United Breweries Ltd.,, Bangalore v. Addl..C.I.T., Bangalore

ITA 722/BANG/2014 | 2007-2008
Pronouncement Date: 30-09-2016 | Result: Dismissed

Appeal Details

RSA Number 72221114 RSA 2014
Assessee PAN AAACU6053C
Bench Bangalore
Appeal Number ITA 722/BANG/2014
Duration Of Justice 2 year(s) 4 month(s) 7 day(s)
Appellant United Breweries Ltd.,, Bangalore
Respondent Addl..C.I.T., Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2016
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted C
Tribunal Order Date 30-09-2016
Date Of Final Hearing 10-08-2016
Next Hearing Date 10-08-2016
Assessment Year 2007-2008
Appeal Filed On 23-05-2014
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE S HRI VIJAY PAL RAO JUDICIAL MEMBER AND SHRI S. JAYARAMAN ACCOUNTANT MEMBER I.T . A. NO. 722 801 & 1065 /BANG/20 14 (ASSESSMENT YEAR S : 2007 - 08 TO 2009 - 10 ) ITA NO. ASST. YEAR APPELLANT RESPONDENT 722/BANG/2014 2007 - 08 UNITED BREWERIES LTD. UB TOWER UB CITY 24 VITTAL MALLYA ROAD BANGALORE. PAN AAACU 6053C ADDL. COMMISSIONER OF INCOME TAX RANGE - 12 BANGALORE. 801/BANG/2014 2007 - 08 DY. COMMISSIONER OF INCOME TAX CIRCLE 12(5) BANGALORE. UNITED BREWERIES LTD. BANGALORE. 1065/BANG/2014 2008 - 09 UNITED BREWERIES LTD. BANGALORE. D.C.I.T. CIRCLE 12(5) BANGALORE. 1066/BANG/2014 2009 - 10 UNITED BREWERIES LTD. BANGALORE. JOINT COMISSIONER OF INCOME TAX OSD CIRCLE 12(5) BANGALOR E. ASSESSEE BY : SHRI K.R. PRADEEP C.A. R E SPONDENT BY : SHRI SANJAY KUMAR CIT - III (D.R) DATE OF H EARING : 15.9.2016. DATE OF P RONOUNCEMENT : 30. 9 .201 6 . O R D E R P E R B E N C H : CROSS APPEALS FOR THE ASSESSMENT YEAR 2007 - 08 ARE DIRECTED AGAINST THE ORDER DT.21.3.2014 OF COMMISSIONER OF INCOME TAX (APPEALS) 2 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 WHEREAS THE ASSESSEE HAS ALSO FILED THE APPEALS FOR THE ASSESSMENT YEARS 2008 - 09 & 2009 - 10 AGAINST THE RESPECTIVE ORDERS OF THE CIT (APPEALS) BOTH DT.27.5.2014. 2. THE REVENUE IN THE APPEAL FOR THE ASSESSMENT YEAR 2007 - 08 HAS RAISED THE FOLLOWING GROUNDS : 3 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 3. THIS ISSUE IS ALSO COMMON IN THE ASSESSEE'S APPEAL FOR THE ASSESSMENT YEAR 2008 - 09 & 2009 - 10. THE GR OUNDS RAISED FOR THE ASSESSMENT YEAR 2008 - 09 IN THE APPEAL FILED BY THE ASSESSEE ARE AS UNDER : 4 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 4. THE FIRST ISSUE RAISES AS DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE INCOME TAX ACT 1961 (IN SHORT 'THE ACT') R.W. RU LE 8D OF INCOME TAX RULES. FOR THE ASSESSMENT YEAR 2007 - 08 THE CIT (APPEALS) HAS DELETED DISALLOWANCE ON THE GROUND THAT THE BORROWED FUND HAS BEEN UTILIZED BY THE ASSESSEE FOR THE BUSINESS PURPOSE AND THEREFORE THE ASSESSEE HAS NOT USED THE BORROWED FUN D FOR THE PURPOSE OF INVESTMENT IN QUESTION. THE CIT (APPEALS) HAS ALSO RELIED UPON THE ORDER PASSED ON THE INVESTMENT ISSUE OF DISALLOWANCE UNDER SECTION 14A FOR THE ASSESSMENT YEAR 2006 - 07. 5. WE HAVE HEARD THE LEARNED AUTHORISED REPRESENTATIVE AS WELL AS LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD. DR HAS SUBMITTED THAT THE CIT (APPEALS) HAS NOT EXAMINED THE DIRECT NEXUS OF ASSESSEE'S OWN FUND AND INVESTMENT 5 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 MADE IN THIS YEAR AND THEREFORE THE FINDING OF THE CIT (APPEALS) IS BASED ON THE PRESUMPTION THAT THE BORROWED FUND HAS BEEN UTILIZED BY THE ASSESSEE FOR THE BUSINESS PURPOSE AND NOT FOR THE PURPOSE OF INVESTMENT. HE HAS FURTHER SUBMITTED THAT FOR THE ASSESSMENT YEAR 2006 - 07 THE TRIBUNAL HAS SET A SIDE THE ORDER OF THE CIT (APPEALS) VIDE ORDER DT.24.11.2014 AND REMITTED THE ISSUE TO THE RECORD OF THE ASSESSING OFFICER FOR RECONSIDERATION OF THE ISSUE WITHOUT APPLYING RULE 8D. 6. ON THE OTHER HAND THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMI TTED THAT THE ASSESSEE'S OWN FUND IS MORE THAN SUFFICIENT FOR THE INVESTMENT IN QUESTION. HE HAS