas assumedtheliabilitiesofthetransferorcompany,includingtaxliabilities; (iii)Thirdly,theconsequenceoftheschemeofamalgamationapprovedunder section394oftheCompaniesAct,1956isthattheamalgamatingcompany ceasedtoexist.InSaraswatiIndustrialSyndicateLtd.(supra)theprinciplehas beenformulatedbythisCourtinthefollowingobservations:"5.Generally, whereonlyonecompanyisinvolvedinchangeandtherightsofthe shareholdersandcreditorsarevaried,itamountstoreconstructionor reorganisationofschemeofarrangement.Inamalgamationtwoormore companiesarefusedintoonebymergerorbytakingoverbyanother. Reconstructionor'amalgamation'hasnopreciselegalmeaning.The amalgamationisablendingoftwoormoreexistingundertakingsintoone undertaking,theshareholdersofeachblendingcompanybecomesubstantially theshareholdersinthecompanywhichistocarryontheblendedundertakings. Theremaybeamalgamationeitherbythetransferoftwoormoreundertakings toanewcompany,orbythetransferofoneormoreundertakingstoanexisting company.Strictly'amalgamation'doesnotcoverthemereacquisitionbya companyofthesharecapitalofothercompanywhichremainsinexistenceand continuesitsundertakingbutthecontextinwhichthetermisusedmayshow thatitisintendedtoincludesuchanacquisition.See:Halsbury'sLawsof England(4theditionvolume7para1539).Twocompaniesmayjointoforma newcompany,buttheremaybeabsorptionorblendingofonebytheother, bothamounttoamalgamation.Whentwocompaniesaremergedandareso joined,astoformathirdcompanyoroneisabsorbedintooneorblendedwith another,theamalgamatingcompanylosesitsentity;" (iv)Fourthly,upontheamalgamatingcompanyceasingtoexist,itcannotbe regardedasapersonundersection2(31)oftheAct1961againstwhom assessmentproceedingscanbeinitiatedoranorderofassessmentpassed; (v)Fifthly,anoticeundersection143(2)wasissuedon26September2013.Tothe amalgamatingcompany,SPIL,whichwasfollowedbyanoticetoitunder section142(1); (vi)Sixthly,priortothedateonwhichthejurisdictionalnoticeundersection143(2) wasissued,theschemeofamalgamationhadbeenapprovedon29January ITAno.557/AHD/2022 Asstt.Year2016-17 10 2013bytheHighCourtofDelhiundertheCompaniesAct1956witheffectfrom 1April2012; (vii)Seventhly,theassessingofficerassumedjurisdictiontomakeanassessmentin pursuanceofthenoticeundersection143(2).Thenoticewasissuedinthe nameoftheamalgamatingcompanyinspiteofthefactthaton2April2013,the amalgamatedcompanyMSILhadaddressedacommunicationtotheAssessing Officerintimatingthefactofamalgamation.Intheaboveconspectusofthe facts,theinitiationofassessmentproceedingsagainstanentitywhichhad ceasedtoexistwasvoidabinitio. 20.InSpiceEntertainment,(supra)aDivisionBenchoftheDelhiHighCourtdealt withthequestionastowhetheranassessmentinthenameofacompanywhich hasbeenamalgamatedandhasbeendissolvedisnullandvoidor,whetherthe framingofanassessmentinthenameofsuchcompanyismerelyaprocedural defectwhichcanbecured.TheHighCourtheldthatuponanoticeunder section143(2)beingaddressed,theamalgamatedcompanyhadbroughtthe factoftheamalgamationtothenoticeoftheassessingofficer.Despitethis,the assessingofficerdidnotsubstitutethenameoftheamalgamatedcompanyand proceededtomakeanassessmentinthenameofanon-existentcompany whichrendersitvoid.This,intheviewoftheHighCourt,wasnotmerelya proceduraldefect.Moreover,theparticipationbytheamalgamatedcompany wouldhavenoeffectsincetherecouldbenoestoppelagainstlaw: "11.Afterthesanctionoftheschemeon11thApril,2004,theSpiceceasesto exitw.e.f.1stJuly,2003.EvenifSpicehadfiledthereturns,itbecame incumbentupontheIncome-taxauthoritiestosubstitutethesuccessorinplace ofthesaid'deadperson'.Whennoticeundersection143(2)wassent,the appellant/amalgamatedcompanyappearedandbroughtthisfacttothe knowledgeoftheAO.He,however,didnotsubstitutethenameoftheappellant onrecord.Instead,theAssessingOfficermadetheassessmentinthenameof M/sSpicewhichwasnonexistingentityonthatday.Insuchproceedingsan assessmentorderpassedinthenameofM/sSpicewouldclearlybevoid.Sucha defectcannotbetreatedasproceduraldefect.Mereparticipationbythe appellantwouldbeofnoeffectasthereisnoestoppelagainstlaw. 12.Onceitisfoundthatassessmentisframedinthenameofnon-existingentity,it doesnotremainaproceduralirregularityofthenaturewhichcouldbecuredby invokingtheprovisionsofSection292BoftheAct." FollowingthedecisioninSpiceEntertainment,(supra)theDelhiHighCourt quashedassessmentorderswhichwereframedinthenameofthe amalgamatingcompanyin: (i)DimensionApparels(supra); (ii)MicronSteels;and(supra) (iii)MicraIndia(supra). 21.InDimensionApparels,(supra)aDivisionBenchoftheDelhiHighCourtaffirmedthe quashingofanassessmentorderdated31December2010.TheRespondenthad amalgamatedwithanothercompanyandthus,ceasedtoexistfrom7December2009.The CourtrejectedtheargumentoftheRevenuethattheassessmentwasinsubstanceand effectinconformitywiththeActbyreasonofthefactthattheassessingofficerhadused correctnomenclatureinaddressingtheAssessee;statedthefactthatthecompanyhad amalgamatedandmentionedthecorrectaddressoftheamalgamatedcompany.Itwasthe Revenue'scontentionthattheomissiononthepartoftheassessingofficertomentionthe ITAno.557/AHD/2022 Asstt.Year2016-17 11 nameoftheamalgamatedcompanyisaproceduraldefect.TheDelhiHighCourtrejected thiscontention.Indoingso,itreliedontheholdinginSpiceEntertainment,(supra)where theHighCourtexpresslyclarifiedthat"theframingofassessmentagainstanon-existing entity/person"isajurisdictionaldefect.TheDivisionBenchalsoreliedontheholding inSpiceEntertainment(supra)thatparticipationbytheamalgamatedcompanyin proceedingsdoesnotcurethedefectas"therecanbenoestoppelinlaw",toaffirmthe quashingoftheassessmentorder. 22.InMicronSteels,(supra)anoticewasissuedtoMicronSteels(P.)Ltd.(original assessee)afterithadamalgamatedwithLakhanpalInfrastructure(P.)Ltd.ADivision BenchoftheDelhiHighCourtupheldthesettingasideofassessmentorders,notingthat SpiceEntertainment(supra)isanauthorityforthepropositionthatcompletionof assessmentinrespectofanon-existentcompanyduetotheamalgamationorder,would rendertheassessmentanullity. 23.InMicraIndia,(supra)theoriginalassesseeMicraIndia(P.)Ltd.hadamalgamated withDynamicBuildmart(P)Ltd.NoticewasissuedtotheoriginalassesseebytheRevenue afterthefactofamalgamationhadbeencommunicatedtoit.TheCourtnotedthatthough theassesseehadparticipatedintheassessment,theoriginalassesseewasnolongerin existenceandtheassessmentofficerdidnotthetaketheremedialmeasureoftransposing thetransfereeasthecompanywhichhadtobeassessed.Instead,theoriginalassessee wasdescribedasoneinexistenceandtheordermentionedthetransferee'snamebelow thatoftheoriginalassessee.TheDivisionBenchadvertedtothejudgmentinDimension Apparels(supra)whereintheHighCourthaddiscussedtherulinginSpice Entertainment(supra).Itwasheldthatthiswasacasewheretheassessmentwas contrarytolaw,havingbeencompletedagainstanon-existentcompany." 17.Hon'bleSupremeCourtthereaftertookthenoteofthejudgmentinthecaseofSky LightHospitalityLLPv.Asstt.CIT[2018]92taxmann.com93/254Taxman390.This judgmentwaspressedinservicebytheRevenuetopointoutthatifanorderwasframed inaccordancewithlawinthenameofamalgamatingcompany,thenitwouldamountto mistake,defectoromissionwhichiscurableundersection292BoftheIncome-taxAct. Hon'bleSupremeCourthasdealtwiththisjudgmentandexplaineditsimpact.Hon'ble SupremeCourtultimatelyupheldthejudgmentofHon'bleDelhiHighCourtinthecase ofMarutiSuzukiIndiaLtd.(supra)andheldthatassessmentorderpassedsubsequentlyin thenameofnon-existingcompanywouldbewithoutjurisdictionandanullity.Concluding paragraphofthejudgmentisworthtonotewhichreadsasunder: "33.Inthepresentcase,despitethefactthattheassessingofficerwasinformedofthe amalgamatingcompanyhavingceasedtoexistasaresultoftheapprovedschemeof amalgamation,thejurisdictionalnoticewasissuedonlyinitsname.Thebasisonwhich jurisdictionwasinvokedwasfundamentallyatoddswiththelegalprinciplethatthe amalgamatingentityceasestoexistupontheapprovedschemeofamalgamation. Participationintheproceedingsbytheappellantinthecircumstancescannotoperateasan estoppelagainstlaw.Thispositionnowholdsthefieldinviewofthejudgmentofaco- ordinateBenchoftwolearnedjudgeswhichdismissedtheappealoftheRevenuein SpiceEnfotainment(supra)on2November2017.ThedecisioninSpiceEnfotainmenthas beenfollowedinthecaseoftherespondentwhiledismissingtheSpecialLeavePetitionfor AY2011-2012.Indoingso,thisCourthasreliedonthedecisioninSpice Enfotainment(supra). 34.Wefindnoreasontotakeadifferentview.Thereisavaluewhichthecourtmust abidebyinpromotingtheinterestofcertaintyintaxlitigation.Theviewwhichhasbeen takenbythisCourtinrelationtotherespondentforAY2011-12must,inourviewbe adoptedinrespectofthepresentappealwhichrelatestoAY2012-13.Notdoingsowill onlyresultinuncertaintyanddisplacementofsettledexpectations.Thereisasignificant valuewhichmustattachtoobservingtherequirementofconsistencyandcertainty. Individualaffairsareconductedandbusinessdecisionsaremadeintheexpectationof consistency,uniformityandcertainty.Todetractfromthoseprinciplesisneitherexpedient nordesirable." ITAno.557/AHD/2022 Asstt.Year2016-17 12 18.InthecaseofEmeraldCo.Ltd.v.ITO[2017]83taxmann.com29,ITATKolkatta Benchhasalsodealtwithsimilarsituationaftermakingreferencetojudgmentofthe Hon'bleDelhiHighCourtinthecaseofCITv.DimensionApparels(P.)Ltd.[2014]52 taxmann.com356/[2015]370ITR288aswellasdecisionofHon'bleDelhiHighCourtin thecaseofSpiceEntertainmentLtd.TheITAThasalsomadereferencetothedecisionof Hon'bleKarnatakaHighCourtinthecaseofCITv.IntelTechnology(P.)Ltd.[2015]57 taxmann.com159/232Taxman279/[2016]380ITR272.TheTribunalhasheldthataction undersection263isajurisdictionalactionagainstanassessee.Inthecaseofacompany, theld.Commissionerwasrequiredtoissueashowcausenoticeagainstajuridicalperson contemplatedinsection2(31)oftheIncome-taxActandifajuridicalpersonceasesto existthenitwouldnotbeconstruedasapersonwithinthemeaningofsection2(31) againstwhomanyactioncanbetaken.TheCommissionerwouldnotassumeproper jurisdictionandsuchtypeofdefectwouldnotbecuredwithhelpofsection292Bofthe Act,becauseitisnotaproceduralirregularitywhichcouldbecured.Wealsonotethatthis TribunalinthecaseofSnowhillAgencies(P.)Ltd.v.Pr.CIT[ITAppealNo.1775(Ahd.)of 2019,dated21-1-2020]involvingidenticalfactsandcircumstanceshasdecidedtheissue infavouroftheassessee. 