PCIT Vs Aculife Healthcare Pvt. Ltd. (Gujarat High Court)
Summary: The Gujarat High Court, in Principal Commissioner of Income-tax-1, Ahmedabad Vs Aculife Healthcare Pvt. Ltd., dismissed two Revenue appeals arising from the Income Tax Appellate Tribunal’s common order dated 14 October 2022, which had set aside revisional proceedings initiated under Section 263 of the Income-tax Act, 1961. The dispute concerned depreciation claimed on goodwill recognised following the demerger of the healthcare division of Nirma Limited into Aculife Healthcare Pvt. Ltd. The Revenue questioned whether the Assessing Officer had properly examined the claim in the light of the written-down-value provisions under Section 43(6) and the depreciation provisions under Section 32. The High Court held that the Assessing Officer had considered relevant documentary evidence and the binding Supreme Court decision in CIT Vs Smifs Securities Ltd., 348 ITR 302 (SC), and had adopted a legally plausible view. Consequently, the Tribunal’s decision setting aside the revision was upheld.
The underlying transaction involved a composite scheme of arrangement sanctioned by the Gujarat High Court on 20 April 2015. Under the scheme, the healthcare division of Nirma Limited was transferred to Aculife Healthcare Pvt. Ltd., with an appointed date of 1 October 2014 and an effective date of 15 June 2015. Goodwill arose or was recognised in the resulting company’s books as the difference between the net assets transferred and the shares to be issued. In the proceedings concerning Assessment Year 2015-16, the Revenue referred to goodwill of approximately ₹275 crore and depreciation of approximately ₹68.85 crore. In the submissions concerning Assessment Year 2016-17, the Revenue referred to goodwill of ₹275.40 crore and depreciation of ₹51,63,70,941.
The Principal Commissioner contended that no corresponding goodwill had existed in the balance sheet of the demerged undertaking before the transaction. Consequently, its actual cost and written-down value in the hands of Nirma Limited were nil. On this reasoning, the Revenue argued that the resulting company could not recognise a higher written-down value for depreciation purposes because Explanation 2B to Section 43(6) linked the resulting company’s written-down value to that of the demerged company. The Revenue also invoked the sixth proviso to Section 32(1), dealing with depreciation allocation following demerger. It accordingly characterised the assessment orders allowing goodwill depreciation as erroneous and prejudicial to Revenue interests.
The Tribunal, however, found that the Assessing Officer had expressly examined the depreciation claim during the original scrutiny proceedings. The assessee had furnished detailed factual and legal submissions dated 19 December 2017, the board resolution, the Gujarat High Court’s order sanctioning the arrangement and a valuation report prepared by an approved valuer dated 4 October 2014. The assessee had also relied on the Supreme Court’s judgment in Smifs Securities Ltd., which treated goodwill as an intangible asset falling within the expression of business or commercial rights of a similar nature under Explanation 3(b) to Section 32(1), under the statutory framework applicable to that decision.
The High Court agreed with the Tribunal that the Assessing Officer had considered the material and taken a view sustainable in law. It reproduced the Supreme Court’s observations concerning the treatment of goodwill as an intangible asset and noted that the Assessing Officer had relied upon that authority while allowing the depreciation claim. The Court therefore found no substantial question of law warranting admission of the Revenue’s appeals and dismissed both appeals. The decision turns principally on the limits of Section 263 revisional jurisdiction where the Assessing Officer has conducted an enquiry and adopted a legally plausible view. It should not be read as an unrestricted approval of depreciation on goodwill for all years, particularly because the Finance Act, 2021 subsequently excluded goodwill of a business or profession from depreciable intangible assets from Assessment Year 2021-22.
Cases Discussed:
1. Deniel Merchants (P.) Ltd. Vs ITO, (2018) 95 taxmann.com 366 (SC), Supreme Court: Cited by the Revenue in its proposed substantial question of law concerning revisional jurisdiction where an Assessing Officer accepts an assessee’s explanation without conducting proper enquiries. The High Court did not separately analyse the decision because the Tribunal had found that the Assessing Officer had examined the depreciation claim and supporting evidence.
