ITA No. 38/Panaji/2009 (Asst. Yr. 2005-06). Case: Chowgule and Co. (P) Ltd. Vs Assistant Commissioner of Income Tax. ITAT (Income Tax Appellate Tribunal)
| Case Number | ITA No. 38/Panaji/2009 (Asst. Yr. 2005-06) |
| Counsel | For Appellant: R. Srinivasan and For Respondent:Ms. Swati Patil |
| Judges | B.R. Jain, AM. and D.K. Agarwal, J.M. |
| Issue | Income-tax Act, 1961 - Section 32 |
| Citation | 2011 (131) ITD 545 (Panaji), 2012 (137) TTJ 596 (Panaji), 2011 (9) ITR(Trib) 21 (Panaji) |
| Judgement Date | January 24, 2011 |
| Court | ITAT (Income Tax Appellate Tribunal) |
Order:
B.R. Jain, A.M., (Panaji Bench)
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This appeal by Assessee against the order dt. 26th Dec, 2008 of learned CIT(A), Panaji, Goa raises the following grounds in appeal:
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The CIT has erred in law and on facts in upholding the disallowance made by the AO on account of claim of depreciation on intangible assets described as 'goodwill'.
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The learned CIT(A) and the AO have merely gone by description of the asset and not by the facts of the matter.
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The learned CIT(A) and AO have failed to appreciate that the Appellant has paid actual price to acquire the said intangible method and has followed the 'purchase method' according to normally accepted accounting standard.
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The AO be directed to allow the said depreciation as claimed in the return.
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Alternatively, the CIT(A) ought to have allowed the entire amount as revenue expenditure since the same is incurred wholly and exclusively for the purpose of business and by the admission of the AO the same does not bring into existence any asset nor gives any enduring benefit. The AO be directed to allow the entire amount as revenue expenditure.
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Briefly the facts are that the Assessee is engaged in the business of mining, export of iron ore, ship and crane building. From assessment year under consideration, the Assessee also undertook business of manufacture of pellets after amalgamation of Mandovi Pellets Ltd. ("MPL" for short), into Chowgule and Co. Ltd. as a going concern pursuant to approval of scheme by the order dt. 10th Dec, 2004 of the Hon'ble High Court of Bombay, at Goa, Panaji w.e.f. 1st April 2004. In the audited P&L a/c submitted along with the return of income, the Assessee had written off an amount of Rs. 4,605.90 lacs as exceptional item "goodwill arising out of amalgamation written off". It however, has been added back in the profit as per P&L a/c for the purposes of computation of 'profits and gains from business and profession' in the computation of income appended with the return of income for the year under consideration. In the computation, the Assessee has computed income of Rs. 1,84,45,88,355 after claiming excess of depreciation of Rs. 46,890.257 as per tax audit report and the depreciation as per books of account. The Assessee claimed further depreciation of Rs. 11,51,47,507 describing the same as 'depreciation on goodwill (intangible asset)' Rs. 46,05,90,029 @ 25 per cent for computing aforesaid income of Rs. 1,84,45,86,355. The Assessee also claimed 'set off of Rs. 1,33,83,53,529 on account of brought forward business losses and unabsorbed depreciation of amalgamating company. The AO found that the goodwill is self-generated by the Assessee and not acquired on amalgamation. As perSection 32(l)(ii) of the Act, goodwill is not an asset on which depreciation can be allowed. He therefore, disallowed the claim of depreciation of Rs. 11,51,47,507 being 25 per cent of Rs. 46,05,90,029.
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The aforesaid decision was taken after requiring the Assessee to show as to why the goodwill or depreciation on goodwill should not be disallowed. In response to the questionnaire dt. 5th June, 2007, the Assessee furnished a reply vide letter dt. 7th June, 2007 including a note on goodwill and depreciation on goodwill as reproduced below:
The company has shown the goodwill of Rs. 46,05,90,029 in its annual accounts and the same has been written off entirely in the P&L a/c. However, in the computation of income the write off of goodwill is not considered as an allowable expenditure but the same has been treated as addition to fixed assets and the depreciation there on has been claimed in accordance with the provisions of Part B of new Appendix I under r. 5 of the IT Rules.
