Income Tax Appellate Tribunal - Mumbai
Dcit Cc 1(1), Mumbai, Mumbai vs Ecap Securities And Investment Ltd., ... on 30 September, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "E", MUMBAI
BEFORE SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL MEMBER
AND
SHRI RATNESH NANDAN SAHAY, ACCOUNTANT MEMBER
ITA No.2965/M/2024
Assessment Year: 2018-19
DCIT CC 1(1) ECAP Securities and
905, 9th Floor, Investment Ltd.
Partishtha Bhavan, Edelweiss House,
M. K. Road, Off. CST Road,
Mumbai- 400020. Vs. Kalina,
Mumbai
PAN: AABCE8997N
(Appellant) (Respondent)
CO No. 132/M/2024
(Arising out of ITA No.2965/M/2023)
Assessment Year: 2018-19
ECAP Securities and DCIT CC 1(1)
Investment Ltd. 905, 9th Floor,
Edelweiss House, Partishtha Bhavan,
Off. CST Road, M. K. Road,
Kalina, Vs. Mumbai- 400020.
Mumbai
PAN: AABCE8997N
(Appellant) (Respondent)
Present for :
Assessee by : Shri Ajit Kumar Jain, A.R.
Revenue by : Shri Salil Mishra, CIT D.R.
2
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ITA No.2965/MUM/2024 & CO No. 132/M/2024
ECAP Securities and Investment Ltd.; A. Y.2018-19
Date of Hearing : 30 . 07 . 2024
Date of Pronouncement : 30 . 09 . 2024
ORDER
Per : Ratnesh Nandan Sahay, Accountant Member:
1. This appeal has been filed by the revenue and the Cross Objection by the assessee against the common order of the Ld. CIT (Appeals) passed u/s. 250 of the Income Tax Act [the „Act‟ in short] vide DIN & Order Nos. ΠΒΑ/ΑΡΙ/Μ/250/2023-24/1063387859(1), ITBA/APL/M/250/2023- 24/1063388107(1), ITBA/APL/M/250/2023-24/ 1063388257(1), ITBA/APL/M/250/2023-24/1063388738(1), ITBA/APL/ M/250/2023- 24/1063388891(1) Dated 26/03/2024 for the Assessment Year 2014-15, 2015-16, 2016-17, 2017-18, 2018-19.
2. Following grounds of appeal have been raised by the appellant revenue in ITA No. 2965/M/2024: i. "Whether on the facts and circumstances and in law the Ld. CIT(A) was justified in not considering that as per the amended provisions of the Finance Act 2022, section 14A shall apply to a case irrespective of whether exempt income has accrued or received during the previous year relevant to an assessment year and expenditure has been incurred during the said previous year in relation to such exempt income? ii. Whether on the facts and circumstances and in law the Ld. CIT(A) was justified in not considering that amended provisions of the Finance Act 2022 has nullified several judgements as relied by the assessee wherein it was held that no disallowance u/s 14A of the Act could be made in respect 3 Page | 3 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 of any expenditure incurred in earning any exempt income, in the absence of any exempt income?"
iii. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A), Las justified deleting the addition of Rs.8,03,88,055/-made by Assessing Officer 4/s 144 r.w.r.8D(2)(iii), without appreciating the facts that there is no evidence furnished by the assessee to prove that the borrowed funds on which interest is paid by it, are directly attributed to earning of taxable income only?"
iv. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was deleting the addition made to Book Profit computed u/s 115 JB of the Income Tax Act, 1961, disregarding the clear provisions under Explanation (1)(f) to section 115 JB of the Act, which does not prescribe any parameters for computing expenditure attributable to exempted income?
v. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A), erred in deleting the disallowance of ESOP of Rs.16,63.49.039/- without appreciating the fact that the treatment given by the assessee to the ESOP amounts as integral part of cost of assets is in accordance with accepted principles of accountancy and that being so; the assessee is not entitled to claim in his assessment deduction of these amounts as revenue expenditure?
vi. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A), erred in deleting the disallowance of ESOP of Rs.16,63,49,039/ ignoring the decision of the Hon'ble Judicial Committee in 1937 that an assessee cannot ask for two different methods one for writing books of accounts for the purpose of his business and another for having his tax liability determined under the Income Tax.
vii. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Depreciation claimed on goodwill of Rs.1,52,35,951/ without appreciating the fact that goodwill is generated due to excess amount paid by acquiring firm/company during amalgamation?
viii. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Depreciation claimed on goodwill of Rs.1,52,35,951/- without appreciating the fact that value of goodwill was arrived on the 4 Page | 4 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 basis of the difference in the consideration and the WDV of the assets of the amalgamated company and hence depreciation on the same was not allowable in the light of Hon'ble ITAT Bangalore pronouncement in the case of M/s United Breweries Ltd.?
1. The appellant craves leave to add, delete, alter, modify, rectify, substitute or otherwise any or all of the grounds of appeal at or before the time of hearing of the appeal.
2. The appellant, therefore, prays that on the ground(s) stated above, the order of the Ld. CIT(A), Mumbai, may be set aside and that of the Assessing Officer to be restored.
3. The order of the Ld. CIT(A) was received by the Pr. CIT, Central-1, Mumbai, having jurisdiction over the case on 04.04.2024. Therefore limitation for filing appeal starts from 04.04.2024 and last date for filing appeal is 03.06.2024."
3. Following grounds of appeal have been raised by the assessee company in the cross-objection no. 132/M/2024 "Disallowance under section 14A of the Income-tax Act, 1961 ('the Act') read with Rule 8D of the Income-tax Rules, 1962 ('the Rules') On the facts and in the circumstances of the case and in the law, the Learned CIT(A) erred in directing the Learned AO to restrict the disallowance under section 14A of the Act instead of deleting the disallowance made by the Learned AO in absence of his non-satisfaction with the suo moto disallowance offered by the Respondent under section 14A of the Act, thereby violating the mandatory provision of section 14A(2) of the Act.
The Respondent craves leave to add to or alter, by deletion, substitution, modification or otherwise or amend or withdraw the cross objections herein and to submit such statements, documents and papers as may be considered necessary either before or during the hearing of the appeal."
4. The facts of the case, in brief, are that the assessee is a Public Limited Company incorporates under Company Act, 1956. The assessee is subsidiary of Edelweiss Financing Services Limited (hereinafter known 5 Page | 5 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 as „EFSL‟ and formerly known as Edelweiss Capital Limited. The assessee is a registered sub broker of National Stock Exchange and Bombay Stock Exchange. It is engaged in the business of providing broking and advisory services and also trading in shares and securities, currency derivative, equity derivative and interest rate derivative.
5. Ground No. 1, 2, 3 & 4 - Disallowance u/s. 14A:
5.1. During the course of scrutiny assessment proceedings for the assessment year 2018-19, it was noticed by the Ld. AO that the assessee has claimed exempt income of Rs.14,14,42,122/- and has suo moto disallowed a sum of Rs.27,24,680/- being expenditure relating to exempt income. It was also noticed by the Ld. AO that from the details submitted by the assessee that the assessee has made substantial investments in equity shares and mutual funds. Therefore, the expenses attributed to these shares/securities by way of indirect and interest expenses will fall within the ambit of Sec. 14A r.w.r.8D as the section 14A is independent of the head of income under which the exempted income would be otherwise, liable to tax. The intent behind enactment of section 14A is to tax the income where there is one divisible business which gives rise to taxable as well as exempt income.6
Page | 6 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 5.2. On perusal of the Profit & Loss account and bifurcation of financial expenses submitted by the assessee, it was observed by the AO that the assessee has made claim of interest on borrowed funds. However, in support of the claim the assessee has neither established that no part of interest-bearing funds as well as expenses so claimed has found its way in to the investments in shares/mutual funds nor adduced any documentary evidences. In such a situation, the funds and expenses of assessee need to be considered as mixed one and accordingly, the expenditure relatable to activity of investments in mutual funds/shares need to be disallowed u/s. 14A. Therefore, any expenditure relatable to earning of such exempt income cannot be allowed as deduction in light of the provisions of section 14A. 5.3. The AO has noted in the assessment order that it is a well-known fact that any investment in mutual funds/shares are subject to market risk and have potential of earning income depending on various commercial and economic factors andvarious strategies were deployed from time to time by the companies. Therefore, the investment decisions itself become complex in nature. They require substantial market research, day to day analysis of market trends, and decisions with regard to acquisition, retention, and sale of shares at the most appropriate time. Further, it cannot be denied that there are 7 Page | 7 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 certain other administrative expenses like salary, wages, staff welfare, general expenses, printing stationery, motor vehicle, telephone bills, bank charges, bank commission, brokerage, service charges on share transactions and commission etc. incurred during the year and part of which could also be attributable to earning of dividend income. Besides, investments, decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore, not correct to say that no expenditure was incurred in making the investment in the shares/mutual funds which in turn capable of earning exempt income in the future period. This aspect of the matter has also received careful attention of the Chennai Bench of Tribunal in 93 TTJ (Chennai) 161. After comprehensive consideration of all the relevant aspects of the case, including the provisions of Law, it was held that the investment decisions are very strategic decisions in which top management is involved, and therefore, proportionate management expenses are required to be deducted while computing the exempt income.
5.4. This view is also supported by the decision of the ITAT "C"-Bench, Mumbai, in the case of ACIT- 10(1), Vs. Citi Corp Finance (India) 8 Page | 8 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 Ltd. in ITA No. 5832/Mum/2003 (A.Y. 2000-01), dated 27.11.2006. The relevant part of the order is being reproduced below:
"Keeping in view the provisions of section 14A as also the aforesaid decisions of the Co-ordinate Benches of this Tribunal, we hold that, all expenses connected with the exempt income have to be disallowed u/s. 14A, regardless of whether they are direct or indirect, fixed or variable, and managerial or financial in accordance with Law". In this connection the provisions of sub section (2)/ (3) of Section 14A inserted by the Finance Act, 2006, deserves to be noted."
5.5. The procedure for computation of disallowance has now been provided in sub-section (2)& (3) of section 14A of the I.T. Act. It is no longer open to the Assessing Officer to apply his discretion in computing the disallowances, or to make ad hoc disallowance u/s. 14A. Substantive provisions are contained in sub-section (1) of section 14A, prohibiting deduction in respect of expenditure incurred in relation to exempt income, while procedural provisions regarding computation of the aforesaid disallowances, are contained in sub- section (2) and (3) thereof. Sub-section (2) & (3) seek to achieve the underlined object of section of 14A (1) that, any expenditure incurred in relation to exempt income should not be disallowed as deduction. 9
Page | 9 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 It is fairly well settled by catena of decisions that procedural provisions apply to all pending matters, and that the rule against retrospectively does not hit them.
5.6. The insertion of section 14A with retrospective effect, from 1.4.1962, was a serious attempt on the part of the Legislature not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act, against the taxable income. The Legislature has further clarified its intention that the expenses incurred can be allowed only to the extent they are relatable to the earning of the taxable income. The Legislature has, therefore, made an attempt to curb the practice used to reduce the tax payable on the non- exempt income by debiting the expenses incurred to earn the exempt income against the taxable income. The language used by the legislature in the statute makes it amply clear that the legislature was well aware that the deduction of expenses in respect of exempt income were being claimed in full, against the taxable income. It was, therefore, clarified that expenses incurred can be allowed only to the extent they are relatable to earning of the taxable income. Nature of the expenses incurred may, therefore, be related partly to the exempt income, and partly to the taxable income, but the intention of the 10 Page | 10 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 legislature to allow the expenses only to the extent they are relatable to the earning of taxable income. It has been clarified unambiguously that in computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee against the income which is claimed as exempt from tax. Circular No.14 of 2001, dated 22.11.2001, and Circular No.8 of 2002, dated 27.8.2002 have also explained the provisions wherein it has been clarified that no expenses relatable to an income exempt from tax would be allowed as a deduction.
