MAHADHAN AGRITECH LIMITED (FORMERLY KNOWN AS SMARTCHEM TECHNOLOGIES LTD ,MUMBAI V. COMMISSIONER OF INCOME TAX(APPEAL)--50, MUMAI

ITA 2229/MUM/2024

AI Insights

The case involves multiple appeals by Mahadhan AgriTech Limited against the orders of the Commissioner of Income-tax (Appeals) concerning various assessment years. The primary issues revolved around the disallowance of depreciation on goodwill and other intangibles, additions under Section 69A of the Income Tax Act for alleged inflated capital expenditure, and disallowances related to donation expenses and deductions under Section 35AD. The Tribunal examined the legality of the assessments made under sections 153A and 143(3) of the Act, the applicability of various provisions concerning the treatment of goodwill and intangibles post-restructuring, and the evidentiary basis for the additions and disallowances made by the Assessing Officer.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 712146 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Assessment Year: 2018-2019
• Other Referred Cases: PCIT vs. E-City Projects Lucknow (P) Ltd., Jai Lokenath Oil Extractions (P) Ltd. vs. DCIT, Killick Nixon Ltd. vs. CIT, Sadanand Varde v. State of Maharashtra, CIT vs. Chettinad Logistics (P) Ltd, CIT vs. Nuclear Power Corporation of India Ltd., CIT vs. Smifs Securities Ltd., CIT vs. Birla Global Asset Finance Co. Ltd., JX Nippon Two Lubricants India Pvt. vs. DCIT, M/s. Merck Specialities Pvt. Ltd. V. ACIT, PCIT vs. Carolina Food and Industries (P) Ltd., Akash Ceramics (P.) Ltd. vs. ITO, PCIT vs. Delhi International Airport (P) Ltd., CIT vs. Jagdishprasad Mohanlal Joshi, CIT vs. Harjeev Aggarwal, CIT vs. Harsukhlal Dhirajlal Doshi, CIT vs. Dosti Realty Ltd., CIT vs. Era Infrastructure (India) Ltd., CIT vs. Cheminvest Limited, CIT vs. VVS Hotels (P.) Ltd., CIT vs. Killick Nixon Ltd., CIT vs. Sadanand Varde, CIT vs. PCIT vs. Abhisar Buildwell (P) Ltd., CIT vs. PCIT vs. Carolina Food and Industries (P) Ltd., CIT vs. PCIT vs. Dosti Realty Ltd., CIT vs. PCIT vs. Era Infrastructure (India) Ltd., CIT vs. PCIT vs. Cheminvest Limited, CIT vs. PCIT vs. VVS Hotels (P.) Ltd., CIT vs. PCIT vs. Killick Nixon Ltd., CIT vs. PCIT vs. Sadanand Varde, CIT vs. PCIT vs. PCIT vs. Abhisar Buildwell (P) Ltd., CIT vs. PCIT vs. PCIT vs. Carolina Food and Industries (P) Ltd., CIT vs. PCIT vs. PCIT vs. Dosti Realty Ltd., CIT vs. PCIT vs. PCIT vs. Era Infrastructure (India) Ltd., CIT vs. PCIT vs. PCIT vs. Cheminvest Limited, CIT vs. PCIT vs. PCIT vs. VVS Hotels (P.) Ltd., CIT vs. PCIT vs. PCIT vs. Killick Nixon Ltd., CIT vs. PCIT vs. PCIT vs. Sadanand Varde, CIT vs. PCIT vs. PCIT vs. PCIT vs. Abhisar Buildwell (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. Carolina Food and Industries (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. Dosti Realty Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. Era Infrastructure (India) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. Cheminvest Limited, CIT vs. PCIT vs. PCIT vs. PCIT vs. VVS Hotels (P.) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. Killick Nixon Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. Sadanand Varde, CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Abhisar Buildwell (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Carolina Food and Industries (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Dosti Realty Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Era Infrastructure (India) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Cheminvest Limited, CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. VVS Hotels (P.) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Killick Nixon Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Sadanand Varde, CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Abhisar Buildwell (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Carolina Food and Industries (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Dosti Realty Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Era Infrastructure (India) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Cheminvest Limited, CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. VVS Hotels (P.) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Killick Nixon Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Sadanand Varde, CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Abhisar Buildwell (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Carolina Food and Industries (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Dosti Realty Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Era Infrastructure (India) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Cheminvest Limited, CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. VVS Hotels (P.) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Killick Nixon Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Sadanand Varde, CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Abhisar Buildwell (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Carolina Food and Industries (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Dosti Realty Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Era Infrastructure (India) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Cheminvest Limited, CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. VVS Hotels (P.) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Killick Nixon Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Sadanand Varde, CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Abhisar Buildwell (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Carolina Food and Industries (P) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Dosti Realty Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Era Infrastructure (India) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Cheminvest Limited, CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. VVS Hotels (P.) Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Killick Nixon Ltd., CIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. PCIT vs. Sadanand Varde
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BARE GANESH SUDHAKAR
• Assessee Lawyers: MADHUR AGRAWAL; WAY OF REVISED RETURN OF
• Keywords: Capital asset; Additional evidence; Revised return; Retrospective amendment; Business expenditure; Bad and doubtful debts; Corroborative evidences; Depreciation; Fair market value; Income from undisclosed sources; Documents seized; Onus to prove; Commercial expediency; Retraction; Capital expenditure; Search and seizure; Valuation report; Block assessment; Earning of tax free income; Loose papers; Notional interest; Competent authority; Wholly owned subsidiary; Rule 8D; Scheme of amalgamation; Bogus
• Section: 143(3); 153A; 131; 28; 14A; 133A; 115JB; 37(1); 80G; 139(5)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, ‘D’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.2227/Mum/2024 (Assessment Year :2017-18) ITA No.2228/Mum/2024 (Assessment Year :2016-17) ITA No.2229/Mum/2024 (Assessment Year :2018-19) ITA No.3937/Mum/2024 (Assessment Year :2019-20) ITA No.5423/Mum/2024 (Assessment Year :2020-21) Mahadhan AgriTech Limited (Formerly known as Smartchem Technologies Ltd.) Survey No.93, Sai Hira Mundhwa, Pune-411036 Vs. Assistant Commissioner of Income Tax, Central Circle 8(1), Mumbai PAN/GIR No.AACCA5046P (Appellant) .. (Respondent) ITA No.3569/Mum/2024 (Assessment Year :2019-20) Dy.Commissioner of Income Tax, Central Circle 8(1), Mumbai Vs. Mahadhan AgriTech Limited (Formerly known as Smartchem Technologies Ltd.) Survey No.93, Sai Hira Mundhwa, Pune-411036 PAN/GIR No. AACCA5046P (Appellant) .. (Respondent) Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 2 Assessee by Shri Madhur Agrawal, Shri Suraj Sheth & Shri Soumen Alok Revenue by Shri Bare Ganesh Sudhakar, CIT DR Date of Hearing 07/05/2025 Date of Pronouncement 24/07/2025 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeals have been filed by the assessee against separated impugned order dated 31.03.2024 for AY 2016-17 to AY 2018-19, order dated 27.06.2024 for AY 2019-20 and order dated 30.08.2024 for AY 2020-21, passed by the Ld. Commissioner of Income-tax (Appeals) – 50, Mumbai [in short CIT(A)‟]. The appeals for AY 2016-17 to AY 2018-19 are arising out of search assessment order passed u/s 153A of Income-tax Act, 1961 (in short „the Act‟). Appeal for AY 2019-20 is arising out of assessment order passed u/s 143(3), being year of search. Further, appeal of AY 2020- 21 is also arising out of assessment order passed u/s 143(3). Since the issues involved in all the years under consideration are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by way of this consolidated order. 2. The assessee has raised the following grounds of appeal in all the impugned assessment years: Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 3 For AY 2016-17 Ground 1(a) - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowances made in the order u/s 153A in utter disregard of the express provisions of the Act since no incriminating material has been found during the course of search and seizure carried out us 132 of the Act. Ground 1(b) - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in not considering the cardinal principle of law that the scope of assessment u/s 153A in respect of completed / unabated assessment is limited only to undisclosed income unearthed during the course of search. Ground 1(c) - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred the in holding that materials were unearthed during search & seizure carried out u/s 132 of the Act in utter disregard of the facts of the case Ground 1(d) - That on the facts and in the circumstances of the case and without prejudice to Ground No. 1(a), 1(b) & 1(c) taken herein above, the Ld CIT (Appeals) was not justified and grossly erred in confirming additions made u/s 69A of alleged inflated capital expenditure without appreciating the fact that no incriminating material had been found referable to the assessment year under consideration, during the course of search & seizure carried out u/s 132 of the Act. Ground 2 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of the claim of depreciation on goodwill and or other intangible assets while computing total income under the normal provisions of the Act. Ground 3 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the additions of undisclosed income us 69A on account of alleged inflated capital expenditure while Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 4 computing total income under the normal provisions of the Act. Ground 4 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of depreciation claimed on alleged inflated capital expenditure under the under the normal provisions of the Act. Ground 5 - That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in confirming disallowance of expenses incurred on donation. Ground 6 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming addition of depreciation on goodwill and/or other intangible assets while computing book profit u/s 115JB of the Act. Ground 7 - That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in confirming the addition of depreciation on the alleged inflated capital expenditure while computing book profit u/s 115JB of the Act. For AY 2017-18 Ground 1 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of the claim of depreciation on goodwill and/or other intangible assets in computing total income for non-specified business and specified business under the normal provisions of the Act. Ground 2 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of deduction claimed u/s. 35AD of the Act. Ground 3 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the additions of undisclosed income u/s. 69A on account of alleged inflated capital expenditure in Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 5 computing total income under the normal provisions of the Act. Ground 4 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of deduction claimed u/s. 35AD on alleged inflated capital expenditure. Ground 5 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of depreciation claimed on alleged inflated capital expenditure under the normal provisions of the Act. Ground 6 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming addition of depreciation on goodwill and/or other intangible assets in computing book profit u/s. 115JB of the Act. Ground 7 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the addition of depreciation on the alleged inflated capital expenditure in computing book profit u/s. 115JB of the Act. For AY 2018-19 Ground 1 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of the claim of depreciation on goodwill and/or other intangible assets while computing total income for non-specified business and specified business under the normal provisions of the Act. Ground 2 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the additions of undisclosed income u/s. 69A on account of alleged inflated capital expenditure in computing total income under the normal provisions of the Act. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 6 Ground 3 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of depreciation on alleged inflated capital expenditure under the normal provisions of the Act. Ground 4 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the addition of depreciation on goodwill and/or other intangible assets while computing book profit u/s. 115JB of the Act. Ground 5 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the addition of depreciation on the alleged inflated capital expenditure in computing book profit u/s. 115JB of the Act. For AY 2019-20 Ground 1 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of the claim of depreciation on goodwill and/or other intangible assets while computing total income for non-specified business and specified business under the normal provisions of the Act. Ground 2 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the additions of undisclosed income u/s. 69A on account of alleged inflated capital expenditure in computing total income under the normal provisions of the Act. Ground 3 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of depreciation on alleged inflated capital expenditure under the normal provisions of the Act. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 7 Ground 4 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of stock difference under the normal provisions of the Act. Ground 4.1 - That on the facts and in the circumstances of the case, and without prejudice to Ground No. 4.0 taken herein above, necessary directions may please be given to the AO to increase the opening stock of finished goods of subsequent assessment year. Ground 5 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the addition of stock difference while computing book profit u/s. 115JB of the Act. Ground 6 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming addition of depreciation on goodwill and/or other intangible assets while computing book profit u/s. 115JB of the Act. Ground 7 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the addition of depreciation on the alleged inflated capital expenditure in computing book profit u/s. 115JB of the Act. For AY 2020-21 Ground 1 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the denial of the claim of depreciation on goodwill and/or other intangible assets in computing total income for non-specified business and specified business under the normal provisions of the Act. Ground 2 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the additions of undisclosed income u/s. 69A on account of alleged inflated capital expenditure in Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 8 computing total income under the normal provisions of the Act. Ground 3 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the disallowance of depreciation on alleged inflated capital expenditure under the normal provisions of the Act. Ground 4 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming addition of depreciation on goodwill and/or other intangible assets while computing book profit u/s. 115JB of the Act. Ground 5 - That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the addition of depreciation on the alleged inflated capital expenditure in computing book profit u/s. 115JB of the Act. 3. The brief background of the business carried out by the assessee are that; M/s Deepak Fertilizers and Petrochemicals Corporation Limited (DFPCL), M/s SCM Fertichem Private Limited (SCMFPL) and M/s Smartchem Technologies Limited (STL), {now Mahadhan Agritech Limited (“MAL”) („the assessee‟)} have entered into a scheme of arrangement to transfer Technical Ammonium Nitrate (TAN) and fertilizer business verticals to its wholly owned subsidiaries and filed a petition before the NCLT, Mumbai bench. The scheme was sanctioned by NCLT, Mumbai by an order dated 30.03.2017, wherein the appointed date was 01.01.2015. The effective date of the scheme was 01.05.2017. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 9 4. For the periods under consideration, the assessee was engaged in the business of manufacturing and trading of ammonium-nitrate and weak nitric acid. It has its manufacturing facility at Srikakulam in the state of Andhra Pradesh. DFPCL has three prominent verticals namely (i) Industrial Chemicals (“IC”), (ii) Technical Ammonium Nitrate (“TAN”) and (iii) Fertilizers. While TAN and fertilizers business have inter-linkages in the form of use of common raw materials and similarity of select manufacturing processes, the IC business is relatively independent of such process commonalities. 5. A Scheme of Arrangement (“SOA”) was proposed amongst DFCPL, SCMFPL and MAL. According to the scheme, it was stated that each of the varied businesses carried out by DFPCL (either by itself or through strategic investments in subsidiaries) including TAN, fertilizers, IC, real estate and power have potential for sustainable profit growth and also capable of attaining a different set of investors, strategic partners and know how providers to scale up the size and operations. Additionally, in order to enable investors to choose the business of their liking and priority of portfolio in the event of such a possibility arising, DFPCL proposes to reorganize and segregate its TAN business and Fertilizer business into a separate company. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 10 6. Resultantly, a scheme of arrangement was propounded by the board of directors of the previously mentioned companies wherein “TAN” and “fertilizers” businesses were proposed to transfer through slump sale from DFPCL to SCMFPL and further Demerged of the TAN Business and the Fertilizer Businesses an integral and indivisible part of the Scheme from SCMFPL to MAL (assessee). The consideration paid over and above the fair value of net assets was recorded as goodwill in the books of the assessee. 7. A search and seizure action u/s 132 was conducted on 15.11.2018 on the Deepak Group and in pursuance thereof notices u/s 153A were issued for the assessment years as mentioned above. 8. The various additions and disallowances arising in impugned assessment years are as under:- AY 2016-17 9. Assessee filed its original return of income u/s 139(1) of the Act on 13.10.2016, declaring a loss of Rs. 4,24,09,063/-. Said return was duly processed under Section 143(1) of the Act. The case of the assessee was not selected for scrutiny assessment. Later on, the assessee filed a revised return u/s 139(5) of the Act on 28.02.2018, declaring a loss of Rs.395,96,32,472/-, wherein an enhanced claim of depreciation, including on goodwill, was Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 11 made. The revised return of income captured all the adjustments arising out of the scheme of arrangement and was filed within the statutory period prescribed under the Act. 10. Subsequently, a search and seizure action u/s 132 of the Act was carried out on 15.11.2018 on the assessee along with other entities forming part of „Deepak Fertilizers Group‟. Consequently, a notice u/s 153A of the Act was issued on 01.01.2020. In response to the notice u/s 153A of the Act, the assessee filed return of income on 30.01.2020 declaring the same income as computed in the revised return of income filed on 28.02.2018. During the course of assessment proceedings, Assessing Officer questioned the claim of the depreciation on goodwill and other intangibles which arose pursuant to the scheme of arrangement. Further, based on certain Whatsapp chats found during the course of search and statements on oath, Ld. AO alleged that assessee has inflated capital expenditure during the year. 11. Following additions / disallowances have been made by the ld. AO:- Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.387,99,30,797/- b) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.3,08,64,221/- Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 12 c) Disallowance of claim of donation of Rs.1,04,37,000/- d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.1,99,316/- Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.97,25,00,000/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.11,90,603/- AY 2017-18 12. Assessee originally filed its original return of income u/s 139(1) of the Act on 30.11.2017, declaring a loss of Rs.1036,29,83,804/-. Subsequently, the assessee filed revised return of income u/s 139(5) of the Act on 30.11.2018, declaring loss of Rs.1030,82,22,871/-. Subsequently, in response to notice u/s 153A, the assessee filed its return of income on 30.01.2020 declaring total losses at Rs.1030,82,22,771. Further, during the course of assessment proceedings, assessee filed revised computation of income, wherein certain mistakes were rectified. The said revised computation of income was accepted by the Ld. AO. On conclusion of assessment proceedings, Ld. AO passed assessment order u/s 153A of the Act on 26.07.2022, thereby assessing total loss at Rs. 1,86,53,02,509/- under normal provisions of the Act and book profit at Rs. 91,11,08,762/- under MAT provisions. 