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Tax Publishers Allowability of depreciation on goodwill arising out of amalgamation prior to 1-4-2021 *Facts:* There were 3 group companies viz. (i) KIFS Securities Pvt. Ltd. (in short KSPL), (ii) KIFS International Pvt. Ltd. (in short KIPL) (iii) KIFS Trade Capital Pvt. Ltd. (in short KTPL) The stock broking business undertaking of KIFS Securities Pvt. Ltd. (in short KSPL) was transferred in slump sale to KTPL and then an amalgamation happened with KTPL merging into KIPL w.e.f. 1st April, 2015 which was duly approved by the Honble Jurisdictional High Court of Gujarat. The share swap ratio was determined by an independent firm of Chartered Accountants and thus as per AS-14 the amalgamated company (then assessee KIPL) who following the pooling of interest method accounted for the excess consideration over and above the net assets of the amalgamating company vis a vis the share swap consideration as goodwill in their books of accounts post facto the amalgamation. Subsequently the amalgamated company called KIPL was converted into a LLP (assessee KIFS International LLP) with the same set of shareholders holding similar share percentage in the LLP as well. The amalgamation and the conversion of the amalgamated company into a LLP was all exempt under Capital gains law. There was no dispute on this dimension. For the Financial year 2015-16, the pre-LLP converted company (amalgamated company) KIPL claimed depreciation on Rs. 308.87 crores on the goodwill arising out of the amalgamation process until 14-3-2016 (the date of conversion into LLP) and the resultant assessee LLP has claimed depreciation on the same for the pro-rata period from 15-3-2016 to 31-3-2016. This was not disputed by the revenue at that point of time for the then assessment year. While passing the amalgamation order also revenue did not object or raise their objections/points to the high court. Subsequently in the later assessment years revenue refused to allow the depreciation on the goodwill citing the following reasons - 1. Depreciation on goodwill was claimed as per Explanation 3 of Section 32. 2. Explanation 7 to Section 43 of the Act is not applicable since goodwill as an asset does not exist or appear in the Balance Sheet of the amalgamating company 3. Provisions of scheme 43(6) of the Act is not applicable since there was no asset by way of goodwill appearing in the amalgamation company and therefore where the asset itself does not exist the question of claiming depreciation and getting the WDV of the asset does not arise. In other words since there was no goodwill appearing in the books of the amalgamating company the entire goodwill entry arising only out of amalgamation they were not entitled to the depreciation as the law expects what ever is the WDV on the assets appearing in the pre-amalgamation becomes the assets in the hands of the amalgamated company post amalgamation and then the depreciation on this cannot exceed more than the depreciation prior to the eligible depreciation in the hands of the pre-amalgamated entity. 4. In short Sections envisaged that an assessee cannot get a new benefit out of the amalgamation process and it ought to have remained the same as per the books of the erstwhile entities. 5. It was self-generated goodwill was created in the books as per AS-14. 6. Sixth proviso to Section 32(1), Section 49(1)(iii)(e), Explanation 7 to Section 43(1) and/or Explanation 2(b) to Section 43(6)(c) and Section 55(2)(a)(ii) do not permit assessee to claim depreciation on the goodwill given the fact that there was no goodwill standing in the books of the companies prior to the amalgamation. 7. The claim of depreciation itself was a colourable transaction. Assessee relied on the following judicial pronouncements: 1. CIT v. Smifs Securites Ltd. (2012) 348 ITR 302 (SC) : 2012 TaxPub(DT) 2430 (SC) 2. Vimalchal Print & Pack (P) Ltd. v. DCIT (Guj) Assessee also canvassed the fact that the revenue did not object on the amalgamation which was court approved and they have allowed the depreciation in the first year in the hands of the amalgamated company KIPL and now retracting the same is also incorrect. AO and CIT(A) did not permit the depreciation claim. On higher appeal - Held in favour of the assessee that they were eligible for claim of depreciation on the goodwill which arose out of amalgamation. The decision of Smifs Securities did discuss various points and all those points do fit into the case of the assessee. The plea that Sixth proviso to Section 32(1), Section 49(1)(iii)(e), Explanation 7 to Section 43(1) and/or Explanation 2(b) to Section 43(6)(c) and Section 55(2)(a)(ii) do not permit assessee to claim depreciation on the goodwill given the fact that there was no goodwill standing in the books of the companies prior to the amalgamation also cannot be read in here. *Applied:* CIT v. Smifs Securites Ltd. (2012) 348 ITR 302 (SC) : 2012 TaxPub(DT) 2430 (SC) *Ed. Note:* The decision may not apply now as there is specific embargo to claim depreciation on goodwill from business or profession post 1-4-2021. *Case:* KIFS International LLP v. ACIT 2024 TaxPub(DT) 837 (Ahd-Trib)

Tax Publishers

Allowability of depreciation on goodwill arising out of amalgamation prior to 1-4-2021

Facts:

There were 3 group companies viz.