5.7. The AO, therefore, concluded that the explanation filed by the assessee is, therefore, not acceptable, in view of the above mentioned decisions and also the decision of Hon'ble ITAT, Special Bench, Mumbai in the case of Daga Capital Management Pvt. Ltd, and decision of the Hon'ble Bombay High Court in Writ Petition No. 785 of 2010 in ITXA 626/10, in the case of Godrej Boyce Manufacturing Co. Ltd wherein it was held that the provisions of sub-section (2) and (3) of Section 14A of the Income Tax Act, 1961 are constitutionally valid. The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (5th Amendment) Rules 2008, are not ultra vires, the provisions of section 14A, more particularly sub- section (2) does not offend Article 14 of the Constitution. It has been specifically held 11 Page | 11 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 by the Hon'ble Jurisdictional High Court that the provisions of the Rule 8D of the Income Tax Rules which have been notified w.e.f. 24.03.2008, shall apply w.e.f. Assessment Year 2008-09. 5.8. Since the assessee has not made disallowance as per section 14A of the Act read with Rule 8D of the Income Tax Rules, the Ld. AO asked the assessee to submit complete details of all the exempt income earned during the year which does not or shall not form part of the total income along with the details of all the investments and also to explain with reasons and supporting documentary evidence as to why the disallowance of expenditure u/s. 14A r.w.r 8D should not be made in its case in relation to income not includible in total income. In response to the said notice, the assessee, submitted as under: -
"The assessee is engaged in the business of providing broking and advisory services, trading in shares and securities, currency derivative, equity derivative and interest rate derivative. It has earned interest and rental income also. During the year under cons employee cost Electricity Charges 13,463,243 93,019 % of employee cost Office Expenses 3,782,411 26,133% of employee cost Rent 11,223,808 77,546 % of employee cost Total 2,724,680 As stated in the introductory paragraph, the assessee is engaged in the business of 12 Page | 12 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 share trading. Shares bought have been shown as stock in trade. On sale thereof, profit has been accounted in note 2.21 of the financial statement being "Income from treasury operation and investments".
During the subjected year, the assessee has earned income of Rs. 183.16 Crores from treasury operation. Dividend received by the assessee on such stock in trade is incidental to the nature of business. However, the related expenses pertaining to such dividend is disallowed by the assessee which represent proportionate salary of accountant and employee working in treasury department who keeps track of dividend in addition to regular office/ treasury work. The assessee has also disallowed other related expenses in the same ratio. The assessee submits that in its case there is no direct expenses related to dividend income. Dividend is directly credited to bank account of the assessee so there is no need of visiting a person to bank to deposit a cheque. However, due to abundant precaution and considering the facts the dividend is earned due to share trading business of the assessee, it has made disallowance as stated above. More disallowance u/s 14A of the Act will result into disallowing the business expenses under the garb of 14A of the Act. Therefore, the assessee submits that no further disallowance shall be made. The assessee further submits that it has not incurred any expenses 13 Page | 13 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 towards director remuneration which can said be have any bearing on disallowance u/s 14A of the Act. The assessee submits that it has disallowed the relevant expenses as stated by you at 4.4 of draft assessment order, hence, no further disallowance shall be called for. In the alternative and without prejudice to the above, the assessee submits that for the purposes of making the disallowance as per Rule 8D(2)(ii) of the Rules, only those investment shall be considered on which assessee has earned the dividend income. The assessee submits that considering only those investment on which it has actually earned the exempt income, the disallowance works to Rs.1,46,62,809/- (working enclosed). Therefore, the disallowance shall be restricted to Rs.1,46,62,809/- only. For the above proposition, the assessee relies on decision of Hon'ble Delhi High Court in the case of ACB India Limited (TS-176-HC-2015-Del) wherein the Hon'ble Delhi High Court held as under:
"4. The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax-exempt investment, chose to factor in the total investment itself. Even though the CIT (Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity. Given the record 14 Page | 14 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 that had to be done so to substitute the figure of Rs.38, 61,09,287/- with the figure of Rs.3,53,26,800/- and thereafter arrive at the exact disallowance of 05%. In view of the above reasoning, the findings of the ITAT and the lower authorities are hereby set aside. The appeal is allowed and the matter is remitted to work out the tax effect to the AO who shall do so after giving due notice to the party. Similar view is taken by the Hon'ble Delhi Special Bench in the case ACIT vs. Vireet Investment Pvt. Ltd (165 ITD 0027) (Special Bench) wherein it has been held that "11.16 Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year."
6. However, the Ld. AO did not accept the above submission of the assessee and added a sum of Rs.8,03,88,055/- (8,31,12,735- 27,24,680) u/s. 14A of the Act r.w.r. 8D (the working of Rs.8,31,12,735/- has already been given by the assessee in its computation of income u/s. 14A r.w.r. 8D). Aggrieved by the order of the Ld. AO, the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) vide its common order no. CIT(A) - 47, Mumbai/10936/2016-17, CIT(A)-47, Mumbai/10347/2018- 15 Page | 15 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 19, CIT(A) - 47,Mumbai/10300/2018-19, CIT(A) - 47/Mumbai/ 10439/ 2019-20, CIT(A)-47/NFAC/2017-18/10045464 dated 26/03/2024 vide assessment year 2014-15, 2015-16, 2016-17, 2017-18, 2018-19 decided all grounds of appeal raised before him.
7. On the issue of disallowance u/s. 14A, the Ld. CIT(A) partly allowed the appeal of the assessee by restricting the disallowance made u/s. 14A r.w.r.8D to Rs.13,47,709/- on the ground that Ld. AO has taken different view of the decision given by the Hon'ble Apex Court in the case of Maxopp Investment Private Limited where the Hon'ble Supreme Court has held that the dividend income earned from shares and securities held as stock-in-trade are incidental and would not attract the provision of section 14A. While doing so, the Hon'ble Supreme Court has discussed the ratio given in (1) Nice Bombay Transport (P) Ltd. vs. ACIT (OSD) Delhi as decided by ITAT Delhi on 19/11/2018.
(2) PCIT vs. PNB Housing Finance Ltd, the decision of the Hon'ble Delhi High Court delivered on 07/09/2022 and (3) PCIT vs. PNB Housing Finance Ltd. decision of the Hon'ble Supreme Court held on 14/12/2023.
8. Further, this issue is already covered in favour of the assessee by the Hon'ble jurisdiction ITAT in the appellant‟s own case for assessment year 16 Page | 16 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 2013-14 in ITA No.6890/Mum/2018 dated 28/09/2021. Wherein, the Hon'ble ITAT has held as under: -
"2.1 We have heard rival submissions and perused the materials available on record. We find that assessee had earned dividend income of Rs.57,04,843/-on shares held as 'stock in trade' and claimed the same as exempt u/s.10(34) and 10(35) of the Act. The assessee made suo-moto disallowance of expenses of Rs.1,67,317/- as expenditure incurred for earning exempt income. The Id. AO -applied the computation mechanism provided in Rule 8D(2) of the Rules and made disallowance as under:-
a) Under Rule 8D(2)(i) Rs.1,67,317/-
b) Under Rule 8D(2)(ii) Rs.3,70,50,384/-
c) Under Rule 8D(2)(iii) Rs.22,28,937/-
Total Rs.3,94,46,638/-
Less amount already disallowed by the Rs.1,67,317/-
assessee
Net disallowance u/s. 14A Rs.3,92,79,321/-
2.2. The Ld. CIT(A) restricted the disallowance to the extent of exempt income and directed the Id. AO accordingly. 2.3. Before us, the Ld. AR vehemently argued that the assessee is having own funds of Rs.67.89 Crores as against the total investment 17 Page | 17 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 of Rs.72.12 Crores. Hence, by placing reliance on the decision of the Hon'ble Jurisdictional High Court in the case of HDFC Bank Ltd., reported in 383 ITR 529 and the decision of Hon'ble Supreme Court in the case of Reliance Industries Ltd., reported in 410 ITR 466, he pleaded that the investment made to the extent of availability of own funds should not be considered for the purpose of disallowance u/s.14A of the Act. Accordingly, he pleaded that the interest disallowance under Rule 8D(2)(ii) of the Rules should be made only for the remaining investments of Rs.4.23 Crores (Rs.72.12 Crores - Rs.67.89 Crores). He stated that the total interest expenditure is Rs.18.23 Crores and assessee had earned interest income of Rs.11.06 Crores and that the net interest expenditure should be considered while working out the disallowance of interest under Rule 8D(2)(ii) of the Rules. Reliance in this regard was placed on the decision of the Hon'ble Gujarat High Court in the case of PCIT vs. Nirma Credit and Capital Pvt. Ltd., reported in 85 Taxmann.com 72. He further pleaded that only those investments which had actually yielded exempt income should be considered for the purpose of working out the disallowance under Rule 8D(2)(ii) and under Rule 8D(2)(iii) of the Rules. 2.4 We find that the Hon'ble Gujarat High Court in the case of Nirma Credit and Capital Pvt. Ltd., referred to supra had categorically held 18 Page | 18 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 that only the net interest expenditure should be considered for the purpose of working out the disallowance of interest under Rule 8D(2)(ii) of the Rules. We find that out of the total investments of Rs.72.12 Crores, the assessee is having own funds to the tune of Rs.67.89 Crores which is evident from the perusal of the financial statements enclosed in the paper book filed before us. Hence, it could be reasonably presumed that investments only to the tune of Rs.4.23 Crores have been made out of borrowed funds, for which disallowance of interest could be made. Hence, in the light of decision of the Hon'ble Supreme Court in the case of Reliance Industries Ltd., reported in 410 ITR 466 and the decision of the Special Bench of Delhi Tribunal in the case of Vireet Investments reported in:165 ITD 27 we direct the Ld. AO to recompute the disallowance of expenses u/s.14A of the Act as under:-
i) To consider only, net interest expenditure as per the decision of the Hon'ble Gujarat High Court in the case of Nirma Credit and Capital Pvt. Ltd., referred to Supra
ii) To consider only those investments which had actually yield exempt income to the assessee for the purpose of working out the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii). 19
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iii) While working out the same, investments which were presumed to be made out of own funds should be given credit or should be reduced for the purpose of working out the disallowance under Rule 8D(2)(ii) of the Rules.
iv) In any case, the total disallowance made u/s.14A of the Act shall not exceed exempt income.
2.5The Id. AO is directed accordingly. The ground Nos. 3 & 4 raised by the Revenue are disposed of in the aforesaid manner"
The Ld. CIT(A) finally, considering the totality of the facts of the decision of various courts and Hon'ble ITAT „E‟ Bench, Mumbai in appellant‟s own case for the assessment year 2013-14, restricted the disallowance u/s. 14A r.w.r.8D to Rs.13,47,709/-.