18.1Inthelightoftheabovediscussion,weanalyzethefactsofthecaseonhand.Itis undoubtedlytheassessmentwasmadebytheAssessingOfficeronnon-existingentity whichisvoidab-initioandnullityintheeyeoflaw.Theassessmentframedagainstanon- existingentitygoestotherootofthematteranditisnotaproceduralirregularitybuta jurisdictionaldefectandtherecannotbeanyassessmentagainstanon-existingentityora deadperson.Therefore,thedecisionoftheHon'bleSupremeCourtinthecaseofMaruti SuzukiIndiaLtd.(supra)squarelyappliestothefactsoftheassessee'scase.Respectfully followingthedecisionsofvariouscourtsasdiscussedabove,weholdthattheassessment madebytheAssessingOfficerinthenameoftheUrminMarketing(P.)Ltd.undersection 143(3)readwithsection144CoftheActvideorderdated27thDecember2018forthe yearunderconsiderationisvoidab-initioandbadinlaw.Hencetheassessmentorderisa nullityintheeyeoflawandthesameisquashed.Theadditionalgroundraisedbythe assesseeisallowed. 8.6Inviewoftheabove,wenotethattheassessmentframedundersection 143(3)oftheActisnotsustainable.Hencethegroundofappealoftheassesseeis allowed. 9.Theissueraisedinthefirstgroundofappealisthattheld.CIT(A)has erredinconfirmingthedisallowanceofdepreciationforRs.73,84,36,872/-onthe intangibleassets/goodwillacquiredintheschemeofamalgamation. 10.ThefactsinbriefarethatM/sKIFSSecuritiesPrivateLimited (amalgamatingco.)gotamalgamatedwiththeassesseecompany[M/s.KIFS InternationalPvtLtd.(amalgamatedco.)]w.e.f.01stApril2015inaschemeof amalgamationapprovedbytheHon’bleGujaratHighCourtvideorderdated22 nd December2015.Alltheassetsandliabilitiesoftheamalgamatingcompanyi.e. M/sKIFSSecuritiesPrivateLimited(here-in-afterknownasKSPL)ason31st ITAno.557/AHD/2022 Asstt.Year2016-17 13 March2015becametheassetsandliabilitiesoftheassessee(amalgamatedco.) w.e.f.1stApril2015. 10.1Thenetvalueofassets(equivalenttocapitalandreserves)ofKSPLwasat Rs.289,30,45,656/-asonthedateofamalgamationi.e.1stApril2015.Butthe purchaseconsiderationoftheamalgamatingcompanyi.e.KSPLwasvaluedby SSPA&COMPANY,CharteredAccountant,atRs.598,18,21,600/-onlyi.e470/- pershare.Thepurchaseconsiderationwaspaidbytheassesseebyissuingitstwo equitysharesi.e.amalgamatedcompanyforoneshareofamalgamatingCowhich wasvalued@Rs.235/-persharehavingfacevalueofRs.10eachandpremiumof Rs.225pershare.Accordingly,theassessee(KIPL)issued2,54,54,560 (598,18,21,600.00/235)freshequitysharestotheshareholderofKSPL,resulting intheexcesspaymentofRs.308,87,75,944/-(Rs.598,18,21,600.00– 289,30,45,656.00)overtheassetsandliabilitiestakenoverbyit.Thisexcess paymentwastreatedasgoodwillbytheassesseeinthebooksofaccounts. Further,theassesseeinreturnofincomefiledfortheyearunderconsideration claimeddepreciation@25%onsuchgoodwill.However,theamalgamated companyi.e.KIPLconvertedintoLLPon15-03-2016.Therefore,KIPLhasdoneits businessupto14-03-2016.Thus,onlytheproportionatedepreciationofRs. 73,84,36,87/-wasclaimed,treatingGoodwillasintangibleasset. 10.2TheAOduringtheassessmentproceedingobservedthatboththe amalgamatingandamalgamatedcompanyi.e.KSPLandKIPLbelongtothesame groupofcompaniesknownas‘KIFSGroup’,meaningtherebyboththecompanies wereowned,controlledandmanagedbysamepromoters/directors.Furthermore, boththecompanieswerealsoregisteredatthesameaddress.TheAOfurther observedthattherewasnobusinessintheamalgamatedcompanyi.e.assessee (KIPL)onthedateofamalgamationastherewasnovendororcustomersinits booksofaccounts.Similarly,therewasnogoodwillrecordedinthebooksof accountsofboththecompaniespriortotheamalgamation.Accordingly,there ITAno.557/AHD/2022 Asstt.Year2016-17 14 shouldnotbeanyquestionofgoodwillowingtothecloseconnectionbetween boththecompaniesintheschemeofamalgamation. 10.3Inadditiontotheabove,theAOalsoobservedthattheproviso5tosection 32(1)oftheActrequiresthatthedepreciationontheassetsincaseof amalgamationshouldbeallowedtotheamalgamatedcompanytotheextentwhat shouldhavebeenallowedincaseifamalgamatingcompanywouldhavecontinued. 10.4Similarlytheprovisionsofsection43(1)&(6)requirethattheactualcostof thetransferredassetsandWDVshouldremainthesameasitwastherein the.booksofamalgamatingcompanypriortotheamalgamation.Accordingly,the AObelieved,astherewasnogoodwillinthebooksofKSPLpriortoamalgamation, thereforethevalueofgoodwillinthebooksofKIPLshouldalsobeNILforthe purposeoftaxation. 10.5TheAOfurtherobservedthatinaschemeofamalgamationtwoormore separateentitiesjoinhandstogetherandbecomeoneentity.Theshareholdersof anamalgamatingcompany,inconsiderationforthetransferoftheassetsand liabilities,receivesharesinanewresultantcompany(amalgamatedco.).The valueofthesharesoftheamalgamatingcompanyisdeterminedafterconsidering variousfactori.e.onthebasisofvaluationofthebusinessandrevaluationof assetsandliabilitiesofboththecompanies(amalgamatedandamalgamating company)whichresultsgoodwillinthehandstheamalgamatedcompanyifthe purchaseconsiderationisinexcesstothenetassetsacquiredbyitfromthe amalgamatingcompany. 10.6Accordingly,theAOwasoftheviewthatsuchintangibleassetintheform ofgoodwillemerginginbooksofresultingcompany(amalgamatedcompany)on accountofvaluationofbusinessandrevaluationofassets&liabilitiesavailablein thebooksofaccountofamalgamatingcompany.Assuchneithertheresulting companynoramalgamatingcompanyincurredanycostinacquiringsuch intangibleassets.Therefore,undertheprovisionsofsection32oftheAct,thereis ITAno.557/AHD/2022 Asstt.Year2016-17 15 noallowanceofdepreciationavailableforanyassetcreatedinthebooksof accountsduetovaluationandrevaluationofthebusinessandassets.Moreover, anamalgamationisnotatransactionofpurchaseandsaleofshares/assets/ liabilitiesbuttojoinhandstogetherforthebusinessexpediencies. 10.7TheAOinviewoftheaboveissuedshowcausenoticedated14 th December 2018purposingNILvalueofGoodwillanddenyingtheclaimoftheassesseefor thedepreciation. 10.8Theassesseeinreplytosuchshowcausenoticesubmittedthatthe provisionofExplanation3tosection32oftheActprovidesthattheintangible assetincludesgoodwill.Accordingly,thegoodwilliseligiblefordepreciationasper theapplicablerate. 10.9Asfarastheprovisionofsection43(1)and43(6)oftheActareconcerned, theseapplyinasituationwhereanycapitalassetstransferredbyamalgamating companytotheamalgamatedcompany.Assuch,thegoodwillinthebooksof KSPL(i.e.amalgamatingcompany)didnotexistandtherefore,thequestionof transferofthegoodwillaswellastheapplicabilityoftheaboveprovisionsdoes notarise.Assuch,theprovisionsofsection43(1)and43(6)oftheActdealwith theassetsalreadyrecordedinthebooksofaccountsofthe transferor/amalgamatingcompany.Inotherwords,suchprovisionsdonotdeal withtheintangibleassetsemergingintheschemeofamalgamation. 10.10TheassesseealsoclaimedbyreferringtotheAS-14andIndAS-103that thesestandardsrecognizegoodwillarisingoutofamalgamationasanasset.As perAS-14goodwillarisinginaschemeofamalgamationrepresentsthe considerationpaidagainstfutureanticipatedincome. 10.11Theassesseefurthersubmittedthattheschemeofamalgamationhasbeen approvedbytheHon’bleGujaratHighCourt.TheFMVandexchangeofshares ITAno.557/AHD/2022 Asstt.Year2016-17 16 weredeterminedbytheexpertvaluer.Basedonsuchvaluationandapproval,the goodwillcametoberecordedinthebooksofaccountsoftheassessee. 10.12Theassesseewithrespecttoitsclaimofdepreciationongoodwillacquired inprocessofamalgamationplaceditsrelianceonthevariousjudgmentplacedon pageno17&18oftheAOorder 10.13Theassessee,inviewofabovejudgments,claimedthatthedepreciationon goodwillarisingintheschemeofamalgamationisallowableundersection32of theAct. 10.14However,theAOduringtheassessmentproceedingsafterconsideringthe detailedsubmissionmadebytheassesseeobservedcertainfactswhichcanbe categorizedunderthesub-headasdetailedunder: I.Controlledtransaction/samemanagement:- i.Thedirectors/shareholdersinboththecompaniesi.e.KSPLandKIPL beforeandaftertheamalgamationwerecommon.Similarly,therewas nochangeintheshareholdingpatternoftheshareholderspreandpost amalgamation.Thus,boththecompaniesweremanagedandcontrolled bythesamegroupofpeople. ii.Likewise,theregisteredaddressofboththecompanieswascommon andtheresidentialaddressesofthedirectorswerealsocommon.Thus, allthedirectorsbelongedtothesamegroup/familyincaseofboththe companies. iii.Theamalgamatedcompany,namelyKIPLwasnotengagedinany manufacturingactivityinthefinancialyear2012-13to2014-15andit wasshowingonlymeagreactivityfromtradingoperationswhichwas resultinglossesinitsbooksofaccounts.Similarly,therewereno vendors/customersinthebalancesheetoftheamalgamatedcompany ason31stMarch2015. ITAno.557/AHD/2022 Asstt.Year2016-17 17 iv.Subsequenttotheamalgamation,theassesseecompanyi.e. amalgamatedcompanywasconvertedintolimitedliabilitypartnership (LLP)witheffectfrom15 th March2016.Accordingly,theshareholders becomethepartnersintheLLPinwhoseaccountshugepartner’s capitalamountwascreditedinthebooksofaccountsofLLPwithout involvinganycashflow. v.Theshareholders/directorswerehavingcontroloverboththecompanies andaccordinglydesignedtheschemeofamalgamationinsuchaway whichresultedhugegoodwillinthebooksofaccountsoftheassessee (amalgamatedcompany)withoutinvolvinganycashpayout,though therewasnogoodwillinthebooksofaccountspre-amalgamation. Thus,thepurposeforcreationofsuchgoodwillwasforevasionoflarge amountoftaxes. II.Contradictoryandinconsistentvaluationreport Therewerecertaininconsistency/contradictioninthevaluationreport preparedbySSPA&Co.CharteredAccountantinthedeterminationof fairvalueofsharesofKSPLwhicharelistedasunder: a.ThevaluationoffairmarketvalueofthesharesofKSPLhasbeen madeusingtheincome/marketapproachmethodwhereasthenet assetsvalueapproachhasbeenusedinthecaseofKIPLwhichis contradictorytoeachother.Assuch,asimilarapproachfor determiningthevalueofthesharesshouldhavebeenadopted, particularlyinthegivensituationwherethemanagementofboththe companieswerecommon.Buttheassesseehasuseddifferent approachestodeterminethehighvalueofequitysharesinthecase ofKSPLinordertogetthehighervalueofgoodwill. b.Nocomparablewasselectedbythevaluerinthevaluationreportfor WACCcalculation. ITAno.557/AHD/2022 Asstt.Year2016-17 18 c.Similarly,thediscountfactorsusedforvaluationsuchas15.22% werewithoutanybase.Valuerdidnotfileanybaseofworkingfor thesame. d.Valuerhasvaluedthecompanyason25-09-2015althoughthe appointeddateofamalgamationis31-03-2015. e.ThevaluationreportissuedbytheSSPA&Co.isnotsignedbyany charteredaccountant,nomembershipnumberismentionedon valuationcertificatetoknowwhoissuedthecertificate. f.Basedontheabovediscrepanciesinthevaluationreportitemerged thatthevaluationwasdoneintentionallyinsuchawaywhichsuits thedirectors/shareholdersoftheassesseecompanysothatitcan claimhugedepreciationonsuchgoodwill. FurthertheemployeecostinrelationtotherevenuefromtheoperationofKSPLis negligible,whichsuggeststhattheprimaryoperationswerecarriedoutbythe directorsofthecompanieswhoarecommon.Hence,thereisnofuturebenefit availabletotheassesseeattributabletotheemployees.Similarly,KSPLdidnot haveanyintangibleassetssuchaspatents,copyrightsoranyotherunique intellectualpropertyorrightswhichwouldyieldfuturebenefit.Thus,inthe circumstances,thevaluationofKSPLatsuchhugeamountisnotjustifiable. 