13. Following additions / disallowances have been made by the ld. AO:- Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 13 Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.177,37,33,254/- while calculating income from non-specified business b) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.113,62,14,844/- while calculating income from specified business c) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.8,94,23,421/- d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.13,94,630/- e) Disallowance of deduction claimed u/s 35AD of Rs.165,16,74,407 f) Disallowance of inflated capital expenditure on disallowance of deduction claimed u/s 35AD of Rs. 16,64,93,836 Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.58,20,00,000/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.41,71,384/- AY 2018-19 14. Assessee filed return of income u/s 139(1) of the Act on 30.11.2018, declaring a loss of Rs. 152,62,35,196/-. Subsequently, in response to notice u/s 153A, the assessee filed its return of income on 30.01.2020 declaring total losses at Rs.152,62,35,196/-. Further, during the Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 14 course of assessment proceedings, assessee filed revised computation of income, wherein certain mistakes were rectified. The said revised computation of income was accepted by Ld. AO. On conclusion of assessment proceedings, Ld. AO passed assessment order u/s 153A of the Act on 26.07.2022, thereby assessing total income at Rs.482,84,68,667/- under normal provisions of the Act and book profit at Rs.134,66,16,621/- under MAT provisions. 15. Following additions / disallowances have been made by the ld. AO:-: Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs. 133,02,99,940/- while calculating income from non-specified business b) Disallowance of claim of depreciation on goodwill and other intangibles of Rs. 85,21,61,133/- while calculating income from specified business c) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.585,73,130/- d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.71,12,480/- Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.58,20,00,000/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.61,23,821/- Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 15 AY 2019-20 16. Assessee filed its return of income u/s 139(1) of the Act on 29.11.2019, declaring a loss of Rs. 241,34,73,307/-. Further, during the course of assessment proceedings, assessee filed revised computation of income, wherein certain mistakes were rectified. The said revised computation of income was accepted by Ld. AO. On conclusion of assessment proceedings, Ld. AO passed assessment order u/s 143(3) of the Act on 26.07.2022, thereby assessing total income at Rs.366,70,65,237/- under normal provisions of the Act and book profit at Rs. 78,58,36,570/- under MAT provisions. 17. Following additions / disallowances have been made by the ld. AO:- Under Normal provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.99,77,24,955/- while calculating income from non-specified business b) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.63,91,20,850/- while calculating income from specified business c) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.45,23,580/- d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.68,53,590/- e) Disallowance u/s 14A of Rs.2,72,16,530/- f) Addition on account of difference in stock of Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 16 Rs.10,82,560/- Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.55,59,88,097/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs.62,74,607/- c) Addition on account of difference in stock of Rs.10,82,560/- AY 2020-21 18. Assessee filed its return of income u/s 139(1) of the Act on 07.01.2021, declaring a loss of Rs. 75,92,21,315/- Further, during the course of assessment proceedings, assessee filed revised computation of income, wherein certain mistakes were rectified. The said revised computation of income was not accepted by Ld. AO. On conclusion of assessment proceedings, Ld. AO passed assessment order u/s 143(3) of the Act on 12.05.2023, thereby assessing total income at Rs. 157,26,02,050/- under normal provisions of the Act and book profit at Rs. 64,29,67,192/- under MAT provisions. The revised computation furnished by the assessee was taken cognizance of by the ld. CIT (A). 19. Following additions / disallowances have been made by the ld. AO:- Under Normal provisions a) Disallowance of claim of depreciation on goodwill and Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 17 other intangibles of Rs. 74,82,93,717/- while calculating income from non-specified business b) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.47,93,40,637/- while calculating income from specified business. c) Ad-hoc 10% addition u/s 69A on account of inflated capital expenditure of Rs.4,88,825/-. d) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs. 62,17,114/- Adjustments to book profits under MAT provisions a) Disallowance of claim of depreciation on goodwill and other intangibles of Rs.47,54,51,920/- b) Disallowance of claim of depreciation on alleged inflated capital expenditure of Rs. 62,90,901/- 20. Aggrieved by the above-mentioned additions / disallowances, the assessee filed appeal before the ld. CIT(A) and challenged the assessment order on the validity of the assessments u/s 153A / 143(3) as well as the additions/disallowance made on merit. However, ld. CIT(A) has decided all the issues against the assessee except for the disallowance u/s 14A against the revenue. Against the order of ld. CIT(A), assessee has filed the present appeals. Further, aggrieved by the relief provided by ld. CIT(A) in AY 2019-20, department has filed present appeal. 21. Ergo, to summarise, the issues under consideration for all the impugned Assessment Years are as under:- Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 18 i. Issue No. 1– additions made in the absence of incriminating material‟ (A.Y.2016-17). ii. Issue No. 2– depreciation on goodwill / intangibles‟ (A.Y.2016-17) which is identical to ground No. 1 of other assessment years (i.e. AY 2017-18 to AY 2020- 21). iii. Issue No. 3 - Addition u/s 69A on alleged inflated capital expenditure‟ (A.Y.2016-17) which are identical to ground no. 3 and 4 of AY 2017-18 and ground No. 2 of AY 2018-19 to 2020-21. iv. Issue No. 4 - Depreciation on alleged inflated capital expenditure‟ (2016-17) are identical to ground no. 5 of AY 2017-18 and ground no. 3 of AY 2018-19 to AY 2020-21. v. Issue No. 5 of AY 2016-17 relates to the disallowance made of donation expense (hereinafter referred to as Issue No. 5 – Donation expenses). vi. Issue No. 6 - Disallowance u/s 115JB on goodwill/ intangibles and inflated capital expenditure‟ (2016-17) are identical to ground no. 6 and 7 of AY 2017-18 and AY 2019-20 and ground no. 4 and 5 of AY 2018-19 and AY 2020-21. vii. Issue No. 7 – Disallowance of Deduction claimed u/s 35AD‟ (2017-18) viii. Issue No. 8 - Difference in stock under the normal provisions. (2019-20) Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 19 ix. Issue No. 9 - Disallowance u/s 115JB on account of stock difference‟ (2019-20) 22. On all the issues, ld. AO has passed detailed order running into several pages, however, for the sake of brevity, the main grounds and reasons for making the addition/ disallowance by the ld. AO is summarised as under:- Issue No. 1 – Additions made in absence of Incriminating material (i) With respect to the depreciation on goodwill and intangibles, Ld. AO stated that incriminating material in form of e-mail communication was seized at the corporate office for the assessee, which clearly mentioned that with the alternate structure of splitting the company in different listed companies rather than opting the scheme of arrangement, tax benefits will be lost. (ii) With respect to inflated capital expenditure, Ld. AO stated that certain whatsapp chats supported by modus operandi explained in recorded statements on oath established that assessee was regularly engaged in inflating the capital expenditure recorded in their books of account. Issue No. 2 – Depreciation on goodwill / intangibles (i) On conjoint reading of content of seized email of Mr. Debasish Benarjee and statement on oath, Ld. AO alleged that the scheme of arrangement was a colorable device to Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 20 evade payment of taxes. (ii) Conditions of demerger as mentioned in Sec. 2(19AA) is not complied. As per provisions of Section 2(19AA), assets are to be recorded in the books of the resulting company at the written down value of transferred assets appearing in the books of demerged company. (iii) As per Explanation 7A to Sec. 43(1) of the Act, where, in a scheme of demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is an Indian company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purposes of its own business. In the instant case as goodwill and intangibles were not recorded in the books of SCMFPL, it could not have been recorded at a higher value in the books of assessee. (iv) As per Explanation 3 to Section 43(1) of the Act, the actual cost of goodwill and other intangible assets in the hands of assessee is held to be NIL and thus, depreciation claimed on the same is disallowed. (v) As per the sixth proviso to Section 32(1) of the Act, the total claim of depreciation shall not exceed the deduction calculated as if the demerger had not taken place and such deduction shall be apportioned between the demerged company and the resulting company in the ratio of number of days for which the assets/businesses were used by Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 21 them. In the instant case, as the demerged company (SCMFPL) did not account for goodwill and intangible assets nor claimed depreciation on the same, assessee being resulting company could not have claimed any deprecation on such goodwill / intangibles. (vi) Reliance was placed on the decision of Hyderabad ITAT in the case of Signoda India Limited vs. DCIT (ITA No. 954/Hyd/19) wherein the claim of depreciation on goodwill was disallowed citing 5th proviso to Section 32, which deals with depreciation allowable on transferred assets under the scheme of amalgamation. Issue No. 3 – Addition u/s 69A on alleged inflated capital expenditure (i). During the course of search action, digital data of Mr. Pandurang Langde (President Projects) and recorded statement on oath of other key personnel, it was revealed that that the cash transactions referred to in Whatsapp communication was the amount received back from vendors providing invoices for capital expenditure. Thus, the entity was engaged in recording of inflated capital expenditure with certain parties (M/s Ray Construction Ltd (in short “Ray”) and Onshore Construction Company Pvt Ltd (in short “Onshore”) and receiving cash back. (ii) In view of the above, ld. AO calculated 10% of capital expenditure incurred as inflated and held that the said amount was received back by assessee in cash. Such cash Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 22 received back was added to the income of assessee u/s 69A of the Act. Issue No. 4 - Depreciation on alleged inflated capital expenditure (i) As discussed in Issue 3 above, Ld. AO held that assessee has recorded inflated capital expenditure incurred with respect to transactions entered into with Ray and Onshore. Further, as the assessee has claimed depreciation on such inflated capital expenditure, the same is now disallowed Issue No. 5 – Donation expenses (i) Assessee had submitted that donation expenses were paid by DFPCL and was debited in Profit and loss account of assessee due to the scheme of arrangement. DFPCL had disallowed the donation expenses in its computation. Thus, assessee had not disallowed it again. However, as donation expenses pertains to assessee‟s part and has not being incurred wholly and exclusively for the purpose of business, the same is disallowed u/s 37(1) of the Act. Issue No. 6 - Disallowance u/s 115JB on goodwill/ intangibles and inflated capital expenditure (i) As claim of depreciation on goodwill and intangibles were disallowed while calculating income as per normal provisions for various reasons discussed in issue no. 2, depreciation on goodwill / intangibles claimed while Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 23 calculating book profits as per provisions of Section 115JB is also disallowed. Issue No. 7 – Disallowance of deduction claimed u/s 35AD (i) Assessee has claimed deduction u/s 35AD in AY 2017- 18 on account of capital expenditure incurred for NPK fertilizers plant. During the course of search action, on physical verification, it was noticed that connecting conveyor belt and bagging units was occasionally used for ANP fertilizers plant. The said fact was evidenced by extract of log book and statement on oath recorded. As the resources were shared, the expenditure is not eligible for deduction u/s 35AD(1). In light of provisions of Section 35AD(7B), deduction of Rs.165,16,74,407 (being 150% of Rs. 1,10,11,16,272) is disallowed. Further, depreciation on such capital expenditure is allowed. Issue No. 8 - Difference in stock (i) During the course of search action, at the time of physical verification, there was difference between the quantity of finished goods found at the time of physical verification and the quantity of finished stock as per books of accounts (33.18 MT + 28.5 MT). As the difference was not reconciled, the difference is considered as cash sales chargeable to tax u/s 28 of the Act amounting to Rs. 10,82,560. [(35.18 MT + 28.50 MT) * 17,000] Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 24 Issue No. 9 - Disallowance u/s 115JB on stock difference (i) The difference in stock as discussed above, was also added while calculating the book profits as per provisions of Section 115JB. 23. The ld. CIT (A) has, for the most part, confirmed the additions / disallowances made by the AO, primarily relying upon the reasoning provided in the assessment order. However, for the sake of brevity, the reasoning and findings of the Ld. CIT(A) are summarized issue wise as under:- Issue No. 1 – Additions made in absence of Incriminating material Depreciation on goodwill / intangibles (i) Ld. CIT (A) has confirmed the disallowance of claim of depreciation on goodwill / intangibles by discussing the scheme in length. He held that DFPCL has adopted two stage restructuring just to claim huge advantage of depreciation on goodwill/intangibles. The real intention of the assessee was revealed during the course of search action. (ii) Further, seized email communication from Mr. Debashish Banerjee emphasized on availing tax benefit by way of splitting verticals of DFPCL to unlisted subsidiary company. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 25 (iii) Further, various statements on oath were recorded u/s 132(4) and the concerned persons avoided explaining the real intent of the scheme. Alleged inflated capital expenditure (i) WhatsApp messages from mobile of Mr. Pandurang Langde (President Projects) confirmed that he was indulged in handling cash transactions for Deepak group. Further, the modus operandi of cash generation was explained in detail. (ii). Further, statements on oath recorded of Mr. Mahesh Agrahara, Mr. Naresh Mehta and Mr. Sailesh Mehta confirmed the methods of cash generation. Thus, the search action revealed that assessee inflated capital expenditure in its books of accounts and received cash back. Issue No. 2 – Depreciation on goodwill / intangibles (i) DFPCL has adopted two stage of restructuring just to claim huge advantage of depreciation on goodwill/intangibles (ii) The valuation reports obtained from Registered Valuers were instrumental in the process of demerger. He noted that there was a wide gap between the projected and actual figures for both the divisions that were transferred. These facts demonstrate that the projected figures were arbitrary and as per the wish of assessee. The figures suitable for Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 26 the assessee were considered to justify the market valuation. Thus, the valuation reports deserve to be rejected. The intent was to inflate the valuation of intangibles and to evade payment of tax. (iii) Valuation for the purposes of slump sale and demerger calculated different values of undertaking. Further, it was done by two different valuers. (iv) Company has failed to justify with supporting evidence that demerger was done to attract potential investors. (v) Provisions of Sec. 2(19AA), Explanation 3 and Explanation 7A to Sec. 43(1) has not been complied with. (vi) Reliance placed on the decision of United Breweries Ltd vs. ACIT [2016] 76 taxmann.com 103 (Bang)(ITAT) & Karnataka HC in Padmini Products (P.) Ltd. vs. DCIT [2020] (121 taxmann.com 237) (Kar)(HC) [5th Proviso to Sec. 32(1) & Explanation 3 to Sec. 43(1)] (vii) Further reliance placed on the decision of Bombay High Court in Killick Nixon Ltd. (2012) 20 taxmann.com 703 (Bom)(HC) [where the transaction is not genuine but a colorable device there could be no question of tax planning] (viii) Just because the scheme was approved by the NCLT, the same would not prevent the lifting of corporate veil by the tax authority. Issue 3 – Addition u/s 69A on alleged inflated capital expenditure (i) Whatsapp messages from mobile of Mr. Pandurang Langde (President Projects) confirmed that he was indulged Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 27 in handling cash transactions for Deepak group. Further, the modus operandi of cash generation was explained in detail. Further, statements on oath recorded of other employees confirmed the methods of cash generation. (ii) Assessee‟s contention that statements on oath of Mr. Pandurang Langde and others were subsequently retracted cannot be acceptable as such retractions are mere self serving statements. Further, various case laws were relied on which hold that retraction statements are not acceptable. (iii) Statements on oath corroborated the whatsapp messages that were seized. Thus, the addition is not made solely on statement of third parties. (iv) Assessee‟s contention that provisions of Section 69A attracts only in hands of owner of cash. During the course of search and the statements on oath recorded highlighted that assessee is owner of entire cash transactions. Thus, provisions of Section 69A applies in case of assessee. (v) Mr. Pandurang Langde, in his statement has confirmed that this practice of cash generation is going on since last 2-3 years and hence, despite whatsapp messages pertaining only to a particular period, additions can be made for all years under consideration. Issue No. 4 - Depreciation on alleged inflated capital expenditure (i) The addition on account of cash generation by inflating Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 28 capital expenditure has been confirmed while deciding Issue 3 above. Hence, depreciation on the alleged inflated capital expenditure is also disallowed. Issue No. 5 – Donation expenses (i) It is clear that donation expenses pertain to assessee. The donation is not incurred wholly and exclusively incurred for the business purpose and hence, the same is disallowed. Issue No. 6 - Disallowance u/s 115JB on goodwill/ intangibles and inflated capital expenditure (i) As per Clause (iia) of Explanation 1 to Sec. 115JB, book profits needs to be reduced by amount of depreciation debited to the statement of profit and loss excluding depreciation on revaluation of assets. The depreciation on intangibles assets is due to revaluation of the same and hence, should be disallowed while calculating book profits. (ii) The assessee has been found to be indulged in inflating capital expenses. Thus, to the extent of cash component, capital expenditure has been inflated. Thus, while computing book profit, bogus expenditure has to be adjusted to reflect the correct position. Thus, the depreciation disallowance is correct. Issue No. 7 – Disallowance of Deduction claimed u/s 35AD (i) Ld. CIT(A) confirmed the action of the AO on the alleged reason that as per Section 35AD(7A), the assets should be exclusively used for specified business and the assessee Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 29 violated the said condition. Further, the expenses proportionate to bagging unit no. 5 cannot only be disallowed, since the entire system is interconnected and interdependent. Issue No. 8 - Difference in stock (i) Assessee failed to explain the discrepancies found in the stock during the survey along with documentary evidence. Hence, the difference on account of stock has been disallowed. (I) Issue No. 9 - Disallowance u/s 115JB on stock difference (i) The assessee failed to explain the stock difference found during the survey. Hence, to that extent the figures reflected in the books of accounts are incorrect and book profit shown by the assessee is understated. 