Case Law Details
Carolina Food And Industries Pvt. Limited Vs DCIT (ITAT Kolkata)
ITAT Kolkata held that the claim the depreciation on goodwill which has resulted from the scheme of amalgamation which was duly approved by the Hon’ble Calcutta High Court cannot be rejected.
Facts-
Post amalgamation, the assessee claimed depreciation amounting to Rs.6,22,022,993/- on Goodwill u/s. 32 of the Income Tax Act, 1961 in accordance with the ratio laid down by the Hon’ble Apex Court in the case of CIT –vs.- Smifs Securities Limited (2012) 348 ITR 302 (SC). AO on examination of this note issued a questionnaire to the assessee. Assessee duly submitted the reply, however, the same was rejected by AO.
Finally the claim of the assessee was rejected by the ld. Assessing Officer for two reasons, namely the assessee has not followed the prescribed procedure as per AS-14 and not relied on the relevant balance sheet as on 01.01.2013 thereby leading to a wrong computation of ratio of share swap at 1:24; and secondly the valuation of assets not being done at fair value or market value but book value of assets was taken and finally disallowed the claim of depreciation amounting to Rs.6,24,73,357/- and added the same to the income of the assessee in the assessment framed under section 143(3) dated 13.12.2017.
Now, the issue is whether the assessee is entitled to depreciation on goodwill arising from the excess of consideration paid over the net value of assets under a scheme of amalgamation which is approved by the Hon’ble Calcutta High Court after calling for objections from all the stakeholders including the income tax department.
Conclusion-
Held that after taking into account the facts of the instant case and the ratio laid down in the various decisions as cited before us and also the provisions of section 32 of the Act , we are of the opinion that the claim the depreciation on goodwill which has resulted from the scheme which was duly approved by the Hon’ble Calcutta High Court cannot be rejected.
In the case of CIT vs. Smifs Securities Ltd., the Hon’ble Apex Court has held that depreciation is allowable on the amount of goodwill which has come into being as a result of amalgamation of two companies.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The assessee is in appeal before the Tribunal against the order of ld. Commissioner of Income Tax (Appeals)-4, Kolkata dated 24.10.2018passed for the assessment year 2015-16.
2. The issue raised in Ground No. 1 is general in nature, which does not require any specific adjudication.
3. The issue raised in Grounds No. 2 & 3 is against the order of ld. CIT(Appeals) upholding the order of ld. Assessing Officer, whereby the ld. Assessing Officer had denied the claim of depreciation on opening written down value of block of assets and depreciation on goodwill and other depreciable assets amounting to Rs.6,24,73,357/-.
4. The facts in brief are that the assessee filed its return of income on 30.09.2015 declaring total income at ‘NIL’ after setting off brought forward losses. The assessee filed revised return declaring total income at Rs.18,27,79,170/- and this return was selected for scrutiny through CASS and statutory notices were issued and duly served upon the assessee. The assessee company entered into a scheme of amalgamation with M/s. Ramuk Scan Investment (P) Limited in consonance with 391(2) and 394 of the Companies Act, 1956 which was approved by the the Hon’ble Calcutta High Court vide order dated 09.12.2015 with appointed date as 01.01.2013. Under the said scheme of amalgamation, M/s. Ramuk Scan Investment (P) Limited (amalgamating company) amalgamated with the assessee company (amalgamated company) with effect from 01.01.2013. M/S The assessee filed a note forming part of the return of income, wherein it was stated that pursuant to the Scheme of Amalgamation with the assessee and its holding company, Ramuk Scan Investment (P) Limited w.e.f. 01.01.2013, all assets and liabilities have been recorded in the books of assessee at fair value under the ‘Purchase Method’ in terms of the Accounting Standard 14 titled Accounting for Amalgamations as issued by the ICAI. The excess consideration paid over net assets taken over by the assessee amounting to Rs.37,91,42,049/- has been recognized as Goodwill in the books of assessee in accordance with the AS-14 and accordingly the assessee claimed depreciation amounting to Rs.6,22,022,993/- on Goodwill under section 32 of the Income Tax Act, 1961 in accordance with the ratio laid down by the Hon’ble Apex Court in the case of CIT –vs.- Smifs Securities Limited (2012) 348 ITR 302 (SC). The ld. Assessing Officer on examination of this note issued a questionnaire to the assessee calling upon to clarify and offer explanation in respect of three issues, namely details of goodwill shown as an intangible assets and depreciation claimed from its inception post amalgamation i.e.01.01.2013, the basis of valuation of Goodwill and the reasoning for valuing shares on the basis of balance sheet as on 31.12.2014 and not on 01.01.2013 the appointed date which were supplied by the assessee vide submission dated 01.11.2017. The ld. Assessing Officer rejected the reply of the assessee by observing and holding as under:-
“From the above it was understood that the computation of any consideration which requires additional payment, in this case which is metamorphosed in to Goodwill shall have to be estimated as on Accounting date for Amalgamation, which in this case would be 01/01/2013. The assessee at the time of the amalgamation computed the swap ratio of shares at 1:24 calculating it on the basis of the provisional Balance Sheet as on 31/12/2014 which is in clear deviation of AS 14 as well as the Scheme approved by the Hon’ble High Court vide para 13.1. Hence, Fair Value itself has not been arrived at. The plea of the assessee vide para 4.1 of its submission that the valuation of the shares was done on the basis of the immediately available balance sheet of Ramuk Scan i.e 31/12/2014 is unacceptable as because there is no such balance sheet in accounting terms for the date 31/12/2014 which is acceptable. More so, in the case of the assessee where the appointed date 01/01/2013 the valuation of shares and the share swapping ratio should have been also on the basis of the Balance sheet as on 01/01/2013 (Appointed date as per the Scheme) or at most 31/03/2013. Automatically, the valuation of Goodwill itself at Rs.37,91,42,049/-over and above the value Cancellation of Share Capital Of Carolina Food & Beverages Pvt Ltd of Rs. 1,43,37,951/( Rs.393480000/- total)also becomes flawed since it is merely, the value of the shares over and above the cash consideration and thereby also making the computation of depreciation claimed flawed”.