10.15Furthermore,theAOoftheopinionthatthegoodwillisnotadifference betweenpurchaseconsiderationandnetbookvalueofassetstakenoverbythe assesseeratherit(goodwill)representsthedifferencebetweenpurchase considerationandmarketvalueofassetsacquired.Assuchthevalueoftheland wasnotrevaluedthoughitkeepsonappreciating.Ifthesamewouldhavebeen done,thentheamountofgoodwillwouldhavebeenlow.Itaccordinglysuggests thattheentireschemeofgeneratinggoodwillintheschemeofamalgamationwas basedontaxbenefitinadubiousmanner. 10.16Inviewoftheabovebroadobservation,theAObelievedthevaluationof KSPLatRs.598.18croresagainstnetassetsofRs.289.30Croresresulting ITAno.557/AHD/2022 Asstt.Year2016-17 19 goodwillofRs.308.87/-croreshasbeenmanagedbythedirectorsofthe companieswhichisnothingbutacolorabledevicetoreducetaxableprofitby claiminghugedepreciation. VI.Depreciationongoodwillemergedduetoschemeofamalgamation isnotallowableinviewoflegalprovisions. 10.17Theassesseewasnotentitledfordepreciationontheimpugnedgoodwillin pursuanceofproviso5tosection32(1)oftheActwhichrestrictsdepreciationon amalgamatedassetstotheextentitwasavailabletotheamalgamatingcompany. Similarly,theprovisionofexplanation7tosection43(1)andexplanation2(b)to section43(6)(c)oftheActmandatethatactualcostandWDVofassets transferredinschemeofamalgamationshouldbeequaltowhatwasinthebooks ofamalgamatingcompany.Astherewasnogoodwillavailableinthebooksof KSPLpriortoamalgamation,accordinglynodepreciationallowanceisavailableto theassessee. 10.18Further,ifanassetemergesinthebooksofamalgamatedcompanywhich didnotexistinthebooksofamalgamatingcompany,suchanassetemergesonly duetorevaluationofassets&liabilitiesforwhichamalgamatedcompanydoesnot incuranycost.Hence,aspertheprovisionofsection55(2)(a)(ii)thevalueofan assetwhichhasbeenacquiredwithoutincurringanycostshouldbetakenatNIL. Similarly,therewouldnotbeanypossibilityofallowingthedeductionforthe depreciationontheassetsresultingonaccountofrevaluationofassets. 10.19TheAOFurtherobservedthatasperAS-14,therearetwomethodsof accountingnamelypoolingofinterestmethodandpurchasemethodwhichare appliedforrecordingthetransactionarisingintheschemeofamalgamationof companies.Incasethecondition,inaschemeofamalgamationprescribedunder para3(e)ofAS14arefulfilled,thenpoolingofinterestmethodofaccounting shouldbeapplicable.Underthepoolingofinterestmethodanydifference betweenpurchaseconsiderationandbookvalueofassets&liabilitiesshouldbe ITAno.557/AHD/2022 Asstt.Year2016-17 20 recognizedasanamalgamationreserve.Assuchnoconceptofgoodwillis availableinthismethodofaccounting.Whereasanyoftheconditionprescribed underpara3(e)isnotfulfilled,insuchcaseassetsandliabilitiesaretransferredat revaluedpriceandanydifferencebetweenpurchaseconsiderationandmarket valueofassets&liabilitiesistoberecognizedasgoodwillinthebooksofresultant company. 10.20Further,para8ofappendix-CofIndAS-103mandatespoolingofinterest methodforamalgamationofcommonlycontrolentity.Similarly,para9ofIndAS- 103mandatesthatalltheassetsandliabilitiesshouldbetransferredatcarrying amount.Furtherpara12ofIndAS-103mandatesthatanydifferencebetween purchaseconsiderationandbookvalueofassets&liabilitiesshouldberecognized ascapitalreserve. 10.21Inviewoftheaboveobservation,theAOheldthattheassesseehasnot incurredcoststoacquiregoodwill.Also,suchgoodwillwasnottransferredfrom amalgamatingcompany.Therefore,thevalueofthesameforthepurposeof taxationisNIL.Thus,depreciationongoodwillisnotallowableintheyearunder considerationandinsubsequentyears. 11.AggrievedbytheorderoftheAO,theassesseepreferredanappealbefore learnedCIT(A)whoconfirmedthefindingoftheAO.Stillaggrievedbytheorder oftheld.CIT-A,assesseeisnowinappealbeforeus. 12.ThelearnedARbeforeussubmittedthatthegoodwillisarisinginthebooksof accountsoftheassesseeonaccountofthedifferencebetweenthepurchase considerationpaidtotheamalgamatingcompanyovertheassetsacquiredbyit fromtheamalgamatingcompany.Thepurchaseconsiderationwasdecidedasper thevaluationreportpreparedbytheSSPA&Co.ThelearnedARinsupportofhis contentiondrewourattentiononthevaluationreportplacedonpages7to16of thepaperbook.ThelearnedARfurthersubmittedthatsuchpurchase considerationwaspartoftheamalgamationschemewhichwasapprovedbythe ITAno.557/AHD/2022 Asstt.Year2016-17 21 Hon’bleGujaratHighCourt.ThelearnedARdrewourattentionontheclause23of theschemewhichisplacedonpage69ofthepaperbook.Itwasalsocontended bythelearnedARthatintheschemeofamalgamationitwasclearlymentioned thatthedifferenceifanybetweenthepurchaseconsiderationandthenetvalueof theassetsshallbeadjustedtothecapitalreserveorthegoodwillasthecasemay bewhichisevidentfromtheclause24.5ofthescheme,copyofthesameis placedonpage70ofthepaperbook. 12.1Similarly,theld.ARalsosubmittedthattherewasnoobjectionraisedbythe RevenueintheschemeofamalgamationasevidentfromthejudgmentofHon’ble GujaratHighCourtdated21-12-2015,therelevantextractisplacedonpage31of thepaperbook.Accordingly,thelearnedARclaimedthattheAOhadno jurisdictionfordisturbingtheimpugnedamountofgoodwillastherewasnotany violationintheimplementationoftheschemewhichisapprovedbytheHon’ble GujaratHighCourt. 12.2Itwasalsopointedoutthatallthedetailsaboutthemanagement/ ownership/shareholdingpatterns/controlpreandpostamalgamationaboutboth thecompanieswereavailableinthepublicdomainandnothingwasconcealedin theimpugnedschemeofamalgamation.Furthermore,thereasonsandthe rationalebehindtheimpugnedschemeofamalgamationwasdulyexplainedinthe schemeofamalgamation.Therefore,thecommonownership/control/management cannotbeareasonfornotallowingtheclaimofgoodwillontheassumptionof thattheentireschemewasacolorabledevice.Theamalgamatedcompanywas earninghugeamountofprofitandithadalotofbusinesspotentialandother assetsincludingcreditors,customers,marketbase,supplierinformation,skilled labour/trainedmanpowerandthelicenceagreementforitsbusiness.Allthese assetsintheprocessofamalgamationeventuallybecamethepropertiesofthe assessee.ThelearnedARinsupportofhiscontentiondrewourattentiononthe incometaxreturn,computationofincomeandauditedfinancialstatementsforthe assessmentyear2016-17whichareplacedonpages275to301ofthepaperbook. ITAno.557/AHD/2022 Asstt.Year2016-17 22 Accordingly,thelearnedARclaimedthatthehigheramountofpurchase considerationwaspaidoverthenetvalueofassetswhichwastreatedasgoodwill. 12.3ThelearnedARfurthersubmittedthataftertheamalgamationscheme,the profitabilityoftheassesseehasincreasedmanifolds.Assuchtheprojectionsmade inthevaluationreportweretranslatedintoreality.ThelearnedARinsupportof hiscontentionhasfiledachartcontainingtheinformationabouttheprojections vizaviztheactualresults.Accordingly,therecannotbeanydoubtonthe valuationreportpreparedbytheprofessionalsandsubmittedbytheassessee. Thus,itwascontendedthattheamalgamationschemewasadvantageoustothe assesseeandtheconsiderationpaidoverthenetassetsvaluecannotbesaidas excessiveorunreasonable. 12.4Moreover,itwasthedecisionofthecompaniestogoforamalgamationand therevenuehasnoroletoplayinsuchadecision-makingprocess.Thelearned ARinsupportofclaimreliedonthejudgmentofHon’bleGujaratHighCourtin caseofVoltapTransformers(P)Ltd.vs.CITreportedin129ITR105. 12.5Similarly,thelearnedARalsocontendedthatitwasthedecisionofthe amalgamatedcompanytoissuethesharesatapremiumtotheamalgamating companywhichwasbasedoncommercialexpediency.Therevenuecannotdirect theassesseetocarryoutoperationasperitsopinion.ThelearnedARinsupport ofhiscontentionreliedonthejudgmentofHon’bleSupremeCourtinthecaseof PCITvs.RohtakChainCo.(P)Ltd.reportedin110taxmann.com59 12.6Regardingthevaluationreportinconnectionwiththepurchaseconsideration paidbytheassessee,thelearnedARsubmittedthatthereweretworeportsof twodifferentcharteredaccountants’firmforthevaluationsofthesharesofthe assesseecompanyandvaluationofthesharesofthetransferorcompanywhich wereavailablebeforetheAO.Intheeventofanydoubtonthegenuinenessof suchreport,therevenuewasempoweredundertheprovisionsoftheActtocarry outnecessaryverification,butithasnotbeendoneso.Thus,nodoubtcanbe ITAno.557/AHD/2022 Asstt.Year2016-17 23 raisedonthecredentialsofthevaluationreport.Assuchthevaluationofthe businessrequiresdistincttechnicalexpertiseandtheAOdoesnotpossesssuch technicalexpertise.Therefore,theAOwasundertheobligationtotakethe assistanceofthevaluerintheeventofbeingdissatisfiedwithvaluation.The learnedARinsupportofhiscontentionreferredtotheordersofthistribunalin caseofSynbioticsLtd.vs.ACITreportedin48ITR(T)210(Ahd)andorderof DelhitribunalincaseCinestaanEntertainmentPvt.Ltd.vs.ITOreportedin177 ITD809. 12.7ThelearnedARfurthercontendedthatthereisnoviolationofproviso5to section32(1)oftheActastheimpugnedamountofgoodwillwasnotshownby theamalgamatingcompany.Assuchtheamountofgoodwillwasgeneratedby theassesseecompanyintheprocessofamalgamation.Thus,thequestionof apportioningthedepreciationonthegoodwillbetweentheamalgamatedand amalgamatingcompanydoesnotarise.Accordingly,proviso5tosection32(1)of theActdoesnothaveanyapplicabilityinthecaseonhand. 