9. Aggrieved by the impugned order, the Revenue has filed this appeal before us. During the appellate proceedings before us, the CIT D.R. placed reliance on the order of the Ld. AO. The assessee company, on the other hand, has submitted as under:-
Submission on Section 14A disallowance of expenditure against earning of exempt income "ECAP Equities Ltd is a sub broker of Bombay Stock Exchange. During the F.Y. 2017-18 relevant to A.Y. 2018-19 the assessee company has earned fee and broking income from its clients, earned/ incurred profit/(loss) from 20 Page | 20 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 Treasury operation (i.e. trading in shares & securities, equity and currency derivatives) and earned interest income on FDs and loan etc. The Company during the F.Y. 2017-18 relevant to A.Y. 2018-19 has earned/ incurred profit/(loss) from Treasury operation (i.e. trading in shares & securities, equity and currency derivatives) and earned interest income on FDs, on margin with brokers, rental income, etc. During the F.Y. 2017-18 relevant to the A.Y. 2018-19, the assessee has earned dividend income of Rs.12,69,42,474/- on stock in-trade and Rs..25,575/- on investment the same has been claimed as exempt u/s 10(34) of the IT Act. The assessee company has also earned share of profit from partnership firm of Rs.1,44,74,073/- and claimed the same as exempt u/s 10(2A) of the I.T Act. The assessee has suo-moto disallowed Rs.27,24,680/- u/s 14A of the I.T Act being expenses incurred earning for earning exempt income.
1.1The assessee submits that the disallowance is not called for on the shares and securities held as stock-in-trade. 1.2The assessee humbly submits that the for the purposes of computing the disallowance as per Rule 8D(2)(ii) of the Rules, stock in trade shall not be considered. The view is fully supported by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd vs. CIT (Civil Appeal No 104-109 of 2015) wherein the Hon'ble Supreme Court has 21 Page | 21 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 confirmed the decision of Hon'ble Punjab & Haryana High Court in the case of PCIT vs. State Bank of Patiala (391 ITR 218). The appellant submitted that the issue is now settled by the Hon'ble Apex Court. Hence, for the purposes of making the disallowance u/s 14A of the Act, securities held as stock in trade shall be excluded. This view is also supported by in the decision of Hon'ble Bombay High Court in the case of HDFC Bank Limited vs DCIT [383 ITR 529 Bom HC) Further the Hon'ble Delhi ITAT in the case of M/s. Nice Bombay Transport (P) Ltd vs ACIT [ITA 1331/Del/2012] relying on that no disallowance u/s 14A of the Act shall be made if the shares are held as stock in trade by the assessee. The operative part of the decision reads as under:
"16. Hon'ble Apex Court, therefore, while rejecting the theory of dominant purpose in making investment in shares-whether it was to acquire and retain controlling interest in the other company or to make profits out of the trading activity in such shares - clearly made a clear distinction between the dividend earned in respect of the shares which were acquired by the assessee in their exercise to acquire and retain the controlling interest in the investee company, and the shares that were purchased for the purpose of liquidating those shares whenever the share price goes up, in order to earn 22 Page | 22 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 profits. It is, therefore, clear that though not the dominant purpose of acquiring the shares is a relevant for the purpose of invoking the provisions under section 14 A of the Act, the shares held as stock in trade stand on a different pedestal in relation to the shares that were acquired with an intention to acquire and retain the controlling interest in the investee company.
17. In the circumstances and respectfully following the aforesaid binding precedent, we are of the considered opinion that Application of Rule BD to the facts of the case is not correct, hence, the addition on this account is hereby directed to be deleted."
In view of the above facts and judicial pronouncements, the assessee submits that, stock in trade shall not be considered for making disallowance under rule 8D(2)(ii) of the revised I.T. Rules. 1.3 The assessee company submits that none of the expenses except expenses considered by the assessee company for proportionate disallowance u/s 14A of the I.T Act, have any proximate or immediate nexus to earning of income not chargeable to tax. It is submitted that expenses debited to profit & loss account are clearly in relation to the various incomes credited to the Profit & Loss Account, apart from dividend income. Therefore, assessee has 23 Page | 23 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 disallowed Rs.27,24,680/- being proportionate employee cost & expenses in computation of total income (working enclosed). 1.4We further submit that Hon'ble Mumbai ITAT in the following cases wherein the disallowance made by the assessee (on the basis of salary paid to the employee) has been accepted
- Edelweiss Securities Ltd [ITA NO.7235/Mum/2011]
- Edelweiss Securities Ltd [ITA NO.7199/Mum/2013]
- JM Financial Consultants P. Ltd [ITA NO.1863/Mum/2013]
- Gravis Hospitality Ltd. vs. DCIT [67 SOT 0184 (Mumbai)) 1.5 In view of the above facts and judicial pronouncements, it is respectfully submitted that in the assessee case rule 8D is not applicable and no further disallowance is warranted in excess of amount of Rs.27,24,680/-already offered by the assessee. 1.6 In the alternative and without prejudice to the above, the assessee submits that for the purposes of making the disallowance as per Rule 8D(2)(ii) of the Rules, only those investment shall be considered on which assessee has earned the dividend income. The assessee submits that considering only those investment on which it has actually earned the exempt income, the disallowance works to Rs.1,46,62,809/- (working enclosed). Therefore, the disallowance shall be restricted to Rs.1,46,62,809/- only. For the above proposition, the assessee rely on 24 Page | 24 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 decision of Hon'ble Delhi High Court in the case of ACB India Limited [TS-176-HC-2015-Del] wherein the Hon'ble Delhi High Court held as under:
"4. The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax exempt investment, chose to factor in the total investment itself. Even though the CIT (Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of 38,61,09,287/- with the figure of 3,53,26,800/- and thereafter arrive at the exact disallowance of 0.5%. In view of the above reasoning, the findings of the ITAT and the lower authorities are hereby set aside. The appeal is allowed and the matter is remitted to work out the tax effect to the AO who shall do so after giving due notice to the party."
Similar view is taken by the Hon'ble Delhi Special Bench in the case ACIT vs. Vireet Investment Pvt. Ltd (165 ITD 0027) (Special Bench) wherein it has been held that "11.16 Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that only those investments are to be considered for 25 Page | 25 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 computing average value of investment which yielded exempt income during the year."
In view of the above facts, judicial pronouncements and overall submission, no further disallowance is warranted in excess of amount of Rs.27,24,680/- already offered by the assessee."
10.We have considered the rival submissions and the judicial decisions held by various courts. It is seen that Hon'ble Supreme Court has already laid down the ratio in Maxopp Investment Private Limited (Supra) which has been followed by the Coordinate Bench of the Jurisdictional ITAT in appellant‟s own case for the assessment year 2013-14 (Supra) and has already laid down the following principles:
i) " To consider only, net interest expenditure as per the decision of the Hon'ble Gujarat High Court in the case of Nirma Credit and Capital Pvt. Ltd., referred to Supra
ii) To consider only those investments which had actually yield exempt income to the assessee for the purpose of working out the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii).
iii) While working out the same, investments which were presumed to be made out of own funds should be given credit or should be reduced for the purpose of working out the disallowance under Rule 8D(2)(ii) of the Rules.26
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iv) In any case, the total disallowance made u/s.14A of the Act shall not exceed exempt income."
11.Thus, respectfully following the decisions of the Hon'ble coordinate Bench of ITAT in the appellant‟s own case for assessment year 2013-14 in ITA No.6890/Mum/2018 dated 28/09/2021dinate Bench of ITAT, we also hold that dividend earned out of funds held as stock-in-trade should not be part of the disallowance u/s. 14A of the Act and thus, the disallowance made by the assessee company is accepted. Accordingly, the ground no.1, 2 & 3 is decided against the appellant Revenue and the assessee company gets relief.
12.Further, on the issue of addition on account of expenses relatable to exempt income while computing book profit u/s. 115JB,the Ld. CIT(A) has already relied on the judgement of Hon'ble High Court, Karnataka in the case of Sobha Developers Vs. DCIT, LTU, Bangalore [2021] and CIT Vs. Gokaldas Images Pvt. Ltd. [2020]", wherein it has been held that any expenditure relatable to earning of income exempt u/s. 10(2A) and 10(35) of the Act is disallowed u/s. 14A of the Act and is added back to book profit under clause
(f) of section 115JB of the Act, the same would amount to doing violence with the statutory provision viz., sub-sections (1) and (5) of section 115JB of the Act. It is also pertinent to mention here that the amounts mentioned in clauses (a) to (i) of Explanation to section 115JB (2) of the Act are debited to the statement of profit and loss account, then only the provisions of section 27 Page | 27 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 115JB of the Act would apply. The disallowance u/s. 14A of the Act is a notional disallowance and therefore; by taking recourse to section 14A of the Act, the amount cannot be added back to book profit under clause (f) of section 115JB of the Act. In view of the above, the Ld. CIT (A) directed the AO to delete the addition of Rs.3,07,64,316 being expenses relatable to exempt income while computing Book Profit u/s 115JB.We have considered the decision of the Ld. CIT(A). Since we have already restricted the disallowance made u/s. 14A r.w.r. 8D, the amount so taken should only be added back to the book profit under clause (f) of section 115JB of the Act. Ground No. 5 & 6 - Employees Stock Option Expenses [ESOP]
13.During the course of assessment proceedings, the Ld. AO observed from the ITR and Computation of Income filed by the assessee company that the assessee has claimed a sum of Rs.16,63,49,039/- for the year under consideration on account of Employee‟s Stock Option Expenses. The Ld. AO, therefore, asked the assessee to justify its claim. In its reply dated 09.04.2021, the assessee submitted as under: -
"In this connection we submit that ESOP cost is crystallized during the year as the Employees have exercised the Option during the year itself and the same has been taxed as perquisite in their hand as evident from the working of ESOP cost and Form 16 of employees filed during the course of assessment proceedings and accordingly Assessee Company 28 Page | 28 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 has claimed the deduction of the same. As stated above the employees have exercised the option in the year under consideration itself; hence, the same cannot be termed as contingent in nature. In support of the assessee company in its earlier submission has relied on the Hon'ble Karnataka High Court in case of CIT v Biocon Limited [2020 131 taxmann.com] wherein the Hon'ble high court has upheld the ruling of Special Bench of Bangalore ITAT and held that the difference between the market value of shares and the value at which employees are granted option to acquire shares of the employer (ESOP Expenditure) is a deductible expenditure u/s 37(1) of the I.T Act and not a contingent or notional expenditure"
14.On further enquiry in this regard, the assessee submitted that the discount/benefit enjoyed by the employees on receipt of shares under the ESOP scheme at the concessional rate is considered as perquisites and taxed as income from salary in the hands of the employee. From the above decisions, it is clear that an assessee after having made entries in the books of account consistent with the method of accounting followed by him cannot be permitted to seek assessment of his income from income tax on a different basis.
15.The AO, however, was not convinced with the above explanations on the ground that ESOP expenditure is contingent in nature since the same is not 29 Page | 29 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 crystallized in the previous year and moreover it is capital in nature.The measurement of periodic income is, to that extent, a matter of estimation on the basis of certain accepted principle of accounting. For this reason, on the same facts and circumstances, the computation of business income may differ depending upon the method of accounting employed. In other words, it is not the legal position that on identical facts, the same amount of income should be assessable in the cases of all the assessees. This position has been clearly recognized by the Hon'ble Supreme Court in the case of A. Krishnaswamy Mudaliar that the quantum of allowance permitted to be deducted from the profit and gains of business would differ according to the system of accounting. In the case of CIT VS. SM Chitnavis [1932] 2 Comp Cases 464 [PC], Lord Russel held that if a method of accounting is regularly employed then the assessee ought to get the advantage and suffer disadvantage of that system of accounting, and even though it may happen that in a particular year the revenue may gain, in another year, the assessee may gain. The Hon'ble Bombay High Court held in the case of CIT Vs Tata Iron & Steel Co Limited [1977] 106 ITR 363 that if the method of accounting followed by an assessee cannot be said unreasonable, the same has to be given effect to even if a better method can be visualized.
16.There are also clear authorities to the fact that it is not open to an assessee to set up in his income tax return a claim altogether at variance to the books of 30 Page | 30 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 account maintained by the assessee. As a matter of fact, this issue has been decided as early as in the case of Sarangpur Cotton Mfg. Co. Ltd. at Page 40 of the judgment records.
