Urmin Marketing (P) Ltd. v. DCIT [ITA No.
1806/Ahd/2019, dt. 21-10-2020] : 2020 TaxPub(DT) 4586 (Ahd-Trib)
Allowability of Depreciation on goodwill arising on
amalgamation
Facts:
Assessee Private Limited Company acquired another group
company called Unicorn packers Pvt. Ltd. in a scheme of Court approved
amalgamation. Subsequently the assessee was amalgamated with another group
company called Urmin Flavourama Pvt. Ltd. also under a Court approved scheme.
The name of the amalgamated company was then changed to Unicorn packaging Pvt.
Ltd. Subsequently this Unicorn Packaging Pvt. Ltd. was converted into a Limited
liability partnership. All of this amalgamation was with companies with common
promoters/group entities.
The amalgamation of assessee with Unicorn packers Pvt. Ltd.
was by exchange of 90,000 shares of the amalgamating company Unicorn packers
Pvt. Ltd. which is the assessee issued 45,000,000 shares i.e. 500 shares for
every share. The value of the amalgamated company was more than the assessee
company in the share valuation. The shares of amalgamating company Unicorn
Packers Pvt. Ltd. were valued by merchant bankers @ Rs. 123.50 share.
Accordingly the assessee issued 4.5 crores of 123.50 of which Rs. 10 was par
value and Rs. 113.50 was the share premium. The Purchase consideration was over
and above the net worth of Unicorn packers Pvt. Ltd by Rs. 468.73 crores which
was accounted as Goodwill as per AS-14 by the assessee post amalgamation.
Depreciation was claimed on this goodwill which was an intangible asset. The
assessing officer/Commissioner (Appeals) negated the claim of depreciation on
the following rationale --
1. The assessee did not incur
any cost for the goodwill so depreciation has to be disallowed.
2. There was no goodwill
existing in the books of the amalgamated company prior to the amalgamation so
there was no asset in existence so depreciation cannot be granted.
3. Vide proviso 5 to section 32
in an amalgamation the depreciation on the assets be allowed in the amalgamated
company as they existed on the values of the amalgamating company so there was
no goodwill hence depreciation cannot be allowed.
4. Section 43(1) and (6)
envisage cost of asset post amalgamation as they existed in the erstwhile
amalgamating company. As no goodwill existed no depreciation was allowable.
5. The entire scheme of
amalgamation was an after thought a colourable devise to bring such a large
goodwill and claim depreciation thus claimed as a tax evading transaction.
6. There was no cost of the
goodwill to the amalgamating company so vide sec. 55(2)(a)(ii) it has to be
treated as NIL.
On higher appeal --
Held in favour of the assessee that --
1. They were entitled to the
depreciation on the goodwill which arose out of the amalgamation.
2. Revenue has not controverted
nor objected to the Court approved scheme of amalgamation.
3. Section 32 proviso 5 or
section 43(1) or 43(6) none of these can be pressed into service by the revenue
as all these are meant only for assets which existed before the amalgamation
not for the goodwill which arose out of the amalgamation.
4. The accounting of goodwill
was in line with accounting standards and court approval as well.
5. The transaction cannot be
called into a colourable one especially when there was no GAAR/SAAR provisions
applicable for the said assessment year merely because of common holding.
6. There being no cost of
goodwill either can be applied as that is only for the purpose of capital gains
computation and cannot be read into for cost of an intangible asset for
depreciation.
Decision of Apex Court in CIT v. Smifs Securities Ltd.
(2012) 348 ITR 302 (SC) : 2012 TaxPub(DT) 2430 (SC) has upheld depreciation
on goodwill as an intangible asset.