Income Tax Appellate Tribunal - Mumbai
Acit-1(1)(1), Mumbai vs M/S Dosti Realty Ltd, Mumbai on 13 May, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "D", MUMBAI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND
SHRI GAGAN GOYAL, ACCOUNTANT MEMBER
ITA No. 2043/Mum/2022 (A.Y.2016-17)
ACIT-1 (1)(1)
533, Aayakar Bhavan,
M. K. Road
Mumbai-400020 ...... Appellant
Vs.
M/s. Dosti Realty Ltd.
276, 1st Floor, Lawrence &
Mayo House, Dr. D. N. Road,
Mumbai-400 001
PAN: AAACCD7714J ..... Respondent
CO No.122/Mum/2022 (A.Y.2016-17)
Arising out of
ITA No. 2043/Mum/2022 (A.Y.2016-17)
M/s. Dosti Realty Ltd.
276, 1st Floor, Lawrence &
Mayo House, Dr. D. N. Road,
Mumbai-400 001
PAN: AAACCD7714J ..... Appellant
Vs.
ACIT-1 (1) (1)
533, Aayakar Bhavan,
M. K. Road
Mumbai-400020 ..... Respondent
2
ITA NO. 2043/MUM/2022
CO. NO. 122/MUM/2022
M/S. DOSTI REALTY LTD.
Revenue by : Smt. Riddhi Mishra, CIT-DR
Respondent by : Shri K. Shivaram, Sr. Adv. &
Shri Rahul Hakani, Adv.
Date of hearing : 17/01/2023
Date of pronouncement : 13/04 /2023
ORDER
PER GAGAN GOYAL, A.M:
There is a cross appeal in this matter that is a substantive appeal by the department and a cross objection by the assessee. For the sake of clarity and better understanding of the matter, we are taking departmental appeal first and then will deal with cross objection of the assessee accordingly.
The Revenue has raised the following grounds of appeal:
"1.On the facts and in the circumstances of the case and in law, Whether the Ld. CIT (A) has was correct in holding that Goodwill created by amalgamation in the facts of the case can be amortised over four years?"
2. On the facts and in the circumstances of the cave and in law, whether the Ld. CIT (A) has was correct in holding that Goodwill created by amalgamated company, in the facts of the case, ineligibles for depreciation us 32 of the Act?"
3. on the facts and in the circumstances of the case and in law, whether the Ld. CIT (A) was correct in holding that the expense of Rs 1, 58, 34,292/-attributable directly to real estate project can be allowed as deduction and need not be capitalized?"
4. On the facts and in the circumstances of the case and in law, whether the Ld. CIT (A) was correct in deleting the disallowance of provision made for meeting expenses in future of Rs. 86, 68, 3 ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
91,003/- without appreciating the fact that the assessee's project has substantially been completed and the Provision for expenses is contingent and is an unascertained liability."
5. On the facts and in the circumstances of the case and in law, whether the disallowance of Rs. 68, 71,080 made by the AO u/s. 14A is incorrect considering that the assessee has not considered the investment in partnership firm while computing the disallowance u/s. 14A, even though share of profit from such firms at Rs. 23, 59, 70,926/- is claimed as exempt?"
Grounds of Cross Objections:
"1. Without prejudice and without admitting, on facts and circumstances of the case and in law, the Learned CIT (A) failed to appreciate that disallowance u/s 14A cannot be made on investments which have not yielded exempt income during the year.
2. On facts and circumstances of the case and in law, the learned CIT (A) erred in upholding interest u/s. 234A by holding that statutory time limitation were not adhere to without appreciating the that the notice u/s. 139(9) was not a valid notice as the defects mentioned in the order u/s. 139(9) do not fall within the Explanation to section 139(9) and hence, the treating of the return filed originally as invalid return is bad in law and consequently interest u/s. 234A may be deleted.
3. Without prejudice and without admitting, on the facts and circumstances of the case and in law, if relief is granted for the grounds of appeal of the Department relating to disallowance of provision made for meeting expenses in future of Rs. 86, 68, 91,003/- then the expenses actually incurred in subsequent years and the part of the provision which is reversed in subsequent years may be allowed as a deduction.4
ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
3.1. without prejudice and without admitting, on the facts and circumstances of the case and in law, the Hon'ble ITAT may give direction for allowance of expenses actually incurred in subsequent years and reduction of income of subsequent year on account of reversal of provision.