"Their Lordships are clearly of opinion that the action relates to a method of accounting regularly employed by the assessee for his own purposes in this case for the purpose of Company's business and does not relate to a method of making up the statutory return for assessment to income tax. Secondly, the section clearly makes such a method of accounting basis of computation unless in the opinion of the Income Tax Officer, the income, profits and gains cannot properly be deduced there from. It may well be that, though the profit brought out in the accounts is not true figure for income tax purpose, the true figure can be accurately deduced there from."
17.The Hon'ble Judicial Committee decided way back in 1937 that an assessee cannot ask for two different methods one for writing books of account for the purpose of his business and another for having his tax liability determined under the Income Tax Act. Along the same lines, decisions were given by Allahabad High Court in the case of CIT Vs Smt. Singarbai [1985] 13 ITR 423, though the question before them was as to whether an assessee writing books of account under mercantile system of accounting can ask for cash system for the purpose of his income tax assessment. This issue has 31 Page | 31 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 recently been categorically determined in the judgment of Hon'ble Calcutta High Court in the case of CIT vs. UCO Bank, after having followed a particular method of valuation of shares and securities in his books of account, insisted upon valuation of the same in the income tax return under the method "cost or market price, whichever is lower".
18.The basis on which these assets were valued in the books of account and another basis, which was followed in the return of income, were both consistent with the mercantile system of accounting. In fact, in the case of Chainrup Sampatram Vs CIT [1953] 24 ITR 481 [SC], the later method has been upheld and that decision was heavily relied upon by the UCO Bank's case before Calcutta High Court. After consideration of the matter, the Hon'ble Calcutta High Court held as under:-
"The assessee in this case, has not valued stock of shares and securities in its books of account in accordance with the method "cost or market price, whichever is lower". This is an admitted position. If this method is not followed in writing and preparing accounts consistently, the assessee cannot claim a notional method of stock valuation only for computation of income by the income tax authorities without following the same method in writing and preparing accounts. Section 145[1] of the Act, 1961, clearly goes against the submissions made on behalf of the assessee. As we have indicated, the assessee's method of accounting 32 Page | 32 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 as well as the system of stock valuation adopted by him consistently for the purposes of preparing his accounts has to be accepted by the tax authorities. The book results can be rejected by the tax authorities only if the method adopted by the assessee is either defective or if the system adopted does not disclose a proper and true income."
19. The AO, therefore, rejected the Assessee‟s claim of 100% deduction of the said expenses during the year on the ground that the provisions of Section 145(1) presuppose that there can be more than one method of accounting, the income from which may be properly deducible. These provisions would make no sense if always there is one method of accounting, the income from which alone may be properly deducible. In the case of ongoing business, the profit or loss made by the businessman from than business, as aptly described in the case of Sunil Siddharth bhai Vs CIT [1985] 156 ITR 509/23 Taxman 14W [SC] at Page 521 remains in the "Womb of Future". The measurement of periodic income is, to that extent, a matter of estimation on the basis of certain accepted principle of accounting. For this reason, on the same facts and circumstances, the computation of business income may differ depending upon the method of accounting employed. In other words, it is not the legal position that on identical facts, the same amount of income should be assessable in the cases of all the assessees. This position has been clearly recognized by the Hon'ble Supreme Court in the case of A. 33 Page | 33 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 Krishnaswamy Mudaliar that the quantum of allowance permitted to be deducted from the profit and gains of business would differ according to the system of accounting. In the case of CIT vs. S M Chitnavis [1932] 2 Comp Cases 464 [PC], Lord Russel held that if a method of accounting is regularly employed then the assessee ought to get the advantage and suffer disadvantage of that system of accounting, and even though it may happen that in a particular year the revenue may gain in another year the assessee may gain again. The Hon'ble Bombay High Court held in the case of CIT Vs Tata Iron & Steel Co Limited [1977] 106 ITR 363 that if the method of accounting followed by an assessee cannot be said unreasonable, the same has to be given effect to even if a better method can be visualized. In the case of Md. Umer vs CIT 101 ITR 525, the Hon'ble Patna High Court have categorically stated at Page 530, "once, therefore, the method of accounting employed by the assessee has been regularly employed and income, profits and gains can properly be deduced from such regularly employed method of accounting, i.e., the end of the matter for the purpose of proviso to sub- section [1] of Section 145."There are also clear authorities to the fact that it is not open to an assessee to make a claim in his income tax return which is altogether at variance to the books of account maintained by the assessee. From the above decided cases, it is clear that an assessee after having made entries in the books of account consistent with the method of accounting 34 Page | 34 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 followed by him cannot be permitted to seek assessment of his income from income tax purposes on a different basis on the ground that another basis may also be permissible under the method of accounting followed by the assessee or has been upheld in certain judgment of a High Court or Supreme Court. To this extent, the entries made in his books of account are as much binding as the method of accounting itself. It is only when the same are not conclusive or decisive of the matter; it is open for the assessee to question it, as held by the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd, vs. CIT [1971] 82 ITR 363 and several other judgments. This position is also in built in the provision of section 145[1] itself that where the method of accounting is followed is such that income cannot be properly deduced there from, the Assessing officer may determine the income. In short, for obtaining a treatment in the assessment proceedings at variance with the books of account maintained by the assessee, it has to be necessarily shown that the treatment as given or entries as made in the books of account are either erroneous or contrary to the correct legal position. It requires to be examined that if assessee has correctly treated the amounts in question as capital expenditure in the books of account and then whether the assessee is entitled to claim in his income tax assessment deduction of these amounts as revenue expenditure in spite of the fact that the amounts have been correctly treated as capital expenditure in the books of account. It may further be seen 35 Page | 35 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 that the treatment given by the assessee to these amounts as integral part of cost of assets is in accordance with accepted principles of accountancy and that being so, the assessee is not entitled to claim in his assessment deduction of these amounts as revenue expenditure.
20.Thus, the Ld. AO finally, disallowed the claim of expenses of Rs.16.63.49.039/- by holding the same as notional capital in nature and therefore an allowable expenditure. Aggrieved by the order Ld. Ld. AO, the appellant raised this ground before the Ld. CIT(A).
21.The Ld. CIT(A) while deciding the issue of the disallowance of Rs.16,63,49,039/- incurred by the appellate proceedings on account of Employees Stock Option Expense [ESOP] has stated as under:-
"23.1 Decision on Ground No. 3: The issue refers to the "disallowance and addition of Rs. 16,63,49,039/- incurred by the Appellant on account of Employees Stock Option Expense [ESOP]":
23.1.1. The AO, vide para 5, in his assessment order, has concluded that an assessee, even after having made entries in the books of account consistent with the method of accounting followed by him, cannot be permitted to seek assessment of his income from income tax purposes on a different-basis and therefore, the ESOP claimed by the assessee is disallowed and added back to its total income for the year under consideration. 36
Page | 36 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 23.1.2 It appears from the assessment order that AO has questioned the method of accounting followed by the appellant with regard to expenses claimed for ESOP. It is noted by the AO in para 5.12 and 5.13 that the ESOP expanses are capital in nature and therefore cannot be allowed as revenue expenditure. However, the judgement of Hon'ble High Court of Karnataka in Biocon Ltd 430 ITR 151 is pertinent to the facts of appellant and covers the entire gamut of issues raised by AO in assessment order:-
"6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the tribunal is correct in holding that discount on the issue of ESOPs i.e., difference between the grant price and the market price on the shares as on the date of grant of options is allowable as a deduction under section 37 of the Act. Before proceeding further, it is apposite to take note of section 37(1) of the Act, which reads as under:
Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". 37
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7. Thus, from perusal of section 37(1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of section 37(1) of the Act would be attracted. It is also pertinent to note that section 37 does not envisage incurrence of expenditure in cash.
10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid "exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfillment of the condition." It is also noted that appellant has actually issued the shares of listed sister company and TDS was also deducted from the perquisites as given 38 Page | 38 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 to employees in form of shares allotted through ESOP schemes. Hence, this is a scheme where shares are actually allotted to the employees. 23.1.3 Further, during the appellate proceedings, the appellant has submitted that Hon'ble ITAT 'A' Bench, Ahmedabad, in the case of Comtrade Commodities Services Ltd. (Formerly Edelweiss Comtrade Ltd.) (sister concern of the appellant) having ITA No. 429/Ahd./2023 (A.Y.2018-19) on the same ground having identical facts, has passed a speaking order dated 27.09.2023 wherein the proceedings initiated by the Hon'ble PCIT u/s. 263 of the ACT on the issue of disallowance of the ESOP-expenses claimed has been quashed, giving the judgement in the favour of the appellant. The said order is reproduced hereunder.
"1. On the facts and in the circumstances of the case, the learned Principal Commissioner of Income-tax -1, Ahmedabad (the learned PCIT") erred in invoking the revision proceedings under section 263 of the Income-tax Act, 1961 (the "Act") and setting aside the Assessment Order dated 26 February 2021 passed by the learned Assessing officer (the AO) under section 143(3) of the Act (the "Assessment Order"), on the alleged ground that the same is erroneous and prejudicial to the interest of the revenue.
The Ld. Pr.CIT, we find, has totally ignored the authoritative pronouncement of the Special Bench of the ITAT, which was confirmed by 39 Page | 39 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 the Hon'ble Karnataka High Court and has relied on decisions of the ITAT without distinguishing the Special Bench decision and the Hon'ble Karnataka High Court decision. He has not pointed out how and why the AO had erred in allowing assesses claim of ESOP expenses in accordance with the decision of the Special Bench of the ITAT and the Hon'ble Karnataka High Court. Therefore, we do not find any merit in the Ld. Pr.CIT's finding of error in the assessment order on the allowance of claim of ESOP expenses. As noted by us above, the issue was thoroughly inquired during the assessment proceedings by the AO. His view in allowing the claim of ESOP expenses in accordance with judicial pronouncements has not been found to be at fault by the Ld. PCIT by pointing out in any way that the said decisions were not applicable to the facts of the case.
10. Even before us Ld.DR was unable to point out how the allowance of claim of ESOP expenses in accordance with the authoritative judicial pronouncements on the issue was erroneous, or for that matter, how the case laws relied upon by the Ld. PCIT were applicable to the facts of the case overruling the Special Bench decision of the ITAT and the Hon'ble Karnataka High Court decision. We hold therefore that the Ld. PCIT has failed to find any error in the order of the AO vis a vis the allowance of 40 Page | 40 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 claim of ESOP expenses to the tune of Rs.2,52,14,540/- and his order on this issue is therefore directed to be set aside.
12. In sum and substance, therefore, the order of the ld. Pr.CIT passed under section 263 of the Act, in entirety, is set aside.
13. In the result, the appeal of the assessee is allowed."
23.1.4. The facts of the case are identical to the case of M/s Biocon Ltd. and the findings of the AO are not relevant in light of the ratio decided by Hon'ble Karnataka High Court. Further, Hon'ble ITAT, 'A' Bench, Ahmedabad in the Appellant's sister concern case for A.Y. 2018-19, has brought this very fact in its decision that in absence of any noted departure from the facts, the ration of M/s Biocon Ltd cannot be ignored. I, therefore, direct the AO is directed to delete the addition of Rs 16,63,49,039/- on account of disallowance of ESOP. Accordingly, the ground of appeal no. 3 raised by the appellant is allowed."