24. Before us ld. Counsel has filed written submissions and also made oral submissions during the course of hearing. The contentions raised by the ld. AR on behalf of the assessee are summarized as under:- On Issue no. 1 - Incriminating Material, the following contentions were put forth: (i) Regarding disallowance of depreciation on goodwill/intangibles, the ld. AR submitted that the assessee had filed a revised return of income on 28.02.2018 for AY 2016-17 to give effect of the demerger of Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 30 'TAN and fertilizers' business from SCM Fertichem Limited to the assessee as per the approved scheme of arrangement vide NCLT order dated 30.03.2017 with an appointed date of 01.01.2015. (ii) Further, it was brought to our notice that the Revenue has accepted the said revised return of income since no notice u/s 143(2) was issued initiating assessment proceedings and the due date for issuing notice u/s 143(2) expired on 30.09.2018. The ld. AR submitted that if the notice u/s 143(2) has not been issued for an assessment year within the prescribed time limit, the same shall be considered as unabated assessment. (iii) Therefore, AY 2016-17 is an unabated assessment year since as on the date of search i.e. 18.11.2018, the prescribed time limit to issue notice u/s 143(2) had already passed. Reliance was placed on the CBDT Circular No. 549 dated 31.10.1989 and on the following judicial pronouncements to support the assessee's contentions- - Chintels India Ltd. vs. DCIT (2017) 84 taxmann.com 57 (Delhi HC) - PCIT vs. E-City Projects Lucknow (P) Ltd. (2022) 143 taxmann.com 423 (Orissa HC) - Jai Lokenath Oil Extractions (P) Ltd. vs. DCIT (2017) 83 taxmann.com 369 (Kol. ITAT) (iv) The Ld. AR further relied in the case of PCIT Vs. Abhisar Buildwell (P) Ltd. (2023) 149 taxmann.com 399 (SC) wherein it is held that in case of completed/unabated assessments, no disallowance/addition can be made in the Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 31 order u/s 153A in the absence of any 'incriminating' material. (v) It was further submitted that during the course of search, no incriminating material was unearthed which showed concealment of income. The seized e-mail of Mr. Banerjee dated 02.03.2016 (page no. 170 of paperbook of AY 2016-17) which was sent at the initial stage for conceptualizing the restructuring cannot be considered as incriminating material. (vi) The two restructuring options discussed in the e-mail was – (1) the demerger of the TAN and Fertilisers undertakings into an unlisted subsidiary, which aligns with the Group's commercial objective of attracting private investors; or (2) alternatively, the demerger of the relevant undertakings of DFPCL into the assessee, which would result in the assessee being classified as a deemed listed entity. It is pertinent to note that both the alternatives could have given same tax result and goodwill could still have been generated. (vii) Further, post the said mail, numerous discussions took place including but not limited to discussion with an eminent Counsel. It was only in September 2016 that the scheme was filed before the Hon'ble High Court. Therefore, an email containing discussions about pros and cons of a restructuring option cannot be held as incriminating material. (viii) The ld. AR further submitted that neither the order Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 32 passed by the ld. AO under section 153A, nor the order of the ld. CIT(A), provide any explanation as to how the email in question is considered as incriminating in nature. (ix) Further, one of the allegations made by the ld. CIT(A), is that DFPCL has adopted two stages restructuring just to claim huge advantage of depreciation on goodwill/intangibles. However, the ld. AR highlighted that the demerger, either directly or through two step process would have yielded the same result from a tax perspective as the sales consideration of demerger would have remained the same, thereby leading to generation of goodwill, being difference between the purchase consideration and the net asset value (NAV) of the demerged undertakings. (x) Furthermore, in the statement recorded u/s 132(4) of Mr. Shailesh Mehta, no where it is stated that the scheme is being designed to evade payment of tax. In fact (at Question No. 60 & 65) (Page no. 174 and 176 of paperbook for AY 2016-17), it is mentioned that the main purpose of the scheme is to have an efficient business structure, and the tax aids are merely incidental in nature. (xi) In view of the above, it was submitted that in absence of any incriminating material on record with respect to the depreciation claimed on goodwill and intangible assets, no disallowance can be made in order passed under section 153A of the Act. (xii) Regarding the addition made u/s 69A on account of Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 33 alleged inflated capital expenditure, the ld. AR submitted that AY 2016-17 is an unabated assessment year and any addition made without any incriminating material is bad in law. Further, with specific reference to the WhatsApp messages relied by the ld. AO in the order u/s 153A, the ld. AR submitted that the chats do not pertain to the year under consideration and any addition made in the absence of any incriminating material qua the assessment year under consideration is bad in law. Reliance is placed on the following decisions wherein it has been held that incriminating material must pertain to the assessment year under consideration- - CIT v. Sinhgad Technical Education Society (2017) 84 taxmann.com, 290 (SC) - Sunny Jacob Jewellers Gold Hyper Market v. CIT (2024) (ITA No.54 of 2019)(Ker. HC) - PCIT v. Saumya Construction (P) Ltd (2017) 81 taxmann.com 292 (Guj. HC) (xiii) Regarding the disallowance of donation expense, the ld. AR submitted that the donation of Rs 1,04,37,000/- is duly recorded in the revised financial statements and claimed as deduction in the revised return of income filed on 28.02.2018 after giving effect to the duly approved scheme of arrangement. The entire details were available prior to the date of search. There is no other material brought on record by the Ld. AO or ld.CIT(A) which was seized during the course of search to evidence that the claim is not allowable. Therefore, in the absence of any incriminating material, this disallowance cannot be made Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 34 in the order passed u/s 153A. (xiv) Regarding depreciation on alleged inflated capital expenditure, the ld. AR submitted that as the disallowance made under Section 69A is not sustainable, the corresponding disallowance of depreciation on the alleged inflated capital expenditure is also unwarranted. II. On Issue no. 2–disallowance of depreciation on good will/intangibles, the following contentions were put forth: (i) The ld. AR iterated the facts of the case in detail that a Scheme of Arrangement was entered into between Deepak Fertilizers and Petrochemicals Corporation Ltd. („DFPCL‟), SCM Fertichem Private Limited („SCM‟) and the assessee company. As per the scheme, the fertilizer and TAN divisions owned by DFPCL were transferred to SCM by way of slump exchange. Further, the said divisions were demerged from SCM to assessee company. (ii) The net value of assets transferred in demerger was Rs. 743 crores. The sales consideration of the demerger was Rs. 2,517 crores. The excess of consideration paid over the net value of assets resulted in goodwill and other intangible assets. (iii) The scheme of arrangement was duly approved by the NCLT vide order dated 30.03.2017. Appointed date of the scheme was 01.01.2015. The effective date was 01.05.2017. The ld. AR made several submissions Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 35 regarding the contours of the Scheme which are summarized below: Rationale of the restructuring: 25. Rationale of the Scheme of Arrangement as at Pg. No. 63 of the paper book filed for AY 2016-17 on 03.01.2025 (duly approved by NCLT) are enumerated here-in-below-  DFPCL had multiple large business verticals, three prominent verticals being Industrial Chemicals (IC), Technical Ammonium Nitrate (TAN) and Fertilisers (Fertiliser). TAN and Fertiliser business verticals have interlinkages in the form of use of common raw materials and similarity in select manufacturing processes  Internationally, there are instances of TAN and Fertiliser businesses, being housed together as select production capacities are interchangeable, and TAN can also be potentially used as a fertilizer. The complementary seasonality of the two businesses also helps in maintaining steady level of operations.  Each of the varied businesses being carried on by DFPCL (either by itself or through strategic investments in subsidiaries) including TAN, Fertiliser, IC, Real Estate and Power have potential for sustainable profitable growth and are also capable of attracting a different set of investors, strategic partners and know-how providers to scale up the size and operations. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 36  Additionally, in order to attract potential investors and strategic partners in a business of their liking, TAN and Fertilizer division had been segregated into a separate company i.e. the assessee company.  The TAN and Fertilisers business verticals hadve reached stability of size and presence in market and were then sufficiently poised to pursue their respective growth in the realm of changing economic environment.  Consolidation of the TAN business in terms of the Scheme would provide synergistic integration to assessee's operations, which in turn will streamline its management, assist in achieving optimum utilization of resources and bring in better operational efficiency, which are currently posing a challenge in terms of untapped economies of scale.  The proposed arrangement would result in greater economies of scale and would provide a larger and stronger base for potential future growth.  DFPCL would continue to retain control of the TAN business and Fertiliser Business by virtue of this Scheme  The proposed arrangement was to assist in optimising the values and synergies of the TAN & Fertiliser businesses for the benefit of all their respective stakeholders.  26. The above rationale was discussed before the NCLT level and the Tribunal accordingly approved the Scheme of Arrangement vide its order dated 30.03.2017. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 37 Purpose of a two-step arrangement: 27. The purpose of the demerger was to attract the private equity investors / funds into specific businesses. However, if the demerger had been executed directly from DFPCL (a listed entity) to the assessee company then the shareholders of DFPCL would have become the shareholders of the assessee which in turn could have made the assessee, a deemed listed entity. With the two- step structure, DFPCL continues to retain the control of the demerged business undertaking through its wholly owned subsidiary, an unlisted limited company. 28. Opportunities for investment in an unlisted company are much higher than that in a publicly listed company. Private Equity investors, Alternate Investment Funds (AIFs), Venture Capital Fund (VCF), and other investment vehicles have certain restrictions while making investment in listed companies. 29. To achieve the above goal, the efforts taken by the Group for attracting investors were iterated that for the undertaking demerged to the assessee company, DFPCL had entered into a Heads of Agreement with Yara International ASA („Yara‟) on 28.01.2008 to constitute a joint venture vehicle with a primary purpose to carry on TAN and fertilizer business activities. However, subsequently, the deal fell off. Agreement entered with Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 38 Yara dated 28.01.2008 was submitted before the Bench during the course of hearing. 30. Further, DFPCL had engaged Morgan Stanley India Company Private Limited for advice and services, inter-alia, for raising of capital for expansion of Ammonia and TAN product business, vide agreement dated 17.07.2020. Thereafter, Morgan Stanley worked on the assignment and approached various potential investors. It also submitted status update reports on regular basis wherein the list of potential investors and the details of progress made was mentioned. Agreement entered with Morgan Stanley dated 17.06.2020 was submitted before the Bench during the course of hearing. 31. In view of the above, it was submitted that the group intended to bring in future investors into a particular line of business. Thus, the restructuring scheme was entered into for commercial reasons. 32. The ld. AR submitted that some of the outside investors were interested only in the TAN business of the Group as against other businesses (such as industrial chemical and fertilizers) run by DFPCL. Thus, eventually, the TAN business of the entity was further demerged from the assessee to another group entity vide NCLT order dated 28.06.2024. Appointed date of the scheme was 01.01.2022. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 39 In the newly demerged business, the group managed to get an investor, wherein they received investment of approx. Rs. 800 crores in the TAN business by way of subscription of private placement. The intimation by DPFCL to the stock exchange regarding the investment in TAN business being fructifying for the Group and the chart depicting the subsequent demerger was submitted before the Bench during the course of hearing. 33. Therefore, the ld. AR submitted that the group has independently analysed commercial opportunities to restructure its operations even post the amendment made vide Finance Act 2021, wherein goodwill was specifically excluded from the block of assets, therefore making it ineligible for claiming depreciation under section 32 of the Act. Thus, time and again, the group has exercised its commercial right to restructure its operations which was driven by commercial reasons rather than tax as has been alleged by the Revenue. Accounting of Demerger: 34. Accounting treatment has been specifically provided in the scheme of arrangement sanctioned by the NCLT at Para No. 32, the relevant portion of which is reproduced below: “32 ACCOUNTING TREATMENT IN THE BOOKS OF SMARTCHEM Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 40 32.1 Smartchem shall account for the Demerger of Demerged Undertakings in its books of account with effect from the Appointed Date. 32.2 All the assets and liabilities of the Demerged Undertakings (as recorded by SCM Fertichem in its books in terms of Clause 14 of the Scheme) shall be recorded at their respective book values in the books of Smartchem. 32.3 Intangible assets (not recorded in the books) shall be recorded in the books of Smartchem, subject to fulfilment of criteria mentioned in AS 26, by Smartchem at a value determined by an independent valuer. 32.4 ……….. 32.5 Excess, if any, of the consideration, viz., fair value of equity shares issued over the values of net assets (including intangible assets, as aforesaid) of Demerged Undertaking taken over and recorded and after making adjustment for inter-company loans, etc, as mentioned in clause 32.4 shall be recognized as Goodwill in the books of Smartchem. In the event the result is negative, it shall be credited as Capital Reserve in the books of account of Smartchem. 32.6 Smartchem shall record in its books of account, all transactions of the Demerged Undertakings in respect of assets, liabilities, income and expenses, from Appointed Date to the Effective Date. 32.7……………….. 32.8 The intangible assets recorded, as aforesaid shall be amortized in the books of Smartchem over its useful life. Goodwill (if Any) recorded on demerge, as aforesaid shall be amortized to the income on a systematic basis not exceeding 20 years and as per criteria given in accounting standards, which shall be reviewed by the board of directors periodically.” Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 41 35. The ld. AR emphasized that from the above, it is clear that even the accounting for the demerger was approved by the NCLT in its order dated 30.03.2017. Therefore, the question of recognition of any asset in books of account arising from the demerger does not arise. 36. It was further submitted that para 23.12 of the scheme of arrangement specifically provides for allowance of depreciation on intangibles and goodwill acquired but not recorded in the books of the demerged company. Relevant portion of the scheme is reproduced below - “23.12 all intangible assets and various business or commercial rights, belonging to but not recorded in books pertaining to Demerged Undertakings shall be transferred to and vested with Smartchem and shall be recorded at their respective fair values under the head intangible assets. The consideration agreed under the Scheme shall be deemed to include payment towards these intangible assets at their respective fair values. Such intangible assets shall, for all purposes, be regarded as Intangible assets in terms of Explanation 3(b) to section 32(1) of Income Tax Act and shall be eligible for depreciation there under at the prescribed rates.” 37. Further, the NCLT in its order at para 15 has held that the proposed scheme of arrangement is fair and reasonable and not violative of any provisions of law and is not contrary to public policy. 38. In view of the above, the ld. AR submitted that the NCLT has approved the scheme of arrangement Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 42 considering all the factors such as rationale, accounting treatment, recognition of intangible assets, etc. Thus, such a well-reasoned order cannot be ignored, much less be categorized as a colorable device as has been alleged by the department. 39. The ld. AR further addressed all the points raised by Ld. AO and ld.CIT(A) in the assessment order and ld.CIT(A) order respectively in the following manner: A. Restructuring is not a colorable device. 40. The ld. AR submitted that the rationale of the scheme, accounting treatment to record the demerger, and NCLT order passed considering the above holding that the scheme is fair and reasonable, underscores that restructuring was not a colorable device. The scheme of arrangement, which is duly approved by NCLT cannot be called as a colorable device to evade tax. The same has been held in the case of PCIT vs. Carolina Food and Industries (P) Ltd. 172 taxmann.com 44 (Cal. HC). 41. Para 23.12 of the scheme of arrangement specifically provides for allowance of depreciation on intangibles and/or goodwill acquired but not recorded in the books of the demerged company. 42. Intimation was given to the Income Tax Department for Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 43 their comment prior to the approval of the scheme by the NCLT. However, no response was received from Income Tax Department, resulting in deemed approval under the Companies Act, 2013. The said fact is also mentioned in the order of the NCLT dated 30.03.2017. Relevant extract of the order is reproduced below: “…8(e) As per existing practice, the Petitioner Companies are required to serve Notice for Scheme of Amalgamation to the Income Tax Department for their comments. It appears that the company vide separate letters dated 2nd February 2017 has served a copy company scheme petition no. 88 to 90 along with relevant orders etc., Further, this Directorate has also issued reminder letters to the Income Tax Department dated on 14.03.2017. However, as on date, there is no response from income Tax Department.” 43. Regional Director (RD) in the report dated 14.03.2017 filed before the NCLT at Para IV(f) has requested that tax implications, if any, arising out of the scheme shall be subject to the final decision of the income tax authorities. In the order, the NCLT has nowhere acceded to the request of the RD. It has only asked the assessee to give an undertaking that it will comply with all the provisions of the Act in giving effect to the scheme of arrangement which the assessee has duly provided. 