12.8Similarly,itwascontendedthattheassesseehasincurredcostsbyissuing sharestotheshareholdersoftheamalgamatingcompanywhichwasmorethan thenetvalueofassetsacquiredintheschemeofamalgamation.Therefore,such excessconsiderationpaidbytheassesseerepresentsthecostincurredbyitas definedundersection43(1)oftheAct.TherewasnodoubtraisedbytheAO aboutthepurchaseconsiderationpaidbytheassesseetotheshareholdersofthe amalgamatingcompanywhichincludesthepaymentforintangiblessuchas customerbase,marketingnetwork,righttousethelicenceattachedwiththe amalgamatingcompanyresultinghugeamountofprofit.Thus,suchexcess considerationrepresentsthegoodwilloftheamalgamatingcompany.Accordingly, theassesseecannotbedeniedthebenefitofdepreciationasprovidedunder section32(1)oftheAct.Assuch,therewasnorelationoftheprovisionsofsection 43(1)oftheActwithgoodwillasallegedbytheAO. ITAno.557/AHD/2022 Asstt.Year2016-17 24 12.9Likewise,theexplanation3tosection43oftheActdoesnothaveany applicationinthecaseonhandastheassetbeinggoodwillwasnotshowninthe booksoftheamalgamatingcompany.Assuchtheexplanation3tosection43(1) oftheActcomesintoplaywhereanassetexistsinthebooksofamalgamating company. 12.10Correspondingly,theexplanation(7)tosection43(1)doesnothaveany applicationinthepresentfactsofthecaseasitdealswithrespecttotheassets whichwerethereinthebooksofaccountsoftheamalgamatingcompany,whereas admittedlytherewasnogoodwillshownbytheamalgamatedcompanyinthe booksofaccounts.Similarly,theprovisionsofsection43(6)oftheActdonot haveanyapplicationtothepresentfactsofthecaseasthesamegoeswith respecttotheassetsexistinginthebooksofaccountsoftheamalgamating company.Admittedly,therewasnowrittendownvaluefortheblockofassetsin thebooksofamalgamatingcompany.Assuch,thegoodwill1sttimecameinto existenceinthebooksoftheamalgamatedcompany. 12.11ThelearnedARalsosubmittedthattheassesseehasadoptedpurchase methodforrecordingthetransactionsintheschemeofamalgamationwhich requiresrecordingalltheassetsandliabilitiesoftheamalgamatedcompanyat bookvalue.Furthermorepara19ofaccountingstandard14recognizesthe goodwillarisingintheprocessofamalgamationonaccountofthepaymentmade intheanticipationoffutureincome. 12.12Similarly,theallegationoftheAOthattheamalgamatedcompanyisa papercompanyisfarfromthetruthbecausetheexistenceofthecompanyhas beenadmittedbytheAOhimselfbymakingtheassessment.Furthermore,the existenceofthecompanyhasalsobeenadmittedbytheHon’bleGujaratHigh Courtandthereforeitsexistencecannotbedoubted.Inviewoftheabovethe learnedARsubmittedthattheclaimoftheassesseeforthedepreciationonthe goodwillbeingintangibleassetsshouldbeallowedundertheprovisionsofsection 32oftheAct. ITAno.557/AHD/2022 Asstt.Year2016-17 25 13.Ontheotherhand,thelearnedDRsubmittedthattheschemeof amalgamationistaxneutralexerciseandthereforetherecannotbeanyquestion ofgoodwillarisinginsuchascheme.ThelearnedDRalsoarguedthatthe assessmentproceedingsandtheamalgamationproceedingsaredifferent exercises.Intheamalgamationproceedings,therewasnoquestionraisedabout theallowabilityofthedepreciationonsuchgoodwill.Accordinglyissueof allowabilityofthedepreciationundertheprovisionsofsection32(1)oftheAct wasverifiedduringtheassessmentproceedings.Thus,noobjectionfiledbythe revenueintheamalgamationproceedingscannotbeagroundforallowingthe depreciationintheassessmentproceedings. 13.1ThelearnedDRhasalsopointedoutthatthevaluationreportwasnot furnishedtotheHon’bleHighCourtalongwiththeschemeofamalgamation.The learnedDRalsoreiteratedthedefectsinthevaluationreportsuchasitwasnot properlysignedandthereweretwodifferentreportsforthevaluationofthe sharesofthesamecompany. 13.2ThelearnedDRalsosubmittedthattherewasnocashpaymentmadebythe assesseeforacquiringthegoodwill.Thus,theimpugnedgoodwillrepresentsthe self-generatedassetwhichisbasedontherevaluationofassetacquiredinthe schemeofamalgamation. 13.3ThelearnedDRbeforeusvehementlysupportedthestandoftheauthorities belowbyreiteratingthefindingscontainedintherespectiveorderswhichwehave alreadyadvertedtointheprecedingparagraph.Therefore,wearenotrepeating thesameforthesakeofbrevity. 13.4ThelearnedARinhisrejoindersubmittedthatpurchaseconsiderationwas basedonthevaluationreportofanexpertvaluerwhichresultedgoodwillon accountofexcesspaymentoverthenetvalueofassetsacquiredintheschemeof amalgamation.Moreover,thevaluationreportwasadmittedbytheAOinthe ITAno.557/AHD/2022 Asstt.Year2016-17 26 assessmentproceedingsandno-showcausenoticewasissuedbyhimeitherto theassesseeortotheindependentvaluerhighlightinganydefectinsuchreport. Thepurposeoftheaboveschemewastostreamlinethecurrentorganizational structureandusageofthecommercialenergieswhichhasresultedhugeprofitto theassesseeasevidentfromthefinancialstatements. 14.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Itisprovidedundertheprovisionsofsection2(1B) oftheActthatinaschemeofamalgamationalltheproperties&liabilitiesofthe amalgamatingcompanywouldbecometheassetsandliabilitiesofthe amalgamatedcompany.Similarly,itwasalsoprovidedthattheshareholders holdingnotlessthan75%invalueofthesharesintheamalgamatingcompany shouldbecometheshareholdersoftheamalgamatedcompany.Theprovisionof section2(1B)oftheActreadsasunder: (1B)"amalgamation",inrelationtocompanies,meansthemergerofoneormore companieswithanothercompanyorthemergeroftwoormorecompaniesto formonecompany(thecompanyorcompanieswhichsomergebeingreferred toastheamalgamatingcompanyorcompaniesandthecompanywithwhich theymergeorwhichisformedasaresultofthemerger,astheamalgamated company)insuchamannerthat— (i)allthepropertyoftheamalgamatingcompanyorcompaniesimmediately beforetheamalgamationbecomesthepropertyoftheamalgamated companybyvirtueoftheamalgamation; (ii)alltheliabilitiesoftheamalgamatingcompanyorcompanies immediatelybeforetheamalgamationbecometheliabilitiesofthe amalgamatedcompanybyvirtueoftheamalgamation; (iii)shareholdersholdingnotlessthanthree-fourthsinvalueofthesharesin theamalgamatingcompanyorcompanies(otherthansharesalready heldthereinimmediatelybeforetheamalgamationby,orbyanominee for,theamalgamatedcompanyoritssubsi-diary)becomeshareholders oftheamalgamatedcompanybyvirtueoftheamalgamation, otherwisethanasaresultoftheacquisitionofthepropertyofonecompany byanothercompanypursuanttothepurchaseofsuchpropertybytheother companyorasaresultofthedistributionofsuchpropertytotheother companyafterthewindingupofthefirst-mentionedcompany; 14.1Intheschemeofamalgamation,twoormorecompaniesmergedandform anewcompany,oroneormorecompaniesmergedintoanexistingcompany.As ITAno.557/AHD/2022 Asstt.Year2016-17 27 aresultofamalgamation,theamalgamatingcompanygetsdissolvedandits businessalongwithassetsandliabilitiesistakenoverbytheamalgamated company.Inreturntheamalgamatedcompanypayspurchaseconsiderationtothe shareholderofamalgamatingcompanybywayofissuingitsequityshare,other securitiesorbypayingcash.Normally,thecompaniesoptforamalgamationfor numerousreasons/objectiveswhichmayincludetheeliminationofthecompetition, better/effectiveutilizationoftheresources,better/effectivecontroloverthe marketetc. 14.2Thepurchaseconsiderationpaidbytheamalgamatedcompanytothe shareholdersoftheamalgamatingcompanymaybemorethanthevalueofthe netassetstakenoverorsometimeitmaybelowerthanthenetassetstakenover. Assuchpurchaseconsiderationtobepaidtotheamalgamatingcompanybythe amalgamatedcompanyisdeterminedafterconsideringvariousinternaland externalfactorswhichmayaffectfutureprofitabilityandgrowth.Suchfactors includepreviousearnings,futurepossibleearnings,location,technicalknow-how, customerbase,marketingnetworketc.Thus,itleadstoadifferencebetweenthe netvalueofassetstakenoverandpurchaseconsiderationpaid. 14.3Accountingstandard-14,issuedbytheICAIprescribestwomethodsof accountingforthetransactioncarriedoutintheschemeofamalgamationnamely poolingofinterestmethodandpurchasemethod.Iftheschemeofthe amalgamationfulfillstheconditionsofpara3(e)oftheAccountingStandard-14, thenpoolingofinterestmethodshouldbefollowedotherwisepurchasemethodof accountingshouldbeapplied.Therelevantextractofaccountingstandardreads asunder: 7.Therearetwomainmethodsofaccountingforamalgamations: (a)thepoolingofinterestsmethod;and (b)thepurchasemethod. 8.Theuseofthepoolingofinterestsmethodisconfinedtocircumstanceswhich meetthecriteriareferredtoinparagraph3(e)foranamalgamationinthenature ofmerger. ITAno.557/AHD/2022 Asstt.Year2016-17 28 14.4Underthepoolingofinterestmethodthedifferencebetweenpurchase considerationsandthenetassetstakenoverbytheamalgamatedcompanyis adjustedwithreserve.Ontheotherhand,inthecaseofpurchasemethodif purchaseconsiderationexceedsnetvalueofassetstakenoverthensuch differenceistobeasrecognizedasgoodwillorvise-versaascapitalreserve. 14.5Goodwillmaybedescribedastheaggregateofthoseintangibleassetsofa businesswhichcontributestoitssuperiorearningcapacityoveranormalreturn oninvestment.Itmayarisefromsuchattributesasfavourablelocations,the abilityandskillofitsemployeesandmanagement,qualityofitsproductsand services,customersatisfactionetc. 14.6Para19ofAS-14describesgoodwillarisinginaschemeofamalgamation asextraamountpaidinanticipationoffutureincomeandsuggeststreatingthe sameasanasset,henceprovideforsystematicamortizationofsameoverthe periodofusefullife.Thepara19ofAS-14readsasunder: 19.Goodwillarisingonamalgamationrepresentsapaymentmadeinanticipationoffuture incomeanditisappropriatetotreatitasanassettobeamortisedtoincomeona systematicbasisoveritsusefullife.Duetothenatureofgoodwill,itisfrequentlydifficult toestimateitsusefullifewithreasonablecertainty.Suchestimationis,therefore,madeon aprudentbasis.Accordingly,itisconsideredappropriatetoamortisegoodwillovera periodnotexceedingfiveyearsunlessasomewhatlongerperiodcanbejustified. 14.7Inthecaseinhand,theassesseecompanyhastakenoverthebusinessof oneofthegroupcompanies,namelyKSPL,withalltheassets,liabilities,and reserves.Inreturntheassesseecompanyissuedits2sharesforoneshareof KSPLaspurchaseconsideration.Accordingly,theassesseecompanyissued 2,54,54,560newsharesfor1,27,27,280/-sharesofKSPL@Rs.235/-havingface valueofRs.10eachandpremiumofRs.225/-each.Thus,theassesseecompany paidpurchaseconsiderationofRs.598.18croresonly(2.54crorexRs.235/-) againstthenetbookvalueoftheassetsandliabilitiestakenoverbyitatRs. 