22.Aggrieved by the order of the Ld. CIT(A), the revenue has filed this appeal. During the appellate proceedings, the Ld. CIT D.R. placed reliance on the order of the AO. The Assessee‟s counsel on the other hand has submitted as under:-
"Note on Deduction claimed of ESOP Cost:-
With reference to the ESOP cost claimed as a deduction, the assessee would like to submit as under:41
Page | 41 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 "a. The assessee, Ecap Equities Ltd, has claimed ESOP cost of Rs.16,63,49,039/- as a deduction as per working of ESOP cost is enclosed herewith as exhibit 6. The above claim has been made in the return of income.
b. The assessee, is a public limited company incorporated under Companies Act, 1956. The assessee is subsidiary of Edelweiss Financial Services Limited ('EFSL') (Formerly known as Edelweiss Capital Ltd), which is listed on the recognised stock exchanges in India. c. EFSL framed an Employees Stock Option Plan ('ESOP') scheme under which eligible employees (including employees of subsidiaries) have been awarded stock options in EFSL. The ESOP scheme was formulated in accordance with the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 ('SEBI Guidelines') ESOP Scheme/Plan is enclosed herewith as exhibit 7. In so far as the subsidiaries are concerned (which includes the assessee company), the preamble to the ESOP scheme reads as under:
d. "Further, this plan will also be implemented, for and on behalf of and at the request of the subsidiary companies (as defined under the Companies Act, 1956) of Edelweiss, for the Employees of the subsidiary companies."
d. EFSL has issued its shares to employees of the assessee under the ESOP scheme formulated by EFSL and assessee claimed a deduction of the ESOP 42 Page | 42 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 cost, being the difference between the market price of EFSL's shares on the date of exercise by the concerned employees and the grant price of such shares, as an expense under section 37(1) of the Act. e. In order to be eligible to acquire the shares, the employees of EFSL and its subsidiaries are obliged to render services to their respective employers and/or achieve specified benchmarks during the vesting period. The employees acquire the right to exercise options on completion of the vesting period. Upon vesting of the shares, the employee can exercise options within a specified period on payment of the exercise price. f. Section 37(1) of the Act allows an assessee to claim expenditure where inter alia it has been incurred or laid out wholly and exclusively for the purpose of business.
g. The primary object of ESOP is to earn profit by securing consistent and concentrated efforts of dedicated employees during the vesting period and is one of the modes of compensating the employees for their services. It is a part of their remuneration package and an alternative to direct Incentive in cash. Thus, shares subscribed by the employees (on exercise) at discount vide ESOP scheme acts as a substitute for direct incentive in cash for their services rendered.
h. By undertaking an obligation to issue shares at a price below prevailing fair market value, the assessee incurs an obligation towards remunerating 43 Page | 43 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 the employees for their services, which is nothing but expenditure which has been incurred for the purpose of its business activity. i. Thus, difference between market value on the date of exercise and offer price in respect of shares offered to employees under ESOP scheme are in nature of benefit (and hence constitute remuneration) to the employees and an actual expenditure to the employer.
J. Separately, based on the provisions of the Act it is stated that the discount/benefit enjoyed by the employee on receipt of shares under the ESOP scheme at the concessional rate is considered as perquisites and taxed as income from salary in the hands of the employee. Thus, it is under the provisions of the Act that the said ESOP discount/compensation would qualify as an employee cost i.e., salary expense for the assessee. Further, tax has been deducted by the assessee on such perquisite in the capacity of the 'employer as evident from Salary Certificate in Form 16 enclosed herewith as exhibit B. k. We wish to state that once it is established that where a payment or benefit in kind is in the nature of remuneration to the employee, the same is fully deductible in the hands of the employer. For instance, where an employer makes payment in respect of medical, leave travel allowance, telephone bills for telephone installed at residence of the employee etc., the employer is entitled to a full deduction as the same represents a business 44 Page | 44 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 expenditure. The legislature has given an inclusive definition of the term 'salary' to include the following components as remuneration of an employee:
- Wages
- any annuity
- any fees or commissions
- any gratuity
- perquisites (including fringe benefits or amenities)
- profits in lieu of or in addition to any salary or wages l. As per the erstwhile provisions of the Fringe Benefit Tax ('FBT'), an employer was made liable to pay FBT on ESOPs, also regarded ESOPs as consideration for employment. This reflects legislative intent of treating ESOP is an employee compensation.
The above position is well accepted under the Act as well as further fortified by the decision of M/s. Biocon Limited ([2013] 25 ITR(T) 602 (Bangalore Trib.) (SB) (Copy attached herewith as Exhibit 9-wherein the Special Bench of the Hon'ble Tribunal at Bangalore held that the discount on ESOP is allowable to the assessee being the difference between the exercise price and the market price on exercise of option by the employee. While determining whether discount under ESOP is an 45 Page | 45 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 expenditure, the Special Bench in case of M/s Biocon Limited (supra] observed that:
Expenditure need not necessarily be incurred in cash. Incurrence of an obligation is also expenditure.
By undertaking an obligation to issue shares at a discounted premium at a future date, the assessee incurs an obligation towards remunerating the employees for their services, which is nothing but expenditure.
ESOP discount is a substitute for direct incentive in cash for their services.
Relevant extract of the judgment is as follows: "The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head Profit and gains of business or profession"
The decision of Bangalore ITAT in case of M/s. Biocon Limited (supra) has been recently affirmed by the Hon'ble Karnataka High Court in case of CIT v. Biocon Limited. (2020 121 taxmann.com 351 (Karnataka HC)] (Copy of Judgement is attached herewith as Exhibit 10)- The Hon'ble High Court upheld the ruling of Special Bench (SB) of the Bangalore ITAT and held that the difference between the market value of 46 Page | 46 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 shares and the value at which employees are granted option to acquire shares of the employer (ESOP Expenditure) is a deductible expenditure and not a contingent or notional expenditure.
- The HC held that ESOP Expenditure represents consideration for services rendered by employees and hence, is a deductible business expenditure.
- For the purpose of business deduction, expenditure need not necessarily be incurred in cash and actual pay-out is not a pre- requisite to claim the deduction. Incurrence of an obligation is also an expenditure allowable as business deduction.
- Furthermore, as held by the SC in the case of CIT v. Woodward Governor (India) Pvt. Limited, expenditure also includes 'loss'. Hence, issuance of shares at a discount, where the taxpayer absorbs the difference between market value of shares and discounted issue price, constitutes an expenditure allowable as a business deduction. The said principle has also been accepted in a plethora of judgements delivered in connection with the shove issue: Pr. CIT v Lemon Tree Hotels (P) Ltd. (2019) 104 taxmann.com 26 (Delhi) Goldman Sachs (1) Securities (P) Ltd. v ACIT (2016) 72 taxmann.com 337 (Mumbai ITAT) 47 Page | 47 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 HDFC Bank Ltd. v Dy. CIT (2015) 61 taxmann.com 361 (Mumbai (TAT) Bharti Airtel Ltd. v Addi CIT [2014] 43 taxmann.com 50 (URO) (Delhi (TAT) Cera Sanityware Ltd v DCIT [2016] 68 taxmann.com 433 (Ahemdabad ITAT) Dr. Reddy's Laboratories Ltd v ACIT [2014] 51 taxmann.com 136 (Hyderabad ITAT) Mylan Laboratories Ltd. v ACIT [2015] 53 taxmann.com 333 (Hyderabad ITAT) Apollo Health Street v Dy. CIT [2014] 45 taxmann.com 507 (Hyderabad ITAT) Accordingly, based on the above facts and relied on various judgement, it can be stated that issue of shares at a price below prevailing fair market value is an expenditure incurred or laid out wholly and exclusively for the purpose of business and the same qualifies as a deduction under section 37 of the Act."
23.We have considered the above submissions and found that the ground raised by the Revenue has already been dealt with and decided in favour of the assessee by the decision of Special Bench of ITAT, Bangalore Tribunal in M/s. Biocon Limited ([2013] 25 ITR(T) 602 (Bangalore Trib.) (SB)wherein 48 Page | 48 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 the Special Bench of the Hon'ble Tribunal at Bangalore held that the discount on ESOP is allowable to the assessee being the difference between the exercise price and the market price on exercise of option by the employee. While determining whether discount under ESOP is an expenditure, the Special Bench in case of M/s Biocon Limited (supra] has already observed that:
"Expenditure need not necessarily be incurred in cash. Incurrence of an obligation is also expenditure.
By undertaking an obligation to issue shares at a discounted premium at a future date, the assessee incurs an obligation towards remunerating the employees for their services, which is nothing but expenditure.
ESOP discount is a substitute for direct incentive in cash for their services.
Relevant extract of the judgment is as follows:
"The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head Profit and gains of business or profession"
The Hon'ble High Court upheld the ruling of Special Bench (SB) of the Bangalore ITAT and held that the difference between the market value of 49 Page | 49 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 shares and the value at which employees are granted option to acquire shares of the employer (ESOP Expenditure) is a deductible expenditure and not a contingent or notional expenditure. The Hon‟ble HC held that ESOP Expenditure represents consideration for services rendered by employees and hence, is a deductible business expenditure-
- For the purpose of business deduction, expenditure need not necessarily be incurred in cash and actual pay-out is not a pre- requisite to claim the deduction. Incurrence of an obligation is also an expenditure allowable as business deduction.
- Furthermore, as held by the SC in the case of CIT v. Woodward Governor (India) Pvt. Limited, expenditure also includes 'loss'. Hence, issuance of shares at a discount, where the taxpayer absorbs the difference between market value of shares and discounted issue price, constitutes an expenditure allowable as a business deduction. The said principle has also been accepted in a plethora of judgements delivered in connection with the shove issue:
Pr. CIT v Lemon Tree Hotels (P) Ltd. (2019) 104 taxmann.com 26 (Delhi) Goldman Sachs (1) Securities (P) Ltd. v ACIT (2016) 72 taxmann.com 337 (Mumbai ITAT) 50 Page | 50 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 HDFC Bank Ltd. v Dy. CIT (2015) 61 taxmann.com 361 (Mumbai (TAT) Bharti Airtel Ltd. v Addi CIT [2014] 43 taxmann.com 50 (URO) (Delhi (TAT) Cera Sanitaryware Ltd v DCIT [2016] 68 taxmann.com 433 (Ahmedabad ITAT) Dr. Reddy's Laboratories Ltd v ACIT [2014] 51 taxmann.com 136 (Hyderabad ITAT) Mylan Laboratories Ltd. v ACIT [2015] 53 taxmann.com 333 (Hyderabad ITAT) Apollo Health Street v Dy. CIT [2014] 45 taxmann.com 507 (Hyderabad ITAT)
24. Thus, following the above decisions, we also hold that that the issue of shares at a price below prevailing fair market value is an expenditure incurred or laid out wholly and exclusively for the purpose of business and the same qualifies as a deduction under section 37 of the Act. Thus, the ground raised by the Appellant Revenue is decided against it.
25.Ground No. 7- Disallowance of depreciation claimed on goodwill of Rs.1,52,35,951/-
25.1. During the course of assessment proceedings, the AO noticed that the assessee has computed the valuation of goodwill as on 31.03.2017 of 51 Page | 51 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 Rs.6,09,43,805/- Further, as per schedule DEP, the assessee has computed total depreciation amount of Rs.13,46,17,292/- including amount of depreciation of Rs.1,52,35,951/- computed on the Intangible assets. The same amount of Rs.13,46,17,292/- has shown as a Depreciation in the computation of Income(Original and Revised).As per depreciation amount of Rs.1,52,35,951/- computed by the assessee on the Intangible assets, it appears that the assessee has claimed depreciation amount of Rs.1,52,35,951/- @ 25% as per schedule DEP on the amount of goodwill as computed on 31.03.2017. The goodwill as per books of accounts is due to the Amalgamation of M/s Olive Business Centre Limited, M/s Serenity Business Park Limited, M/s Eternity Business Centre Limited, M/s Burlington Business Solution Limited and M/s Auris Corporate Centre Limited. 25.2. The AO, therefore, asked the assessee to justify the claim of depreciation on goodwill computed as above. The assessee vide its reply dated 26.01.2021 submitted that the addition to goodwill represent difference between Net asset taken over (i.e. Assets minus Liability) of the said amalgamating companies & cost of investment made by the assessee in amalgamating company. The Amalgamation of the said companies is as per scheme of Amalgamation approved by National Company Law Tribunal (NCLT) Mumbai vide its orders 52 Page | 52 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 dated 23.08.2017 and NCLT, Hyderabad vide its orders dated 11.04.2018 and "Appointed date" is 01.4.2017.