44. The ld. AR pointed out that paragraph 8(f) of the NCLT‟s order provides that any tax implications arising out of the scheme shall be subject to examination by the Income-tax Department based on the return of income filed Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 44 by the assessee. However, the said order does not suggest that the Revenue is permitted to go beyond the framework of the scheme itself. In the present case, the Revenue has considered matters extending beyond the scope of the scheme, rather than confining its scrutiny to the return as contemplated. It was, therefore, submitted that the scope of examination ought to remain within the contours of the scheme as approved. Relevant part of the NCLT‟s order is reproduced below: “…8(f) The tax implication if any arising out of the scheme is subject to final decision of Income Tax Authorities. The approval of the scheme by this Hon'ble Court may not deter the Income Tax Authority to scrutinize the tax return filed by the transferee Company after giving effect to the scheme. The decision of the Income Tax Authority is binding on the petitioner Company” 45. The ld. AR further submitted that an order of the Court in a scheme of arrangement is final and binding on everyone including the statutory authorities and the same cannot be challenged in any collateral proceedings. Reliance was placed on the decision of the Hon‟ble Bombay High Court in the case of Sadanand Varde v. State of Maharashtra [2001] 247 ITR 609 (Bom.). Similar view has also been expressed in the below cases: - Keva Fragrance P. Ltd. v. DCIT (ITA No. 334/Mum/2020) (Mum. Trib) - Electrocast Sales India Ltd. v. DCIT (2018) 92 taxmann.com 85 (Kol. Trib) Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 45 46. The ld. AR submitted that commercially, it is possible that goodwill may arise on restructuring. Thus, only because goodwill has been recorded and depreciation on the same is claimed, the entire restructuring cannot be held as a colorable device. Also, the fact that the transaction occurs within a group does not, in itself, render it invalid or devoid of commercial substance. Group restructurings, including demergers, slump sales, etc. are common and legally recognized methods of corporate reorganization. The transaction was carried out under a Court-approved Scheme of Arrangement as per Sections 391–394 of the Companies Act, 1956 (now under Sections 230–232 of the Companies Act, 2013). The manner and methodology of the transaction including its valuation were determined in accordance with accepted accounting and valuation principles. 47. In a demerger, all assets are typically valued, often bringing to light self-generated assets that were previously unrecorded but already embedded in the transferor company‟s existing assets. This results in unlocking of potential intangible assets. Recognizing such assets is a widely accepted in corporate reorganizations. B. Claim of depreciation on goodwill and other intangibles is in accordance with the Scheme and tax benefit is merely incidental to the restructuring Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 46 48. The ld. AR submitted that even if there was direct demerger from DFPCL to the assessee company, identical tax result would have been generated. Such direct demerger would have resulted in the assessee company getting listed and would have defeated the objective of this restructuring, which was to bring in the private equity investors having interest in the demerged business. 49. In terms of the rationale, para 23.12 & para 32 of Part IV of the NCLT approved scheme of arrangement, the assessee has recorded goodwill and identifiable intangible assets arising pursuant to the duly approved scheme of arrangement and has claimed depreciation on the same u/s 32(1)(ii). Accordingly, the goodwill arising out of the approved scheme of demerger and the consequential, claim of depreciation on such goodwill is merely incidental to the approved scheme of arrangement. Therefore, the contention of the Revenue that the scheme of arrangement is entered only for obtaining tax benefit does not hold true. C. Depreciation on goodwill and intangible assets are allowable claims in accordance with the Act. 50. The ld. AR brought to the notice of the Bench plethora of favorable decisions rendered by various Courts including Supreme Court on allowability of depreciation on goodwill &/or intangible assets, including inter-alia the below: Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 47 - CIT v. Smifs Securities Ltd. (2012) 348 ITR 302 (SC) - CIT v. Birla Global Asset Finance Co. Ltd. (2014) 221 Taxman 176 (Bom HC) - JX Nippon Two Lubricants India Pvt. v. DCIT (ITA No. 4985/Del/2019) (Delhi Trib.) - M/s. Merck Specialities Pvt. Ltd. V. ACIT (ITA No.1727/Mum/2017) (Mum. Trib.) 51. Further, the ld. AR pointed out the below specific judicial precedents where depreciation on goodwill &/or intangible assets pursuant to demerger has been specifically allowed: - PCIT v. Aculife Healthcare Pvt. Ltd. [2023] 155 taxmann.com 283 (Guj. HC) - SunEdison Solar Power India Pvt. Ltd v. DCIT (ITA No.1520/Chen./2018) - DCIT v. J.K. Cement Ltd. (497 & 498/Lucknow/2010) D. Conditions of demerger u/s 2(19AA) have been complied with: 52. The Ld. AR submitted that the conditions prescribed under section 2(19AA) have been duly complied with since: a) All assets and liabilities appearing in the books of the demerged undertaking has been recorded at book value in the books of the assessee. b) Further, the goodwill and/or intangible assets that have arisen pursuant to the approved scheme of Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 48 arrangement were not reflected in the books of the demerged company and have been recorded for the first time in the books of the assessee. c) The consideration for the transfer of undertakings in a tax demerger must be in the form of issuance of shares by the resulting company to the shareholders of the demerged company. The resulting company is not allowed to discharge the purchase consideration through payment of cash. E. Explanation 3 and 7A to Section 43(1) and sixth proviso of Section 32(1) invoked by the ld. AO are not applicable to the assessee‟s case 53. The ld. AR submitted that Explanation 3 to Sec. 43(1) is not applicable to the case of the assessee since goodwill and intangible assets arising pursuant to the scheme of arrangement were never recorded in the books of the transferor company. Reliance was placed, inter-alia, on the decisions below: - I & B Seeds (P.) Ltd. v. DCIT (ITA No. 3415/Bang/2018) - Padmini Products (P.) Ltd. v. DCIT [2020] 121 taxmann.com 237 (Kar. HC) - 54. On similar lines Explanation 7A to Sec. 43(1) is also not applicable in the instant case. Towards this, reliance was placed, on the below decisions: - Aricent Technologies (Holdings) Ltd. v. DCIT (2019) 109 Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 49 taxmann.com 47 (Delhi ITAT) - A.P. Paper Mills Ltd. vs. ACIT (2010) 33 DTR 148 (Hyd. ITAT) 55. Further, the sixth proviso to Sec. 32(1) does not apply for assets on which depreciation has never been claimed by the transferor company towards which reliance was placed on the following decisions: - Triune Energy Services (P) Ltd. v. DCIT [2016] 237 Taxman 230 (Del. HC) - Urmin Marketing P. Ltd. v. DCIT [2020] 122 taxmann.com 40 (Ahmd. ITAT) - Sri Krishna Drugs Limited v. DCIT (ITA No.198/Hyd/2011) F. Observations of the Revenue regarding valuation reports: 56. Regarding the contention of the Ld. CIT(A) that valuation of slump sale and demerger was intentionally done by two different valuers, the ld. AR submitted that the valuation report issued to DFPCL was for the limited purpose of determining the Net Assets Value („NAV‟) of TAN and Fertiliser undertakings of DFPCL. However, the valuation report issued to SCM was for the purpose of determining the equity value and equity value per share of SCM for the purpose of proposed demerger. The purpose and methodology of valuation followed in both reports were Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 50 different. Valuation for the purposes of slump exchange was done at NAV method and valuation for the purposes of demerger was done as per market as well as DCF Method. 57. In determining the equity value of SCM, the valuer has adopted DCF and Market Multiple Method. Thus, the apprehension raised by the ld.CIT(A) that only DCF method is followed is patently incorrect. 58. The ld. AR further submitted the below points with respect to the valuation report: i) Projections cannot be compared with actual figures. The name itself suggests that it is a „projected‟ figure. ii) A valuation report cannot be dismissed only because projections were provided by management. Only the management is best positioned to forecast future revenues and profits. Their insights offer an informed and realistic basis for projections than speculative estimates from a valuer lacking operational context. iii) The approach followed for valuation is 60% based on projections and 40% based on market capitalisation of the business i.e. TAN and fertilisers. However, ld.CIT(A) with a prejudiced mind has viewed the valuation report on selective basis by looking only at the performance of fertilisers business and not the TAN business. iv) For the purposes of DCF based valuation, the actual figures vis-à-vis projected figures as per management for Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 51 both TAN as well as fertilisers division on an overall basis has performed well. Hence, projections used for valuation purposes cannot be doubted upon. 59. To support the above, the ld. AR pointed out the decision of the Delhi ITAT in case of DCIT vs. M/s Global Fairs & Media Pvt. Ltd. (ITA No. 4317/Del/2017) wherein it was held that valuation of goodwill done on the basis of DCF method cannot be rejected merely due to gap between projected and actual figures of revenue since valuation is intrinsically based on projections which can be effected by various factors and hence, it should be left to the consideration and wisdom of experts in the field on accountancy. Further, reliance was also placed on the below decisions where similar principles were upheld: - Akash Ceramics (P.) Ltd. vs. ITO [2024] 168 taxmann.com 407 (Guj.) - PCIT v. Cinestaan Entertainment Pvt Ltd (ITA 1007/2019 & CM Appl. 54134/2019) (Delhi HC) - CIT vs. VVS Hotels (P.) Ltd. [2020] 122 taxmann.com 106 (Mad.) 60. The ld. AR submitted that in the instant case the share price of SCM Fertichem Limited and Smartchem Technologies Limited, which were valued by independent valuers were coming approximately similar and accordingly the shares were issued in the ratio of 1:1. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 52 61. It was pointed out that these valuation reports were presented before the NCLT prior to the scheme‟s approval. Department never raised any objections to the valuation reports nor the valuations provided by the valuers. Further, based on above reports and values, NCLT has approved the scheme. G. Cases relied by the Revenue are distinguishable 62. It was submitted that the decisions in the case of United Breweries Ltd v. ACIT [2016] 76 taxmann.com 103 (Bang. ITAT) and Signoda India Limited v. DCIT (ITA No. 954/Hyd/19) relied upon by the Revenue are clearly distinguishable and squarely inapplicable to the facts of the present case. In the aforesaid cases, Goodwill was merely computed as a balancing figure between the actual consideration paid and the net asset value acquired, and no separate valuation was carried out for goodwill or any intangible asset. However, in the present case, detailed technical valuation of identifiable intangible assets and Goodwill having underlying intangibles has been undertaken by an independent Registered Valuer. 63. Additionally, in United Breweries (Supra), goodwill was appearing in the books of amalgamating company which was enhanced in the books of the amalgamated company. In the present case, goodwill has arisen purely pursuant to the scheme of arrangement and hence never used by or Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 53 accounted for by the demerged company. 64. In Altimetrik India (P) Ltd. v. DCIT [2022] 137 taxmann.com 9 (Bang. Trib) and Aricent Technologies (Holdings) Ltd. (supra), the ITAT has distinguished the decision of United Breweries (Supra) on the contention that in the said case, goodwill was already recorded in the books of the amalgamating company which were subsequently enhanced in view of amalgamation. 65. The decision of Hon‟ble Karnataka High Court in Padmini Products (P.) Ltd. (supra) as relied upon by the Ld. CIT(A) is in fact in favour of the assessee and has been rendered subsequent to the decision of United Breweries (supra). In the said decision, the Hon‟ble High Court has held that the 5th proviso to Sec. 32 restricts the aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. 66. Further, the decision in the case of ACIT vs. Dosti Realty Ltd. (ITA No. 2043/Mum/2022) relied upon by the Revenue is also distinguishable on facts. In the said decision amalgamation was accounted under „pooling of interest method‟. However, in the case of the assessee, demerger was recorded as per „purchase method‟. In fact, the ITAT itself at Para 8, Pg. 8 has held that consideration Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 54 paid in excess of net assets acquired is to be recognized as Goodwill. 67. It was also pointed out that the decision of Dosti Realty Ltd. (supra) has later been distinguished by the Mumbai ITAT in case of Dow Chemical International (P.) Ltd. v. DCIT (ITA No. 1200/Mum/2023)wherein it has been held that in case of Dosti Realty Ltd. „pooling of interest‟ method has been followed to account for amalgamation as compared to „purchase method‟ adopted in the instant case. Similarly, the decision of United Breweries (Supra) has also been distinguished. 68. It was also submitted that since the scheme is approved by the shareholders and NCLT, the decision of Killick Nixon Ltd Ltd. [2012] 20 taxmann.com 703 (Bom. HC) does not apply to the present case. In case of Killick Nixon, the issue involved circular share transactions, i.e. buying at inflated prices and selling at nominal values to generate artificial capital losses and offset against gain on land sale, rendering the transaction non-genuine. In contrast, the assessee's transaction is genuine and duly approved by the relevant authority (refer para 15 of the NCLT order). Therefore, as the transaction is genuine in the current case, the case of Killick is not applicable to the assessee. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 55 69. On Issue no. 3 – Addition u/s 69A on alleged inflated capital expenditure, the following contentions were put forth: 70. The ld. AR submitted that the arguments made for AY 2016-17, 2017-18, 2018-19 and 2020-21, that addition cannot be made in the absence of any incriminating material qua the assessment year under consideration shall apply mutatis mutandis to this issue as well. 71. For AY 2018-19, the ld. AR further submitted that WhatsApp chats relied by the revenue of 20th, 21st and 23rd March 2018 did not contain any mention of the parties Ray and Onshore based on whom the additions u/s 69A were made. Therefore, he submitted that even for AY 2018-19 no additions could be made in the absence of any incriminating material. 72. Reliance was placed on the following decisions to support the above contentions: - CIT v. Sinhgad Technical Education Society (2017) 84 taxmann.com, 290 (SC) - Sunny Jacob Jewellers Gold Hyper Market v. CIT (2024)(ITA Nos. 54 of 2019)(Ker. HC) - PCIT v. Saumya Construction (P) Ltd [2017] 81 taxmann.com 292 (Guj. HC). Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 56 73. With respect to AY 2019-20, the ld. AR made the following submissions: A. WhatsApp chats do not contain any incriminating information: 74. During the course of search the Revenue seized certain WhatsApp communication between individuals wherein names of two parties, Ray Constructions Ltd. („Ray‟) and Onshore Construction Co. (P.) Ltd. („Onshore‟), were mentioned against two numbers. This was the only reference made to these parties. It was based on such chats that the ld. AO made ad-hoc additions u/s 69A in the assessment order to the tune of Rs. 4,52,35,800, being 10% of the civil construction work undertaken by these two parties on the allegation that the assessee had generated cash by recording inflated capital expenditure from the above parties which was returned back to the assessee. 75. The ld. AR vehemently refuted the allegations made by the Revenue and pointed that there is no specific reference to any cash being generated/ exchanged between the parties, nor is there any mention of cash receipt or cash payment, etc. in the said messages. 76. The WhatsApp messages do not mention the nature of the transactions with these parties; they merely reflect numbers listed against their names. Such references do Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 57 not indicate that cash was received/paid from/to the contractors, as the numbers could pertain to various matters such as bills, pending contracts, new agreements, etc. 77. Therefore, in the absence of any specific incriminating evidence indicating that the assessee company is the owner of any money, bullion, jewellery or other valuable article the provisions of Section 69A cannot be invoked. B. Without prejudice, WhatsApp chats cannot be considered as “evidence” in the absence of certificate under section 65B of Indian Evidence Act, 1872. 78. The ld. AR also submitted on a without prejudice basis that the WhatsApp messages found during the course of search were not authenticated in accordance with section 65B of the Indian Evidence Act, 1872 and hence is not even admissible as evidence. The ld. AR placed reliance on the below decisions to support his contentions– - Anwar PV v. B.K. Basheer (Civil Appeal No. 4226 of 2012)(SC) - Dell International Services India Pvt. Ltd. v. Adeel Feroze & Ors. [W.P.(C) 4733/2024] (Del. HC) - ACIT vs. Dinesh Jaiprakash Baheti (ITA No. 5607/Mum/2024) Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 58 79. The ld. AR also pointed out the decision in case of Prashant Prakash Nilawar v. DCIT (ITA No. 5073/Mum/2024)(Mum.) wherein although the judgment has been decided against the assessee, it does not take cognizance of the landmark ruling on Section 65B in the case of Anwar P.V. vs. P.K. Basheer (Civil Appeal No. 4226 of 2012) (SC). 80. The ld. AR further went on to point that where the WhatsApp messages are not incriminating in nature and not even admissible as evidence before the eyes of law, the additions made solely on the basis of WhatsApp messages r.w. statement recorded u/s 132(4) would be considered as bad in law. The ld. AR placed reliance on the following decisions to support his contentions that in the absence of any corroborative evidence being brought on record, no addition could be made to the assessee‟s income based on a statement recorded: - CIT v. Jagdishprasad Mohanlal Joshi [2018] 99 taxmann.com 288 (SC) wherein it was held that in absence of any corroborative evidence, addition could not be made to assessee's income in view of statement recorded. - CIT v. Harjeev Aggarwal (2016) 70 taxmann.com 95 (Delhi HC) wherein it was held that a statement recorded under section 132(4) can form basis for a block assessment only if such statement relates to any incriminating evidence of undisclosed income unearthed during search. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 59 81. The ld. AR strongly argued that since the WhatsApp messages did not contain any incriminating material, the entire basis of making the additions, automatically fails. 82. The ld. AR further pointed that while reference of various seized material has been given at many places in the order u/s 153A, the type of documents seized are nowhere mentioned in the order nor in the remand report. Simply put, there was no corroborative evidence that there were transactions in cash. C. Addition cannot be made on the basis of statement recorded on oath u/s 132(4), which has been subsequently retracted 83. As the WhatsApp chats do not reveal any incriminating information, any addition made solely on the basis of statement recorded u/s 132(4) which are retracted subsequently cannot be sustained unless AO possesses other corroborative evidence. Reliance is placed on the following decisions – - PCIT v. Rohit Karan Jain [2025] 173 taxmann.com 184 (Gauhati HC) - Shree Ganesh Trading Co. v. CIT [2013] 30 taxmann.com 170 (Jhar. HC) - Kailashben Manarlal Choksi v. CIT [2008] 174 Taxmann 466 (Guj. HC) Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 60 84. Further, the retraction affidavit filed by all individuals contained just and proper reasons of retraction and were not retracted in a cryptic manner (refer page no. 313 to 329 of paper book filed for AY 2016-17). D. No money, bullion, jewellery or other valuable article was found at the premises of the assessee and hence, addition under Section 69A 85. It was further submitted that Section 69A is not applicable to the case of the assessee. He pointed out that the invocation of Section 69A requires the cumulative fulfilment of three essential conditions. i.e. - The assessee should be found to be the owner of the money; - The money should not be recorded in the books of accounts of the assessee; - Assessee is not able to offer any explanation about the nature and source of the money, and it is not recorded 86. It was submitted that in the instant case, the company is not found to be owner of any unexplained cash since no cash has been recovered from the possession of the company. It is a settled position that possession is evidence of ownership. This presumption is one of the strongest in case of cash found in the possession of a person since cash is one of the properties of which title is Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 61 transferrable by mere delivery of possession. 