4. the respondent craves leave to add, amend, delete, alters and/or modifies any of the above grounds of cross objections on or before final hearing of this appeal petition."
2. Brief facts of the case are that assessee filed its return of income at Rs 50, 49, 56,130/- on 16-10-2016. The case was selected for scrutiny and assessed at Rs 152, 56, 16,760/- under the normal provisions of the act and Rs 52, 55, 84,506/- under the MAT provisions. Aggrieved with this order of AO assessee preferred an appeal before the Ld.CIT (A). Ld.CIT(A) accepted the contentions of the assessee and a substantial relief was granted on account of all the additions made by AO i.e. Rs 13,10,64,252/- on account of disallowance of depreciation on goodwill, Rs 1,58,34,292/- on account of disallowance of expenses, Rs 86,68,91,003/- on account of provisions made for meeting expenses in future and Rs 68,71,080/- made u/s. 14A.
3. Revenue being aggrieved against the order of Ld.CIT (A) on the reliefs granted to assessee mentioned (supra) preferred this appeal before us. We have gone through the order of AO, order of Ld.CIT (A) and submissions of the assessee along with paper-book. Our ground wise adjudication of the matter is as under:
4. Ground no.1 and 2 pertains to allowability of amortization/depreciation of the goodwill emerged out of amalgamation of two entities with assessee i.e. Dosti Land Developers Pvt. Ltd. (DLDPL) and Friends Development Corporation (Imperia) Pvt. Ltd. (FDCIPL) with Dosti Realty Limited (DRL).
5ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
5. We have gone through page no. 113 to 123 of the paper-book no. 1 (Bombay High Court order dated 26-02-2016 on scheme of amalgamation). This order is effective from 01-04 2015 i.e. relevant A.Y. We have gone through the audited financial results of the assessee vide page no. 5 to 32. We found that assessee has implemented the scheme of amalgamation in its financials as per the order of Honorable Bombay High court except considered reserve and surplus of Amalgamating companies amounting to Rs 37, 10, 79,258/- as reserve and surplus as they are part of owners fund i.e. share capital, same can't be considered for the purposes of calculation of goodwill on amalgamation.
6. As observed by us that scheme of amalgamation not fully observed by assessee by considering reserve and surplus for the purposes of calculation of goodwill. As far as allowability of depreciation/amortization is concerned we have gone through the order of AO, Ld. CIT (A) and assessee's submissions thereon. In our observation claim of the assessee is not tenable for the following reasons notwithstanding the reduction in amount of goodwill by virtue of our finding (supra) as under:
A) In case of amalgamation amongst the closely held companies, where the owner/promoters and directors are same how the goodwill can emerge by virtue of amalgamation, as no new people/organization came into picture and whatever reflecting in Balance-Sheet is merely a balancing figure to match the Balance Sheet.
B) Assessee is a holding company where all the main owners and directors are promoters and on the board of the company, in that case how is it possible that a smaller entity that is too a subsidiary have more market value/brand value, which can create goodwill in favour of parent entity which is the main power house in terms of finance, decision making and personal reputation in the industry.
C) The assessee had tried to make out a case that the amalgamation of two companies with the transferor company was by a method of merger 6 ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
called 'purchase method' by which it was not necessary that all the shareholders of the erstwhile transferor companies would become shareholders in the same ratio in the transferee company. On the other hand, in the 'pooling of interest' method of amalgamation the transferor's assets, liabilities and reserves are recorded by the transferee at the relevant 'carrying amounts', i.e. points. The criteria applicable was 'pooling of interests method' in para 3(e) of AS-14.All assets and liabilities of the transferor companies had passed on, in totality, to the transferee company, thus, indicating that it was a 'pooling of interest' method of amalgamation and there could not have been accounting for goodwill.