5. Finally the claim of the assessee was rejected by the ld. Assessing Officer for two reasons, namely the assessee has not followed the prescribed procedure as per AS-14 and not relied on the relevant balance sheet as on 01.01.2013 thereby leading to a wrong computation of ratio of share swap at 1:24; and secondly the valuation of assets not being done at fair value or market value but book value of assets was taken and finally disallowed the claim of depreciation amounting to Rs.6,24,73,357/- and added the same to the income of the assessee in the assessment framed under section 143(3) dated 13.12.2017.
6. In the appellate proceedings, the ld. CIT(Appeals) affirmed the order of the ld. Assessing Officer on this issue by observing that by taking into account various aspects such as the group structure and shareholding pattern as on 31.03.2014, financial position of amalgamating company as well as amalgamated company and also the transactions of sale of shares of MMRHL to Narayana Hrudalaya Private Limited resulting into long-term capital gain of Rs.19,51,37,648/- and short-term capital gain of Rs.15,90,79,618/- and also depositing by way of payment of advance tax of Rs.10.41 crores. According to the ld. CIT(Appeals), till now everything was all right but thereafter the ld. CIT(Appeals) noted that on 11.06.2015, the assessee submitted a scheme of amalgamation for merger of assessee-company with its holding company Ramuk Scan Investment (P) Limited and requested Court to give effect to the said Scheme from appointed date of 01.01.2013, which was 2.5 years backward. According to the ld. CIT(Appeals), the assessee chose to follow the purchase method for recording the amalgamation and thereby it creates a goodwill of whopping amount of Rs.39 crores. According to the ld. CIT(Appeals), the assessee has created artificial goodwill based on self-serving valuation report issued by a C.A. thereby claiming depreciation on the said goodwill and avoided the obligation to pay legitimate tax on capital gain arising from transfer of shares. Thereafter the ld. CIT(Appeals)relied on the decision of the Hon’ble Apex Court in the case of McDowell and Company Limited –vs.- Commercial Tax Officer reported in 1985 STC Vo;. 59 277 and also the decision of Vodafone International Holding B.V. –vs.- Union of India and Another (2012) 341 page 01 and finally dismissed the appeal of the assessee by observing and holding as under:-
“5.6. The contention of the Ld. AR and detailed submission filed, did not contains anything on the factual and objective assessment of above background. It merely focuses on limited legal aspect of the controversy as to whether depreciation on Goodwill will be allowed u/s 32 of the Act or not. The Ld. AR have submitted number of decision on this issue, however, in my understanding the reliance is grossly misplaced. This transaction of amalgamation is clear case of tax avoidance. Therefore, the examination of said legal issue does not arise. The appellant company miserably failed to justify the purpose and value of the goodwill and only harped on legal issue. The AO has examined the entire case from valuation and accounting aspect which is also true but in my understanding more is expected from them and they should have gone into more depth to understand the real nature of the entire transaction and purpose it sought to achieve. During the course of proceeding I also asked for the original gift deed but the appellant did not produced the same inspite of repeated request(refer para 1.1). This creates suspicion in mind whether the same is genuine or not or is backdated. Similarly no detail pertaining to professional fees provided. This also creates suspicion regarding genuinty of said expenses.
5.7. The fact that the Court has approved the amalgamation scheme does not limit the power of the tax authorities to examine the tax aspect of the said transaction. The High court only examines the issue from limited point of view and tax consideration does not form part of that.It is true that Regional Director sends notice to the income tax department asking for their objection to the scheme. In this case also, like other cases, tax department did not object and rightly so. This is because of the fact that, the only document given to tax department is the Scheme filed by the appellant and that only contains broad contours of the entire amalgamation scheme. It is only post approval of scheme, revised accounts are drafted and Returns are revised to give effect of said scheme. In this case, post selection in scrutiny only this issue crops up as the reason for scrutiny was the claim of depreciation on goodwill. It is not possible for tax department to visualize everything at the time of approval of scheme itself. Therefore, for all practical reasons, the mere fact that Court has approved the scheme does not limit the power of tax authority to examine the issue in detail at the time of assessment or appeal proceeding.
5.8 In view of the above discussion,I am denying the depreciation claim on the artificial goodwill created by the appellant by using dubious means using amalgamation scheme as tax avoidance tool. I am directing the AO to compute capital tax without giving effect to any set off or adjustment on account of depreciation or loss arising from amalgamation. Hence, these grounds are decided against the assessee”.