(i) KIFS Securities Pvt. Ltd. (in short KSPL),

(ii) KIFS International Pvt. Ltd. (in short KIPL)

(iii) KIFS Trade Capital Pvt. Ltd. (in short KTPL)

The stock broking business undertaking of KIFS Securities Pvt. Ltd. (in short KSPL) was transferred in slump sale to KTPL and then an amalgamation happened with KTPL merging into KIPL w.e.f. 1st April, 2015 which was duly approved by the Honble Jurisdictional High Court of Gujarat. The share swap ratio was determined by an independent firm of Chartered Accountants and thus as per AS-14 the amalgamated company (then assessee KIPL) who following the pooling of interest method accounted for the excess consideration over and above the net assets of the amalgamating company vis a vis the share swap consideration as goodwill in their books of accounts post facto the amalgamation.

Subsequently the amalgamated company called KIPL was converted into a LLP (assessee KIFS International LLP) with the same set of shareholders holding similar share percentage in the LLP as well. The amalgamation and the conversion of the amalgamated company into a LLP was all exempt under Capital gains law. There was no dispute on this dimension.

For the Financial year 2015-16, the pre-LLP converted company (amalgamated company) KIPL claimed depreciation on Rs. 308.87 crores on the goodwill arising out of the amalgamation process until 14-3-2016 (the date of conversion into LLP) and the resultant assessee LLP has claimed depreciation on the same for the pro-rata period from 15-3-2016 to 31-3-2016. This was not disputed by the revenue at that point of time for the then assessment year. While passing the amalgamation order also revenue did not object or raise their objections/points to the high court. Subsequently in the later assessment years revenue refused to allow the depreciation on the goodwill citing the following reasons -

1. Depreciation on goodwill was claimed as per Explanation 3 of Section 32.

2. Explanation 7 to Section 43 of the Act is not applicable since goodwill as an asset does not exist or appear in the Balance Sheet of the amalgamating company

3. Provisions of scheme 43(6) of the Act is not applicable since there was no asset by way of goodwill appearing in the amalgamation company and therefore where the asset itself does not exist the question of claiming depreciation and getting the WDV of the asset does not arise. In other words since there was no goodwill appearing in the books of the amalgamating company the entire goodwill entry arising only out of amalgamation they were not entitled to the depreciation as the law expects what ever is the WDV on the assets appearing in the pre-amalgamation becomes the assets in the hands of the amalgamated company post amalgamation and then the depreciation on this cannot exceed more than the depreciation prior to the eligible depreciation in the hands of the pre-amalgamated entity.

4. In short Sections envisaged that an assessee cannot get a new benefit out of the amalgamation process and it ought to have remained the same as per the books of the erstwhile entities.

5. It was self-generated goodwill was created in the books as per AS-14.

6. Sixth proviso to Section 32(1), Section 49(1)(iii)(e), Explanation 7 to Section 43(1) and/or Explanation 2(b) to Section 43(6)(c) and Section 55(2)(a)(ii) do not permit assessee to claim depreciation on the goodwill given the fact that there was no goodwill standing in the books of the companies prior to the amalgamation.

7. The claim of depreciation itself was a colourable transaction.

Assessee relied on the following judicial pronouncements:

1. CIT v. Smifs Securites Ltd. (2012) 348 ITR 302 (SC) : 2012 TaxPub(DT) 2430 (SC)

2. Vimalchal Print & Pack (P) Ltd. v. DCIT (Guj)

Assessee also canvassed the fact that the revenue did not object on the amalgamation which was court approved and they have allowed the depreciation in the first year in the hands of the amalgamated company KIPL and now retracting the same is also incorrect. AO and CIT(A) did not permit the depreciation claim. On higher appeal -

Held in favour of the assessee that they were eligible for claim of depreciation on the goodwill which arose out of amalgamation. The decision of Smifs Securities did discuss various points and all those points do fit into the case of the assessee.

The plea that Sixth proviso to Section 32(1), Section 49(1)(iii)(e), Explanation 7 to Section 43(1) and/or Explanation 2(b) to Section 43(6)(c) and Section 55(2)(a)(ii) do not permit assessee to claim depreciation on the goodwill given the fact that there was no goodwill standing in the books of the companies prior to the amalgamation also cannot be read in here.

Applied:

CIT v. Smifs Securites Ltd. (2012) 348 ITR 302 (SC) : 2012 TaxPub(DT) 2430 (SC)

Ed. Note: The decision may not apply now as there is specific embargo to claim depreciation on goodwill from business or profession post 1-4-2021.

Case: KIFS International LLP v. ACIT 2024 TaxPub(DT) 837 (Ahd-Trib)