D) No credible evidence or material had been laid on record to show that the assessee incurred any cost for acquiring goodwill in the scheme of amalgamation. The record revealed that the assessee himself in the first instance written off the entire amount of Rs. 46.05 Crores accounted for as its goodwill in its accounts. That decision taken by the assessee was consistent to the Standard Accounting Practices followed in respect of fictitious assets. From the accounting treatment, it was clear that the assessee made accounting entries to the goodwill account after the scheme of amalgamation became effective and not on account of the order of the High Court to make any payment for goodwill (intangible assets) specifically. As per standard accounting practices, in the cases of amalgamations, if the assets side is greater than the liability side then the difference is credited to the capital reserve account and in a case where the liability side is greater than the asset side then the difference is accounted as 'Goodwill' account in the hands of the amalgamated company. This practice is followed to balance the asset and liability sides by making accounting entries and by making such book entries, no real asset as goodwill in fact comes into existence. That was how the accounting treatment to be given was clearly stated in the scheme and no payment on account of any such asset was made by the assessee in that scheme which stood approved by the order of the High Court. The said order thus, clearly stated that the assets of the transferor company comprised in the undertaking stood transferred and vested in the transferee company as a going concern.
7ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
7. In the case of Smifs Securities Ltd., the Supreme Court has held that 'goodwill' is an intangible asset eligible for depreciation under the provisions of section 32 of the IT Act. A decision is only an authority for what it actually decides. Hence, the said case can be said to be an authority only to the extent that goodwill is a depreciable asset. In the case of U.P. State Industrial Development Corpn. [CIT v. U.P. State Industrial Development Corpn. [1997] 225 ITR 703], the Hon'ble Supreme Court held that it is a well-accepted proposition that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute. The said principle was again retreated by the Supreme Court in the case of Woodward Governor [CIT v. Woodward Governor India (P.) Ltd.[2009] 312 ITR 254] wherein it held that profits for income-tax purpose are to be computed in accordance with ordinary principles of commercial accounting, unless such principles stand superseded or modified by legislative enactments. In other words, it can be said that accounting treatment of any transaction is relevant only to the extent they are not in conflict with the express provisions of the IT Act. In case of merger and acquisition, the IT Act expressly requires recording of capital assets at the price appearing in the books of Target Company. Accordingly, the recognition of goodwill in accordance with Accounting Standard-14 and amortisation of the same in accordance with Accounting Standard-26 may not be of any help in claiming depreciation under the IT Act in view of the express provisions mentioned therein. Thus, the cost of acquisition of existing goodwill in the hands of the acquirer will be the cost/written down value in the hands of Target Company. Further, in case of goodwill arising out of amalgamation, the cost in the hands of target company would be NIL by virtue of section 55(2) (a) (ii) and, accordingly, the cost would be NIL in the hands of acquirer-company. It is pertinent to note that decisions favouring the proposition [CIT v. Smifs Securities Ltd.[2012] 348 ITR 302(SC)]that depreciation is available on goodwill arising out of amalgamation, section, viz., 5th proviso to section 32 (1), section 49(1)(iii)(e), Explanation 7 to section 43(1) 8 ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
and/or Explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii) were not referred.
8. Generally, when someone acquires a business and purchase consideration paid for the business is more than the net assets acquired, the difference is recognized as goodwill in accounting. Here in this case as amalgamation process has been carried out as per the direction of Hon'ble Bombay High Court and assessee clearly followed "pooling of interest" method, there can't be any separate purchase consideration, which assessee is supposed to pay. In the whole scenario the principle of "substance over form" has to be considered. In substance there is no goodwill involved at all and it is simply an accounting entry to balance the accounts of the transferee company by virtue of scheme implementation as per the directions of Hon'ble High Court.
9. Goodwill falls in the category of "Intangible Assets", but its advantages must be tangible and assessee has to establish on record that by virtue of "Goodwill" what are the financial and non-financial gains are accruing to him. In this case what we observed, pre-merger and post-merger is simply a consolidation of figures of entities involved and not a percentage growth in terms of sales, profitability, net worth and customer base etc. post-merger. In view of the above discussion and legal history analysed, we are of the considered view that order of Ld. CIT (A) is not sustainable in law and order of AO is restored as found to be based on sound legal logics. In the result Ground Nos. 1&2 of the Revenue is allowed.