7. The ld. A.R. vehemently pleaded before the Bench that the ld. CIT(Appeals) has grossly erred in law and on facts in doubting the amalgamation scheme, which was duly approved by the Hon’ble Calcutta High Court vide its order dated 09.12.2015. The ld counsel submitted that amalgamation of Ramuk Scan Investment Pvt. Limited (amalgamating company) with the assessee M/s. Carolina Food & Industries Pvt. Limited, the appellant (Amalgamated company) with the appointed date of 01.01.2013 was pursuant to the scheme approved by the Hon’ble High court. The ld. Counsel submitted that in terms of paragraph 13 of the Hon’ble High Court’s approved scheme, the assessee followed purchase method as per Accounting Standard 14 to record all the assets and liabilities (including intangible assets, whether or not recorded in the books of transferor company) acquired in amalgamation at their respective fair values. The ld. Counsel submitted that the excess of consideration over net value of assets was recorded as goodwill amounting to Rs.37,91,42,049/- in its books of accounts for the year ended 31.03.2013 and depreciation was claimed on the same in terms of Explanation 3(b) to section 32(1). The ld. Counsel also submitted that consequent to scheme of amalgamation, the assessee has filed a revised return of income for A.Y. 2015-16, and claimed depreciation of Rs.6,24,73,357/- on opening written down value of block of assets including depreciation of Rs.6,22,02,993/- on block of intangible assets, copy of which is placed at pages 5 & 31 of the paper book. The ld. Counsel while referring to the assessment order submitted that the ld. Assessing Officer has disallowed the claim of assessee in respect of depreciation (including depreciation on goodwill) for three reasons, namely (1) swap ratio 1:24 on the basis of provisional balance sheet as on 31.12.2014 rather than the balance sheet as on 01.01.2013 which was the appointed date, in violation of the procedure prescribed as per AS-14 and thereby leading to wrong computation of share swap ratio; (2) the appellant had not considered fair market value of assets and liabilities while computing goodwill, & (3) for denial of depreciation on other assets of Rs.2,70,364/-, for which no reason assigned by the ld. Assessing Officer.
8. The ld. A.R. while referring to the decision of ld. CIT(Appeals) pleaded that the ld. CIT(Appeals) has simply dismissed the claim of assessee with regard to depreciation on intangible assets of Rs.6,22,02,993/- by following the decisions of Hon’ble Supreme Court in the case of McDowell and Co. Limited –vs.- CTO (1985) 154 ITR 148 (SC) and Vodafone International Holding B.V. –vs.- Union of India (2912) 341 ITR 1 (SC) by branding the scheme of amalgamation as tax avoidance tool employed by the assessee to create goodwill by using dubious means. The ld. CIT(Appeals) had not adjudicated the other grounds with respect to depreciation on other depreciable assets amounting to Rs.2,70,364/-. The ld. Counsel submitted that the assessee has filed a petition under sections 391(2) and 394 of the Companies Act before the Hon’ble Calcutta High Court on 11.06.2015 and the same was admitted on 16.06.2015. The ld. Counsel submitted that the same was communicated to the Regional Director vide letter dated 17.06.2015. Thereafter the Regional Director issued a letter dated 19.06.2015 seeking various letters inter alia valuation report, etc. which was replied vide letter dated 10.08.2015 and thereafter the Regional Director filed a report vide affidavit dated 09.12.2015 approving the scheme of amalgamation. The ld. Counsel further submitted that after the scheme was approved, the assesese pursuant to the Scheme of Amalgamation w.e.f. 01.01.2013, recorded all assets and liabilities in the books at fair value under the ‘Purchase price allocation report’ in terms of the Accounting Standard 14-Accounting for Amalgamations as certified by the CA. The ld. Counsel also submitted that the assessment year was duly given in A.Y. 2013-14 and in 2014-15 by claiming depreciation on goodwill which was duly allowed by referring to assessment year 2013-14 dated 25.12.2016, a copy of which is placed at page 78 of the paper book.
9. On the issue of determining the swap ratio, the ld. A.R. submitted that the valuation date for determining the swap ratio is the date agreed by both the parties and the consideration of amalgamation was discharged on the basis of valuation report based on accounts as on 31.12,2014 of both the companies. The ld counsel for the assessee pleaded that the said treatment was in accordance with the accepted principles and in accordance with the ratio laid down in the following decisions:-
(i) Sumitra Pharmaceuticals & Chemicals Ltd. (1997) 88 Comp. Case 619 (A.P. HC) and;
(ii) Microchip Technology (India) Pvt. Ltd. –vs.- NIL (COP No. 58/2013) (Kar. HC).
10. The ld. Counsel also submitted that in the process of approval of scheme of amalgamation by the Hon’ble High Court, Income Tax Authorities get due opportunity to raise objections if the scheme is for tax avoidance or against the public interest and that at the time of approving any scheme of amalgamation, the Hon’ble High Court looks into all aspects of the scheme. The High Court approved the scheme of amalgamation as Income Tax Authorities did not object to the proposed scheme. The ld counsel contended that post approval of the scheme no statutory authority has any power to question the said order and in defence of his arguements , the ld. Counsel placed reliance on the following decisions:-
(i) ITO –vs.- Purbanchal Power Co. Limited (ITA No. 201/KOL/2010 dated 17.07.2014) (Kolkata ITAT)
(ii) Electrocast Sales India Limited –vs- DCIT (2018) 170 ITD 507 (KO. ITAT);
(iii) Keva Fragrance Pvt. Limited –vs. – DCIT (ITA No. 334/M/2020 dated 02.08.2021) (Mum. ITAT);
(iv) CIT –vs.- M/s Long View Tea Co. Ltd. (ITAT No. 169 of 2015 order dated 22.06.2018) (Calcutta HC).
11. The ld. Counsel further agrued that the scheme of amalgamation approved by the Hon’ble Court cannot be termed as against public interest or as tax avoidance tools. It has been held by the Hon’ble Court that where the amalgamation scheme is approved after inviting comments/objections from ROC and MCA, and the Income Tax Department, the intent and reasonableness of the scheme cannot be doubted and it cannot be said to be a colourable device/tax avoidance tool. In defence of his arguments ,Ld. Counsel relied on the following decisions:-
(i) ITO –vs.- Purbanchal power Co. Limited (ITA No. 201/KOL/2010 dated 17.07.2014)(KOL-ITAT);
(ii) Urmin Marketing (P) Limited –vs.- DCIT (2020) 122 taxmann.com 40 (Ahd.).
