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Tax Publishers 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.

Tax Publishers

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.