10. Ground No. 3 pertains to disallowance of Rs. 1,58,34,292/- allowed by the Ld. CIT (A) as attributable directly to real estate project instead of capitalising the same. During the year under consideration 9 ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
assessee had incurred expenses under the following heads and debited the same to P & L account as revenue expenditure:
i) Legal and Professional Expenses Rs. 1, 22, 73,252/-
ii) Marketing and Business Development Expenses Rs. 6, 32, 53,673/-
iii). Brokerage Rs. 2, 34, 37,402/-
Total Rs. 9, 89, 64,327/-
As per AO, project was completed only to the extent of 84% then why 16% of the total expenses should not be treated as capital in nature. We have gone the submissions of the assessee and found that; assessee has two running projects in hand, i.e. "Dosti Ambrosia" and "Dosti Imperia".
Dosti Ambrosia is completed fully and 81% of the Dosti Imperia.
11. We found that it's a settled legal position of law that Legal & Professional Expenses and Marketing and Business Development Expenses are time related expenses and not related to any specific project. As far as Brokerage Expenses are concerned those were incurred only towards "Dosti Ambrosia" which has been completed during the year and revenue is also offered accordingly. For A.Y. 2014-15 also on the similar grounds claim of expenses was allowed by coordinate bench of ITAT, Mumbai vide ITA No. 7374/Mum./2019, Dated: 06-09-2022. As revenue is failed to produce any evidence or argument which differentiates the facts of the of the assessee for current A.Y. vis-à-vis A.Y. 2014-15, we respectfully follow the order of coordinate bench and dismiss the appeal of Revenue on this ground. As these are the revenue expenditure allowable u/s. 37 of the Act, further disallowance of the same and capitalising the same will tantamount to double addition, as on the one hand expenses claimed by the assessee is reduced on the other hand same are capitalised as work-in-progress will enhance the value of inventory and profits will be increased. Hence Ground No. 3 raised by the Revenue is dismissed.
10ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
12. Ground No. 4 raised by the revenue pertains to disallowance of provision made for meeting expenses in future of Rs. 86,68,91,003/- allowed by the Ld. CIT (A).We have gone through the order of AO, Ld. CIT (A) and submissions of the assessee along with factual and legal paper book. Assessee is in the business of development and construction of housing projects. Revenue from sale of project under construction is recognised on the basis of percentage completion method determined on the basis of actual cost in proportion to the total estimated cost.
13. Assessee's contention that since 49% of the total area is sold and a total consideration of Rs. 338, 85, 69,700/- is offered to tax and a corresponding cost of construction of the total estimated cost has to be claimed following the "Matching Concept". Regarding the balance 51% total estimated cost is carried to work-in-progress and will be claimed against the corresponding sales value. Vide page no. 148; para-3.32 assessee demonstrated the amounts spent/reversed in later years as under:
Year Ending Opening Balance Amount Spent/ Closing Balance of Provision Reversed During the Carried Forward Year 31.03.2017 Rs. 86.68 Cr. Rs. 41.11 Cr. Rs. 45.57 Cr.
31.03.2018 Rs. 45.57 Cr. Rs. 36.65 Cr. Rs. 8.92 Cr.
Table mentioned (supra) clearly reflects that, whatever may be the amount of provision assessee debited this year that has already been either spent or reversed in later years and in addition to this assessee's case has already been assessed u/s. 143(3) and these expenses were considered to be genuine.
11ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
14. A lot of water has flown, since this matter reached to us and this issue has already been examined in depth in later years by the department itself. Now the only grievance of the revenue can be of deferment of profits, which also became irrelevant/ academic only on the given facts. Law of land laid down by Hon'ble Apex Court on this issue is very clear that on the issue of deferment of results no reopening or other actions can be taken, if otherwise there is no loss to the revenue. We found force in the arguments of assessee on the pretext of double addition. As on the one hand revenue wants to disallow the provision and on the other hand they want to add the same to WIP of the assessee, it clearly tantamount to double addition. Considering the facts of the matter along with legal principles laid down by Hon'ble High Courts and Apex Court, we found the order of Ld. CIT (A) as sustainable on above grounds and requires no interference from us. In the result Ground No. 4 raised by the Revenue is dismissed.