12. Ld. Counsel further submitted that the reliance placed by the ld. CIT(Appeals) on the decision of McDowell & Co. Limited –vs.-CTO (1985) 154 ITR 148 (SC) is wrong and misplaced and the Hon’ble Supreme Court in the case of Union of India –vs.- Azadi Bachao Andolan (2003) 263 ITR 706(SC) while distinguishing the decision of McDowell & Co. Limited –vs.-CTO held that the said decision does not affect the freedom of the citizen to act in a manner according to his requirement within the framework of the law. Ld. Counsel further argued that since the purchase consideration of assets acquired is more than the value of net assets, the difference between the purchase consideration and value of net assets taken over was correctly accounted for as goodwill as has been held in the following decisions:-
(i) CIT –vs. – Smifs Securities Ltd. (2012) 348 ITR 302 (SC);
(ii) Urmin Marketing (P) Ltd. –vs. – DCIT (2020) 122 com 40 (Ahd);
(iii) Keva Fragrance Pvt. Limited –vs. – DCIT (ITA No. 334/M/2020 dated 02.08.2021) (Mum. ITAT);
(iv)Suzion Global Services Limited –vs. – PCIT (ITA No. 67/Ahd/2 021 dated 16.09.2021)(Ahd-ITAT)
13. Once goodwill is accounted for the books of account, goodwill arising upon amalgamation is eligible for depreciation under section 32 of the Act. The Hon’ble Supreme Court in the case of CIT –vs.-Smifs Securities Ltd. (2012) 348 ITR 302 (SC) has held the similar issue in favour of the assessee. The ld Counsel also cited several other decisions passed by various High Courts and Coordinate Benches of the Tribunal, which are as under:-
(i) Urmin Marketing (P) Ltd. –vs. – DCIT (2020) com 40 (Ahd);
(ii) Keva Fragrance Pvt. Limited –vs. – DCIT (ITA No. 334/M/2020 dated 02.08.2021) (Mum. ITAT);
(iii) Suzion Global Services Limited –vs. – PCIT (ITA No. 67/Ahd/2 021 dated 16.09.2021)(Ahd-ITAT)
(iv) Toyo Engineering India Limited –vs.- DCIT (ITA No. 1330 of 2012) (Bombay HC);
(v) DCIT –vs. – Mylan Laboratories Pvt. Ltd. Hyd. (ITA No. 12/Hyd/2019) (Hyd. ITAT);
(vi) Chowgule & Co. (P) Ltd. –vs.- ACIT (ITA No. 28 of 2012 dt. 12.01.2016 (Bom. HC at Goa);
(vii) PCIT –vs.- Zydus Wellness Ltd. (2017) 87 taxmann.com 82 (Guj.).
14. Ld. Counsel submitted that once depreciation on goodwill is allowed in AYs 2013-14 and 2014-15 by the revenue , the ld. Assessing Officer does not have any power to reconsider whether depreciation is allowable on goodwill in AY 2015-16 or not and the Ld. Counsel defended his arguments by relying on the following decisions:-
(i) DCIT –vs. – Spce Matrix Media (P) Ltd. (ITA No. 1292/KOL/2014 dtd. 04.04.2018)(Kol.ITAT);
(ii) Kodak Polychrome Graphics (I) (P) Ltd. –vs. – ACIT (2015) 171 TTJ 224 (Mum ITAT);
(iii) Sicom Limited –vs.- JCIT (2014) 147 ITD 383 (Mum. ITAT)
(iv) ACIT –vs. – Krystal Colloids Pvt. Ltd. (ITA No. 3170& 3171/Mum/2016 dated 31.07.2018 (Muk. ITAT).
(v) Godrej Agrovet Limited –vs.- ACIT (ITA No. 1629/Mum/2009) (Mum. ITAT).
Ld. Counsel finally prayed before the bench that considering the aforesaid facts and the decisions of the Hon’ble Supreme Court and various other judicial forums , the issue may be allowed in favour of the assessee by setting aside the order of ld. CIT(A) on this issue.
15. The Ld. D.R., on the other hand, opposed the arguments of the Ld. A.R. by submitting that the scheme of amalgamation was designed in such a way so that the goodwill is created in the hands of the assessee by paying higher price than the book value and therefore the intent of amalgamation was nothing but to circumvent the tax liability of the assessee. The ld DR argued that the scheme of amalgamation was filed before the Hon’ble High Court in 2015 for approval whereas appointed date of amalgamation was 01.01.2013 . The ld DR further argued that the swap ratio of shares 1:24 was determined on the basis of balance sheet as on 31.12.2014 and not on 01.01.2013 and therefore the same is incorrect and wrong and against the established principles. The ld counsel submitted that if the valuation date is changed to 31.03.2013 the swap ratio would change. The ld DR also opposed the arguments as fallacious and wrong where the ld AR has stated that the depreciation has been allowed in the A.Y. 2014-15. The ld DR contended that the depreciation for 2014-15 has been disallowed by the AO. The ld DR submitted that the scheme of amalgamation was done between the group companies to circumvent the tax liabilities The Ld. D.R. submitted that the scheme of amalgamation becomes suspicious as the amalgamation was carried out between group companies. The Ld. D.R. submitted that the amalgamation was a colourable device intended to defraud the Revenue by claiming depreciation on the amount of goodwill created as a result amalgamation by making excess payment of consideration by one group company to another related entity. The Ld. D.R. submitted that the assessee should have taken the merger method of amalgamation and not the purchase method as was done to create artificial goodwill by paying higher consideration for the assets of another subsidiary. The Ld. D.R. relied heavily on the order of AO and Ld. CIT(A) so far as the rejection of depreciation on goodwill is concerned and submitted that the appeal of the assessee may kindly be dismissed by upholding the order of Ld. CIT(A) and AO.