87. Further it was submitted that no evidence has been brought on record by the Revenue to establish that any funds owned by the assessee were not recorded in its books of accounts. E. Ad-hoc addition cannot be made even otherwise 88. The ld. AR submitted that an ad-hoc addition made without any basis is not sustainable in law. Further, addition u/s 69A can be made only on fulfilment of the criteria provided in the section. Thus, addition can be made u/s 69A to the tune of cash amount, if at all, of which assessee is found to be owner of. Thus, addition u/s 69A cannot be made on ad-hoc basis. Reliance was placed on the decision of ACIT Vs. Harsukhlal Dhirajlal Doshi [1999] 102 Taxman 297 (Rajkot) to support the above contentions. 89. On issue no. 4 regarding disallowance of depreciation on inflated capital expenditure, the following contentions were put forth: 90. During the hearing, ld. AR explained that consequent to the disallowances made u/s 69A of the Act on account of inflated capital expenditure, the ld. AO made further disallowance of depreciation on alleged Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 62 inflated capital expenditure on the presumption that the assessee has also taken depreciation u/s. 32(1) of the Act on the disallowed portion of the alleged inflated capital expenditure. 91. The ld. AR submitted that the above disallowance of depreciation cannot be made in the absence of any incriminating material qua the assessment year under consideration. 92. Reliance was placed on the following decisions to support the above contentions: - CIT v. Sinhgad Technical Education Society (2017) 84 taxmann.com, 290 (SC) - Sunny Jacob Jewellers Gold Hyper Market v. CIT (2024)(ITA Nos. 54 of 2019)(Ker. HC) - PCIT v. Saumya Construction (P) Ltd [2017] 81 taxmann.com 292 (Guj. HC). 93. Further, for AY 2019-20, reliance was placed on the decision of Jurisdictional High Court in case of CIT v. Karma Energy Ltd. (2015) 57 taxmann.com 235 (Bom.) wherein the Hon'ble High Court deleted the disallowance of depreciation on windmill on the contention that there is no documentary evidence on record to substantiate that the assessee has paid excess money for purchase of windmill which has been returned back to the assessee. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 63 94. He further submitted that no addition can be made on the basis of conjectures and surmises. Applying a certain percentage to the total amount debited in the name of the party cannot be the basis for any addition. Thus, the addition made on this aspect suffers from infirmity and ought to be deleted. 95. On issue no. 5 relating to disallowance of donation expense in AY 2016-17, the following contentions were put forth: 96. The ld. AR submitted that in the revised financial statements prepared to give effect to the approved scheme of arrangement, the assessee, inter-alia, has recorded donations of Rs. 1,04,37,000/- attributable to the demerged undertaking under the head 'Interdivisional Overheads' which is clubbed and grouped in Note - 26 [Other Expenses] of the revised audited accounts. In the audited accounts of DFPCL, the amount transferred to the assessee towards donations on account of demerger of Fertiliser & TAN Division has been credited under 'Other Expenses' shown in Note 28 of the revised audited accounts and has been offered to tax in its computation of total income. 97. The above expenses of donation was claimed as a Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 64 deduction by the assessee in the revised` return filed on 28.02.2018 for AY 2016-17 which was correspondingly offered to tax by DFPCL in its computation of income. The same has also been accepted in the order u/s 153A passed in the case of DFPCL. Therefore, disallowing this once again will result in double disallowance of the same expenditure. Reliance in this regard is placed on the following decisions of various High Courts wherein it has been held the same income cannot be taxed twice in the hands of two persons. - CIT v. Smt. Prabha Debi Bagaria (1991) 192 ITR 416 (Cal. HC) - CIT v. Sobhrajmal (2014) 51 taxmann.com 506 (Raj. HC) 98. Without prejudice to above, the ld. AR submitted that even if the disallowance is made, it is submitted that since the amount of donation has been transferred by DFPCL to the assessee in view of the duly approved scheme of arrangement with effect from 01.01.2015, being the appointed date, the assessee is eligible to claim deduction u/s 80G on the same. Hence, necessary direction may please be given to the AO to allow deduction u/s 80G on the amount of donation despite the fact that certificate and receipt for such donations has been issued in the name of DFPCL. 99. On issue no. 6 relating to disallowance of Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 65 depreciation on goodwill/intangibles and inflated capital expenditure while computing book profits u/s 115JB,the following contentions were put forth: 100. During the hearing, the ld. AR highlighted the facts that the disallowance made on account of depreciation on goodwill/intangibles and on account of depreciation on alleged capital expenditure were made under the normal provisions of the Act as well as under Section 115JB of the Act while computing the book profits. 101. In relation to the disallowances made while computing book profits, the ld. AR submitted that Clause (iia) of Explanation 1 to Sec. 115JB invoked by the ld. AO is not applicable in the case of the assessee as no revaluation of assets were made. Goodwill/Intangible Assets was recorded as on 01-01- 2015, pursuant to demerger and these assets never existed in the accounts of the demerged company. 102. Further, Section 115JB provides that every assessee, being a company, shall for the purposes of this section prepare its profit and loss account in accordance with the provisions of Parts II & III of Schedule VI to the Companies Act, 1956 and the AO has to accept the authenticity of accounts prepared in accordance with the provisions of the Companies Act. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 66 103. Reliance was placed on various judicial precedents listed below wherein it is held that the ld. AO has limited power to make any modification to book profits as provided in Explanations to Section 115JB - - Apollo Tyres Limited vs. CIT (2002) 255 ITR 273 (SC) - Mahindra & Mahindra Ltd. vs. CIT (ITA No. 416 of 2003) (Bom) - PCIT vs. Varun Corporation Ltd. (2023) 154 taxmann.com 548 (Bom) - CIT vs. Nuclear Power Corporation of India Ltd. (2021) 132 taxmann.com 100 (Bom)(HC). SLP dismissed by the Hon‟ble Supreme Court 104. Therefore, the ld. AR submitted that in view of the limited powers of the AO to modify the book profits, the additions made by him are bad in law and ought to be deleted. 105. On issue no. 7 - Disallowance of deduction claimed u/s 35AD of the Act in AY 2017-18, the following contentions were put forth: 106. DFPCL commenced construction of NPK fertilizer unit at Taloja in Maharashtra in February 2015. The said unit was commissioned in March 2017. In view of the demerger w.e.f. 01.01.2015 being the appointed Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 67 date, the Fertiliser undertaking (including NPK Fertiliser unit) was transferred to the assessee. The Ld. AR pointed that in terms of section 35AD, an assessee shall, if he opts, be allowed deduction at the rate of 150% of capital expenditure incurred on „specified business‟. In terms of the provisions of section 35AD(8)(c)(vii) „specified business‟ includes 'production of fertiliser in India‟. Hence, the assessee had claimed weighted deduction u/s 35AD of Rs 804.95 crores [@150% of capital expenditure of Rs. 536 crores. incurred for setting up of NPK Fertilizer Unit]. 107. During the course of search action, from certain extract of seized log book and based on statement on oath recorded, it was noted that a conveyor belt and bagging unit no. 5 were occasionally used for to transmit and bag the ANP fertilizers product. Deduction u/s 35AD was claimed on capital expenditure incurred for NPK plant and not ANP fertilizers plant. 108. As per provisions of Section 35AD(7A), the assets should be exclusively used for specified business. According to Ld. AO and ld.CIT(A), the assessee violated the said condition by occasionally using the assets for ANP fertilizers plant instead of being exclusively used for NPK plant, and thus, the deduction claimed u/s 35AD was disallowed. Deduction claimed for conveyor belt and Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 68 all five bagging units amounting to Rs.1,65,16,74,407 (being 150% of Rs. 1,10,11,16,272) was disallowed. 109. With respect to the above disallowance, ld. AR of the assessee submitted as under:- I. Section 35AD(8)(c)(viii) is different from other clauses of 35AD(8)(c) (i) NPK fertilizer unit at Taloja in Maharashtra was commissioned in March 2017 and accordingly, deduction u/s 35AD was claimed in AY 2017-18. (ii) All the conditions prescribed in Sec. 35AD for claiming weighted deduction of 150% of the capital expenditure incurred on setting up of NPK fertilizer unit has been duly complied with. (iii) As per Sec. 35AD(8)(c)(viii) list of businesses to be classified as specified business includes “production of fertilizer in India”. Therefore, both NPK Fertiliser unit and ANP Fertiliser unit are „specified business‟ of the assessee. (iv) The aforesaid view is supported by the tax commentary „The Law and Practice of Income Tax‟ of Eminent Tax Counsel & Practitioner, Kanga & Palkhivala wherein it is stated that Sec. 35AD(8)(c) while defining \"specified business\" in sub-clause (i) to Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 69 (v) starts with the words “setting up and operating”, “laying and operating” \"building and operating\", “developing and operating”. But sub-clause (viii) merely reads \"for the production of fertilisers in India\".The commentary states that “this suggests that the intention of Parliament was to grant wider relief to the fertiliser industry, and that the deduction under section 35AD is permissible so long as the capital expenditure has been incurred “wholly and exclusively” for the purpose of the fertiliser business.” (vi) In view of the above, ld. AR respectfully submitted that the assessee has, at all relevant times, utilised the bagging and conveyor belt facilities wholly and exclusively for the production of fertilisers in India i.e. for production of NPK and ANP fertilisers. Accordingly, the question of shared use does not arise. II.Condition specified for Section 35AD(7B) was not satisfied as the asset was being used for specified business. (i) Ld. AR further submitted that the alleged occasional use of Bagging Unit No. 5 and the conveyor belt was used exclusively for the production of fertilizers i.e. for ANP and NPK fertilizers. Further, it was submitted that both NPK and ANP fertilizer plants are specified business. Hence, even if the bagging unit of NPK plant Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 70 was allegedly used occasionally for ANP fertilizers, it does not result in violation of deduction u/s 35AD. Accordingly, sub-sections (7A) and (7B) of Section 35AD cannot be invoked, as the assets in question were used solely for the specified business and not for any business other than specified business. III.Conditions specified for Section 35AD(7B) is not satisfied as the asset was being “used for non-specified business” does not mean “occasional use” (i) In the assessment order passed under Section 153A, the ld. AO has referred to only a single instance alleging that the 5th bagging unit of the NPK fertilisers plant was occasionally used for the ANP fertilisers plant. However, drawing a broad conclusion that the entire plant is being shared based solely on one isolated incident lacks sufficient evidentiary support and is not a legally tenable assumption. (ii) The intent of the legislature in using the phrase „use of asset of specified business for business other than specified businesses‟ is to address situations where an asset is effectively diverted or transferred from the specified business to a non-specified business, thereby justifying legal consequences. (iii) However, in the assessee‟s case, bagging unit no. 5 of the NPK fertilisers plant was used on rare and Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 71 exceptional occasions, solely to address downtime in the ANP fertilisers plant. This limited and incidental use does not constitute a transfer or diversion to a non- specified business, warranting the application of penal provisions. It would have been commercially irrational to use an outside facility for bagging of ANP fertilizer. Therefore, occasional use of one fertiliser asset for production of another fertiliser cannot disentitle the assessee from the claim of the deduction. (iv) Further, the assessee was in the process of setting up two new bagging units at the existing ANP fertilisers plant, and no deduction under Section 35AD was claimed in the year of capitalization of the related expenditure. This demonstrates that the assessee had no intention of availing any undue tax benefit. Accordingly, the alleged occasional use of bagging unit no. 5 of the NPK fertilisers plant cannot be construed as use of the asset for a non-specified business. (v) In view of the above, it was submitted that an occasional use of an asset for another specified business does not result in violation of provisions of Section 35AD(7B). IV.Conditions specified for Section 35AD(7B) is not satisfied as the condition of “claimed and allowed” is not fulfilled. (i) Deduction u/s 35AD is being claimed for the first Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 72 time in the instant assessment year. For invoking the provision of Sec. 35AD(7A) & (7B), the basic condition of “claimed and allowed” is not fulfilled in this year as before allowing such claim, the claim itself is disallowed by the Ld. AO in his order u/s 153A. (ii) Without prejudice to the above submissions, a plain reading of Section 35AD(7B) indicates that any taxability or disallowance of the deduction under Section 35AD, on account of the use of a specified business asset for a non-specified business, must arise in the year in which such contravention occurs. The only reference to any alleged violation appears on the page 55 of the assessment order, where an extract from the logbook dated 20.05.2018 is cited, indicating occasional use of Bagging Unit No. 5 of the NPK fertilisers plant in the ANP fertilisers plant. Accordingly, if any disallowance were to be considered, it should pertain to FY 2018-19 (AY 2019-20), and not to AY 2017-18, the year in which the deduction was originally claimed. (iii) Furthermore, from perusal of statements recorded u/s 131 of Mr. Subrahmanya K Bhat and Mr. Nilesh Jadhav, photos and other evidences i.e. log book dated 20-05-2018, it can be seen that the bagging unit of NPK unit, if at all, used for any business other than NPK fertiliser business, was used occasionally post April 2018 that too for ANP fertiliser business. Hence, denial of deduction u/s 35AD is not called for in this Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 73 assessment year in terms of the explicit provision of Sec. 35AD. V. Memorandum to Finance Act, 2014 supporting the contention that Section 35(7B) is not applicable to the year under consideration: (i) Section 35AD was introduced by the Finance Act, 2009 to promote rural infrastructure and environmentally friendly transport of bulk goods. The Finance Act, 2011 expanded its scope by including production of fertiliser in India as a specified business, with eligibility starting from 1st April 2011 for new plant or newly installed capacities in an existing plant. (ii) Further, the Finance Act, 2014 (“FA‟ 14”) introduced sub-sections (7A) and (7B) to Section 35AD to address the consequence of contraventions of provisions of Section 35AD. The relevant extract from the Memorandum to FA‟ 14 discussing this amendment is reproduced below: “The existing provisions of section 35AD do not provide for a specific time period for which capital assets on which the deduction has been claimed and allowed, are to be used for the specified business. With a view to ensure that the capital asset on which investment linked deduction has been claimed is used for the purposes of the specified business, it is proposed to insert sub-section (7A) in section 35AD to provide that any asset in respect of which a deduction is claimed and allowed under section 35AD, shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 74 If any asset on which a deduction under section 35AD has been allowed, is demolished, destroyed, discarded or transferred, the sum received or receivable for the same is chargeable to tax under clause (vii) of section 28. This does not take into account a case where asset on which deduction under section 35AD has been claimed is used for any purpose other than the specified business by way of a mode other than that specified above. Accordingly, it is proposed to insert sub-section (7B) to provide that if such asset is used for any purpose other than the specified business, the total amount of deduction so claimed and allowed in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the assessee chargeable under the head \"Profits and gains of business or profession\" of the previous year in which the asset is so used…” (iii) Based on the above, ld. AR argued that any disallowance under Section 35AD, if applicable, must be made in the year in which the asset is actually used for a business other than the specified business and not in the captioned year, AY 2017–18. Accordingly, the disallowance made under Section 35AD in AY 2017–18 is not legally sustainable. VI. Without prejudice to above points (I) to (IV) above, if at all, disallowance of deduction is to be made, it should be restricted to bagging unit No. 5 of the plant. (i) It was submitted that even if revenue‟s contention were to be accepted, it was only bagging unit no.5 and Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 75 conveyor belt that was used for ANP fertilizer. Hence, without prejudice to the submission made in above paragraphs, even if disallowance is called for, then only proportionate capital expenditure incurred on 5th bagging unit and conveyor belt should be disallowed. The amount aggregates to Rs.13,50,87,173/- [Rs.6,60,60,070/- (cost of 5th bagging unit) + Rs. 6,90,27,103 (cost of conveyor belt)]. (ii) Reliance was placed on the following judicial pronouncements, wherein it was held that disallowance of deduction claimed u/s 35AD, if any, should be applied proportionately to the non-compliant division. A total disallowance should not be imposed. - DCIT vs. Rushay Commodities Pvt. Ltd.(ITA No. 1577/Ahd/2019) (Ahmedabad-Trib) - ACIT vs. M.P. Warehousing and Logistics Corporation (ITA No. 167/Ind/2023) (Indore-Trib) 110. For issue no. 8 regarding disallowance under the normal provisions of the Act on account of difference in stock in AY 2019-20, the following contentions were put forth: 111. The ld. AR highlighted that during the Survey proceedings conducted u/s 133A at the manufacturing facility and godown at Panipat, a physical stock verification was done and a minor difference was found Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 76 which was treated as cash sales by the Revenue. With respect to the same, the ld. AR made the following submissions: 112. A recording lag cannot be considered as stock discrepancy. A time lag is inevitable between the physical receipt of stock at the godown and its corresponding entry in the books of accounts and a prejudiced view cannot be taken on this basis. 113. Minor discrepancy, amounting to just 6.68 metric tonnes or 0.70% of the total inventory of 954.13 metric tonnes, underscores the practical challenges of real-time inventory tracking in high-volume operations. Despite 99.30% of the inventory being accurately accounted for, the ld. AO made an unwarranted addition without appreciating the entire context of the matter. 114. Without prejudice to the above, the excess stock is shown in the credit side of the profit & loss A/c either as sales or closing stock of inventory. In both the scenarios the excess stock has been duly offered to tax. The action of the AO considering such minor difference in stock as cash sales would tantamount to double taxation of the same stock. 