There was amalgamation of Mandovi Pellets Ltd. (MPL) with Chowgule & Co. (P) Ltd. (CCPL) as per the order passed by the Bombay High Court at Goa Company Petn. No. 16C of 2004, a copy of this order along with the scheme of amalgamation is already enclosed as Annex. III under serial No. 5 of the covering letter. Specific attention is drawn to para 14.1(c) of the scheme which states that the excess of net assets of the transferor company recorded in the books of the transferee company over the book value as on the effective date shall be credited to capital reserve account and in case there being a shortfall, the same shall be debited to goodwill account.
We also draw the attention to Accounting Standard AS-14 which is prescribed by the ICAI for accounting relating to amalgamation and also Section 211(3C) of the Companies Act, 1956 which makes the following of the AS-14 mandatory on all the companies. Under AS-14, the accounting of the merger by way of 'pooling of interest method' is prescribed when the following conditions are fulfilled:
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All the assets and liabilities of the transferor company are transferred to the transferee company.
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90 per cent of the equity holders of the transferor company continue as the equity shareholders of the transferee company.
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Payment of consideration is by way of issue of equity shares of the transferee company.
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The business so acquired is continued by the transferee company.
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All the assets and liabilities of the transferor company are recorded at book values in the books of the transferee company.
It may be noted that most of the conditions mentioned above, were not fulfilled in the merger in the case of MPL and CCPL. Consequently, under AS-14, the company was required to resort to the accounting under 'purchase method'. Under this method the existing assets and liabilities of the transferor company are revalued by an expert and on that basis that exchange ratio is determined. In the recent case the exchange ratio was determined by Deloitte Haskins & Sells and N.M. Raiji & Co., both highly reputed firms of chartered accountants. On the basis of such report and duly approved by the Court, CCPL offered the shareholders of MPL the option either to receive each of Rs. 10 per share of MPL held by them or to receive 1 preference share of CCPL of the face value of Rs. 10 each carrying dividend coupon of 8 per cent for every share of MPL held by them. Thus, it may be noted that the CCPL has offered to buy out the shareholders in consideration paid by CCPL to the shareholders of MPL on the above basis far exceeded the revalued figures of the tangible fixed assets of MPL as taken over by CCPL.
The excess as aforesaid over the tangible fixed assets of MPL as paid for by CCPL towards the goodwill representing intangible assets in the nature of know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. Accordingly this actual payout by way of payment as well as issue of preference shares has not been treated as revenue expenditure but has been capitalized in the income-tax computation and depreciation has been claimed thereon. It may be noted that CCPL has acquired the right to all the process know-how and technology for manufacture of pellet and the brand Mondovi Pellet which is now used by CCPL. Accordingly, the goodwill representing the cost of such acquisition is to be considered as depreciable asset under the aforesaid Part B of Appendix I to Rule 5. However, if the same is not treated as capital expenditure, the entire amount becomes allowable as revenue expenditure as the payment is made wholly and exclusively for the purpose of the business of production of pellets carried on by the company.
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Assessee also relied on note No. 5 of Annex. II to the tax audit report dt. 25th Oct., 2005 as under:
Goodwill of Rs. 46,05,90,029 has arisen as a result of Court order dt. 10th Dec, 2004 and in accordance with the purchase method prescribed in AS-14 on accounting for amalgamations issued by the ICAI. The entire goodwill has been written off in the books of account. The company has been advised that depreciation on goodwill can be claimed as deduction in computation of business income. However, such depreciation has not been considered in this annexure.
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The AO examined the claim with reference to material on record and statutory provisions as contained under...
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