298,30,45,656/-onlyleadingtoadifferencebetweenNAVandpurchase considerationofRs.308,87,75,944/-.Theassessee,byfollowingthepoolingof ITAno.557/AHD/2022 Asstt.Year2016-17 29 interestmethodofaccountingasprescribedunderAS-14recognizedsuch differenceasGoodwillinthebooksofaccount.Theschemeofamalgamationwas approvedbytheHon’bleGujaratHighCourtvideorderdated21 st December2015 whichwaseffectivefrom1-4-2015.Subsequently,theassesseeatthetimeof filingreturnofincomeclaimeddepreciationonsuchgoodwillbytreatingthesame asintangibleassetwhichwasdisallowedbytheAOandconfirmedbythelearned CIT(A)byholdingitatNILvalueforthepurposeoftaxation. 14.8Undeniably,thepurchaseconsiderationpaidbytheassesseetothe shareholdersofthetransferor/amalgamatingcompanystandsatRs.598.18 croresasevidentfromtheschemeofamalgamation.Therelevantclauseofthe schemeoftheamalgamationstandsasunder: 23.1UponthisSchemebecomingeffective,TransfereeCompany-2shallwithoutany furtherapplicationordeed,issueandallotEquity.Sharesatpar,creditedasfullypaidup, totheextentindicatedbelowtotheshareholdersofTransferorcompany,holdingsharesin TransferorcompanyandwhosenameappearintheRegisterofMembersontheAppointed Dateortosuchoftheirrespectiveheirs,executors,administratorsorotherlegal representativeorothersuccessorsintitleasmayberecognizedbytherespectiveBoardof Directorsinthefollowingmanner: 2(Two)fullypaidEquitySharesofRs.1Q/-eachofTransferee.Company-2shallbeissued andallotted,forevery1(.One)EquitySharesofRs.10/-eachheldinTransferorCompany. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 23.5UponSchemebeingeffectiveandonallotmentofnewEquitySharesby TransactionCompany-2,thesharecertificaterepresentingsharesheldinTransferor Companyshallstandautomaticallycancelled.ThenewEquitySharesshallbeissuedby TransfereeCompany-2totheshareholdersofTransferorCompanyatapremiumof Rupeestwohunderedandtwentyfivepershare.ApprovalofthisSchemebythe shareholdersoftransfereecompany2shallbedeemedtobetheduecomplianceofthe provisionsofSection62andSection42oftheCompaniesAct,2013andotherrelevantand applicableprovisionsoftheActfortheissueandallotmentofEquitySharesbyTransferee Company-2totheshareholdersofTransferorcompany,asprovidedinthisScheme. 14.9Hence,thepurchaseconsiderationexceedsthebookvalueofnetassets acquiredbyitbyRs.308,87,75,944/-asdiscussedabove.Theexcessamountwas recordedasgoodwillinthebooksoftheassessee.Admittedly,thattheassessee incurredthecostmorethanthenetbookvalueofassetsacquiredbyitinthe schemeofamalgamationwhichhasalsobeenapprovedbytheHon’bleGujarat ITAno.557/AHD/2022 Asstt.Year2016-17 30 HighCourtvideorderdated21 st December2015w.e.f.01stApril2015.The relevantportionofthejudgmentreadsasunder: Thepetitionercompaniesarefurtherdirectedtolodgeacopyofthisorder,thescheduleof immovableassetsoftheundertakingbeingtransferredundertheslumpsaletothe Transferee-1andthatoftheremainingundertakingoftheTransferee-2,asonthedateof thisorderandtheschemedulyauthenticatedbytheRegistrar,HighcourtofGujaratwith concernedsuperintendentofstamps,forthepurposeofadjudicationofstampduty,ifany, onthesamewithin60daysfromthedateoftheorder. ThePetitionercompaniesaredirectedtofileacopyofthisorderalongwithacopyofthe schemewiththeconcernedRegistrarofCompanies,electronically,alongwithINC-28in additiontoaphysicalcopyasperrelevantprovisionsoftheAct. Filingandissuanceofdrawnuporderisherebydispensedwith. AllconcernedauthoritiestoactonacopyofthisorderalongwiththeSchemeduly authenticatedbytheRegistrar,HighCourtofGujarat.TheRegistrar,HighCourtofGujarat shallissuetheauthenticatedcopyofthisorderalongwiththeSchemeofexpeditiouslyas possible. 14.10Furthermore,itwasmentionedintheschemeofamalgamationthatthe differenceifanybetweenthevalueoftheassetsacquiredbytheamalgamated companyandtheconsiderationpaidshallberecordedeitherascapitalreserveor goodwill.Therelevantportionoftheschemereadsasunder: Thedifference(excessordeficit),betweenthenetvalueofassetsoveraggregateface valueandpremiumamountfortheEquitySharesissuedbyTransfereeCompany-2tothe shareholdersofTransferorcompanypursuanttothisSchemeandaftergivingeffectto Clause24.3beadjustedtoCapitalReserveorGoodwill,asthecasemaybeinbooksof TransfereeCompany-2. 14.11Atthisjuncture,itisalsoimportanttonotethattheHon’bleGujaratHigh Courtintheimpugnedschemeofamalgamationwhileapprovinghasalso observedthattheRegionalDirector,MinistryofCorporateaffairsvideletterdated 3 rd December2015,hasinvitedobjectionsfromtheIncomeTaxDepartmentifany intheschemeofamalgamation.ButtheIncomeTaxDepartmentdidnotreply withinthetimelimitof15days,henceitwasassumedthattheIncomeTax Departmenthasnoobjectioninconnectionwiththeimpugnedschemeof amalgamation.ThisfactcanbeverifiedfromtheorderoftheHon’bleHighCourt, therelevantfindingisreproducedasunder: ITAno.557/AHD/2022 Asstt.Year2016-17 31 ThenextobservationoftheRegionalDirectorvideparagraph2(e),pertainstotheletter dated3 rd December2015sentbytheRegionalDirectortotheIncomeTaxDepartmentto invitingtheirobjections,ifany.Sincethestatutoryperiodof15days,asenvisagedbythe relevantcircularoftheMinistryofCorporateAffairsisover,itcanbepresumedthatthe IncomeTaxDepartmenthasnoobjectiontotheproposedSchemeofarrangement.The petitionercompanieshaveagreedtocomplywiththeapplicableprovisionsoftheIncome TaxActandrules.Inviewofthesame,nodirectionarerequiredtobeissuedtothe petitionercompaniesinthisregard. 14.12Inthisconnection,wefurthernotethattheschemeforthe amalgamationwaspresentedbeforetheHon’bleGujaratHighCourtforthe approvalinpursuancetotheprovisionsofsection391to394AoftheCompanies Act.Butonperusaloftheprovisionsofsection391to394AoftheCompaniesAct, wenotethatthereisarequirementforinvitingtheobjectionfromthecentral governmentabouttheproposedschemeofamalgamation.Therelevantextractof thesectionreadsasunder: 394A.NOTICETOBEGIVENTOCENTRALGOVERNMENTFORAPPLICATIONS UNDERSECTIONS391AND394The1[Tribunal]shallgivenoticeofevery applicationmadetoitundersection391or394totheCentralGovernment,and shalltakeintoconsiderationtherepresentations,ifany,madetoitbythat Governmentbeforepassinganyorderunderanyofthesesections.1.Substituted for`Court'bytheCompanies(SecondAmendment)Act,2002(w.e.f.adateyetto benotified). 14.13Accordingly,wefindthattherewasnorequirementtoinviteobjections fromtheIncomeTaxDepartment.However,wefindthattheMCAhasissueda circularNo.1/2014dated15.01.2014directingregionaldirectorsofMinistryof CorporateAffairtoinvitecommentsandinputsfromtheIncomeTaxDepartment aswellasfromotherregulatorydepartmentbeforetheamalgamation.The relevantcopyofthecircularrecessunder: GeneralCircularNo1/2014 F.No2/1/2014 Dated15thJanuary2014 Subject:Reportu/s394AoftheCompaniesAct,1956-Takingaccountsof comments/inputsfromIncomeTaxDepartmentandothersectoralRegulators whilefilingreportsbyRDs. Section394AoftheCompanieAct,1956requiresserviceofanoticeontheCentral Governmentwherevercasesinvolvingarrangement/compromise(underSection391)or reconstruction/amalgamation(underSection394)comeupbeforetheCourtof ITAno.557/AHD/2022 Asstt.Year2016-17 32 competentjurisdiction.AsthepowersoftheCentralGovernmenthavebeendelegatedto theRegionalDirectors(RDs)whoalsofilerepresentationsonbehalfoftheGovernment wherevernecessary. 2.Itistobenotedthatthesaidprovisionsisinadditiontotherequirementofthereport tobereceivedrespectivelyfromtheRegistrarofCompaniesandtheOfficialLiquidator underthefirstandsecondprovisostoSection394(1).AjointreadingofSections394and 394AmakesitclearthatthedutiestobeperformedbytheRegistrarandOfficialLiquidator underSection394andoftheRegionalDirectorconcernedactingonbehalfoftheCentral GovernmentunderSection394Aarequitedifferent. 3.AninstancehasrecentlycometolightwhereinaRegionalDirectordidnotproject theobjectionsoftheIncomeTaxDepartmentinacaseunderSection394.The matterhasbeenexaminedanditisdecidedthatwhilerespondingtonoticesonbehalfof theCentralGovernmentunderSection394A,theRegionalDirectorconcernedshallinvite specificcommentsfromIncomeTaxDepartmentwithin15daysofreceiptofnoticebefore filinghisresponsetotheCourt.IfnoresponsefromtheIncomeTaxDepartmentis forthcoming,itmaybepresumedthattheIncomeTaxDepartmenthasnoobjectiontothe actionproposedunderSection391or394asthecasemaybe.TheRegionalDirectors mustalsoseeifinaparticularcasefeedbackfromanyothersectoralRegulatoristobe obtainedandifitappearsnecessaryforhimtoobtainsuchfeedback,itwillalsobedealt withinalikemanner. 4.ItisalsoemphasizedthatitisnotfortheRegionalDirectortodecidecorrectnessor otherwiseoftheobjections/viewsoftheIncometaxDepartmentorotherRegulators. WhileordinarilysuchviewsshouldbeprojectedbytheRegionalDirectorinhis representation,iftherearecompellingreasonsfordoubtingthecorrectnessofsuchviews, theRegionalDirectormustmakeareferencetothisMinistryfortakingupthematterwith theMinistryconcernedbeforefilingtherepresentationunderSection394A. 5.ThisCirculariseffectivefromthedateofissue. 14.14TheabovecircularissuedbytheMCAwascirculatedbytheCBDTamong itsofficersvideF.No.279/MISC./M-171/2013-ITJ,dated11thApril2014which readsasunder: F.NO.279/MISC./M-171/2013-ITJ,Dated-11′′‘April,2014 GovernmentofIndia,MinistryofFinance,DepartmentofRevenue,C.B.D,T.,NewDeihl Subject:Merger/Amalgamation/de-mergerObjectionsentertainedbyHighCourts- reg. Iamdirectedtorefertotheabovementionedsubject. 2.Inarecantcaseofproposedamalgamation,itwasnotedthattheschemeof amalgamationwasdesignedseekingamalgamationwithretrospectivedatessoastoclaim setoffoflossesofloss-makingCompaniesagainsttheprofitsofprofitmakingCompanies ofthegroupandthusimpactingadverselythemuchneededpublicrevenue. ThisfactofproposedamalgamationwasnotbroughttothenoticeofIncomeTax DepartmenteitherbytheMinistryofCorporateAffairs(MCA)orRegistrarofCompanies (ROC).TheDeportmenthadtofileaninterventionapplicationopposingsuch amalgamationbeforetheHighCourtwhichwasrejectedonthegroundthatthe ITAno.557/AHD/2022 Asstt.Year2016-17 33 DepartmenthadnolocusstandiinthematterandthatRegionalDirector,MCAhasbeen delegatedpowerinthisregard. 