115. The Ld. AO has applied an ad-hoc rate of Rs. 17,000/- per tonne while computing disallowance on account of stock difference which is totally unjustified Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 77 since ad-hoc rates/disallowance cannot be made by the Revenue. 116. Without prejudice to the above, any addition, if at all warranted, should be restricted to the net difference of 6.68 MT (i.e., 954.13 MT – 947.45 MT), amounting to Rs. 1,13,560 (6.68 MT * Rs. 17,000). 117. Further, it was prayed that the amount added should be allowed as the opening stock for Assessment Year 2020–21. 118. For issue no. 9 regarding additions made while computing book profit u/s 115JB on account of difference in stock in AY 2019-20, the ld. AR reiterated the submissions made in issue no. 6 above. 119. For department appeal for AY 2019-20 in case of disallowance made u/s 14A of Rs. 2,72,16,529, the Ld. AR submitted the following: 120. During the previous year, the assessee has not earned any dividend income. In the absence of any dividend income which is exempt from tax, the provisions of section 14A, per se, cannot be applied. Reliance was placed by the ld. AR on the following decisions to support the above contentions: - Cheminvest Limited v. CIT [2015] 378 ITR 33 (DelhiHC), Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 78 - PCIT v. GVK Project and Technical Services Ltd. [2019] 106taxmann.com 180 (Del. HC). SLP dismissed by Supreme Court - CIT v. Chettinad Logistics (P) Ltd [2018] 248 Taxman 55 (Mad. HC). SLP dismissed by the Supreme Court 121. The amendment made to Sec. 14A vide Finance 2022 cannot be presumed to have retrospective effect and hence no disallowance can be made u/s 14A where the assessee has not earned any dividend income in earlier years. Reliance was placed by the ld. AR on the following decisions to support the above contentions:- - PCIT v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Del. HC) - ACIT v. Bajaj Capital Ventures (P) Ltd. [2022] 140 taxmann.com 1 (Mum) - ACITv. K Raheja Corporate Services (P) Ltd. (ITA No. 2521/Mum/2021) - PCIT v. Delhi International Airport (P) Ltd. [2022] 144 taxmann.com 80(Del. HC) 122. The AO has relied on Circular No. 5/2014 dtd. 11- 02-2014 which provides for disallowance of expenditure in accordance with Rule 8D r.w.s 14A, where assessee has not earned any exempt income. 123. The ld. AR submitted that CBDT circulars are only binding on the department and not binding on the Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 79 assessee or on the appellate authorities. Reliance in this regard was placed on: - CIT vs.Hero Cycles (P) Ltd. [1997] 228 ITR 463 (SC) - UCO Bank vs. CIT [1999] 237 ITR 889 (SC) 124. Reliance was also place by the ld. AR on the following decisions wherein even after considering the aforesaid Circular, it has been held that no disallowance u/s 14A can be made in the absence of exempt income: - CIT vs. Chettinad Logistics (P) Ltd (supra) - Redington (India) Ltd. vs. ACIT [2017] 392 ITR 633 (Mad.) - Kamat Hotels (India) Ltd. vs. DCIT [ITA No. 7083(Mum) of 2014] - PCIT vs. IL & FS Energy Development Company Ltd. [2017] 297 CTR 452 (Del. HC) 125. Before us ld. DR on each and every additions / disallowances qua each of the issues has referred to various observations of the ld. AO and the ld. CIT(A) wherein the issue has been decided against the assessee. His arguments shall be dealt by deciding each and every issue. 126. Ld. CIT DR has summarized her entire arguments in her written submissions which for the same of ready reference is reproduced hereunder:- Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 80 1 The above appeals are filed by the assessee company against the orders of the CIT(A) confirming the various additions/disallowances made by the AO in the orders passed u/s 143(3) rwis 153A of the IT Act, 1961 in the above-mentioned AYs. As directed by the Bench, written submissions on the various grounds of appeals are discussed AY-wise in the ensuing paragraphs 2. AY 2015-16 2.1 Ground of appeal no 10 (sub-ground nos 1(a) to 1(e)) is that since it is a completed/unabated assessment and disallowances have been made despite no incriminating material being found during the course of search u/s 132 of the Act, therefore, assessment u/s 153A of the Act is bad in law Further, the assessee has contended that during the course of assessment proceedings, it had filed revised computation of income vide letter dated 22-12-2017 wherein it had claimed depreciation on intangibles and provision for doubtful debts The A.O had not taken cognizance of the said revised computation. The assessee contends that as it had already disclosed the above items during the original assessment, hence no undisclosed material had been unearthed during search which constituted incriminating material so as to give A. O jurisdiction u/s 153A of the Act. 2.2 The above contention of the assessee is not acceptable. The A.O during the course of original assessment proceedings had not taken cognizance of the revised computation of income on account of the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Ltd v Commissioner of Income-Tax [2006] 157 Taxman 1 (SC) which states that an assessing officer can only entertain the claims filed by the assessee by way of revised return of income. Since no revised return had been filed by the assessee, the A.O considered the original return wherein Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 81 there was no claim of depreciation on intangibles and provision for doubtful debts. In other words, no claim of depreciation on intangibles or provision for doubtful debts had been made before the A.O by way of a valid return of income. The revised computation of income, albeit filed before the A.O during the course of assessment proceedings, had no legality or legitimacy as per the prevailing law. 2.3 Further, during the course of search proceedings on 15- 11-2018 on Deepak group entities, a communication in the form of email was found in the desktop of Shri Shailesh Mehta, Promoter and Group CMD The said email was written by the Executive Vice President Finance in Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL) Mr Debashish Banerjee to Shri Shailesh Mehta and others The contents of the said email clearly showed that the assessee carried out the transfer of two divisions from DFPCL in two stages to M/s Smartchem Technologies Ltd so that the resulting company is a private company without any interference from outside external shareholders, activist investors or institutional investors Further, the said arrangement as compared to alternate structure of splitting DFPCL also offered the tax benefit to DFPCL group entities. This tax benefit by way of depreciation on intangibles has been analysed in detail by the CIT(A) in the table given on pages 17 & 18 of his appellate order. While the TAN business in DFPCL was highly profitable, when the said unit was transferred to the assessee company, the profits were wiped out from its books due to the claim of depreciation on intangibles. The tax benefit to assessee company for AYs 2015-16 to 2022-23 comes to Rs 518 crores. Thus, it was found during the search that the process of slump sale and demerger for transfer of TAN business and fertilizer business from DFPCL to the assessee company served twin goals of conversion of taxable profits to loss while retaining the real control in the hands of DFPCL Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 82 2.4 The above-mentioned scheme was confronted to Shri Shailesh Mehta while recording his statement u/s 132(4) of the Act and he was asked to explain the rationale behind the two stages of transfer of business ie slump sale and demerger. He provided evasive replies that the main purpose of the scheme was efficient business structure and that tax benefits were merely incidental. Thus, the true intent of tax evasion behind the scheme of slump sale and demerger came to light via the email communication found during the course of search proceedings. Therefore, it is emphasized that incriminating material was found during the search. 2.5 Further, in response to notice u/s 153A of the Act, the assessee filed return of Income declaring total loss of Rs 245,84,05,861/- The A.O examined the claim of depreciation on intangibles in the light of the incriminating material found during search and the statement recorded during search. The AO observed that the assessee could not satisfactorily explain the rationale behind the two stages of the scheme. However, given the huge lax benefits by way of depreciation on intangibles, it was clear that the scheme was a colourable device designed with the intention to evade taxes. The A.O proceeded to disallow the same from the total loss claimed as per the return of income filed u/s 153A of the Act. 2.6 Thus, the assessee's contention that it had already disclosed the scheme of slump sale and demerger and the resultant depreciation on intangibles to the A.O during original assessment proceedings and hence no incriminating material was unearthed during the search has no legs to stand because the disclosure was limited to merely making a claim of depreciation on Intangibles by way of revised computation of income which was not maintainable before the A.Ο.the disclosure was not true and full as the real Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 83 motive of tax evasion behind the scheme came to light only during the search. 2.7 Further, the assessee's contention in ground no 1(d) that no incriminating material had been found during the search with respect to addition made u/s 69A of the Act of inflated capital expenditure is not tenable. The orders of the AO and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant paras of the assessment order wherein the A.O has given his analysis and findings are para 5 (sub-paras 5.1 to 5.21). The A.O has found from the various evidences in the form of digital data, whatsapp messages from the mobile of Shri Pandurang R Landge, President of Projects of assessee company, loose papers and documents seized during the search and statements of key persons recorded u/s 132(4) of the Act that the assessee was in the practice of inflating capital expenses and receiving cash back from vendors which was not recorded in its regular books. The A.O has reproduced relevant extracts from the statements of Shri Pandurang R Landge, Shri Shailesh Mehta, Promoter and Group CMD, Shri Mahesh Kumar Agrahara, Associate Vice-President of Projects, Shri Deepak Desai, consultant of DFPCL and Shri Naresh Mehta, relative of Shri Shailesh Mehta acting as conduit in receipt of cash from vendors. All the above persons have separately confirmed the generation of cash by booking inflated capital expenditure in the books of the assessee. They have confirmed the names of the vendors, the modus operandi, the use of code words in their communication and the role of the others in the process. Shri Landge has confirmed that the said practice has been followed since the last 2 to 3 years. All the above persons have confirmed that they carry out the cash transactions on the instructions of Shri Shailesh Mehta. Shri Shailesh Mehta in his statement has confirmed that the contents of the statements given by the above- mentioned persons are correct. The relevant paras of the Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 84 CIT(A)'s order which contain his adjudication are in para 8.3 (sub-paras 8.3.1 to 8.5) The CIT(A) has specifically held the whatsapp messages from the mobile phone of Shri Pandurang Landge and specific admission of cash generation by Shri Landge and Shri Shailesh Mehta as incriminating evidence unearthed during the search. Therefore, it is emphasized that incriminating material was found during the search. 2.8 Furthermore, the assessee's contention in ground no 1(e) that it had already claimed provision of doubtful debt in revised computation before the A.O during original assessment proceedings and hence it could not be disallowed under proceedings u/s 153A of the Act in absence of incriminating material has no legs to stand because the disclosure was limited to merely making a claim of provision of doubtful debt by way of revised computation of income which was not maintainable before the A.Ο. the admissibility of the said claim had never been examined by the A.O in the original assessment proceedings. Thus, the claim had been examined by the A.O for the first time during the proceedings u/s 153A of the Act wherein it was found to be inadmissible. 2.9 Ground of appeal no 2.0 is on the merits of denial of claim of depreciation on goodwill and/or other intangibles while computing income under normal provisions of the Act. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant paras of the assessment order wherein the A.O has given his analysis and findings are paras 4.4.4 to 4.4.10. The relevant paras of the CIT(A)'s order which contain his adjudication are in para 11 (sub-paras 11.1 to 11.20). Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 85 2.10 Ground of appeal no 3.0 is on the merits of addition of undisclosed income u/s 69A on account of inflated capital expenditure while computing income under normal provisions of the Act. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant paras of the assessment order wherein the A.O has given his analysis and findings are para 5 (sub-paras 5. 1 to 5.21) The relevant paras of the CIT(A)'s order which contain his adjudication are in paras 12.5 to 12.15. 2.11 Ground of appeal no 4.0 is on the merits of disallowance of provision for doubtful debts while computing income under normal provisions of the Act. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant para of the assessment order wherein the A.O has given his analysis and findings is para 7. The relevant para of the CIT(A)'s order which contain his adjudication is para 13.4. 2.12 Ground of appeal no 5.0 is on the merits of disallowance of notional interest on investments made in subsidiary company while computing income under normal provisions of the Act. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant para of the assessment order wherein the A.O has given his analysis and findings is para 8. The relevant para of the CIT(A)'s order which contain his adjudication is para 15.3. 2.13 Ground of appeal no 6.0 is on the addition of depreciation on goodwill while computing book profit u/s 115JB of the Act. Relying on the order of the CIT(A), the relevant para of the CIT(A)'s order which contain his adjudication is para 16.3.4 wherein it is stated that only allowable depreciation needs to be adjusted for computing Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 86 book profit. Since, the claim of depreciation on intangibles has been held as inadmissible by the A.O, the same will have the effect of enhancing the book profit of the assessee 2.14 Ground of appeal no 7.0 is on the addition of depreciation on inflated capital expenditure while computing book profit u/s 115JB of the Act. Relying on the order of the CIT(A), the relevant para of the CIT(A)'s order which contain his adjudication is in para 17.4 wherein it is stated that depreciation pertaining to bogus capital expenditure needs to be adjusted for computing book profit. Since, the assessee has been found to be claiming inflated capital expenditure, the depreciation on the same needs to be disallowed, thus having the effect of enhancing the book profit of the assessee. 2.15 Ground of appeal no 8.0 is general and no comments are required. 3. AY 2016-17 3.1 Grounds of appeal nos 1(a) to 1(d) are similar to ground nos 1(a) to 1(d) raised for AY 2015-16 Hence, the comments are already offered thereon in the above paragraphs 3.2 Ground of appeal no 2.0 is similar to ground no 2.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs. 3.3 Ground of appeal no 3.0 is similar to ground no 3.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs. 3.4 Ground of appeal no 4.0 is similar to ground no 4.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 87 3.5 Ground of appeal no 5.0 is against the confirming of disallowance of expenses incurred on donation. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant paras of the assessment order wherein the A.O has given his analysis and findings are para 7 The AO has observed that the said donation of Rs 104 crores pertains to the assessee company although it may have been paid by DFPCL Hence, it is not relevant whether DFPCL had disallowed the same in its computation of income The assessee company ought to have added it back in its computation of income as it is not an allowable business expenditure u/s 37 of the Act. The relevant paras of the CIT(A)'s order which contain his adjudication are in paras 14 to 14.2.3. The CIT(A) has observed that the assessee has not established with documentary evidences that the said expenditure has been incurred wholly and exclusively for business purpose with commercial expediency 3.6 Ground of appeal no 6.0 is similar to ground no 6.0 raised for AY 2015-16 Hence, the comments are already offered thereon in the above paragraphs 3.7 Ground of appeal no 7.0 is similar to ground no 7.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs 3.8 Ground of appeal no 8.0 is general and no comments are required. 4. AY 2017-18 4.1 Ground of appeal no 1.0 is similar to ground no 2.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 88 4.2 Ground of appeal no 2.0 is against the confirming of the disallowance of deduction claimed u/s 35AD of the Act. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant paras of the assessment order wherein the A.O has given his analysis and findings are para 5 (sub-paras 5.1 to 5.16). The A.O has found from analysis of the statements of key employees recorded during search and from the log book impounded during survey at the factory premises of the assessee at MIDC, Taloja that deduction u/s 35AD of the Act was wrongly claimed by the assessee for purposes other than for the specified business. Section 35AD of the Act explicitly bars the use of the asset for a period of 8 years for any purpose other than the specified business. The relevant paras of the CIT(A)'s order which contain his adjudication are in paras 6.4.6 to 6.4.11 The CIT(A) has stated that provisions of section 35AD cannot be applied in the case of business restructuring underwent by the assessee. Further, the said deduction was not allowable as the assessee had used the assets of the new plant to serve operational needs of the old plant. Furthermore, on the assessee's plea of proportionate deduction, the CIT(A) held that the amount spent on shared resources cannot be subject to apportionment under the provisions of section 35AD of the Act. 4.3 Ground of appeal no 3.0 is similar to ground no 3.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs 4.4 Ground of appeal no 4.0 is against confirming the disallowance of deduction u/s 35AD of the Act on alleged inflated capital expenditure The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon. The relevant para of the assessment order wherein the A.O has given his analysis and findings is Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 89 para 6.22 The relevant paras of the CIT(A)'s order which contain his adjudication are paras 8.3 to 8.3.3 4.5 Ground of appeal no 50 is against the confirming of the disallowance of depreciation claimed on alleged inflated capital expenditure under the normal provisions of the Act. The orders of the A.O and the CIT(A) which have dealt with the aforesaid issue in great detail are relied upon The relevant para of the assessment order wherein the A.O has given his analysis and findings is para 6.23. The relevant paras of the CIT(A)'s order which contain his adjudication are paras 9.3 to 9.3.3. 4.6 Ground of appeal no 6.0 is similar to ground no 6.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs 4.7 Ground of appeal no 7.0 is similar to ground no 7.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs 4.8 Ground of appeal no 8.0 is general and no comments are required 5. AY 2018-19 5.1 Ground of appeal no 10 is similar to ground no 2.0 raised for AY 2015-16 Hence, the comments are already offered thereon in the above paragraphs 5.2 Ground of appeal no 2.0 is similar to ground no 3.0 raised for AY 2015-16 Hence, the comments are already offered thereon in the above paragraphs. 5.3 Ground of appeal no 3.0 is similar to ground no 5.0 raised for AY 20157-18 Hence, the comments are already offered thereon in the above paragraphs Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 90 5.4 Ground of appeal no 4.0 is similar to ground no 6.0 raised for AY 2015-16. Hence, the comments are already offered thereon in the above paragraphs. 5.5 Ground of appeal no 5.0 is similar to ground no 27.0 raised for AY 2015-16 Hence, the comments are already offered thereon in the above paragraphs 5.6 Ground of appeal no 6.0 is general and no comments are required. DECISION 127. We have heard both the parties, perused the relevant finding given in the impugned orders as well as material referred to before us including the judicial precedents relied upon. 128. We will take up the first issue which has been raised in all the years, i.e., claim of depreciation goodwill or intangible assets. 