2. Commissioner of Income-tax, Kolkata Vs Smifs Securities Ltd., (2012) 348 ITR 302 (SC), Supreme Court, Civil Appeal No. 5961 of 2012, Order Dated 22 August 2012: Relied upon by the assessee before the Assessing Officer and by the Tribunal. The Supreme Court held that goodwill constituted an intangible asset within the scope of Explanation 3(b) to Section 32(1), being a business or commercial right of a similar nature. The Gujarat High Court reproduced paragraphs 4 to 7 of the judgment and upheld the Tribunal’s conclusion that the Assessing Officer had adopted a plausible view.
FULL TEXT OF THE ORIGINAL ORDER OF GUJARAT HIGH COURT
1. These tax appeals have been filed challenging the order dated 14.10.2022 passed by the Income Tax Appellate Tribunal (for short ‘the Tribunal’) in the respective appeals being ITA No. 304 and 305 of 2020.
2. Since the questions of law are common, the same of Tax Appeal No. 404 of 2023 are reproduced as under:
(a) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred in setting aside the revision order u/s 263 of the I.T Act passed by the Pr. CIT without considering the provisions of section 43(6) of the Act?
(b) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred in not considering the decision of Hon’ble Supreme Court in the case of Deniel Merchants (P) Ltd. vs. ITO [2018] 95 taxmann.com 366 (SC) dealing with the identical situation of acceptance of explanation of the assessee without making detailed enquiries?
3. Brief facts indicate that the assessee company has filed return of income for assessment year 2015-16 declaring total loss of Rs. 1,04,49,70,098/-. The case was selected for complete scrutiny and assessment was completed u/s. 143(3) of the Act vide order dated 23-12-2017 accepting the return of income filed by the assessee. Subsequently, the Pr. CIT noticed that pursuant to the order of Hon’ble High Court of Gujarat dated 20-04-2015 sanctioning the composite scheme of arrangement in the nature of amalgamation or demerger, the Healthcare Division of M/s. Nirma Limited got demerged and was transferred to and vested in the assessee company M/s. Aculife Healthcare Pvt. Ltd. effective from 15-06- 2015. The appointed date for the said demerger was 01-10-2014. According to the said scheme all “assets and liabilities” of the healthcare division of M/s. Nirma Ltd. as on the appointed date was transferred to and vested in the assessee company M/s. Aculife Healthcare Pvt. Ltd. The Pr. CIT observed that in the process of demerger, goodwill amounting to Rs. 275 crores being difference between net assets and shares to be issued was credited by the assessee company on which depreciation amounting to Rs. 68,84,94,588/- was claimed for the year under consideration i.e. assessment year 2015-16. The Pr. CIT observed that on the perusal of details, no goodwill is reflected in the balance sheet of the demerged entity prior to the demerger. This indicates that the aforesaid goodwill is a self acquired asset, the actual cost of which in the hands of the demerged company is “Nil”. Since, the actual cost of the goodwill in the hands of the demerged company is “Nil”, which should naturally follow that the WDV of the same would also be “Nil” in its hands. Therefore, after demerger, WDV of the same has to be taken “Nil” in the hands of the assessee company, being the resulting company in view of the explanation to section 43(6) of the Act which provides that the WDV of the block of the assets in the hands of resulting company (assessee company) shall be the WDV of the block of assets of the demerged company immediately before the demerger. Further, the Pr. CIT observed that 6th Proviso to section 32(1) of the Act makes it clear that the depreciation in the hands of the resulting company is to be calculated at the prescribed rates on the WDV of the assets in the books of the demerged company, which in this case would be “Nil” as the WDV of the corresponding assets itself is “Nil” as discussed above. Thus, the Pr. CIT was of the view that the depreciation amounting to Rs. 68,84,94,588/- claimed on the aforesaid goodwill is not allowable under the Act to the assessee company. However, according to Ld. Pr. CIT, the ld. Assessing Officer wrongly accepted the claim of depreciation of Rs. 68,84,94,988/- on goodwill created by virtue of demerger scheme without examining the provisions of explanation 2 to section 43(6) r.w.s. 32 of the Act due to which the assessment order passed u/s. 143(3) of the Act has become erroneous in so far as the same is prejudicial to the interest of the Revenue within the meaning of section 263 of the Act.