25.3. The above reply of the assessee was considered by the Ld. AO who informed the assessee that that the value of goodwill is arrived on the basis of the difference in the consideration and the WDV of the assets of the amalgamated company. The depreciation on the same is not allowable in the light of Hon'ble ITAT Bangalore decision pronounced vide ITA No. 7222, 801 & 1065/bang/2014 dated 30.09.2016 in the case of M/s United Breweries Ltd., Bangalore. The AO, therefore, asked the assessee by way of show- cause notice along with Draft Assessment Order to show cause why the depreciation on goodwill be disallowed? In its reply dated 09.04.2021, the assessee submitted as under:-
"During the year under consideration, the assessee has claimed depreciation of Rs.1,52,35,951/- on goodwill acquired due to amalgamation of five companies with the assessee company. Companies amalgamated with the assessee are namely (i) M/s Olive Business Centre Limited (ii) M/s Serenity Business Park Limited (iii) M/s Eternity Business Centre Limited (iv) M/s Burlington Business Solution Limited and (v) M/s Auris Corporate Centre Limited. Working of goodwill is given at note 2.39 of the audited financial 53 Page | 53 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 statement for year ended 31/3/2018 (relevant page of audited financial statement is enclosed herewith for your honours ready reference). Sole basis of proposed disallowance of goodwill is judgment of Bengaluru ITAT in the case of United Breweries Pvt Ltd in ITA NO 7222/Ban/2014."
25.4. The Ld. AO did consider considered the above reply but he didn‟t accept the same on the ground that the Income Tax Act doesn't allow for depreciation on intangible asset (goodwill) that is generated due to excess amount paid by acquiring firm/company during amalgamation. Accordingly, the depreciation claimed at Rs.1,52,35,951/- @ 25% of total goodwill amount of Rs. 6,09,43,805/-, was disallowed and added back to the total income of the assessee for the year under consideration."
25.5. Aggrieved by the order of the Ld AO, the assessee company filed appeal before the Ld. CIT (A), who vide impugned order held as under:-
"The AO, vide para 6, in his assessment order, has concluded that the assessee has computed the valuation of goodwill of Rs.16,09,43,805/- as on 31.03.2017 and as per schedule DEP, has computed total depreciation amount of Rs.13,46,17,292/- including amount of depreciation of Rs.1,52,35,951/- computed on the Intangible assets. 54
Page | 54 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 The same amount of Rs.13,46,17,292/-has shown as a Depreciation in the computation of Income (Original and Revised). Further, the assessee has claimed depreciation of Rs. 1,52,35,951/ on goodwill acquired due to amalgamation of five companies with the assessee company. Companies amalgamated with the assessee are namely (1) M/s Olive Business Centre Limited (ii) M/s Serenity Business Park Limited (iii) M/s Eternity Business Centre Limited (iv) M/s Burlington Business Solution Limited and (v) M/s Auris Corporate Centre Limited. However, the Income Tax Act doesn't allow for depreciation on intangible asset (goodwill) that is generated due to excess amount paid by acquiring firm/company during amalgamation. Thus, the depreciation claimed of Rs.1,52,35,951/- @ 25% of total goodwill amount of Rs.6,09,43,805/-, is hereby by disallowed and added back to the total income of the assessee for the year under consideration.
23.2.3 Further, during the appellate proceedings, the submission of the appellant is as under:
"During the year under consideration, the assessee has claimed depreciation of Rs.1,52,35,951/- on goodwill acquired of Rs.6,09,43,805/- due to amalgamation of five companies with the Appellant company.55
Page | 55 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 The companies amalgamated with the Appellant are namely
(i) M/s Olive Business Centre Limited
(ii) M/s Eternity Business Centre Limited
(iii) M/s Serenity Business Park Limited
(iv) M/s Auris Corporate Centre Limited. And
(v) M/s Burlington Business Solution Limited The Ld. AO vide show cause notice dated 06.04.2021 has asked the Appellant to provide justification on allowability of depreciation on Goodwill In response thereto, the Appellant vide its submission dated 09.04.2021 has submitted that the goodwill on amalgamation has been accounted in the books of accounts as per the Scheme of Amalgamation approved by Hon'ble NCLT vide its order dated 11.04.2018 and the same is an intangible asset within the meaning of section 32(1) of the Act and it has rightly claimed Depreciation u/s 32 of the Act.
However, the Ld. AO did not accept the contention of the Appellant and disallowed the depreciation of Rs.1,52,35,951/- claimed on goodwill. This is an issue which was put to rest by the Hon'ble Supreme Court in favour of the Assessee in the case of CIT v Smifs Securities Ltd. (2012) 348 IIR 302 (SC) wherein it was held that 56 Page | 56 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 goodwill arising at the time of merger is an intangible asset and is entitled to be depreciated u/s 32 of the Act.
The question before the Apex Court was whether goodwill is an asset u/s.32 of the Act and whether depreciation is allowable or not. The findings of the Apex Court were: "The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that the authorized 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."
Subsequent to this decision there have been plethora of judgements by various Courts wherein the decision of the Hon'ble Supreme Court has been followed. In a few cases and notable amongst them is the case of United Breweries Ltd. Vs. Addl. CIT (ITA No. 722, 801 & 57 Page | 57 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 1065/Bang/2014 dated 30.09.2016), wherein a different view was taken. This view was however based on the peculiar facts of the case and is not in divergence with the view of the Apex Court. The ITAT in the said matter denied depreciation on goodwill by applying the 6th proviso to section 32(1) of the Act and Explanation 3 to section 43(1) of the Act.
However, the said judgement, though referred to by the Ld. AO would not apply to the present case before Your Honour, mainly since the same is differentiable on the facts itself since in the case of United Breweries, the assets on amalgamation were also revalued which is not the case before Your Honour The facts of the case were that during the year under consideration the assessee inter alia amalgamated its wholly owned subsidiary KBDI. The assessee acquired the entire shareholding of the company from the shareholders for consideration of Rs. 180.52 crores. In the books of account, the assessee had recorded the value of the assets on the basis of revaluation done by the valuer and thereby shown the goodwill at Rs.62.30 crores. The Assessing Officer did not accept the claim of depreciation on goodwill by holding that the assessee had not acquired any intangible assets in pursuant to the amalgamation of its subsidiary with the assessee and therefore as per the Assessing 58 Page | 58 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 Officer the goodwill was not at all in existence. The Assessing Officer invoked the provisions of Explanation 3 to section 43(1) which confers a power on the AO to determine the cost if the Assessing Officer is satisfied that the main purpose of the transfer of such assets was the reduction of liability to income tax by claiming depreciation on the enhanced cost. As this was an amalgamation of the subsidiary with the assessee therefore all the assets which came to the assessee were already in use by the subsidiary and consequently the valuation of all the assets was subjected to the verification of the Assessing Officer as per Explanation 3 of section 43(1). The value of the goodwill shown in the books of KBDL. was Rs.7.45 crores which was enhanced in the books of account of the assessee to Rs.62.30 crores. The Assessing Officer also invoked the 6th proviso to Section 32 which restricts the depreciation in the hands of the successor or amalgamated company to the extent as apportioned between the amalgamating and amalgamated company in the ratio of number of days for which the assets are used by them as if no amalgamation had taken place. According to the Assessing Officer as goodwill was appearing in the books of the amalgamating company, no depreciation on the enhanced value of goodwill was permissible considering the said proviso.
59
Page | 59 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 Sixth proviso the section 32 of the Act mandates that in a case of succession/ amalgamation/demerger during the previous year, depreciation is to be calculated as if the succession or amalgamation or demerger has not taken place during the previous year and apportioned between the predecessor and panithe successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.
This proviso would be applicable only and only if goodwill is appearing in the books of the amalgamating company (Refer the United Breweries Case). If goodwill arises at the time of amalgamation or demerger then this proviso is not applicable, it is respectfully submitted.
Sub-section (1) of section 43 of the Act which defines actual cost of the assets to the assessee. Explanation 7 to this section covers a situation where in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company. It clarifies that in this situation, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the 60 Page | 60 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. This once again would have no application where goodwill is arising on account of amalgamation/merger/demerger as the amount paid over and above the net assets acquired would be the cost of the goodwill.
The ITAT held and rightly so that the Assessing Officer has full powers to examine the value of goodwill under the existing provisions of the Act. It is important to note that the ITAT did not hold that goodwill is not a depreciable asset. As a matter of fact, the ITAT held that "there is no quarrel on the issue that goodwill is eligible for depreciation'.
Usually there is no goodwill appearing in the books of the amalgamating company as there is no cost of such self- generated goodwill and therefore goodwill arises only on account of the amalgamation/merger and in such cases the aforesaid provisions of the Act as relied upon by the Hon'ble ITAT in the case of United Breweries (supra) would not be applicable. Accordingly, in a case where goodwill arises on account of amalgamation/ merger the goodwill is eligible for depreciation in accordance with the judgement of the Apex Court.
61
Page | 61 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 Hence, in view of the above facts and circumstances of the case, the issue being clearly and squarely covered by the decision of the Hon'ble Apex Court which in turn has since been followed and relied upon by various courts including jurisdictional Bombay High Court Chowqule & Co. Pvt. Ltd. vs. ITO (ΙΤΑ No.28 of 2012; Order dt. 12.01.2016)), the said disallowance of the depreciation may kindly be deleted and issue be decided in favour of the Appellant. Following the above, various other courts have decided the issue in favour of the Appellant, some of the said judgements being relied upon are being quoted hereunder:
a. Toyo Engineering Ltd. (ITA No.3279/M/2008) b. M/s. MTANDT Rentals Ltd. vs. ITO (ITA No.2410/CHNY/2017) (ITAT Chennai) c. Sprit Infrapower & Multiventures Pvt. Ltd. vs. PCIT (ITA No.3081/M/2019) d.Cosmos Coop Bank Ltd. vs. DCIT (2014) 45 taxmann.com 13 (Pune-Trib) e. M/s. Keva Fragrances P. Ltd. vs. DCIT 4(2)(2), Mumbai (ITA No.334/M/2020; Order dt. 02.08.2021)."
I have considered the relevant material and facts on record in respect of this ground of appeal, as brought out in the submissions made during appeal proceedings. I have noted that assessing officer has 62 Page | 62 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 denied the depreciation on goodwill relying upon judgement of Hon'ble ITAT Bangalore in case of United Brewerles Ltd Vs. Addl. CTT (ITA No. 722,801 and 1065).