129. The brief facts have already been discussed in the foregoing paragraphs however, in a succinct manner; the facts relevant for the issue involved are reiterated. Here in this case DFCPL, SCMFPL and STL now known as MAL, the assessee has entered into a scheme of arrangement to transfer Technical Ammonium Nitrate (TAN) and fertilizer business verticals to its wholly owned subsidiaries and filed a petition before the NCLT, Mumbai, which sanctioned Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 91 the scheme vide order dated 30/03/2017 and effective date of scheme was 01.05.2017 and appointed date was 01/01/2015. The background behind scheme was that DFPCL has three prominent verticals namely (i) Industrial Chemicals (“IC”), (ii) Technical Ammonium Nitrate (“TAN”) and (iii) Fertilizers. While TAN and fertilizers business have inter-linkages whereas industrial chemical business is relatively independent. 130. A Scheme of Arrangement was proposed amongst DFCPL, SCMFPL and MAL with each of the varied businesses carried out by DFPCL either by itself or through strategic investments in subsidiaries including TAN, fertilizers, industrial chemicals, real estate and power have potential for sustainable profit growth and also capable of attaining a different set of investors, strategic partners and know how providers to scale up the size and operations. Additionally, in order to enable investors to choose the business of their liking and priority of portfolio in the event of such a possibility arising, DFPCL proposed to reorganize and segregate its TAN business and Fertilizer business into a separate company. Accordingly, scheme of arrangement was propounded and TAN and fertilizers were proposed to transfer to slump sale from DFPCL, SCMFPL and further, demerger of TAN and fertilizers business, an integral and individual part of the scheme from SCMFPL, assessee i.e. MAL, the consideration paid above the fair value of net Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 92 assets were recorded as goodwill in the books of the assessee. 131. The ld. AO based on the seized email of Mr. Debasish Benarjee and statement recorded on oath during the course of search, deduced that scheme of arrangement was a colorable device to evade payment of taxes. He further observed that conditions of demerger as prescribed under Section 2(19AA) of the Act were not complied with in as much as, as per provisions of said Section, assets are recorded in the books of the resulting company at the written down value of transferred assets appearing in the books of demerged company. AO further noted, in terms of Explanation 7A to Sec. 43(1) of the Act, where, under a scheme of demerger, any capital asset is transferred by the demerged company to the resulting company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purposes of its own business. In the present case, goodwill and intangibles were not recorded in the books of SCMFPL and therefore, it could not have been recorded at a higher value in the books of assessee. AO further referred to Explanation 3 to 43(1) of the Act, which provides that actual cost of goodwill and other intangible assets in the hands of assessee is liable to be held to be NIL where such assets were not purchased and thus, Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 93 depreciation claimed on such goodwill is to be disallowed. 132. AO further held that as per the sixth Proviso to Section 32(1) of the Act, the total claim of depreciation shall not exceed the amount calculated as if the demerger had not taken place and such deduction shall be apportioned between the demerged company and the resulting company in the ratio of number of days for which the assets/businesses were used by them. In the instant case, since the demerged company (SCMFPL) had neither accounted for goodwill and other intangible assets nor claimed depreciation thereon, the assessee being resulting company could not have claimed any deprecation on such goodwill / intangibles. 133. The ld. CIT DR relying upon the order of the ld. AO submitted that the entire scheme of transaction was a colourable devise which is evident from the contents of the e-mail seized during search and deposition of the person under oath. She further contended that the conditions prescribed under Section 2(19AA) of the Act had not been complied with, since the goodwill and intangibles were not recorded in the books of the demerged company and hence, could not be recorded in the hands of the assessee. Referring to Explanation 7A to Section 43(1) and the sixth proviso to Section 32(1), she submitted that the actual cost of such assets should be taken as nil and consequently, no Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 94 depreciation should be allowed. 134. Ld. CIT (A) has confirmed the addition merely referring to the reasoning given by the ld. AO and further held that in so far as the valuation reports obtained from from Registered Valuers were instrumental in the process of demerger, there was a wide gap between the projected and actual figures for both the divisions that were transferred. Thus, it clearly shows that the figures have been taken at a very arbitrary manner suitable to the assessee to justify the market valuation. Apart from that, he held that valuation for the purpose of slump sale and demerger calculated to different values of the undertaking. Therefore, the valuation reports to justify such a high valuation to account for the difference of the goodwill cannot be sustained. Apart from that the assessee company has failed to justify with supporting evidence that demerger was done to attract potential investors. 135. We are unable to concur with the conclusions drawn by the ld. AO and ld. CIT (A). In the first place, the scheme of agreement was sanctioned by the NCLT after issuing of notice to all stakeholders including the Income Tax department. No objections were raised by the department at that stage. The accounting treatment for goodwill and intangibles has been explicitly stated in the scheme and was given effect in the audited books of account as already Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 95 noted above. As discussed in the earlier part of the order while dealing with the submissions of the ld. AR, in the present case the net value of the asset transferred in demerger was Rs. 743 crores, whereas, the total consideration of the demerger was Rs. 2,517 crores. The excess of consideration paid over the net value of assets resulted in goodwill and other intangible assets. We have already elaborated upon the rationale of the restructuring which has been discussed in the foregoing paragraphs. The said rationale has been also disclosed before the NCLT, which thereafter approved the scheme of agreement vide its order dated 30/03/2017. 136. It has further been brought to our notice that re- structuring was undertaken primarily to attract future investors into specific line of business. It was submitted that the investors were only interested in TAN business of the group, as opposed to the other business run by DFPCL. Accordingly, the TAN business was first demerged from the assessee to another group entity, pursuant to the NCLT order dated 28/06/2024 with the aappointed date of the scheme was 01/01/2022. Following the demerger, the group succeeded in securing investment of approximately Rs. 800 crores in the TAN business through private placement. This substantiates the commercial rationale for the restructuring, which continued to remain viable even after the amendment brought in by Finance Act 2021, Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 96 whereby goodwill was excluded from the block of assets, thereby rendering it ineligible for depreciation under section 32 of the Act. The restructuring was guided by sound rationale and the assessee‟s intent to realign its business operations, driven by legitimate business exigencies and not by any motive of tax avoidance as alleged by Revenue. 137. Upon the perusal of the material placed on record, we find substance in the arguments advanced by the ld. Counsel for the assessee. It has been demonstrated that there existed a genuine commercial rationale for undertaking the restructuring, which involved entering scheme of arrangements for separating the TAN and fertilizer business to a distinct entity. This segregation was intended to facilitate synergistic integration within the assessee's operations, enabling streamlined management and efficient utilisation of resources. The restructuring was thus commercially expedient and aligned with the broader objectives of business optimization and investor alignment. Thus, it cannot be held that restructuring undertaken pursuant to the demerger was done solely for the purpose of generating goodwill and claiming depreciation thereon. On the facts on record reinforce the position that the restructuring was carried out even when goodwill was specifically excluded from the block of assets pursuant to the amendments introduced by the Finance Act 2021. It is Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 97 further noted that the assessee had undertaken similar re- structuring to demerge its TAN business, which enabled it to attract substantial investment for that line of business. This clearly indicates that the generation of goodwill was not intended as a device to avail depreciation benefits, albeit, it stemmed from bonafide business consideration. The objective purely was to attract investors and achieve operational efficiency a strategic realignment of business segments. 138. Apart from the above, under the scheme of arrangement approved by the NCLT, specific reference was made to para 32 of the scheme which has also been incorporated in preceding paras. The said clause provided that, even in the event of any excess of the consideration determined as the fair value of the equity shares issued over the net value of assets of the demerger undertaking taken (after making appropriate adjustments for the inter- company loans etc.) such excess shall be recognized as goodwill in the books of Smartchem. Conversely, if the result of such computation is negative, the same shall be credited as Capital Reserve in the books of account of Smartchem. Thus, the accounting treatment adopted pursuant to the demerger was in accordance with scheme duly approved by the NCLT. Therefore, the question of recognition of any assets in the books of accounts arising Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 98 from the demerger cannot be questioned in isolation or treated as a device to evade tax. 139. Further para 23.12 of the scheme of arrangement specifically provides for allowance of depreciation on goodwill and other intangible assets acquired but not recorded in the books of the demerged company. Once the NCLT has approved the scheme and held that proposed scheme of arrangement is fair, reasonable and not violative of any provisions of law or contrary to public policy, any allegation that the scheme was undertaken only for the purpose of creating goodwill and claiming depreciation thereon to avail tax benefits cannot be sustained. 140. A re-structuring exercise that has been approved by NCLT cannot be treated as a colourable device. It is also placed on record that, prior to the approval of the scheme by NCLT, notice was issued to the department, however, no objection or response was filed by the department. Thus, placing reliance on decision of the Hon‟ble Bombay High Court in the case of Sadanand Varde v. State of Maharashtra [supra], once a scheme of arrangement is sanctioned by the NCLT, the same attains finality and is binding upon the stakeholders, including statutory authorities. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 99 141. Before us it has been stated that there was two step re-structuring (i), the fertilizer and TAN division owned by DFPCL was transferred to SCMFPL by way of slum exchange and the said divisions were demerged from SCMFPL to assessee company. The purpose of these two step re-structuring was to attract the private equity investors / funds into specific business. The rationale for such two step arrangements have been stated by the ld. AR in his arguments which have been captured in Preceding para 27 to 33. We have already held in the preceding para 137 that this segregation was intended to facilitate firstly, synergistic integration within the assessee‟s operation enabling streamline management and efficient utilization of resources and to attract substantial investment in the TAN business. These two stage arrangements were purely guided by business and commercial expediency rather than any colourable scheme only for creating goodwill and claiming depreciation thereon. 142. In the context of restructuring and demerger, where there exists a difference between the net asset value and the valuation of the shares, such difference is generally recorded as goodwill. It may not be necessary that goodwill or other intangibles assets must already be recorded in the books of the demerged company for such treatment to apply. At the time of demerger, the valuation of the shares of the demerged company is required to be undertaken at Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 100 fait market value (FMV), which may be determined using any of the valuation methodologies. The FMV is generally determined by the Valuer based on the prospective business potential of the company. In the present case, it has been brought on record that the TAN and fertilizer business were expected to generate significant profits in the future and had attracted substantial investor interest. Therefore, the valuation was carried out taking into account the company‟s future prospects, which is a recognised and accepted approach in determining the fair value in a demerger scenario. Here in this case, the Registered Valuer has adopted DCF method relying upon financial that was subsequently justified by actual performance. The assessee has also obtained valuation reports from two independent Registered Valuers (i) adopting DCF method and other market multiple approach, both being globally accepted valuation methodologies. The allegation of the learned Assessing Officer that the projections under the DCF method did not align with the actual results is misplaced. 143. A suitable explanation was furnished by the assessee, and it is further noted that in the subsequent periods, the actual share value far exceeded the projected figures. The fact that actual results may have deviated from initial projections does not, by itself, vitiate or invalidate the valuation. It is a settled principle that the reliability of a Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 101 DCF-based valuation cannot be assessed with the benefit of hindsight. 144. Accordingly, the reasoning given by the learned Assessing Officer and the learned CIT (A) for discarding the assessee‟s valuation is rejected. 145. In the present case, the reference by the Assessing Officer to Explanation 7A to Section 43(1) of the Act is misplaced, as the said provision applies only where the asset was already recorded in the books of the demerged company. In the instant case, the goodwill and other intangible assets in question arose for the first time in the books of the assessee, being the resulting company, pursuant to the scheme of arrangement. 146. Clause 23.12 of the scheme explicitly provides that such intangible assets though not recorded in the books of the demerged company shall be eligible for depreciation under Section 32(1) of the Act. The embargo on depreciation of goodwill introduced by the Finance Act, 2021, is prospective in nature and does not apply to the years under consideration. 147. The Hon‟ble Supreme Court in CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)] has held that depreciation is allowable on goodwill arising out of amalgamation. The Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 102 same principle applies mutatis mutandis to demergers and corporate reorganizations, provided that the transaction is genuine and the asset is recognised in accordance with law. 148. In our considered view, the assessee has demonstrated that the restructuring was carried out with a legitimate business purpose, was duly approved by the competent authority, and has been given effect to in accordance with accounting and legal norms. The goodwill and intangible assets recorded in its books cannot be disregarded merely because of a resultant tax benefit. The depreciation claimed on such assets is permissible under law and supported by both fact and jurisprudence. Accordingly, we direct that the disallowance of depreciation on goodwill and other intangible assets should be deleted for all the assessment years under appeal. Thus, this issue is decided in favour of the assessee. Issue relating to addition made under Section 69A of the Act on the alleged inflation of capital expenditure 149. The next issue arising for our consideration is the addition made by the learned Assessing Officer under Section 69A of the Act on the allegation that the assessee had inflated its capital expenditure by recording bogus construction expenses, allegedly resulting in the generation and return of unaccounted cash. The foundation of this addition rests primarily on certain WhatsApp Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 103 chats unearthed during the course of search, and the statement recorded under Section 132(4) of the Act. 150. The brief facts, as noted by the learned AO, pertain to a search action conducted at various premises of the Deepak Group. No Money and jewellery was seized from residential premises. Statements of various important persons were recorded. One of the allegations made by the Department was that the assessee-company was engaged in the practice of inflating capital expenditure and subsequently receiving the inflated amount back in cash from vendors. During the search, digital data of one Mr. Pandurang Langde was seized, and in a statement recorded from him, he was confronted with suspicious WhatsApp communications wherein certain words such as “contribution” and “drawings” were used, which purportedly referred to cash transactions connoting crores and lakhs, respectively. Further investigation revealed that the cash allegedly represented amounts received back from vendors involved in projects of the group concerns. 151. The modus operandi described was that bills were raised by vendors like Onshore Construction Company Pvt. Ltd., Ray Constructions Ltd., Jobby Engineering Pvt. Ltd., and National Builders Infrastructure Ltd. After raising the bills and receiving the payments, it was alleged that certain cash amounts were handed back to officials of the company. This cash was allegedly Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 104 not recorded in the regular books of accounts. Similar statements were reportedly made by other key persons. 152. In response to the show-cause notice, the assessee submitted all details pertaining to the vendors, stating that these entities were civil contractors engaged for execution of capital projects of the assessee group. Detailed information regarding services received was also submitted. It was clarified that the capital expenditure recorded against these vendors pertained to a project that was subsequently demerged to M/s. Smartchem Technologies Ltd. and was duly recorded as capital expenditure in the books of accounts. The assessee gave point-wise rebuttal to each allegation made by the learned AO, clarifying that out of the four vendors named, there were no transactions with two of them, and only two vendors had been appointed as contractors. The assessee submitted year-wise certified ledger accounts, copies of bank accounts, invoice details, details of retention money, penalties levied for delayed work, etc., from Financial Year 2012–13 to 2018–19. 153. However, the learned AO rejected these contentions primarily on the basis of certain WhatsApp chats retrieved from the phone of Shri Pandurang Langde and statements recorded under oath, which were subsequently elaborated before the Investigation Wing and the learned AO. The AO relied upon the statement recorded under Section 132(4), without considering the retraction, and also incorporated certain WhatsApp chats Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 105 and statements of employees in the assessment order. Accordingly, the AO concluded that these WhatsApp chats and the statement under Section 132(4) constituted incriminating material and concluded that the assessee had inflated capital expenditure to generate cash. He accordingly estimated the inflated capital expenditure at 10% of the total capital expenditure booked with the said parties, even though no incriminating material was found for any assessment year other than A.Y. 2018–19. 