3.InthisconnectionCircularNo1/2014dated15.01.2014hasbeenissuedbyMCAto RegionalDirectorswhichlaysdownthatwhilefurnishinganyreportregarding reconstructionoramalgamationofcompaniesundertheCompaniesAct,commentsand inputsfromtheIncomeTaxDepartmentmayinvariablybeobtainedsoastoensurethat theproposedschemeofreconstructionoramalgamationhasnotbeendesignedinsucha wayastodefraudtheRevenueandconsequentlybeingprejudicialtopublicinterest.Ithas furtherbeensaidthattheRegionalDirectorswouldinvitespecificcommentsfromthe IncomeTaxDepartmentwithin15daysofreceiptofnoticebeforefilingresponsetothe Court.ItisemphasisedthatthisistheonlyopportunitywiththeDepartmenttoobjecttothe schemeofamalgamationifthesomeisfoundprejudicialtotheinterestofRevenueand therefore,itisdesiredthatthecomments/objectionsoftheDepartmentaresentbythe concernedCITtoRegionalDirector,MCAforincorporatingtheminitsresponsetothe Court,immediatelyafterreceivinginformationaboutanyschemeofamalgamationor reconstructionetc. 4.ThisissueswithapprovalofMember(A&J). 14.15Fromtheabovecircular,itistranspiredthattheRevenuewasconscious aboutthefactthattherewasthepossibilityofmisusingtheprovisionsofthe incometaxActinthenameoftheschemeofamalgamationasprovidedunder section2(1B)causingprejudicetotheRevenue.ButtheRevenue,despitehaving theopportunityinitshanddidnotraiseanyobjectionwithinthetimeallowedby theMCAorsubsequentlybyraisingtheobjectionintheimpugnedschemeof amalgamation.Thus,fromtheconductoftheRevenue,itisrevealedthatthere wasnogrievanceintheimpugnedschemeofamalgamation.Hadtherebeenany grievancetotheRevenue,thesamecouldhavebeenbroughttothenoticeofthe regionaldirectoroftheMCA,thensuitableactionshouldhavebeeninitiated againsttheimpugnedschemeoftheamalgamation.Inthisregard,wenotethat recentlytheMumbaibenchofNCLTinoneofthepetitionsforamalgamationin caseofGabsInvestmentPvtLtd(Transferor)andAjantaPharmalimited (Transferee)inCPSNo.995and996/2017hasnotapprovedtheschemeof amalgamationontheobjectionraisedbytherevenue.Therelevantextractofthe orderreadsasunder: 36.Therationalegivenintheschemeamongothersthingsaretheproposed amalgamationofthetransferorcompanyintoTransfereeCompanybythescheme, asaresultofwhichtheshareholdersofthetransferorcompanyviz.thepromoters ofthetransferorcompany(whoarealsothepromotersofthetransfereecompany) shalldirectlyholdsharesinthetransfereecompanyandthepromoterswould ITAno.557/AHD/2022 Asstt.Year2016-17 34 continuetoholdthesamepercentageofsharesintheTransfereecompanypre andpostmerger. 37.Theaboverationalepresentedbythepetitionercompanyiswithoutany Justification.Petitionerhastocomplywithallapplicablelaws.Bythisschemeof amalgamationandarrangementGabs/shareholdersofGabsareavoidingfulltax liabilitywhichisstrenuouslyobjectedbytheIncomeTaxDepartmentasdiscussed Supra.Anytransferofpropertyfromoneentitytootherhastobetreatedas sale/transferandthesamehastocomplywithapplicableprovisionsoflaw includingapplicabletaxliability,stampduty.Intheinstantcase,thetransferorisa privateLtd.companywhichisaseparatelegalentityandanytransferofsharesto otherentityincludingindividualsfromthelegalentitywouldattractapplicabletax liability.Therefore,weareoftheconsideredviewthattheBenchcan sanction/approvetheschemeonlyifitcomplieswithallapplicableprovisionsof theAct,Rulesandiftheschemeisintheinterestofpublic,shareholderetc. However,thepetitionercompaniesdidnotprovidedetailswithregardto complianceoftaxliabilityraisedbytheIncomeTaxDepartment,theirundertaking topaythehugetaxliabilityaspointedoutbytheincomedepartmentetc. 38.FromtheaboveanalysisofthefinancialsofGabs,thebenchnotedthatwith anequitysharecapitalofonly1,91,100thepromoters/shareholdersofGabswho arealsothecommonpromotersofAPL,bywayofthisproposedschemeof amalgamationandarrangementwouldgetthesharesofAPLworth?1477.50 Crores(marketvalueason31.03.2017)andthattoowithoutpayinganyIncome Tax,StampDutyetc.forwhichthebenchisoftheconsideredviewthatthesame isnotinthepublicinterest,thousandsofshareholdersofTransfereecompany especiallyretailshareholders.Themarketvalueofthesamenumberofsharesas at31.03.2016was1,182.59Crores.39.SinceIncomeTaxdepartment(IT)has raisedstrongobjectionsabouttaxbenefit,taxavoidance,taxlossasdiscussed above,weareoftheopinionthatitwouldbewww.taxguru.inadvisabletosettle theimportant/crucialissueofhugetaxliabilitybeforesanctioningtheschemeby theTribunalratherthandisputingthesameatalaterstageaftertheschemeis sanctionedbytheTribunal.Itismandatoryaspersection230(5)ofthe CompaniesAct,2013,anoticeundersubsection(3)alongwithallthedocuments insuchformshallalsobesenttocentralgovernment,IncomeTaxAuthorities,RBI, SEBI,ROC,stockexchanges,OL,CCIandotherSectoralregulatorsorAuthorities fortheirrepresentations.Inresponsetothenoticereceivedasperabovesection theIncomeTaxDepartmenthasraisedvalidobservation/objectionsasdetailed above,wefindmeritintheobjectionsraisedbyIncomeTaxDepartmentandwe arealsoinclinedtoagreewiththeobjectionsraised. 14.16Fromtheabove,itisinferredthattheIncomeTaxDepartment,being aggrievedwiththeschemeofamalgamation,raisedtheobjection,whichwasduly acceptedbytheNCLTandaccordingly,theschemeofamalgamationwas disapprovedintheabovecase. 14.17Now,thequestionariseswhethertheschemeonceapprovedbythe Hon’bleGujaratHighCourtafterreceivingnoobjectionfromtheIncomeTax ITAno.557/AHD/2022 Asstt.Year2016-17 35 Department,theAO/revenuehasauthoritytochallengethesame.Whatisthe inferencethatflowsfromacumulativeconsiderationofalltheaforesaid contendingfactsisthattherevenuecannotobjecttotheimpugnedschemeof amalgamation.Itisbecause,itisimpliedthattherevenuehasgivenitsconsentin theimpugnedschemeofamalgamationbyraisingnoobjectioninresponsetothe letterissuedbytheregionaldirectoroftheMCAasdiscussedabove.Furthermore, hadtherebeenanygrievancetotherevenue,thenitshouldhaveapproachedthe Hon’bleHighCourtthroughtheregionaldirectoroftheMCA.Butitdidnotdoso. Assuchtherevenueononehandisissuingcircularstoitsofficerstoobjectthe schemeofamalgamationifitisfoundprejudicialtotheinterestofrevenuebuton theotherhanditremainssilentwhensuchopportunitywasaffordedtoitand raisingthesameissueduringtheassessmentproceedingswhichinourconsidered viewisnotdesirable. 14.18Movingahead,thereisalsonodisputeintheamountofthe purchaseconsiderationandtheNAVdeterminedbetweenthecompanies,as availableintheschemeofamalgamation,whichwasapprovedbytheHon’ble GujaratHighCourtaswell.However,thelowerauthoritiesheldthevalueof goodwillatNILforthepurposeoftaxationduringtheassessmentproceedingsfor thereasonsasdiscussedaboveintheirrespectiveorders.But,inthebackdropof theabovediscussion,wearenotconvincedwiththeordersoftheauthorities belowonthispreliminaryissue. 15.Now,thenextquestionarisesforourconsiderationwhetherthevalueof goodwillshouldbetakenatNILundertheprovisionofIncomeTaxActinthe booksofamalgamatedcompanyasnosuchgoodwillwasavailableinthebooksof amalgamatingcompanypriortoamalgamationandsuchgoodwillemergedinthe booksofamalgamatedcompanyonaccountofvaluationandrevaluationof businessasnocostincurredbytheamalgamatedcompanyforsuchgoodwill.In thisconnection,weareinclinedtorefercertainprovisionsoftheActinthecontext ITAno.557/AHD/2022 Asstt.Year2016-17 36 oftheschemeofamalgamationasprovidedundersection2(1B)oftheActas detailedunder: Depreciation. 19 32.(1) 20 [Inrespectofdepreciationof— (i)XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (ii)know-how,patents,copyrights,trademarks,licences,franchisesoranyother businessorcommercialrightsofsimilarnature,beingintangibleassetsacquired onorafterthe1stdayofApril,1998, owned 21 ,whollyorpartly,bytheassessee 21 andusedforthepurposesofthe business 21 orprofession,thefollowingdeductionsshallbeallowed—] 22 [(i)XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (ii) 24 [inthecaseofanyblockofassets,suchpercentageonthewrittendown valuethereofasmaybeprescribed 25 :] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 38 [Providedalsothattheaggregatededuction,inrespectofdepreciation ofbuildings,machinery,plantorfurniture,beingtangibleassetsorknow-how, patents,copyrights,trademarks,licences,franchisesoranyotherbusinessor commercialrightsofsimilarnature,beingintangibleassetsallowabletothe predecessorandthesuccessorinthecaseofsuccessionreferredtoinclause (xiii)andclause(xiv)ofsection47orsection170ortotheamalgamating companyandtheamalgamatedcompanyinthecaseofamalgamation,ortothe demergedcompanyandtheresultingcompanyinthecaseofdemerger,asthe casemaybe,shallnotexceedinanypreviousyearthedeductioncalculatedat theprescribedratesasifthesuccessionortheamalgamationorthedemerger, asthecasemaybe,hadnottakenplace,andsuchdeductionshallbe apportionedbetweenthepredecessorandthesuccessor,ortheamalgamating companyandtheamalgamatedcompany,orthedemergedcompanyandthe resultingcompany,asthecasemaybe,intheratioofthenumberofdaysfor whichtheassetswereusedbythem.] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX Explanation2.—Forthepurposesofthis 40 [sub-section]“writtendown valueoftheblockofassets”shallhavethesamemeaningasinclause*(c)of sub-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,franchisesoranyotherbusinessorcommercialrightsofsimilar nature. 15.1Theaboveprovisionofsection32oftheActprovidesallowingthe depreciationtotheamalgamatedcompanyinthesamemannerwhichwouldhave beenallowedtotheamalgamatingcompanyintheeventhadtherenotbeenany amalgamation. ITAno.557/AHD/2022 Asstt.Year2016-17 37 15.2Similarly,theactualcostoftheassetsacquiredintheschemeof amalgamationinthehandsoftheamalgamatedcompanywillcontinuetobethe sameasitwouldhavebeeninthehandsoftheamalgamatedcompanyinthe event,hadtherenotbeenanyamalgamation.Therelevantextractofthe explanation7tosection43(1)readsasunder: Definitionsofcertaintermsrelevanttoincomefromprofitsandgainsof businessorprofession. 43.Insections28to41andinthissection,unlessthecontextotherwiserequires 3 — 4 (1)“actualcost”meanstheactualcost 3 oftheassetstotheassessee,reducedby thatportionofthecostthereof,ifany,ashasbeenmet3directlyorindirectly byanyotherpersonorauthority: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 14 [Explanation7.