It is also noted that AO has not challenged the valuation of asset adopted by the appellant in the extent year. It is further noted that goodwill in question, was generated in the process of amalgamation and same was not existing before amalgamation. The case relied upon by assessing officer is distinguishable on two accounts (1) there was revaluation of asset before amalgamation in case of United Breweries Ltd. (ii) goodwill was existing in the books of amalgamating company. Further, the application of fifth proviso to section 32 (1) as mentioned in United Breweries Ltd. is restricted to the companies wherein similar class of assets are held for the purpose of depreciation. This proviso does not prohibit the claim of depreciation on goodwill arisen in the process of amalgamation. It is pertinent to quote here recent judgement of Hon'ble ITAT Chennai 146 Taxmann.com 130 in the case of Trivitron Healthcare Pvt. Ltd. Vs PCIT where in Hon'ble Court has considered the judgement of United Breweries as well as Smifs Securities and held as:63
Page | 63 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 "Therefore, in our considered view, said proviso only determines amount of depreciation to be claimed in the hands of predecessor/amalgamating company and in hands of the successor or amalgamated company only in the year of amalgamation based on the date of such amalgamation. However, it does not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation. Therefore, it is very clear from 5th proviso to section 32(1) of the Act, that once any asset, including intangible asset, more particularly, goodwill is added to the respective block of asset of the amalgamated company, in the context of claim of depreciation in the hands of amalgamated company and such addition to the block of assets would not fall within the purview of the 5th proviso to section 32(1) of the Act. Effectively, scope of the said proviso is narrow as could be culled out for the purpose for which said proviso was inserted in the statute as reflected in the Memorandum to the Finance Bill. To further clarify, 5th proviso to section 32(1) of the Act, with regard to depreciation on goodwill is restricted to assets which belongs to amalgamating company and its application cannot be extended to the assets which arise in the course of amalgamation to the amalgamated company. The intention of law was to extend benefit available to the 64 Page | 64 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 amalgamated company on succession and not to restrict depreciation on assets which generated in the course of succession ...accounting of goodwill and consequent depreciation claim on such goodwill in the books of account of the assessee company is nothing but purchase of goodwill and thus, the assessee has rightly claimed depreciation on said goodwill in terms of section 32(1) of the Income-tax Act, 1961. This legal principle is supported by the decision of Hon'ble Supreme Court in the case of CIT v. Smifs Securities Ltd. [2012] 24 taxmann.com 222/210 Taxman 428/348 ITR
302. This principle is also supported by the decision of the ITAT., Mumbai in the case of Keva Fragrances (P.) Ltd. (supra) and also decision of the ITAT., Hyderabad Benches in the case of Mylan Laboratories Ltd. v. Dy. CIT [2020] 113 taxmann.com 6/180 ITD
558. The sum and substance of ratios laid down by the Hon'ble Supreme Court and the Tribunals are that goodwill arising on amalgamation is entitled for depreciation u/s.32(1) of the Income-tax Act, 1961. Insofar as case law relied on by the PCIT in the case of United Breweries Ltd. (supra) of ITAT., Bangalore Bench, we are of the considered view that facts of the case of United Breweries Ltd.(supra) are distinguishable from facts of the presentcase, because in the case of United Breweries Ltd. (supra), before amalgamation 65 Page | 65 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 there was a goodwill in the books of account of amalgamating company. Further, in a scheme of amalgamation, goodwill has been revalued and shown higher value. The amalgamated company on succession has claimed higher depreciation on goodwill arose out of amalgamation: Under those facts, the Tribunal came to the conclusion that in terms of 5th proviso to section 32(1) of the Act, predecessor and successor company can claim depreciation on proportionate basis for number of days assets used by them, however, they cannot claim depreciation over and above normal depreciation allowable on a particular asset."
The Hon'ble ITAT has further quoted in the same order that the facts of the case squarely comes under ratio laid down by Hon'ble Supreme Court in the case of Smifs Securities Ltd. and in a subsequent decision even ITAT Bangalore bench in the case of Altimetrik India (P) Ltd. vs. DCIT 137 Taxmann.com 9 had considered an identical issue and after considering the decision of the United Breweries Ltd. held that consideration paid by the amalgamated company over and above net asset of amalgamating company should be considered as goodwill arising on amalgamation and such goodwill is capital asset eligible for depreciation." 66
Page | 66 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 25.6. Finally, the Ld. CIT(A), considering the facts of the case and ratio laid down by the Hon'ble courts including Hon'ble ITAT Bangalore Bench in the case of United Breweries Ltd. vs. ACIT ITA No. (722, 801 & 1065) and Hon'ble ITAT Chennai 146 taxmann. Com 130 in the case of Trivitron Health Care Pvt. Ltd. vs. PCIT, wherein Hon'ble court has considered the judgement of United Breweries Ltd as well as Smifs Security and ITAT Bangalore Bench in the case of Altimetrik India Pvt. Ltd. vs. DCIT 137 taxmann. Com has already considered identical issue and allowed the depreciation on goodwill and following the above orders of the Hon'ble Courts and Tribunals, the Ld. CIT(A) finally deleted the addition of Rs.1,52,35,951/- on account of depreciation claimed on goodwill.
25.7. Aggrieved by the impugned order, the revenue has filed this appeal.
During the appellate proceedings before us, the revenue department submitted as under:-
"This is an appeal preferred by the Department against the order of CIT (Appeals)-47, Mumbai dated 26.03.2024 in the case of M/s Ecap Securities and Investments Ltd. for Assessment Year 2018-19. The Ground Nos. (6) and (7) thereof relate to the issue of disallowance of deprecation claimed on goodwill. The relevant Grounds of Appeal are reproduced as under, for the sake of ready reference, - 67
Page | 67 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 "(6). Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of depreciation claimed on goodwill of Rs.1,52,951/- without appreciating the fact that goodwill is generated due to excess amount paid by acquiring firm/company during amalgamation?
(7). Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance of Depreciation claimed on goodwill of Rs.1,52,35,951/- without appreciating the fact that value of goodwill was arrived on the basis of the difference in the consideration and the WDV of the assets of the amalgamated company and hence depreciation on the same was not allowable in the light of Hon'ble ITAT, Bangalore pronouncement in the case of M/s United Breweries Ltd.?" .
2.Brief Facts The appellant has claimed that Goodwill has arisen due to amalgamation of five companies (namely M/s Olive Business Centre Limited, M/s Serenity Business Park Ltd., M/s Eternity Business Centre Limited, M/s Burlington Business Solution Limited and M/s Auris Corporate Centre Limited.) with the appellant company, with effect from 1 April 2017 ("the Appointed date"). The scheme of amalgamation was approved by the National Company Law Tribunal (NCLT, Mumbai order dated 23.08.2017 and NCLT Hyderabad order dated 11.04.2018). The 68 Page | 68 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 valuation of Goodwill was computed at Rs.6,09,43,805/- as on 31.03.2017, being excess of consideration paid by the appellant company over the Net Asset Value (Assets minus Liability) of the amalgamating companies. During the year, the appellant company has claimed depreciation of Rs.1,52,35,951/- on goodwill, at the rate of 25 percent of the valuation of Goodwill as on 01.04.2017.
3. AO's finding AO has reverted a finding that in the instant case, goodwill has been recognized in the books of the appellant company, on the basis of excess of consideration paid over the Net Assets Value of the amalgamating companies. On these facts, AO has held that depreciation on goodwill, which is generated out of excess of the consideration paid for acquisition of amalgamating companies, is not eligible for depreciation, under the Income Tax Act. In support of this proposition, AO has placed reliance on decision of Hon'ble ITAT, Bangalore in the case of Unites Breweries Ltd.
4. Decision of FAA CIT (Appeals) has held that the appellant is eligible for depreciation on goodwill, relying on the decision of ITAT, Chennai in the case of Trivitron Healthcare Pvt Ltd. Vs PCIT (146 Taxmann.com 130) on this issue. Being aggrieved, the Department is in appeal before the Hon'ble Tribunal.
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Page | 69 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19
5. Submission on merits In the instant case, the appellant has claimed depreciation on Goodwill arising on account of amalgamation of certain companies, with the appellant company, with effect from 1st April 2017, as per scheme of amalgamation approved by the NCLT Benches of Mumbai and Hyderabad. The computation of Goodwill arising in the book of the appellant company is based on excess of consideration paid by the appellant company for acquiring the amalgamating companies, over their Net Asset Value (i.e. Assets minus liability) as on 31 March 2017. The claim of depreciation on Goodwill has been made for the first time in the year under consideration i.e. Assessment Year 2018-19, relevant to the Financial Year 2017-18.
5.1 It is important to note here that in the present case, the claim has been disallowed by the AO, on the grounds that the Act does not permit claim of depreciation on such goodwill, which has been recognized in the books of accounts, on account of excess of consideration paid for acquisition (over the Net Asset Value) of the amalgamating companies. The AO has not taken a view that goodwill per se is not an intangible asset, and therefore not eligible for depreciation. 5.2 The facts of the present case are identical to the case of United Breweries Ltd. Vs ACIT (2016) (76 taxmann.com 103) (Bangalore - 70
Page | 70 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 Trib.), wherein Hon'ble ITAT, Bangalore vide order dated 30.09.2016 (for the Assessment Years 2007-08, 2008-09 and 2009-10 in ITA Nos. 722, 801, 1065 & 1066/Bang/2014) has laid down that by virtue of 5th proviso to section 32(1), assessee being amalgamated company could not claim, or be allowed to claim depreciation on assets acquired in scheme of amalgamation more than depreciation that was allowable to amalgamating company. This ratio is squarely applicable on the present case, as here also no such depreciation on goodwill was allowable in the hands of the amalgamating companies. Infcat, goodwill has been recognized for the first time in the books of the appellant company, which is nothing but a book entry to balance the effect of excess of consideration paid by the appellant company, for acquisition of the amalgamating companies, over their Net Asset Value as per books of accounts. The relevant findings of ITAT, Bangalore on this issue are reproduced as under, -
"15. There is another aspect involved in this issue of claiming depreciation on the enhanced cost of goodwill in cases of succession/amalgamation as it is restricted in the hand of successor or amalgamated company only to the extent as apportioned between the amalgamating and amalgamated company in the ratio of number of days for which the assets used by them. Further the deduction shall be 71 Page | 71 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 calculated at the prescribed rate as if the amalgamation has not taken place. For ready reference, we quote the provisions to section 32(1) as under:
"Section 32. (1) In respect of depreciation of- (I) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed- (I) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:
Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or 72 Page | 72 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. This proviso provides that depreciation allowable in the case of succession, amalgamation or merger, demerger should not exceed the depreciation allowable had the succession not taken place. In other words, the allowance of depreciation to the successor/amalgamated company in the year of amalgamation would be on the written down value of the assets in the books of the amalgamating company and not on the cost as recorded in the books of amalgamated company. The case of amalgamation is not regarded as transfer for the purpose of capital gain as provided under section 47(vi) of the Act and therefore such cases are exempted from capital gain which is otherwise chargeable to tax on transfer of assets. In the case on hand the business of the subsidiary was 73 Page | 73 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 transferred to the assessee by way of amalgamation therefore it would not be regarded as transfer of asset for the purpose of capital gain. Hence the claim of depreciation on the assets acquired under the scheme of amalgamation is restricted only to the extent if such amalgamation has not taken place. The Assessing Officer made a reference to 5th proviso to Section 32 in para 5.7 as under:
"5.7 As highlighted above, the company paid Rs.180.52 Crores in the preceding year as consideration for acquiring shares of KBDL from original owners and thereby KBDL became a subsidiary last year. Thus, the consideration paid is for shares but not for individual assets. In this year, KBDL which had earlier become subsidiary got amalgamated with the assessee company. As per 5th proviso under section 32(1)(ii), the aggregate deduction in respect of depreciation on any tangible or intangible assets allowable to amalgamating company and the amalgamated company shall not exceed the deduction calculated at the prescribed rates as if the amalgamation had not taken place and such deduction shall be apportioned between these companies in the ratio of period of usage of assets. In view of this explanation, KBDL was not claiming any goodwill as an asset eligible for depreciation. If amalgamation is not considered, there would not be any deduction of 74 Page | 74 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 depreciation on goodwill. Therefore, under this provision also, the assessee is not eligible for depreciation on goodwill. However the Assessing Officer has proceeded to hold the value of the goodwill as shown by the assessee is not justified. It is pertinent to note that once the claim of depreciation is restricted under the 5th proviso to section 32(1)(ii) then the valuation issue become irrelevant. The CIT (Appeals) has also concurred with the view of the Assessing Officer regarding the applicability of the 5th proviso to Section 32(1) of the Act in para 5.4 as under:
"5.4 It is also highlighted both in the assessment order and remand report that no depreciation on goodwill was claimed by KBDL before amalgamation. Therefore, as per the 5th proviso to Section 32(1)(ii), the appellant is not entitled to depreciation. This is a valid and relevant argument and appellant has not offered any rebuttal to this contention of the A.O."
