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23.6 The AO Further observed that as per AS-14 there are two methods of accounting namely pooling of interest method and purchase method which are applied for recording the transaction arising in the scheme of amalgamation of companies. In case the conditions, in a scheme of amalgamation prescribed under para 3(e) of AS 14 are fulfilled, then pooling of interest method of accounting should be applicable. Under pooling of interest method any difference between purchase consideration and book value of assets & liabilities should be recognized as amalgamation reserve. As such no concept of goodwill is available in this method of accounting. Whereas any of the condition prescribed under para 3(e) is not fulfilled, in such case assets and liabilities are transferred at revalued price and any difference between purchase consideration and market value of assets & liabilities is to be recognized as goodwill in the books of resultant company.

23.7 Further para 8 of appendix-C of Ind AS -103 mandate pooling of interest method for amalgamation of commonly control entity. Similarly para 9 of Ind AS -103 mandates that all the assets and liabilities should be transferred at carrying amount. Further para 12 of Ind AS-0103 mandates that any difference between purchase consideration and book value of assets & liabilities should be recognized as capital reserve.

23.8 In view of the above observation the AO held that the assessee has not incurred cost in order to acquire goodwill and also such goodwill was not transferred from amalgamating company. Therefore the value of the same for the purpose of taxation is NIL. Thus depreciation on goodwill is not allowable in the year under consideration and also in subsequent year. Hence the AO disallowed the depreciation and added to the total income of the assessee.

31.3 Accounting standard-14, issued by the ICAI prescribes two method of accounting for the transaction carried out in the scheme of amalgamation namely pooling of interest method and purchase method. If scheme of the amalgamation fulfills the condition of para 3(e) of the Accounting standard- 14 then pooling of interest method should be followed otherwise purchase method of accounting should be applied. The relevant extract of accounting standard reads as under:

7. There are two main methods of accounting for amalgamations:

(a) the pooling of interests method; and

(b) the purchase method.

8. The use of the pooling of interests method is confined to circumstances which meet the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger.

31.4 Under pooling of interest method the difference between purchase considerations and the net assets taken over by the amalgamated company is adjusted with reserve. On the other hand in case of purchase method if purchase consideration exceeds net value of assets taken over then such difference is to be as recognized as goodwill or vise-versa as capital reserve.