—Where,inaschemeofamalgamation,anycapitalassetistransferredby theamalgamatingcompanytotheamalgamatedcompanyandtheamalgamatedcompany isanIndiancompany,theactualcostofthetransferredcapitalassettotheamalgamated companyshallbetakentobethesameasitwouldhavebeeniftheamalgamating companyhadcontinuedtoholdthecapitalassetforthepurposesofitsownbusiness.] 15.3WefurthernotethattheWDVoftheassetsacquiredintheschemeof amalgamationinthehandsoftheamalgamatedcompanywillcontinuetobethe sameasitwouldhavebeeninthehandsoftheamalgamatingcompanyinthe event,hadtherenotbeenanyamalgamation.Therelevantextractofthe explanation2tosection43(6)(c)oftheActreadsasunder: (6)“writtendownvalue”means— XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 42 [Explanation2.—Whereinanypreviousyear,anyblockofassetsis transferred,— (a)XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (b)bytheamalgamatingcompanytotheamalgamatedcompanyinascheme ofamalgamation,andtheamalgamatedcompanyisanIndiancompany, then,notwithstandinganythingcontainedinclause(1),theactualcostofthe blockofassetsinthecaseofthetransferee-companyortheamalgamated company,asthecasemaybe,shallbethewrittendownvalueoftheblockof assetsasinthecaseofthetransferor-companyortheamalgamatingcompany fortheimmediatelyprecedingpreviousyearasreducedbytheamountof depreciationactuallyallowedinrelationtothesaidprecedingpreviousyear.] 15.4Aspersection32(1)oftheITAct'depreciation'istobecomputedon 'actualcost'/'writtendownvalueoftheblockofassets'ascertainedinaccordance withtheprovisionsofsection43oftheAct.Further,areadingoftheabove ITAno.557/AHD/2022 Asstt.Year2016-17 38 provisionshowsthatinrespectof'capitalassets'transferredbytheamalgamating companytotheamalgamatedcompany,thecost/writtendownvalueofthe transferredcapitalassettotheamalgamatedcompanyshallbetakentobethe sameasitwouldhavebeenhadtheamalgamatingcompanycontinuedtoholdthe capitalassetforthepurposesofitsownbusiness. 15.5Acombinedreadingoftheaboveprovisionsrevealsthattheintentionof thelegislaturebehindtheintroductionoftheamalgamationschemewasto achievetaxneutrality.Besidestheabove,theintentionofthelegislatureisalso reflectingfromthefollowingprovisions: i.Thereisnocapitalgaininthehandsoftheamalgamatingcompanyon thetransferofcapitalassetsintheschemeofamalgamationunderthe provisionsofsection47(vi)oftheAct. ii.Thecostofstock-in–tradeinthehandsoftheamalgamatedcompany shallremainthesameasinthehandsoftheamalgamatingcompany eitherascapitalassetorstockintradeasprovidedundersection43Cof theAct. iii.Provisionsrelatingtocarryforwardandsetoffofaccumulatedlossand unabsorbeddepreciationallowanceinamalgamationordemerger,etc undertheprovisionsofsection72AoftheAct. iv.Exemptionofcapitalgainsinthehandsofshareholdersof amalgamatingcompanyontransferofsharesofamalgamatingcompany intheschemeofamalgamationundertheprovisionsofsection47(vii) oftheAct. v.Costofcapitalassetstobethesameasinthehandsofpreviousowner wherecapitalassetsbecametheassetsofthesuccessorasaresultof transferundersection47(vi)r.w.s.49(1)(iii)(e)oftheAct. vi.Costofsharesofamalgamatedcompanyinthehandsofshareholders, receivedasconsiderationfortransferofsharesofamalgamating company,tobesameasthecostofsharesofamalgamatingcompany undersection49(2)oftheAct. ITAno.557/AHD/2022 Asstt.Year2016-17 39 15.6Fromtheabove,theintentoftheLegislatureistomakeamalgamationa taxneutralschemeforcompaniesaswellasfortheshareholdersandnotto provideataxplanningmechanismtoeitherofthem.However,aconjointreading oftheaboveprovisionsrevealsthattheassetswhichweretransferredbythe amalgamatingcompanytotheamalgamatedcompanyintheprocessof amalgamationwerenotmadesubjecttothecapitalgaintax.Furthermore,the6 th provisotosection32oftheActhaslimitedtheamountofdepreciationavailableto theamalgamatedcompanypostamalgamationtotheextentoftheamountof depreciationwhichwouldhavebeenavailabletotheamalgamatingcompany,had therenotbeenanyamalgamation.Indeed,therewasnoentryinthebooksofthe transferor/amalgamatingcompanyfortheintangibleassets/goodwillbeingself- generatedassets.However,wenotethatalltherelevantprovisionsoftheActas discussedabovedealwithrespecttotheassetsavailable/recordedinthebooksof thetransferor/amalgamatingcompany.Inotherwords,theassetswhichhave beenacquiredbytheassesseeintheschemeofamalgamationwouldcontinueat thebookvalueinthebooksoftheamalgamatedcompany.Thequestionarises whetherthegoodwillshownbytheassesseeasdiscussedabovewasacquiredin theschemeofamalgamationfromtheamalgamatingcompany.Theanswer standsinnegative.Itisbecausetherewasnoentryinthebooksofaccountsof theamalgamating/transferorcompanyreflectingthevalueofgoodwill.Assuch, theamountofgoodwillasclaimedbytheassesseerepresentsthedifference betweenthepurchaseconsiderationandtheNAVacquiredbyit.Thepurchase considerationpaidbytheassesseewasbasedonthevaluationreportasdiscussed aboveafterconsideringthevariousfactors.Thus,theassesseehasnotacquired anygoodwillfromtheamalgamating/transferorcompanyasalleged,accordingly theprovisionsoftheActi.e.6provisotosection32,explanation7tosection 43(1),explanation2tosection43(6)(c)oftheActcannotbeappliedtothecase onhand. 15.7Normally,theissue/questionofgoodwillariseswhenonecompanyis acquiredbyanothercompany.Inotherwords,whenonecompanytransfersits ITAno.557/AHD/2022 Asstt.Year2016-17 40 businesstoanothercompanyagainsttheconsideration,thedifferencebetween thenetvalueoftheassetsacquiredandthepurchaseconsiderationpaidbythe transfereeisregardedasgoodwill.Thesucceedingquestionariseswhethersuch goodwillacquiredbytheassesseeiseligiblefordepreciationundertheprovisions ofsection32oftheAct.Inthisconnection,weareinclinedtorefertothe provisionsofsection32(1)oftheActwhichreadsasunder: 32.(1)Inrespectofdepreciationof— (i)buildings,machinery,plantorfurniture,beingtangibleassets; (ii)know-how,patents,copyrights,trademarks,licences,franchisesoranyother businessorcommercialrightsofsimilarnature,beingintangibleassetsacquired onorafterthe1stdayofApril,1998, owned,whollyorpartly,bytheassesseeandusedforthepurposesofthebusinessor profession,thefollowingdeductionsshallbeallowed— 15.8Onperusaloftheaboveprovisions,wenotethatthewordgoodwillhas nowherebeenmentioned.However,wenotethat,theHon’bleSupremeCourtin thecaseofCITvs.SmifsSecuritiesLtdreportedin348ITR302hasheldthatthe goodwillfallswithinthedefinitionoftheassetsunderthecategoryofanyother businessorcommercialrightsofsimilarnature.Therelevantextractreadsas under: Explanation3tosection32(1)statesthattheexpression'asset'shallmeanan intangibleasset,beingknow-how,patents,copyrights,trademarks,licences, franchisesoranyotherbusinessorcommercialrightsofsimilarnature.Areading ofthewords'anyotherbusinessorcommercialrightsofsimilarnature'inclause (b)ofExplanation3indicatesthatgoodwillwouldfallundertheexpression'any otherbusinessorcommercialrightsofasimilarnature'.Theprincipleofejusdem generiswouldstrictlyapplywhileinterpretingthesaidexpressionwhichfinds placeinExplanation3(b).(Para4) Inviewoftheabove,itisopinedthat'Goodwill'isanassetunderExplanation3(b) tosection32(1).(Para5) 15.9Inviewoftheabovejudgment,thereremainsnoambiguitythatgoodwillis partandparcelofintangibleassets.Hence,theassesseeiseligiblefor depreciationongoodwill. 15.10Movingfurther,wenotethatforclaimingthedepreciation,amongother conditionsasprovidedundersection32oftheAct,oneoftheconditionsisthat ITAno.557/AHD/2022 Asstt.Year2016-17 41 theassesseecanclaimdepreciationonthegoodwillbeingintangibleassetif acquiredonorafter1stdayofApril1998.Inotherwords,theassesseecanclaim depreciationonthegoodwillacquiredbyit.Thus,thecontroversyariseswhether thegoodwillgeneratedintheschemeofamalgamationisacquiredbythe transfereecompany.SuchcontroversyhasbeenansweredbytheHon’ble SupremeCourtinthecaseofSmifssecuritiesLtd(supra)byholdingasunder: Onemoreaspectneedstobehighlighted.Inthepresentcase,theAssessing Officer,asamatteroffact,cametotheconclusionthatnoamountwasactually paidonaccountofgoodwill.Thisisafactualfinding.TheCommissioner(Appeals) hascometotheconclusionthattheassesseehadfiledcopiesoftheordersofthe HighCourtorderingamalgamationoftheabovetwocompanies;thattheassets andliabilitiesof'Y'Ltd.weretransferredtotheassesseeforaconsideration;that thedifferencebetweenthecostofanassetandtheamountpaidconstituted goodwillandthattheassessee-companyintheprocessofamalgamationhad acquiredacapitalrightintheformofgoodwillbecauseofwhichthemarketworth oftheassessee-companystoodincreased.Thisfindinghasalsobeenupheldby Tribunal.Thereisnoreasontointerferewiththefactualfinding.(Para6) 15.11WealsofindthattheHon’bleDelhiHighCourt,involvingidenticalfactsand circumstances,inthecaseofCITVs.M/sEltekSGSPvt.Ltd.inITANo.475- 476/2022hasdecidedtheissueinfavouroftheassesseebyobservingasunder: 7.Beforeus,learnedcounselappearinginsupportoftheappealcontendedthatitwould betheprovisionsofSection49oftheActwhichwouldapplyandthatboththeCIT (Appeals)aswellastheITAThaveclearlyerredinholdingotherwise.Learnedcounsel referredtothedefinitionof“costofacquisition”asspeltoutinSection55(2)oftheAct andwhichhaddefinedthatexpressiontoalsoincludegoodwillofabusinessorprofession oratrademarkorbrandnameassociatedwiththebusinessorprofessionoranyother intangibleasset.Itisintheaforesaidcontextthatlearnedcounselfortheappellanthad soughttorelyuponSection49andmoreparticularlySection49(1)(e)thereof.8.The aforesaidsubmission,however,clearlylosessightofthefactthatSection47inexpress termsexcludesthetransferofacapitalassetintermsofaschemeofamalgamation.We furtherfindthattheprovisionsoftheActreferredtobylearnedcounselfortheappellant areplacedinaChapterdealingwiththe“CapitalGains”.ThatChapteritselfpertainsto profitsorgainsarisingfromthetransferofacapitalasset.However,itiswellsettledthata transferintermsofaschemeofamalgamationwhichissanctionedisaccomplishedby operationoflawasopposedtoanactofparties.Itisinthatbackdropthatthedecisionin Smifsassumessignificance.ThejudgmentrenderedbytheSupremeCourtinSmifsclearly recognisesgoodwilltobeanintangibleassetandonwhichdepreciationcanclearlybe claimedintermsofSection32(1)oftheAct.9.Accordinglyandforalltheaforesaid reasons,wefindnomeritintheinstantappeals.Theyshallconsequentlystanddismissed. ITAno.557/AHD/2022 Asstt.Year2016-17 42 15.12Fromtheabove,thereremainsnoambiguitythatthegoodwillgeneratedin theschemeofamalgamationisacquiredbytheassessee.Thus,inourconsidered viewtheassesseehascompliedwithalltheconditionsprovidedundersection32 oftheAct.Accordingly,wearenotconvincedbythefindingsoftheauthorities below. 