15. Ground No. 5 pertains to disallowance of Rs. 68, 71,080/- made by AO and deleted by Ld. CIT (A).Before making disallowance, the AO has not given any cogent reasons for rejecting the disallowance under section 14A of the Act amounting to Rs. 12,500/- made by the appellant itself and resorting to the provisions of section 14A (2) read with Rule 8D. A perusal of the impugned order reveals that the AO has not properly examined the suo-moto disallowance made by the assessee. Nor has the AO expressed any opinion on the correctness or otherwise of the appellant's claim in respect of aforesaid expenditure. On the matter under consideration we rely on the judicial pronouncement made by the Hon'ble Jurisdictional High Court in the case of [2023] 149 taxmann.com 222 PCIT v. Godrej & Boyce Mfg. Co. Ltd. held as under:
"In the assessment order there is no discussion by the Assessing Officer with regard to the computation of inadmissible expenditure made by the assessee forming part of the return of income. Further the Assessing Officer has not recorded any satisfaction that the working of inadmissible expenditure under section 14A is incorrect with regard to the books of account of the assessee. The provision under section 14A(2) 12 ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
does not empower the Assessing Officer to apply rule 8D straightaway without considering the correctness of the assessee's claim in respect of expenditure incurred in relation to the exempt income. In the instant case the Assessing Officer has neither examined the claim in respect of expenditure incurred in relation to exempt income of the assessee nor has recorded any satisfaction with regard to the correctness of assessee's claim with reference to the books of account. Consequently the disallowance made by applying rule 8D is not only against the statutory mandate but contrary to the legal principles laid down. Consequently the interest expenditure cannot be disallowed under section 14A read with rule 8D (2)(ii) Under any circumstances. [Para 11]"
16. As discussed and observed above, the procedure laid down by the law, has not been followed by the AO. As he his supposed to point out the mistakes/deficiencies in the working given by the assessee, only then he can substitute his own working with that and the same is missing here. Moreover, the Hon'ble Apex Court in the case of M/s Maxopp Investments Limited 254 Taxmann 325 held that the AO needs to record satisfaction before invoking provisions of Section 14A reads with Rule 8D. As far as investments in partnership forms are concerned assessee was only a partner and there is no active involvement at the end of the Assessee. Hence, share of profit received by the Assessee which is exempt u/s 10(2A) cant trigger disallowance provisions of Section 14A. In these terms, we are not inclined to interfere in the order of the Ld. CIT (A). In the result, Ground No. 5 raised by the Revenue is dismissed.
17. In the result appeal filed by the revenue is partly allowed.
CO No.122/Mum/2022 (A.Y.2016-17) Arising out of ITA No. 2043/Mum/2022 (A.Y.2016-17)
18. Ground No. Raised by the assessee is already dealt with in the appeal of the revenue and allowed also, hence became academic now 13 ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
and no separate adjudication is required, resultantly ground no. 1 raised by the assessee is dismissed.
19. Ground no. 2 raised by the assessee is not pressed at the time of hearing; hence the same is treated to be dismissed.
20. Ground no. 3 and 3.1 already discussed and adjudicated in assessee's favour, hence no separate finding is required here, resulting in dismissal of the same.
21. In the result C.O. filed by the assessee is dismissed.
Order pronounced in the open court on 13th day of April, 2023.
Sd/- Sd/-
AMIT SHUKLA GAGAN GOYAL
(JUDICIAL MEMBER) ACCOUNTANT MEMBER
Mumbai, दिन ां क/Dated: 13/ 04/2023
Mahesh R. Sonavane
Copy of the Order forwarded to:
1. अपील र्थी/The Appellant ,
2. प्रदिव िी/ The Respondent.
3. आयकर आयुक्त CIT
4. दवभ गीय प्रदिदनदि,आय.अपी.अदि.,मुबांई/DR, ITAT, Mumbai
5. ग र्ड फ इल/Guard file.
14ITA NO. 2043/MUM/2022 CO. NO. 122/MUM/2022 M/S. DOSTI REALTY LTD.
BY ORDER, //True Copy// (Dy. /Asstt. Registrar) ITAT, Mumbai