16. We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee company entered into a scheme of amalgamation with M/s. Ramuk Scan Investment (P) Limited in consonance with 391(2) and 394 of the Companies Act, 1956 which was approved by the Hon’ble Calcutta High Court vide order dated 09.12.2015 with appointed date as 01.01.2013. Under the said scheme of amalgamation, M/s. Ramuk Scan Investment (P) Limited (amalgamating company) got amalgamated with the assessee company (amalgamated company) with effect from 01.01.2013. The AO observed that a note was accompanied the return of income stating that pursuant to the Scheme of Amalgamation, the assessee and its holding company, Ramuk Scan Investment (P) Limited have amalgamated w.e.f. 01.01.2013 in terms of scheme of amalgamation and all assets and liabilities have been recorded in the books of assessee at fair value under the ‘Purchase Method’ in terms of the Accounting Standard 14 titled Accounting for Amalgamations as issued by the ICAI. The excess consideration paid over net assets taken over by the assessee amounting to Rs.37,91,42,049/- has been recognized as Goodwill in the books of assessee in accordance with the AS-14 and accordingly the assessee claimed depreciation amounting to Rs.6,22,022,993/- on Goodwill under section 32 of the Income Tax Act, 1961. The AO after examining the scheme of amalgamation and on the basis of details/documents furnished by the assesse came to the conclusion that the claim of depreciation is not correct for various reasons such as the swap ratio of shares was not based on the balance sheet as at 31.12.2014 rather than the balance sheet as at 01.01.2013 resulting into wrong calculation of swap ratio of shares, the assesse not taking the market value of the assets and liabilities while computing goodwill etc finally rejected the depreciation of Rs. 6,24,73,357/- including other depreciations. The ld CIT(A) affirmed the order of AO in the appellate order. Now the issue before us is whether the assesse is entitled to depreciation on goodwill arising from the excess of consideration paid over the net value of assets under a scheme of amalgamation which is approved by the Hon’ble Calcuta High Court after calling for objections from all the stakeholders including the income tax department. We note that the revenue was given an opportunity to state any objection to the scheme of amalgamation but the revenue did not objected to the same. Now after taking into account the facts of the instant case and the ratio laid down in the various decisions as cited before us and also the provisions of section 32 of the Act , we are of the opinion that the claim the depreciation on goodwill which has resulted from the scheme which was duly approved by the Hon’ble Calcutta High Court cannot be rejected. The case of the assessee find supports from the several decisions cited by the ld AR a few of which are discussed as under:
a) In the case of CIT vs. Smifs Securities Ltd.(supra), the Hon’ble Apex Court has held that depreciation is allowable on the amount of goodwill which has come into being as a result of amalgamation of two companies.
b) In the case of Toyo Engineering Ltd. (supra), the coordinate bench after following the decision of Apex Court in the case of CIT Vs Smifs Securities Ltd (supra) and also the Hon’ble Bombay High Court in Toyo Engineering India Ltd. Vs ACIT ITA No. 129 of 2013 and others decided the issue in favour of the assessee.
c) In the case of Keva Frangrance P. Ltd. Vs DCIT(Supra) the coordinate bench of the tribunal after considering the decision of Hon’ble Apex Court CIT Vs Smifs Securities Ltd. (Supra) and various other decisions as cited before us by the ld Counsel of the assesse decided the similar issue in favour of the assesse.
17. Further we also find merit in the contentions of the ld AR that once the scheme of amalgamation is approved by the High Court after giving notice to the stakeholders including the income tax department to state its objections, if any, to the proposed amalgamation scheme. In the instant case before us the revenue has not raised objection to the scheme of amalgamation. Therefore the principle of estoppel prevents the revenue from challenging the validity of the scheme at the subsequent date. The case of the assessee is squarely covered by the decision of the coordinate bench in Electrocast Sales India Ltd. Vs DCIT (Supra) wherein the coordinate bench has held as under:
“4.4. We find that the scheme of amalgamation would be approved by the Hon’ble High Court only after ensuring that the same is not prejudicial to the interests of its members or to public interest. Hence the merger scheme approved by the Hon’ble High Court having in mind the larger public interest, cannot be disturbed by the revenue merely because the assessee is not entitled for benefits u/s 72A of the Act. The expression ‘Public interest’ was discussed by the Hon’ble Gujarat High Court in the case of Wood Polymer Ltd reported in 109 ITR 177 (Guj) wherein the Hon’ble Court refused to sanction the scheme of amalgamation formulated solely for the purpose of avoiding taxes. It was held that :
“The court is charged with a duty, before it finally permits dissolution of the transferor company by dissolving it without winding up, to ascertain whether its affairs have been carried on, not only in a manner not prejudicial to its members but in even public interest. The expression “public interest” must take its colour and content from the context in which it is used. The context in which the expression “public interest” is used, enables the court to find out why the transferor company came into existence, for what purpose it was set up, who were its promoters, who were controlling it, what object was sought to be achieved through creation of the transferor company and why it was being dissolved by merging it with another company, That is the colour and content of the expression “public interest” as used in the second proviso to section 394(1) of the Act which have to be enquired into. If the only purpose appears to be to acquire certain capital asset through the intermediary of the transferor-company created for that very purpose to meet the requirement of law, and in the process to defeat tax liability which would otherwise arise, it could not be said that the affairs of the transferor-company sought to be amalgamated, created for the sole purpose of facilitating transfer of capital asset through its medium, have not been carried on in a manner prejudicial to public interest. Public interest looms large in this background and the machinery of judicial process is sought to be utilized for defeating public interest and the court would not lend its assistance to defeat public interest. The court would, therefore, not sanction the scheme of amalgamation.´
Hence it could be safely inferred that the Court would exercise due diligence and would conduct detailed enquiries before sanctioning the scheme. A scheme formulated for the purposes of tax evasion cannot be held to be in ‘public interest’ and hence the same cannot be sanctioned under the provisions of Companies Act, 1956. The fact that the Hon’ble Calcutta High Court had accorded its sanction to the scheme of amalgamation in the assessee’s case implies that the same had been done by considering representations from the various fields and by duly considering the tax evasion point for income tax purposes. In this regard, we would like to place reliance on the functions, powers and discretions of the court that had been noted by Shri A .Ramaiya in the Companies Act, Part 2 at pages 2499 and 2500 in Point No. 6 incorporated hereunder:
“That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray the same.”