154. Before us, learned Counsel for the assessee raised a preliminary objection regarding the absence of incriminating material for the assessment years under consideration. He further contended that capital expenditure cannot be disallowed on an ad-hoc basis by disallowing 10% thereof. He relied upon the judgment of the Hon‟ble Supreme Court in CIT v. Sinhgad Technical Education Society [(2017) 84 taxmann.com 290 (SC)], and decisions of various High Courts, including Sunny Jacob Jewellers Gold Hyper Market v. CIT (2024) (Ker. HC) and PCIT v. Saumya Construction (P.) Ltd. [(2017) 81 taxmann.com 292 (Guj. HC)]. 155. As noted above, the main reliance of the Revenue is upon certain WhatsApp messages dated 20th, 21st, and 23rd March 2018, which allegedly referred to civil contractors, specifically Ray Constructions Ltd. and Onshore Construction Co. Pvt. Ltd. and purportedly indicated cash circulation through inflated Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 106 billing. On this basis, an ad-hoc addition of ₹4,52,35,800/-, being 10% of the civil construction payments made to these parties, was made under Section 69A. 156. Upon perusal of the assessment order and the WhatsApp chats reproduced therein, we find it extremely difficult to arrive at a conclusive finding that such vague chats alone can justify an ad-hoc addition or disallowance of capital expenditure across all the impugned assessment years. For instance, a screenshot at page 57 of the assessment order reads: “on-shore: 200I; Onshore: 200L; Ray: 562.56L; Confirmed with Naresh Mehta”. We are unable to accept the inference drawn from these numbers as indicating any cash-back arrangement post billing. These chats merely refer to isolated references to vendors and numeric values that could plausibly relate to bills, project codes, milestones, or administrative records. There is no clear reference to any cash transaction, no mention of kickbacks, and no context to suggest the existence of unaccounted income. Such cryptic entries are wholly insufficient to meet the threshold required under Section 69A. 157. It is further pertinent to note that no unaccounted cash or valuable article was found in the possession of the assessee during the search. The essential condition for invoking Section 69A is that the assessee must be found in possession of money, bullion, jewellery, or other valuable articles that are not recorded in the books and for which no explanation is provided. In the Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 107 present case, none of these foundational requirements are fulfilled. Mere conjecture or presumption cannot substitute the evidentiary standards mandated by law. 158. As regards the statements of employees reproduced in the assessment order, while some answers may indicate post- payment handover of cash to one Mr. Naresh Mehta, such statements remain uncorroborated by any documentary evidence or material discovered during the search. Sole reliance on such statements particularly when subsequently retracted and not supported by additional evidence cannot sustain an addition under Section 69A. The text of the section itself reads: “69A. Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition… the money and the value… may be deemed to be the income of the assessee for such financial year.” 159. Ergo, to invoke the deeming fiction of this provision, it must be shown that the assessee was found to be the owner of unrecorded money or valuables. In the present case, not only were all capital expenditure transactions duly recorded in the books, but no physical or financial evidence of unaccounted cash was found. A deeming provision must be construed strictly, and cannot be invoked merely on the basis of suspicion or inference. Even assuming argued that certain cash was received back, it Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 108 has not been shown to have reached the assessee‟s office, or to have been utilized by the assessee. At most, it might point to possible embezzlement by certain individuals, but such presumption cannot be extended to implicate the assessee- company unless the benefit of such income is directly traced to it. Notably, the search did not unearth any such documentary evidence or material indicating such a flow of cash. 160. It is well-settled that in income-tax proceedings, especially in search assessments, the burden of proof lies squarely on the Revenue to establish that the assessee is the owner of unaccounted money or assets. In this case, the Revenue has not produced any corroborative evidence documentary or otherwise to demonstrate that the assessee received any cash component from the vendors. There is no material to establish a money trail, concealment of receipts, or cash inflows. 161. Without prejudice, learned counsel rightly argued that the WhatsApp chats relied upon by the Revenue constitute electronic evidence, and have not been authenticated in accordance with Section 65B of the Indian Evidence Act, 1872. The Hon‟ble Supreme Court in Anvar P.V. v. P.K. Basheer [(Civil Appeal No. 4226 of 2012)] has categorically held that electronic records are admissible only if accompanied by the requisite certificate under Section 65B. In the absence of such certification, the WhatsApp chats lack admissibility. Reliance was also placed on the decisions in Dell International Services India Pvt. Ltd. v. Adeel Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 109 Feroze [W.P.(C) 4733/2024] (Del HC) and ACIT v. Dinesh Jaiprakash Baheti (ITA No. 5607/Mum/2024), which reiterate the same. 162. Further, the addition is based in part on statements recorded under Section 132(4) during the search. However, it is trite law that a statement under Section 132(4), in the absence of supporting evidence, cannot form the sole basis for addition. This legal position has been settled in CIT v. Harjeev Aggarwal [(2016) 70 taxmann.com 95 (Del.)], CIT v. Jagdishprasad Mohanlal Joshi [(2018) 99 taxmann.com 288 (SC)], and PCIT v. Rohit Karan Jain [2025] 173 taxmann.com 184 (Gauhati HC). In this case, not only were the statements retracted by the concerned individuals, but such retractions were duly supported by cogent reasoning and affirmed through sworn affidavits (refer pages 313–329 of the paper book for AY 2016–17). In such circumstances, the statements recorded u/s.132(4) during search lose all probative value. 163. As discussed above, the invocation of Section 69A, in our considered view, is wholly misplaced. The three cumulative conditions for its applicability, firstly, that the assessee must be found to be the owner of unexplained money or valuable article; secondly, that such asset is not recorded in the books of account; and thirdly, that the assessee has failed to offer a satisfactory explanation are conspicuously absent in the present case. In the absence of any discovery or seizure of such Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 110 unrecorded asset or money, the essential jurisdictional facts necessary to trigger the deeming fiction under Section 69A are not fulfilled. Possession, or its absence, is a critical indicator of ownership in matters involving alleged unaccounted assets. The law mandates that the Revenue must establish a clear and substantive linkage between the unaccounted asset and the assessee. Such linkage is wholly lacking in the present case. 164. Further, the addition has been made on an ad-hoc basis at 10% of the civil construction cost incurred with two vendors, without any tangible nexus to actual inflation or cash reversal. The learned AO has not identified any concrete evidence or cash trail suggesting that payments made were inflated or that any part of the payment was returned to the assessee. Such estimations, made in vacuum and unsupported by primary evidence, are legally unsustainable. The law does not permit ad- hoc or estimated additions under Section 69A without first satisfying the jurisdictional prerequisite that unexplained money or asset is found in the possession or ownership of the assessee. In ACIT v. Harsukhlal Dhirajlal Doshi [1999] 102 Taxman 297 (Rajkot), it was held that additions based on arbitrary percentages and conjectures, without corroborative material, cannot be sustained. 165. In view of the foregoing discussion, we hold that the addition made under Section 69A is legally untenable, factually unsubstantiated, and contrary to the well-settled principles of Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 111 law. The Revenue has failed to discharge its burden of proof and has proceeded to make an addition solely based on speculative interpretation of cryptic WhatsApp chats and uncorroborated, retracted statements. In the absence of any incriminating or corroborative material, such addition cannot be sustained in law. 166. Accordingly, the addition made under Section 69A on account of alleged inflation of capital expenditure stands deleted for all the years under appeal. Issue relating to disallowance of depreciation on the alleged inflated capital expenditure 167. The next issue relates to the disallowance of depreciation on the alleged inflated capital expenditure. The learned AO has proceeded to make a further disallowance of depreciation on the assumption that the assessee had claimed depreciation under Section 32(1) of the Act on the disallowed portion of the allegedly inflated capital expenditure. However, we have already held that the addition on account of inflated capital expenditure is unsustainable and has been deleted. Consequently, the basis for the disallowance of depreciation also ceases to exist. Furthermore, since the learned AO has made an ad-hoc disallowance of 10% of the capital expenditure, the corresponding disallowance of depreciation on such ad-hoc basis is equally untenable. Accordingly, this ground is allowed in favour of the assessee. Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 112 Issue relating to disallowance of donation expenses for A.Y. 2016–17 168. The next issue pertains to the disallowance of donation expenses in A.Y. 2016–17. As noted earlier, the assessee had recorded donation expenses amounting to ₹1,04,37,000/- under the head “Interdivisional Overheads,” clubbed under “Other Expenses.” In the revised return filed on 28.02.2015 for A.Y. 2016–17, these were claimed as donations. It was explained that the corresponding income was duly offered to tax by DFPCL in its computation, which was accepted in the order passed under Section 153A in the case of DFPCL. Therefore, there remains no justification for disallowing the same once again in the hands of the assessee. Accordingly, this issue is decided in favour of the assessee. Issue relating to disallowance under Section 115JB for depreciation on goodwill and alleged inflated capital expenditure 169. Coming to the issue of disallowance under Section 115JB of the Act, we note that the learned AO has reiterated the disallowance made under the normal provisions, specifically in respect of depreciation on goodwill/intangible assets and alleged inflated capital expenditure, while computing the book profits under Section 115JB. The learned AO has invoked Clause (iia) of Explanation 1 to Section 115JB, which is applicable only in Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 113 cases where there is a revaluation of assets. However, this is not a case involving revaluation. The goodwill and intangible assets were recorded as on 01.01.2015, pursuant to a scheme of demerger, and the adjustments were not made at the instance of the assessee. Therefore, Clause (iia) has no application, and the disallowance made under Section 115JB is accordingly directed to be deleted. Issue relating to disallowance under Section 35AD for the NPK Fertiliser Unit 170. We now turn to the issue relating to the disallowance of deduction under Section 35AD in respect of the NPK Fertiliser Unit. The facts, in brief, are that the assessee claimed a deduction under Section 35AD amounting to ₹804.95 crores (being 150% of the capital expenditure of ₹560 crores) incurred for setting up a new NPK Fertiliser Unit at Taloja, Maharashtra. The unit was commissioned in March 2017, and the claim was made for A.Y. 2017–18. The fertilizer undertaking stood vested in the assessee pursuant to a scheme of demerger w.e.f. 01.01.2015. The learned AO disallowed the claim under Sections 35AD(7A) and 35AD(7B), alleging that Unit No. 5, the conveyor belt, and the bagging units forming part of the NPK unit were occasionally used for the ANP Fertiliser Plant, and thus the assets were not used exclusively for the “specified business.” Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 114 171. The foundational issue to be examined is, whether the occasional or incidental use of certain assets for another fertilizer unit (albeit within the same line of business) constitutes a violation of the exclusivity condition under Sections 35AD(7A) and 35AD(7B), thereby warranting complete disallowance of the deduction. 172. At the outset, it is important to note that Clause (vii) of Section 35AD(8)(c) defines “specified business” in the context of the fertilizer sector without restrictive expressions such as “setting up and operating” or “developing and operating,” which are used in other clauses. This linguistic distinction demonstrates legislative intent to confer broader relief to the fertilizer industry. Therefore, both NPK and ANP units, being engaged in the manufacture of fertilizers, fall within the ambit of “specified business.” 173. Before us, learned counsel for the assessee contended that the bagging unit and conveyor belt in question were used wholly and exclusively for the production of fertilizers in India, whether for NPK or ANP. Even if the NPK plant assets were temporarily used for ANP production, such usage was only to address operational exigencies or downtime and not a deliberate diversion. This claim is further substantiated by the fact that the assessee had initiated the process of installing two additional bagging units at the ANP plant, in respect of which no deduction under Section 35AD was claimed. This demonstrates bona fide Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 115 conduct on the part of the assessee. In the absence of any intent to misuse the benefit of weighted deduction, no disallowance is warranted. 174. The phrase “used for any purpose other than the specified business” under Section 35AD(7B) is intended to address cases of systematic diversion of assets to non-specified domains. In the present case, there is no such diversion. The inference drawn is based solely on a single entry in a logbook recording isolated usage. This does not meet the evidentiary threshold required for invoking Sections 35AD(7), (7A), or (7B). 175. The cost attributable to Bagging Unit No. 5 and the conveyor belt, as per the assessee‟s submission, aggregates to ₹13,50,87,173/- (i.e., ₹6,60,60,070/- for the bagging unit and ₹6,90,27,103/- for the conveyor belt). Even if disallowance were warranted, it should have been restricted to the deduction relatable to these components alone. However, since the business of the assessee pertains exclusively to fertilizers, the claim under Section 35AD is held to be allowable in full. 176. A further legal infirmity arises from the fact that the deduction under Section 35AD was claimed for the first time in A.Y. 2017–18. Subsections (7A) and (7B) are applicable only where deduction has already been claimed and allowed in earlier years, and the asset is subsequently used for non-specified purposes. This condition does not stand fulfilled in the present Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 116 year. Accordingly, the invocation of these sub-sections is legally untenable. In view of the above, we hold: • The NPK Fertiliser Unit qualifies as a “specified business” under Section 35AD(8)(c)(vii), and all conditions for claiming weighted deduction are satisfied. • Incidental use of certain assets for another fertilizer unit within the same business does not amount to violation of Section 35AD(7A)/(7B). • The condition of “claimed and allowed” in prior years is not met in A.Y. 2017–18, and therefore the disallowance fails on statutory grounds. Accordingly, the disallowance made under Section 35AD is directed to be deleted. 177. In the result, this ground is allowed. Issue relating to disallowance on account of stock difference under normal provisions and under Section 115JB for A.Y. 2019–20 178. The next issue pertains to the disallowance made under the normal provisions of the Act on account of alleged stock difference in A.Y. 2019–20. The brief facts, as culled out from the record, reveal that during the course of survey proceedings conducted under Section 133A at the manufacturing facility and godown located at Panipat, a physical verification of stock was undertaken. It was observed that a minor difference existed Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 117 between the physical stock and the book records, which the Revenue treated as cash sales. 179. However, such minor timing discrepancies between physical stock receipts at the godown and their corresponding accounting entries in the books are common and inevitable, particularly in large-scale manufacturing concerns. In the present case, the difference was to the extent of only 6.68 Metric Tonnes, which constituted a mere 0.70% of the total inventory of 954.13 Metric Tonnes. This implies that 99.30% of the inventory was duly reconciled and accounted for. Such marginal variation, in our considered view, cannot be the basis for invoking a disallowance, especially when the same is plausibly explained as a timing issue and not as unaccounted sales. 180. Furthermore, it is well settled that where the alleged excess stock is already credited to the Profit & Loss Account, whether as sales or closing stock, there can be no occasion for a further addition. In the present case, even assuming the stock difference was treated as sales or inventory, the same has already been factored into the computation of taxable income. The learned AO, however, proceeded to apply an ad-hoc rate of ₹17 per kilogram for computing the disallowance, which is wholly unjustified. Even if we were to accept the alleged difference of 6.68 MT and apply a much higher rate of ₹70,000 per MT (as suggested in some parts of the record), the resultant disallowance would not exceed ₹1,13,560/-. In the broader context of the total stock, Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 118 such an inconsequential difference cannot form the basis of an addition. Accordingly, the disallowance made by the learned AO is deleted. 181. The Revenue has also reiterated the same stock difference while computing the book profit under Section 115JB for A.Y. 2019–20. Since we have held that the alleged difference in stock does not warrant any addition under the normal provisions, the consequential adjustment under Section 115JB also stands deleted. 182. In so far as the issue raised in ground No.1 that additions made by the ld. AO are beyond the scope of Section 153A as there were no incriminating materials found in the course of search which has been argued by the ld. Counsel at length, however, we are not dealing with this issue and is kept open because we have decided the issue on merits and have held that on the facts and in law such additions are not sustainable. Therefore, ground No.1 is treated as academic. Issue relating to disallowance under Section 14A for A.Y. 2019– 20 183. The Revenue is in appeal for A.Y. 2019–20 against the deletion of disallowance under Section 14A of ₹2,72,16,529/-. It is an admitted position that the assessee has not earned any dividend income during the year under consideration. In the Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 119 absence of any exempt income, the invocation of Section 14A is legally untenable. This legal position is now well settled by a long line of judicial precedents, including the decisions of the Hon‟ble Delhi High Court in CIT v. Era Infrastructure India Ltd. and PCIT v. Delhi International Airport Ltd., which have categorically held that Section 14A cannot be applied where no exempt income has been earned during the year. 184. Before us, the learned Departmental Representative sought to argue that the amendment to Section 14A by the Finance Act, 2022 should be given retrospective effect. However, this contention has already been rejected by various High Courts, including in the aforementioned cases. It is now settled law that the said amendment is prospective and cannot be applied to A.Y. 2019–20. Accordingly, the finding of the learned CIT(A) deleting the disallowance under Section 14A is confirmed. 185. In the result, the appeals filed by the assessee are allowed, and the appeal filed by the Revenue is dismissed. Order pronounced on 24th July, 2025. Sd/- (GIRISH AGRAWAL) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 24/07/2025 KARUNA, sr.ps Printed from counselvise.com ITA No.2227/Mum/2024 and others Mahadhan Agritech Limited 120 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// Printed from counselvise.com "