Mahadhan AgriTech Limited Vs ACIT (ITAT Mumbai)
Summary: The Mumbai Bench of the Income Tax Appellate Tribunal, comprising Judicial Member Amit Shukla and Accountant Member Girish Agrawal, disposed of six connected appeals involving Mahadhan AgriTech Limited (formerly Smartchem Technologies Limited) for assessment years 2016-17 through 2020-21. Five appeals were filed by the assessee against orders of the CIT(A)-50, Mumbai, and one appeal was filed by the Revenue for assessment year 2019-20. The assessee appeals arose from search assessments under Section 153A for AYs 2016-17 to 2018-19 and regular assessments under Section 143(3) for AYs 2019-20 and 2020-21. In its order pronounced on 24 July 2025, the Tribunal allowed all appeals filed by the assessee and dismissed the Revenue’s appeal.
The dispute originated in a scheme of arrangement involving Deepak Fertilisers and Petrochemicals Corporation Limited, SCM Fertichem Private Limited and Smartchem Technologies Limited. The Technical Ammonium Nitrate and fertiliser businesses were transferred and demerged through a two-stage reorganisation sanctioned by the NCLT Mumbai on 30 March 2017, with an appointed date of 1 January 2015 and effective date of 1 May 2017. Consideration paid above the net value of transferred assets was recognised as goodwill and other intangible assets in the resulting company’s accounts. A search of the Deepak Group on 15 November 2018 led to additions and disallowances concerning depreciation, alleged inflated construction expenditure, specified-business deductions, donation expenditure and stock discrepancies.
The Assessing Officer regarded the corporate restructuring as a colourable arrangement designed to generate depreciation on goodwill, relying on a seized management email, statements recorded during search and differences between valuation projections and eventual performance. Invoking Section 2(19AA), Explanation 7A and Explanation 3 to Section 43(1), and provisos to Section 32(1), the Revenue contended that the resulting company could not claim depreciation on intangible assets not recorded in the demerged company’s books. The assessee countered that the reorganisation had real commercial objectives, including segregation of business verticals, attraction of private investment and operational efficiencies. It relied on NCLT approval, auditor-recognised accounting treatment and independent valuations employing discounted cash-flow and market-multiple methods.
The Tribunal accepted the commercial rationale for restructuring and observed that the scheme had been sanctioned by the NCLT after notice to stakeholders, including the Income Tax Department, which did not object. It noted subsequent restructuring and significant private investment in the TAN business as evidence of commercial purpose even after the Finance Act, 2021 excluded goodwill from depreciation prospectively. The Tribunal rejected the AO’s hindsight criticism of valuation forecasts, distinguished assets newly recognised by the resulting company from transferred assets already appearing in the demerged company’s books, and applied CIT v. Smifs Securities Ltd. It directed deletion of disallowances of depreciation on goodwill and other intangible assets across all the assessment years in appeal, based on the applicable law for those years.
The Revenue also alleged that capital expenditure on construction contracts had been inflated and that portions of vendor payments were returned in cash. It relied on WhatsApp messages obtained from an employee’s device and statements recorded under Section 132(4), and estimated additions at 10% of certain capital expenditure under Section 69A. The assessee disputed ownership or receipt of any unaccounted cash, produced records of contractor transactions and challenged the reliability and admissibility of electronic messages and retracted statements. The Tribunal held that no cash or corresponding unrecorded valuable article was found to belong to the assessee, no money trail linked the purported cash reversals to the company, and an ad-hoc percentage could not replace proof required under Section 69A. It also discussed Section 65B of the Evidence Act and evidentiary limitations of unsupported statements. The Section 69A additions were deleted for every assessment year, together with consequential disallowances of depreciation on supposedly inflated expenditure.
For AY 2016-17 the assessee challenged disallowance of donation expenses of ₹1,04,37,000. It explained that these expenses had been allocated through interdivisional overheads in the restructuring and that the corresponding sum had already been considered in Deepak Fertilisers’ tax computation. The Tribunal accepted the concern regarding duplicate disallowance and decided this ground in favour of the assessee. In respect of the Minimum Alternate Tax computation under Section 115JB, the AO had added back depreciation on goodwill and allegedly inflated capital assets. The Tribunal found that the relevant intangible assets were recognised under a sanctioned demerger scheme, not created by a simple revaluation attracting clause (iia) of Explanation 1 to Section 115JB, and directed deletion of the corresponding book-profit adjustments.
A separate major controversy arose under Section 35AD for AY 2017-18 concerning the assessee’s new NPK fertiliser unit at Taloja. The AO had denied the specified-business investment-linked deduction on the basis that a conveyor belt and bagging facilities were sometimes used by another ANP fertiliser unit. The Tribunal reasoned that both facilities engaged in production of fertilisers in India constituted specified businesses, and incidental cross-use within the same class of specified business did not establish diversion to a non-specified purpose. It further held that Sections 35AD(7A) and 35AD(7B), dealing with subsequent non-specified use after a deduction had already been claimed and allowed, were not attracted in the first year of the relevant claim. It directed full deletion of the disallowance. The order contains differing figures for the gross claimed deduction and specific amount disallowed; these should not be conflated.
For AY 2019-20 the AO had made a ₹10,82,560 addition concerning an alleged difference between physical and recorded finished-goods inventory, with a corresponding MAT adjustment. The Tribunal identified the remaining discrepancy as only 6.68 metric tonnes, around 0.70% of inventory of 954.13 metric tonnes, and accepted the explanation that timing differences in inventory movement and recording could arise in a large manufacturing enterprise. It also noted that the stock or related sales were already reflected in accounts, so a further addition would lack basis; the arbitrary ₹17-per-kilogram rate used by the AO was rejected. Both the normal-income addition and consequential Section 115JB adjustment were deleted.
The Revenue’s separate appeal concerned the CIT(A)’s deletion of a disallowance of approximately ₹2.72 crore under Section 14A for AY 2019-20. The Tribunal recorded that no dividend or other exempt income was earned during the year and relied on Delhi High Court authorities, including Era Infrastructure and Delhi International Airport, to hold that Section 14A could not sustain the disallowance for that year. The Department’s argument that the amendment by Finance Act, 2022 applied retrospectively was rejected. The deletion was therefore upheld and the departmental appeal dismissed.
The assessee had separately challenged additions for AY 2016-17 on the ground that its assessment had already attained finality and the search had not unearthed incriminating material specifically supporting them, relying on PCIT v. Abhisar Buildwell. Importantly, the Tribunal expressly declined to decide that jurisdictional issue after allowing the additions on merits; it treated the Section 153A ground as academic and kept it open. The decision must therefore not be described as quashing the search assessment for lack of incriminating material. Taken as a whole, the order emphasises the need for substantive evidence of unrecorded money, recognition of genuine NCLT-sanctioned commercial restructuring, and careful application of year-specific deduction and MAT provisions.
Cases Discussed
- 1. PCIT Vs Abhisar Buildwell P. Ltd. (Supreme Court) — (2023) 149 taxmann.com 399; scope of section 153A, jurisdictional ground expressly left undecided.
- 2. CIT Vs Smifs Securities Ltd. (Supreme Court) — (2012) 348 ITR 302; historic depreciation treatment of goodwill.
- 3. CIT Vs Harjeev Aggarwal (Delhi High Court) — (2016) 70 taxmann.com 95; evidentiary status of statements recorded during search.
- 4. PCIT Vs Era Infrastructure (India) Ltd. (Delhi High Court) — 448 ITR 674; no exempt income and prospective operation of 2022 section 14A amendment.