4. On an appeal filed by the assessee before the Tribunal, the Tribunal opined that the Principal CIT had erred in facts and in law in invoking the provisions of Section 263 of the Act and hence set aside the order.
5. According to Mr. Varun Patel, learned Senior Standing Counsel appearing with Mr. Dev Patel, learned advocate for the Revenue, on sanction of scheme of arrangement in the nature of amalgamation and demerger, the Healthcare Division of M/s. Nirma Ltd. got demerged and was transferred and vested with M/s. Acculife Healthcare Pvt. Ltd. effective from 15.06.2015. He would submit that in the process of demerger, goodwill amounting to Rs.275.40 crores being the difference between the net assets and shares to be issued was created by the assesee company on which depreciation amounting to Rs.51,63,70,941/- was claimed for the year under consideration i.e. Assessment Year 2016-17. On records, it was found that no such goodwill was reflected in the balance sheet of the demerged company. Since it is a self acquired asset, the actual cost in the hands of the demerged company is nil and hence the WDV was also nil.
5.1 Mr. Patel would submit that the Assessing Officer had failed to follow the explanation 2B to Section 43(6) of the Act where it is made clear that the WDV of the block of assets in the hands of the resulting company shall be the WDV of the block of assets of the demerged company immediately before merger. Hence the Assessing Officer wrongly allowed the depreciation on self generated goodwill.
6. We have perused the order of the Principal CIT and that of the Tribunal. The Tribunal by the order held as under:
“8. We have heard the rival contentions and perused the material on record. We observe that the issue regarding the claim of depreciation in the hands of the demerged company was inquired during the course of assessment proceedings. Further, we also observe that during the course of assessment, the assessee had furnished various factual and legal submissions in respect of its claim of depreciation on goodwill vide submission dated 19- 12-2017, wherein the assessee relied on the case of Smifs Securities 348 ITR 302 (SC) in support of its claim for deprecation of goodwill by assessee company. We also observe that the extract of board resolution passed by the meeting of board of directors and order passed by the Hon’ble Gujarat High Court granting approval to the aforesaid said of demerger and also the valuation report prepared by the approved valuer dated 04-10-2014 were all submitted before the Assessing Officer during the course of assessment proceedings, for his consideration. Accordingly, in the light of the above, we are of the considered view that the Assessing Officer had examined the aspect of assessee’s claim of depreciation during the course of assessment proceedings, factually as well as legally, while allowing the assessee’s claim of depreciation on goodwill .
9. Now, the second issue that arises for our consideration is whether the assessee took a view which is legally plausible/sustainable in law.”
7. Reading the order indicates that the Tribunal found that the assessee had furnished various factual and legal submissions dated 19.12.2017 where the assessee relied upon the case of Commissioner of Income Tax, Kolkata vs. Smifs Securities Ltd [348 ITR 302 (SC)]. As observed by the Tribunal that the Assessing Officer had considered the action of granting approval and also the Valuation Report. Since therefore the Assessing Officer had examined the aspect of the assessee’s claim during the course of acceptance, in the opinion of the Tribunal, the Assessing Officer while passing order under Section 143(3) of the Act had taken a plausible view sustainable in the eye of law. Relying on the decision, it was held that the assessee company is entitled to claim depreciation on goodwill expended at the time of amalgamation of companies.
8. In the case of Smifs Securities Ltd. (supra), paras 4 to 7 read as under:
“4. Explanation 3 states that the expression `asset’ shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words `any other business or commercial rights of similar nature’ in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature’. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).
5. In the circumstances, we are of the view that `Goodwill’ is an asset under Explanation 3(b) to Section 32(1) of the Act.
6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) [`CIT(A)’, for short]has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal [`ITAT’, for short]. We see no reason to interfere with the factual finding.
7. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove.”
9. The Assessing Officer had also relied on the case of Smifs Securities Ltd. (supra) and allowed the claim for depreciation.
10. For the aforesaid reasons, no substantial question of law arises for consideration and the appeals are accordingly dismissed.