4.4.1. Further we find that the provisions of section 394A of the Companies Act, 1956 reads as under:-
Notice to be given to Central Government for applications under sections 391 and 394 – The court shall give notice of every application made to it under section 391 or 394 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing any order under any of these sections.
Hence if there be any objections for the income tax department , they could raise the same at that stage i.e. prior to sanction of scheme by the court. Once the scheme is approved, it implies that the same has been done after duly considering the representations from the Government / revenue. Similar view was expressed by the Co-ordinate bench of this Tribunal in the case of ITO vs Purbanchaal Power Co. Ltd in ITA No. 201/Kol/2010 dated 17.7.2014 wherein it was held that :-
From the above provisions of section 394A of the Companies Act, 1956, legal position enunciated in the decisions of Hon’ble Gujarat High Court in the case of Wood Polymer Ltd ., in re and Bengal Hotels Pvt Ltd in re, supra and Vodafone Essar Gujarat Ltd., supra, evidently makes the purpose clear that if the revenue wants to object to the proposed scheme of amalgamation, it has to do so in the course of proceedings before the High Court but before the final order is passed. Whenever such objections have been raised, these have been considered on merits by the concerned High Court and also incorporated the condition for safeguarding the interest of revenue in the very scheme. As a matter of public policy, once a scheme of amalgamation is approved by Hon’ble High Court no authority should be allowed to tinker with the scheme. In the present case of the assessee, neither the official liquidator nor the Regional Director nor Central Government raised any objection to the scheme of amalgamation. In such circumstances , we are of the view that the revenue has nothing to say at the time of approval of the scheme by Hon’ble High Court in the present case.
4.5. We find that the Hon’ble Madras High Court in the case of Pentamedia Graphics Ltd vs ITO reported in 236 CTR 204 (Mad) had categorically held that once the scheme had been sanctioned with effect from a particular date by the Court, it is binding on everyone including the statutory authorities. It further held that having regard to the law declared by the Hon’ble Apex Court as to the effect of the scheme sanctioned by the Court, the only course open to the revenue would be to act as per the scheme sanctioned effective from 1st Jan 2004, which means that the tax authorities are bound to take note of the state of affairs of the applicant as on 1st Jan 2004 and a return filed regarding the same cannot be ignored on the strength of section 139(5) of the IT Act. The merits or otherwise on the returns filed , however, is a matter of assessment for the authorities to consider and pass order in accordance with law. It was further held that when the claim of the assessee in the appeal had already been granted, on a mere circumstance that the Department had not accepted the same and gone before the appellate forum does not mean that the scheme sanctioned would be of no consequence to the respondent. The respondent cannot ignore the order of this Court approving the scheme giving the effective date as 1st Jan, 2004. Similar view, that once the court sanctions the scheme , the Income tax department will be bound by the same, including the appointed date and cannot review the same, has been held by the Hon’ble Bombay High Court in the case of Casby CFS (P) Ltd reported in 231 Taxman 89 (Bom) dated 19.3.2015 .
(underlining provided by us)
4.5.1. We also find that the Hon’ble Supreme Court in the case of J.K.(Bombay) (P) Ltd vs New Kaiser –I-Hind Spg.& Wvg.Co. reported in 1970 AIR 1041 (SC) dated 22.11.1968 had held :
The Principle is that a scheme sanctioned by the court does not operate as a mere agreement between the parties ; it becomes binding on the company, the creditors and the shareholders and has statutory force , and therefore the joint-debtor could not invoke the principle of accord and satisfaction. By virtue of the provisions of sec. 391 of the Act, a scheme is statutorily binding even on creditors , and shareholders who dissented from or opposed to its being sanctioned. It has statutory force in that sense and therefore cannot be altered except with the sanction of the Court even if the shareholders and the creditors acquiesce in such alteration.
(underlining provided by us)
4.5.2. We find that the aforesaid observations of the Hon’ble Supreme Court had been followed by the Hon’ble Bombay High Court in the case of Sadanand Varde and Others vs State of Maharashtra reported in 247 ITR 609 (Bom) wherein it was held that :
“Once a scheme becomes sanctioned by the court, it ceases to operate as a mere agreement between the parties and becomes binding on the company, the creditors and the shareholders and has statutory operation by virtue of the provisions of section 391 of the Companies Act.”
The said judgement of Hon’ble Bombay High Court further provided that an appeal, if any, against the order of amalgamation lies u/s 391(7) of the Companies Act, 1956 and the same cannot be agitated in any collateral proceeding. The relevant extract of the same is reproduced hereunder for the sake of ready reference :-
“We are of the view that the amalgamation, which has become final and binding, cannot be permitted to be challenged by the petitioners, without locus standi, in a collateral proceeding in the present writ petition. An amalgamation order can only be challenged under the Companies Act by an appeal under section 291(7) by any one of the parties, but no such appeal was ever filed.”