It is not the case of the assessee that the subsidiary has claimed any depreciation of goodwill. Therefore by virtue of 5th proviso to Section 32(1), the depreciation on the hands of the assessee is allowable only to the extent if such succession has not taken place. Therefore the assessee being amalgamated company cannot claim or be allowed depreciation on the assets acquired in the scheme of amalgamation more than the 75 Page | 75 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 depreciation is allowable to the amalgamating company. As regards the decision of Hon'ble Supreme Court in the case of Smiff Securities Ltd. case (supra), the said ruling of the Hon'ble Supreme Court is only on the point whether the goodwill falls in the category of intangible assets or any other business or commercial rights of similar nature as per the provisions of section 32(1) of the Act. Therefore there is no quarrel on the issue that goodwill is eligible for depreciation. However the said judgment would not over-ride the provisions of 5th proviso to Section 32(1) of the Act which restricts the claim in the cases specified thereunder. The consideration paid by the assessee for acquiring the shareholding of the subsidiary in the earlier years is not relevant for the issue of depreciation on the assets taken under amalgamation and for the purpose of 5th proviso to Section 32(1) of the Act. Accordingly, in view of the above facts and circumstances of the case as well as the above discussion, we hold that the claim of depreciation in the hands of the assessee is subjected to the 5th proviso to Section 32(1) of the Act. Accordingly, this issue is decided against the assessee." 5.3 Furthermore, in this context, it is pertinent to briefly consider the relevant accounting standards prescribed for accounting in case of amalgamation etc. The Accounting Standard AS-14, notified under the Companies (Accounting Standard) Rules, deals with accounting for amalgamations and the 76 Page | 76 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 treatment of any resultant goodwill or reserves. The AS-14 describes two types of amalgamation, viz. an amalgamation in the nature of merger, and an amalgamation in the nature of purchase.
5.3.1 As per AS-14, an amalgamation is considered to be an amalgamation in the nature of merger when all the following conditions are satisfied, -
i. All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. ii. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. iii. The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares. iv. The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. 77
Page | 77 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 v. No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.
The Accounting Standard AS-14 further prescribes that amalgamation in the nature of merger should be accounted for under the pooling of interests method. The pooling of interest method provides that in preparing the transferee company's financial statements, the assets, liabilities and reserves (whether capital or revenue or arising on revaluation) of the transferor company should be recorded at their existing carrying amounts and in the same form as at the date of the amalgamation. In pooling of interest method, the difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company is to be adjusted in reserves. an 5.3.2 As per AS-14, an amalgamation is regarded as an amalgamation in the nature of purchase when any one or more of the above conditions is not satisfied. An amalgamation in the nature of purchase should be accounted for under the purchase method. The purchase method provides that in preparing the transferee company's financial statements, the assets and liabilities of the transferor company should be incorporated at their 78 Page | 78 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 existing carrying amounts or, alternatively, the consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation. In purchase method, any excess of the amount of the consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognized in the transferee company's financial statements as goodwill arising on amalgamation, 5.4 It is evident from the above discussion that the appellant company has recognized goodwill, being excess of consideration paid over Net asset Value, in its books of accounts, as a matter of accounting practice. However, the said accounting entry does not by itself ordain that an intangible asset in the nature of Goodwill has arisen in the hands of the appellant company. To sum up, the moot point which requires adjudication in the instant case is whether or not an intangible asset in the nature of Goodwill, within the meaning of Section 32 of the Act, could be said to have arisen as a result of the amalgamation of five other companies, with the appellant company, in accordance with the sanctioned Scheme of amalgamation.
5.5 In this regard, it is important to draw the distinction that the issue in the present case is not whether depreciation could be allowed on intangible asset in the nature of Goodwill, as per the provisions of section 79 Page | 79 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 32 of the Act. Therefore, the ratio of the Supreme Court decision in the case of CIT Vs Smifs Securities Ltd (2012) (348 ITR 302) (SC) is not at all applicable in the present case. In the case of CIT Vs Smifs Securities Ltd, the question which arose for determination of Hon'ble Supreme Court was whether Goodwill is an asset within the meaning of Section 32 of the Act and whether depreciation on Goodwill' is allowable under the said Section. This question was, however, based on clear finding of fact that Goodwill had indeed arisen in the books of the accounts of the transferee company, as a result of amalgamation. It was explained before the Hon'ble Supreme Court that excess consideration paid by the assessee over the value of net assets of the amalgamating company should be considered as goodwill arising on amalgamation. On these facts, Hon'ble Supreme Court took a view that 'Goodwill is an asset under Explanation 3(b) to Section 32(1) of the Act. However, Hon'ble Supreme Court, in the succeeding paragraphs of the same judgment, has also made it abundantly clear that the said decision was rendered on the basis of clear findings of facts, reverted by the lower authorities, that the Goodwill had indeed arisen to the assessee company as a result of amalgamation, and further that these findings of fact were not controverted by Revenue before the High Court. The relevant paragraphs of the judgment are reproduced as under,-
80
Page | 80 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 "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 (emphasis supplied) referred to hereinabove."
81
Page | 81 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 5.6 In the wake of Supreme Court judgement in CIT Vs Smifs Securities Ltd, the relevant statutory provisions have since been amended, by virtue of the Finance Act 2021, to clarify the legislative intent that Goodwill is not a depreciable asset. In substance, this amendment has only clarified the existing position of law, and not laid down any new law; therefore the same has to be given a retrospective application. This position of Revenue is being explained in detail in the succeeding paragraphs. 25.8. The assessee on the other hand, submitted as under:-
"Note on claim of Depreciation on Goodwill:
During the year under consideration, the assessee has claimed depreciation of Rs.1,52,35,951/-on goodwill acquired due to amalgamation of five companies with the assessee company. Companies amalgamated with the assessee are namely (1) M/s Olive Business Centre Limited (u) M/s Serenity Business Park Limited (in) M/s Eternity Business Centre Limited (iv) M/s Burlington Business Solution Limited and (v) M's Auris Corporate Centre Limited. Working of goodwill is given at note 2.39 of the audited financial statement for year ended 31/3/2018 (relevant page of audited financial statement is enclosed herewith for your honours ready reference). Sole basis of proposed disallowance of goodwill is judgment of Bengaluru ITAT in the case of United Breweries Pvt Ltd in ITA NO 7222/Ban/2014.82
Page | 82 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 The assessee submits that the scheme of amalgamation is enclosed herewith. On paragraph 6.4 of the scheme, it has been categorically stated that "The excess or deficit, if any arising after recording of above entries, shall be adjusted in Capital Reserve Account or Goodwill account in the books the Transferee Company". Here Transferee Company is assessee.
During the course of proceeding before the National Company Law Board (NCLT) two notices (i.e. on 14/08/2017 and 02/08/2017) have been sent to income tax authority. However, no response have been filed by the Income Tax authorities. The scheme of the amalgamation have been approved by the NCLT vide order dated 11/04/2018 whereat paragraph 17. NCLT has categorically stated that "a) The Scheme of Amalgamation which is attached (at Page 69 to 91) to CP (CAA) No 140/230/HDB/2018 is hereby sanctioned and it is declared that the same shall be binding on herewith as Exhibit 6) "(Copy of NCLT order alongwith scheme is enclosed We are enclosing herewith auditor's certificate certifying that accounting treatment given by the assessee company in its books is as per Scheme of Amalgamation (Refer Exhibit 7).
Thus, the scheme of amalgamation of the assessee has been approved by the NCLT holding that the excess or deficit, if any arising after recording 83 Page | 83 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 of above entries, shall be adjusted in Capital Reserve Account or Goodwill account. Considering the fact that the goodwill has been accounted in the books, your attention is drawn to judgment of Hon'ble Supreme Court in the case of CIT vs Smifs Securities Ltd [348 ITR 302 SCI wherein the Hon'ble Supreme Court has categorically held that goodwill is an intangible assets. Operative part of the judgment reads as under:
"10. 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 (of) the words 'any other business or commercial rights of similar nature' in cl. (b) of Expln. 3 indicates that goodwill would fall under the expression 'any other business or commercial right of similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Expln. 3(b).
11. In the circumstances, we are of the view that 'goodwill' is an asset under Expln. 3(b) to s. 32(1) of the Act.
12. One more aspect needs to be highlighted. In the present case, the AO, 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 CIT(A) has come to the conclusion that the Authorised Representatives had filed 84 Page | 84 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 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 & Securities (P) Ltd. 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 Tribunal. We see no reason to interfere with the factual finding.
13. One more aspect which needs to be mentioned is that, against the decision of Tribunal, 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 s. 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.
Considering the principle laid down by the Hon'ble Supreme Court, the assessee submits that goodwill is an intangible asset and depreciation has been rightly claimed. Hence, the depreciation claimed by the assessee shall be allowed.
Coming to the decision of United breweries (supra) the assessee submits that the facts in that case is totally different than the present case of the 85 Page | 85 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 assessee. In the case of United Breweries (supra), a company named as KBDL was amalgamated with the assessee company. Before amalgamation, goodwill of an amount of Rs.7.45 Crores was shown in books of KBDL which has been enhanced by revaluation to Rs.62.30 Crores while doing amalgamation. The assessee claimed depreciation on this enhanced value of Rs.62.30 Crores. The AO invoked section 43(1) of the Act and held that revaluation was done to reduce the tax liability. In present case before you, no goodwill was there in the books of companies who amalgamated with assessee. Hence, the facts in present case is totally difference than the fact before Bangalore ITAT. In view of the facts of present case and principal laid down by the Hon'ble Supreme Court, the assessee submits that no disallowance shall be made for the depreciation claimed on goodwill."
25.6. We have considered the rival submissions. It is found that Hon'ble ITAT Bangalore Bench in the case of United Breweries Ltd. vs. ACIT ITA No. (722, 801 & 1065) and Hon'ble ITAT Chennai 146 taxmann. Com 130 in the case of Trivitron Health Care Pvt. Ltd. vs. PCIT, have already considered identical issue and allowed the depreciation on goodwill. Thus, respectfully following the decisions of the Hon‟ble ITAT (supra.) we also hold that the assessee company is eligible to get relief of Rs.1,52,35,951/- on account of depreciation claimed on goodwill. 86
Page | 86 ITA No.2965/MUM/2024 & CO No. 132/M/2024 ECAP Securities and Investment Ltd.; A. Y.2018-19 25.7. In the result, appeal of the revenue is dismissed and the cross objection of the assessee is allowed.
Order pronounced in the open court on 30.09.2024.
Sd/- Sd/-
NARENDER KUMAR CHOUDHRY RATNESH NANDAN SAHAY
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 30.09.2024.
Snehal C. Ayare, Stenographer
Copy to:The Appellant
The Respondent
The CIT, Concerned, Mumbai
The DR Concerned Bench
//True Copy//
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.