16.ThenextallegationoftheAOisthattherewascontradictionand inconsistencyinthevaluationreportfiledbytheassessee.Admittedlythe valuationreportwaspreparedbytheSSPA&CO,afirmofcharteredaccountants. Thevaluationofthebusinessbeingatechnicalmatter,inourview,theassistance oftheexpertisrequired.TheAOhimselfcannotdeterminesuchvalue.Ifhewas notsatisfiedwiththevaluationreport,thentheonlyrecourseavailabletotheAO istoreferthemattertothetechnicalperson.Inholdingsowedrawsupportand guidancefromthejudgmentofthistribunalincaseofSynbioticsLtdvs.ACIT reportedin[2016]48ITR(T)210(Ahd)whereitwasheldasunder: AssessingOfficerhasadoptedthevalueofRs.250persq.mtr.Onthebasisofthe saleinstancesrelatedtoresidentialareassituated2to3kms.awayfromthe propertyinquestion.Thereisnodisputewithregardtothefactthatpropertyin questionisanindustriallandwhichcannotbecomparedwiththeresidential properties.Admittedly,neithertheAssessingOfficernortheCommissioner (Appeals)calledforreportfromtheDepartmentalValuationOfficerandproceeded tomaketheirownestimation.Itisincumbentupontheassessingauthoritytocall forreportfromDepartmentalValuationOfficerforascertainingthefairmarket valueoftheasset,intheeventheisnotsatisfiedabouttheclaimoftheassessee. Boththeauthoritiesbelowarenotjustifiedinadoptingtherateastheassessee hadfurnishedareportfromanexpert,i.e.,Governmentapprovedvaluer. 16.1ThesubsequentallegationoftheAOisthatboththecompaniesi.e. amalgamatedandtheamalgamatingcompanieswerecontrolledandmanagedby thesamegroupofpersonpreandpostamalgamation.Thus,theissuearises whetheritwasacolourabledeviceadoptedbytheassesseetocreategoodwillin thebooksofaccountsandclaimsuchhugeamountofdepreciation.Inthisregard wenotethatboththecompanies,namelyKSPLandKIPLwereregisteredon27 th January1995and27 th December2007respectivelywiththeMinistryofcorporate affairs.These2companieswerefilingseparateincometaxreturns.Boththe companiesbeingbodycorporatehaveaseparatelegalidentity.Allthesedetails ITAno.557/AHD/2022 Asstt.Year2016-17 43 weredulydisclosedintheschemeofamalgamationwhichwasdulyapprovedby theHon’bleGujaratHighCourtvideorderdated21 st December2015. 16.2Wealsonotethatvideletterdated3 rd December2015theregionaldirector ofministryofcorporateaffair(MCA)hasalsoinvitedcommentorobjectionfrom theIncomeTaxDepartment,butthedepartmentdidnotraiseanyobjectionwith respecttoschemeofamalgamation.Thisfactcanbeverifiedfrompara7(III)of theorderoftheHon’bleHighCourtwhichisplacedonrecordanddiscussedabove. 16.3Itisalsopertinenttomentionherethatallthenecessarydetailsabout themanagementofbothcompaniesweredisclosedintheschemeofamalgamation andnothingwashidden.Theschemecontainedalltheinformationrelatedto purchaseconsideration,itsvaluation,modeofpaymentandaccountingtreatment. TheHon’bleHighCourtapprovedsuchschemeafterinvitingobservationand commentfromROC,MCA,andofficialliquidatorincludingtheincometax department.Thus,inthegivenfactandcircumstancesthereasonablenessofthe schemecannotbedoubted.Accordingly,noinferencecanbedrawnthatthe assesseehasemployedcolorabledeviceinordertorecordhighvalueofpurchase considerationwhichisresultinggoodwill. 16.4Withoutprejudicetotheabove,wealsonotethattheRevenuehasto considercertainfactsbeforearrivingatafindingwhetheraparticularseriesofthe transactionsisacolourabledeviceornotastheprimaryonusisontheAOtofind out: (i)Whetherthepartiestothetransactionshaveconcealedorhidden anyfactand/orwhetherwhatisshowntobedonecouldhave actuallyhappenedindifferenttimeoratdifferentplace: Ans:Regardingthefactsofthetransactions,wenotethatallthe necessaryfactsweredulydisclosedbytheassesseeinthescheme ofamalgamation.Thefollowingfactsweredulydisclosed: a)Thepurchaseconsiderationbytheamalgamatedcompanytothe shareholdersoftheamalgamatingcompanywasdulydisclosedin theschemeofamalgamation. ITAno.557/AHD/2022 Asstt.Year2016-17 44 b)Thevaluationofthebusinessoftheamalgamatingcompanywas basedontheapprovedvaluationreport. c)Thefactofthecommoncontrolandmanagementofboththe amalgamatedandamalgamatingcompaniesweredisclosedinthe schemeofamalgamationwhichwasalsonotedbytheHon’ble GujaratHighCourtandthisfactwasalsointheknowledgeof Revenue. Thus,weareoftheviewnofactswereconcealedorhidden. (ii)Whetheritcouldbeanormalbusinesspractice: Ans:Intoday’stimetheactivityofamalgamationisverycommon andprevailinginthecorporateworldforsynergizingresources, control,eliminatethecompetitionetc. (iii)Evenwhereindividualtransactionsofthedevicearelegal/legitimate, whethercombinationofthesestepscreatesaneffectwhichis abnormalinthebusinessworldandcouldnothavebeenotherwise undertakeninnormalcircumstances: Ans.Inthepresentcasetherewasnoreferencemadebythe authoritiesbelowsuggestingthatthetransactioniscarriedout illegally.Asthetransactionsintheinstantcasewerewithinthe ambitofthelawaspertheprovisionofsection2(1B)oftheAct. (iv)Theseindividualtransactionscreateaneffectwhichiscontraryto humanprobabilities: Ans.Thetransactionscarriedoutbythepartieswereverymuch normaltransaction. (v)Whetheractionsofthepartiesfinallyareatvariancewiththeterms oftheagreement: Ans.Therewasnovarianceintheimpugnedtransactionwithregard tothetermsoftheagreement. 16.5Itisalsoimportanttohighlightthefactthatthereisnoprohibitionunder theActfordisallowingthedepreciationonthegoodwillgeneratedinthescheme ofamalgamation.Therearecertainkindsoftransactions,prejudicialtothe interestofRevenue,whichmayfallunderthepurviewoftheprovisionsofGeneral Anti-Avoidancerule(GAAR),POEM,andBEPSprovidedundersection95to102, section6(3)oftheActrespectivelyunderwhichtheimpugnedtransaction ITAno.557/AHD/2022 Asstt.Year2016-17 45 (depreciationonthegoodwillinaschemeofamalgamation)canbedenied.But suchprovisionsarenotapplicablefortheyearunderconsideration. 16.6Thereisnodisputeaboutthefactthatthepaymentwasmadebythe assesseetotheshareholdersoftheamalgamatingcompanyintheformofshares andnotthroughthecashpayment.Butthepaymentthroughthesharesisavalid modeofpayment.Inthisregardwedrawsupportandguidancefromthe judgmentofHon’bleDelhiHighCourtinthecaseofCITvs.MiraEximLtd reportedin359ITR70whereinitwasheldasunder: Intermsoftheorderpassedundersection394oftheCompaniesAct,1956the respondentcompanyacquiredtheimportedmotorcars.Thecarswerenot acquiredandtherespondentassesseewasnotownerofthemotorcarspriorto thesaiddate.Onmergerofthethreeconcernswiththerespondentassessee, shareswereissuedasconsiderationtotheproprietorsofthebusinessconcerns. Thesharesissuedwereconsiderationforthetransferoftheassets.Itis immaterial,whethertherewastransferofanundertaking,includingtheblockof assets,whichalsoincludedtheimportedmotorcars.[Para15] Itisclearthattherespondentassesseehadacquiredtheasset,i.e.,importedcars, afterthecutoffdate,i.e.,1-4-2001and,therefore,isentitledtodepreciationand thebar/prohibitioninclause(a)toprovisotosection32(1)wouldnotapply.The Tribunalhasrightlydecidedtheissueinfavouroftherespondentassesseeand againsttherevenue.[Para16] 16.7Itisalsopertinenttonotethatschemeoftheamalgamationcanbe approvedundertheprovisionsofsection2(1B)oftheActwhereshareholders holdingnotlessthan75%inthevalueofsharesoftheamalgamatingcompany becometheshareholdersoftheamalgamatedcompany.Itispossibleonlywhen thesharesareissuedtotheshareholdersoftheamalgamatingcompany. Accordingly,wearenotimpressedwiththefindingoftheAOthattherewasno cashpaymentfortheacquisitionofthegoodwillbytheassessee,ratheritwas recognizedinthebooksofaccountsbywayofaccountingentries.Thus,wehold thattheimpugnedtransactioncannotberegardedascolorabledevicemerelyon thereasoningthattheassesseeclaimedthedepreciationonthegoodwillinthe schemeofamalgamation. ITAno.557/AHD/2022 Asstt.Year2016-17 46 16.8WealsonotethatthisTribunalincaseofUrminmarketing(P)Ltd.Vs.DCIT reportedin122taxmann.com40hasalreadydecidedtheissueinfavorof assesseeonthesimilarfactsandcircumstances. 16.9Itisimportanttonotethattherewasanamendmenttosection32,section 2(11)oftheActandotherrelevantsectionsoftheIncomeTaxActfromthe FinanceAct2021,effectivefromAY2021-22.Theamendmentwasbroughtinto section32oftheActtoexcludegoodwillfromdepreciableassets.Therelevant portionoftheamendmentsinsection32isreproducedasunder: 32.(1) 97 [Inrespectofdepreciationof— (i)xxxxxxxx (ii)know-how,patents,copyrights,trademarks,licences,franchisesoranyotherbusiness orcommercialrightsofsimilarnature 98 ,beingintangibleassetsacquiredonorafterthe 1stdayofApril,1998, 99 [notbeinggoodwillofabusinessorprofession,] Explanation3.—Forthepurposesofthissub-section, 23 [theexpression"assets"]shall mean— (a)tangibleassets,beingbuildings,machinery,plantorfurniture; (b)intangibleassets,beingknow-how,patents,copyrights,trademarks,licences, franchisesoranyotherbusinessorcommercialrightsofsimilarnature 2425 [,not beinggoodwillofabusinessorprofession]. 16.10Therefore,nodepreciationisallowableongoodwillfromtheAY2021-22 onwards.However,goodwillisnotexcludedfromcapitalassets.Thepurposeof exclusionofgoodwillfromthedepreciableassetsisthatitisseenthatGoodwill,in general,isnotadepreciableassetandinfactdependinguponhowthebusiness runs;goodwillmayseeappreciationorinthealternativenodepreciationtoits value.Therefore,theremaynotbeajustificationofdepreciationongoodwill. Accordingly,thereisnoneedtoprovidefordepreciationongoodwillof business/professionlikeotherintangibleassetsorplant&machinery.Butsuchan amendmentisnotapplicablefortheyearunderconsideration. 16.11Inviewoftheaboveandafterconsideringthefactsintotality,wereverse theorderoftheauthoritiesbelowanddirecttheAOtoallowtheclaimofthe ITAno.557/AHD/2022 Asstt.Year2016-17 47 assesseeforthedepreciationontheimpugnedgoodwill.Hence,thegroundof appealoftheassesseeisallowed. 17.Intheresult,theappealoftheassesseeisallowed. OrderpronouncedintheCourton15/09/2023atAhmedabad. Sd/-Sd/- (SIDDHARTHANAUTIYAL)(WASEEMAHMED) JUDICIALMEMBERACCOUNTANTMEMBER (TrueCopy) Ahmedabad;Dated15/09/2023 Manish