In the instant case before us, the ld AR informed that the Income Tax Department , which is part of Union of India, had not filed any appeal u/s 391(7) of the Companies Act, 1956 against the order of amalgamation sanctioned by the Hon’ble High Court. This fact was not controverted by the ld DR before us.
4.6. The ld AR further argued that the scheme of amalgamation, as sanctioned by the Hon’ble Calcutta High Court, was effective from 1.4.2010 and the parties had acted according to the said scheme and cannot be subjected to reversal after a period of 7 years by virtue of the principle of ‘res judicata’ , ‘constructive res judicata’ and ‘acquiescence’. In this regard, the ld AR placed reliance on the decision of Hon’ble Supreme Court in the case of Forward Construction Co. and Others vs Prabhat Mandal reported in 1986 AIR 391 (SC) wherein it was held that :
“The principle underlying Explanation IV is that where the parties have had an opportunity of controverting a matter that should be taken to be the same thing as if the matter had been actually controverted and decided. It is true that where a matter has been constructively in issue it cannot be said to have been actually heard and decided . It could only be deemed to have been heard and decided.”
We find that in the instant case, the income tax department had the opportunity to controvert the specific clause mentioned in para 10(iii) in the scheme of amalgamation , when the scheme was presented before the Hon’ble High Court for approval. Thus applying the principles of res judicata as explained by the Hon’ble Apex Court in the aforesaid case, the issue can be deemed to be heard and decided . Accordingly, the argument that the same cannot be agitated in appeal u/s 391(7) of the Companies Act, 1956 deserves attention and merit. The English Court of Chancery in case of Henderson vs Henderson reported in (184360) All ER Rep 378 while construing Explanation IV to Section 11 of Code of Civil Procedure quoted hereunder:-
The plea of res judicata applies, except in special case (sic), not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a Judgement, but to every point which properly belonged to the subject of litigation and which the parties, exercising reasonable diligence, might have brought forward at the time”.
4.7. It would be relevant to note that the scheme of amalgamation was approved on 6.10.2010 and intimation to this effect was sent by the assessee to the income tax department in January 2011 (copies of letters enclosed in pages 33 to 37 of paper book). The same was acted upon by the assessee assuming acceptance from the income tax department since no appeal against the said judgement of the Hon’ble High Court was filed before the Hon’ble Supreme Court. Thus, at this juncture, if the revenue is allowed to challenge the same u/s 391(7) of the Companies Act, 1956, then it would be clearly barred by the doctrine of acquiescence and estoppel. In law, acquiescence occurs when a person knowingly stands by without raising any objection to the infringement of his or her rights, while someone else unknowingly and without malice aforethought acs in a manner inconsistent with their rights. As a result of acquiescence, the person whose rights are infringed may lose the ability to make a legal claim against the infringer, or may be unable to obtain an injunction against continued infringement. The doctrine infers a form of ‘permission’ that results from silence or passiveness over an extended period of time. Applying this principle to the instant case before us, the assessee probably paid a consideration for the set off of accumulated losses taken over from the amalgamating companies and accordingly the share exchange ratio (as approved under the scheme) was acted upon assuming acceptance from the income tax department. Thus by applying the Doctrine of acquiescence, the department would be now barred from raising an objection to the scheme. Further a claim of estoppel arises when one party gives legal notice to a second party of a fact or claim, and the second party fails to challenge or refute that claim within a reasonable time. The second party may be said to have acquiesced to the claim, and thus to be estopped from later challenging it or making a counterclaim based upon the actions of the other party. In the instant case also, the fact of amalgamation was intimated to the income tax department 7 years back against which no appeal was preferred by them. Accordingly the claim of estoppel applies. These Doctrines of Estoppel and Acquiescence had been approved by the Hon’ble Calcutta High Court in the case of Suresh Kumar Rungta and Ors vs Roadco India Pvt Ltd dated 22.9.2011 wherein the Hon’ble Calcutta High Court upheld the view of Trial Court wherein it was held that “ the present appellants / applicants had knowledge about the passing of order of winding up. They had knowledge or have hadoccasion to come before this Court earlier, and did not come because they have accepted legality and validity of amalgamation”.
Applying the Doctrine of Acquiescence and Estoppel the Hon’ble Court held that “It appears to us all the appellants have accepted the scheme of amalgamation and now these companies against whom relief is sought for are no longer in existence and they cannot be reverted back to their earlier position as by this time third parties right have been created by reallocation or reallotment of shareholding for there may be fresh subscribing. In true sense there has been sea change in the shareholding pattern of these companies. Therefore we dismiss the appeal.”
4.8. In view of the aforesaid observations and findings in the facts and circumstances of the case, we hold that the accumulated losses of amalgamating companies, comprising of unabsorbed short term capital loss of Rs 10,26,44,123/- ; unabsorbed long term capital loss of Rs 6,34,784/- and unabsorbed business loss of Rs 6,63,574/- , would belong to the amalgamated company pursuant to clause in para 10(iii) of the scheme of amalgamation which was approved by the Hon’ble Calcutta High Court vide order dated 6.10.2010. Since the losses belonged to the amalgamated company i.e the assessee herein, the provisions of section 72 and section 74 of the Act would come into play with respect to set off of the same against the respective incomes of the assessee . In view of this, the provisions of noncompliance of section 72A of the Act as narrated by the ld CITA does not hold any water. Accordingly, the Grounds 1 & 2 raised by the assessee are allowed.”
18. In view of the above facts and circumstances and the various decisions as discussed above, the order of the ld CIT(A) upholding the order of AO on this issue cannot be sustained. Accordingly we set aside the order of ld CIT(A) on this issue and direct the AO to allow the depreciation on goodwill. The ground no. 2 and 3 are allowed.
19. The issue raised in Ground No. 4 is against the order of ld. CIT(Appeals) not allowing set off of brought forward unabsorbed depreciation against the short-term capital Gain instead of long-term capital gain.
20. The facts in brief are that in the revised return of income, the assessee had set off current year’s business loss and depreciation of Rs.6,41,89,512/- against short-term capital gain of Rs.15,90,79,618/- and the remaining short-term capital gain of Rs.9,48,90,106/- was reduced to ‘nil’ by setting off against the brought forward unabsorbed depreciation. The remaining brought forward unabsorbed depreciation was adjusted against income from other sources amounting to Rs.1,21,88,323/- and long-term capital gain of Rs.1,23,58,478/-. The ld. Assessing Officer instead of setting off the entire brought forward unabsorbed depreciation of Rs.11,94,36,907/- against short-term capital gain, set off only Rs.9,48,90,106/- against short-term capital gain and Rs.1,21,88,323/-against income from other sources and balance unabsorbed depreciation of Rs.1,23,58,478/- was set off against long-term capital gain.
21. In the appellate proceedings, the ld. CIT(Appeals) held that since the claim of depreciation or any loss arising from amalgamation had not been allowed, and, therefore the ground becomes infructuous and does not require any adjudication.
22. Ld. Counsel submitted before the Bench that provisions of section 32(2) of the Act provides that the brought forward unabsorbed depreciation becomes part of the current year’s depreciation and is to be set off in accordance with provisions of section 71 of the Act. The ld counsel of the assessee argued that in the absence of any specific mode of set off, in terms of CBDT Circular No. 26 (LXXVI-3)(F. No. 4(53)-IT/54] dated 7.7.1955 – unabsorbed depreciation is to be adjusted in a manner, which is most beneficial to the assessee. The ld AR submitted that the issue is also squarely covered by the decision of Hon’ble Jurisdictional High Court in CIT –vs.- Rungamatee Trexim (P) Limited (ITA No. 812/KOL/2008 dated 19.12.2008)(KOL.HC) and therefore the ground raised by the assessee may kindly be allowed. The Ld. Counsel for the assessee also referred and relied on the decision of Hon’ble Apex Court, wherein it has been held that if the provisions are couched in language, which is not free from ambiguity and admits two interpretations, a view which is favourable to the assessee should be adopted:-
(i) CIT –vs. – Madho Pd. Jatia (1976) 105 ITR 179 (SC);
(ii) CIT –vs. – Vegetable Products Ltd. (1973) 88 ITR 192 (SC);
(iii) CIT –vs.- Naga Hills Tea Co. Ltd. (1973) 89 ITR 236 (SC).
Ld. Counsel finally prayed before the Bench that the appeal of the assessee may kindly be allowed after following the decisions of the Hon’ble Jurisdictional High Court and also the judgment of the Hon’ble Supreme Court as stated hereinabove.
23. The ld. D.R., on the other hand, relied on the order of the ld. Assessing Officer.
24. After hearing the rival submissions and perusing the relevant material available on record, we find that undoubtedly the brought forward unabsorbed depreciation becomes a part of the current year’s depreciation in terms of the provisions of section 32(2) of the Act and set off has to be done in accordance with the provisions of section 71 of the Act. Having perused the facts in the light of above decisions we are of the view that the assessee has to be allowed the set off, which is most beneficial to it. We have perused the decision of the Hon’ble Jurisdictional High Court in the case of Rungamatee trexim (P) Limited (supra), wherein it has been held that unabsorbed depreciation is to be adjusted in a manner which is most beneficial to the assessee. Similarly the Hon’ble Supreme Court in the above three decisions has held that in case of provisions of the Act, the interpretation which is more favourable to the assessee has to be followed. Accordingly we allow this appeal of the assessee by setting aside the order of the ld. CIT(Appeals) and the AO is directed to allow the set off as discussed above. The ground no. 4 is allowed.
25. The issue raised in Ground No. 5 is consequential in nature and does not need any specific adjudication.
26. The issue raised in Ground No. 6 has already been decided by us in Ground No. 4 and, therefore, we do not need separate adjudication.
27. The issue raised in Ground No. 7, which is against the order of carry forward of MAT Credit of amalgamating company, i.e. Ramuk Scan India Pvt. Limited of Rs.9,32,990/-. In the revised return of income filed pursuant to the scheme of amalgamation, the assessee has set off MAT credit of Rs.9,32,990 brought forward by the amalgamating company while computing its tax liability in consonance with the Court approved the scheme of amalgamation. The ld. Assessing Officer has not allowed the set off of MAT Credit brought forward by the amalgamating company while computing tax liability of the assessee without assigning any reason thereof. Similarly in the appellate proceedings, the ld. CIT(Appeals) considered the entire amalgamation scheme as tax avoidance tool and held that the entire MAT Credit of the amalgamating company would lapse.
28. After hearing the rival submissions and perused the relevant material available on record, we are of the view that the MAT Credit of amalgamating company will be available to the assessee as has been held in the following decisions:-
(i) ACIT –vs.- Caplin Point Laboratories (ITA No. 667/Mds/2013 dated 31.01.2014 (Chen. ITAT);
(ii) Skol Breweries Limited –vs.- ACIT (ITA No. 2313/Mum/2007 dated 15.05.2008) (Mum. ITAT).
However, the issue is required to be examined at the end of ld. Assessing Officer and restore the issue to the file of ld. Assessing Officer with a direction to allow the same.
29. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open Court on September 9th, 2022.
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