REFERRED THE DETAILS OF THE ASSESSEE'S OWN FUND AND INVESTMENT FOR ALL THESE ASSESSMENT YEARS AND SUBMITTED THAT ONCE THE ASSESSEE'S FUND IS MORE THAN THE AM OUNT OF INVESTMENT THEN NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A ON ACCOUNT OF INTEREST. HE HAS FURTHER POINTED OUT THAT FOR THE ASSESSMENT YEARS 2007 - 08 & 2008 - 09 THE ASSESSEE HAS NOT RECEIVED ANY DIVIDEND INCOME AND THEREFORE WHEN THERE IS NO TA X FREE INCOME THEN NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT. THE LEA RNED AUTHORISED REPRESENTATIVE H A S FURTHER CONTENDED THAT FOR THE ASSESSMENT YEAR 6 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 2007 - 08 THE TOTAL INVESTMENT AS ON 31.3.2007 WAS RS.59 06 99 000 WHEREAS THE ASSESSEE'S OWN FUND WAS RS.557 63 53 000. HE HAS FURTHER POINTED OUT THAT THE SAID INVESTMENT WAS MADE IN THE EARLIER YEAR AND THERE IS NO FRESH INVESTMENT DURING THE ASSESSMENT YEAR 2007 - 08. THEREFORE NO DISALLOWANCE IS CALLED FOR UNDER SECTION 14A ON ACCOUNT OF INTEREST EXPENDITURE. AS REGARDS THE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES THE LD. AR HAS SUBMITTED THAT WHEN THERE IS NO DIVIDEND FOR THE ASSESSMENT YEARS 2007 - 08 & 2008 - 09 AND IN VIEW OF THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CAS E OF CHE M INVEST LTD. VS. CIT 378 ITR 33 NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT. HE HAS SUBMITTED THAT THIS TRIBUNAL BY FOLLOWING THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF CHE M INVEST LTD. VS. CIT (SUPRA) HAS TAKEN A SIMILA R VIEW. HE HAS RELIED UPON THE FOLLOWING DECISIONS : I) AMITA VERMA VS. ACIT ITAT DELHI ITA NOS.1145 TO 1149 & 1275/DEL/2013 DT.27.4.2016. II) KINGFISHER FINVEST INDIA LTD. VS. ADDL. CIT ITAT BANGALORE ITA NO.1368/BANG/2012 DT.17.10.2014. III) ALLIANCE INF RSTRUCTURE PROJECTS PVT. LTD. VS. DCIT ITAT BANGALORE ITA NOS.220 & 1043/BANG/2013 DT.12.09.2014. 7 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 7. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND RELEVANT MATERIAL ON RECORD WE NOTE THAT THERE IS NO FRESH INVESTMENT DURING THE ASSESSMENT YEAR UNDE R CONSIDERATION EXCEPT RS.50 000. THEREFORE THE ISSUE OF DISALLOWANCE UNDER SECTION 14A ON ACCOUNT OF INTEREST EXPENDITURE IS DEPENDENT ON THE FINDING ON THIS ISSUE FOR THE ASSESSMENT YEAR 2006 - 07. THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT Y EAR 2006 - 07 HAS REMITTED THIS ISSUE IN ITA NOS.84 & 85/BANG/2014 VIDE ORDER DT.24.11.2014 IN PARAS 6 & 7 AS UNDER : 6. WITH THE ASSISTANCE OF THE LEARNED REPRESENTATIVES WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND GONE THROUGH THE RECORD CAREFULL Y. THE HON'BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENTS LTD (SUPRA) HAS HELD THAT RULE 8D IS APPLICABLE FROM ASSESSMENT YEAR 2008 - 09 THAT DOES NOT MEAN THAT PRIOR TO THE INTRODUCTION OF THIS RULE NO AMOUNT CAN BE CONSIDERED AS INCURRED FOR THE PURPOSE OF EARNING TAX FREE INCOME. THE DISALLOWANCE HAS TO BE MADE FIRST EXAMINING THE ACCOUNTS OF THE ASSESSEE AND IF THE ASSESSING OFFICER IS SATISFIED THAT THE ACCOUNTS DO NOT DEPICT TRUE PICTURE THEN HE CAN WORK OUT THE DISALLOWANCE ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. THE LEARNED CIT (A) OUGHT TO HAVE NOT DELETED THE DISALLOWANCE IN TOTO RATHER OUGHT TO HAVE EXAMINED WHETHER ANY DISALLOWANCE IS POSSIBLE OR NOT. IN OTHER WORDS SHE SHOULD HAVE EXAMINED WHETHER ANY EXP ENDITURE ATTRIBUTABLE TO EARNING EXEMPT INCOME CAN BE IDENTIFIED FOR DISALLOWANCE U/S 14A OF THE ACT. SHE HAS SIMPLY OBSERVED THAT RULE 8D IS NOT APPLICABLE THEREFORE ADDITION BY THE ASSESSING OFFICER IS DELETED. THE OBSERVATIONS OF THE HON'BLE DELHI HIG H COURT IN THE CASE OF MAXOPP INVESTMENTS LTD. VS CIT REPORTED IN 347 ITR 272 (DEL.) IS WORTH TO NOTE IT READ AS UNDER: HOW IS SECTION 14A TO BE WORKED FOR THE PERIOD PRIOR TO THE INTRODUCTION OF RULE 8D? 41. SUB - SECTION (2) OF SECTION 14A AS WE HAV E SEEN STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED . OF COURSE THIS DETERMINATION CAN ONL Y BE UNDERTAKEN IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTION 14A (2) WHICH EXPLICITLY REQUIRES THE FULFILLMENT OF A CONDITION PRECEDENT IS ALSO IMPLICIT IN SECTION 14A (1) [AS IT NOW STANDS] AS ALSO IN ITS INITIAL AVATAR AS SECTION 14A. IT IS ONLY THE 8 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 PRESCRIPTION WITH REGARD TO THE METHOD OF DETERMINING SUCH EXPENDITURE WHICH IS NEW AND WHICH WILL OPERATE PROSPECTIVELY. IN OTHER WORDS SECTION 14A EVEN PRIO R TO THE INTRODUCTION OF SUB - SECTIONS (2) & (3) WOULD REQUIRE THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH REJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN THAT THE QUESTIO N OF DETERMINATION OF SUCH EXPENDITURE BY THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB - SECTION (2) OF SECTION 14A. PRIOR TO THAT THE ASSESSING WAS FRE E TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. 42. THUS THE FACT THAT WE HAVE HELD THAT SUB - SECTIONS (2) & (3) OF SECTION 14A AND RULE 8D WOULD OPERATE PROSPECTIVELY (AND NOT RETROSPECTIVELY) DOES NOT MEAN THAT THE ASSESSING OFFICER IS NOT TO SATISFY HIMSELF WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WITH REGARD TO SUCH EXPENDITURE. IF HE IS SATISFIED THAT THE ASSESSEE HAS CORRECTLY REFLECTED THE AMOUNT OF SUCH EXPENDITURE HE HAS TO DO NOTHING FURTHER. ON THE OTHER HAND IF HE IS SATISFIED ON AN OBJECTIVE ANALYSIS AND FOR COGENT REASONS THAT THE AMOUNT OF SUCH EXPENDITURE AS CLAIMED BY THE ASSESSEE IS NOT CORRECT HE IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. IT W OULD BE APPROPRIATE TO RECALL THE WORDS OF THE SUPREME COURT IN WALFORT (SUPRA) TO THE FOLLOWING EFFECT: - THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON - TAXABLE HAS IN PRINCIPLE BEEN NOW WIDENED UNDER SECTION 14A.' SO EVEN FOR T HE PRE - RULE8D PERIOD WHENEVER THE ISSUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER HE HAS FIRST OF ALL TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PAR T OF THE TOTAL INCOME UNDER THE SAID ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME THE ASSESSING OFFICER WILL HAVE TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN CASE THE ASSESSING OFFICER IS SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE AS THE CASE MAY BE THE ASSESSING OFFICER IS TO ACCEPT THE CLAIM OF THE ASSESSEE INSOFAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A I S CONCERNED. IN SUCH EVENTUALITY THE ASSESSING OFFICER CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION14A (1). IN CASE THE ASSESSING OFFICER IS NOT ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSES SEE A REASONABLE OPPORTUNITY SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HE SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVING DONE SO THE ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT . 7. IN VIEW OF THE ABOVE DISCUSSION WE ARE OF THE VIEW THAT THE ORDER OF THE LEARNED CIT (A) IS NOT SUSTAINABLE. WE SET ASIDE THE ORDER DATED 7.10.2013 AND RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR RE - ADJUDICATION. THE ASSESSING OFFICER SHALL KEEP IN MIND THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CA SE OF MAXOPP INVESTMENT LTD (SUPRA) OR ANY OTHER LATEST DECISION IF ANY RENDERED BY THE HON'BLE JURISDICTIONAL HIGH COURT OR OF THE HON'BLE SUPREME COURT ON THIS POINT. 9 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 THERE IS NO QUARREL ON THE POINT THAT RULE 8D IS APPLICABLE ONLY FROM THE ASSESSME NT YEAR 2008 - 09 ONWARDS AND THEREFORE THE SAME IS NOT RETROSPECTIVE AND NOT APPLICA BLE FOR THE YEAR UNDER CONSIDERATION. HENCE IN VIEW OF THE ORDER OF THIS TRIBUNAL FOR THE ASSESSMENT YEAR 2007 - 08 THE ISSUE OF DISALLOWANCE UNDER SECTION 14A IS SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER WITH THE SIMILAR DIRECTION. 8. AS REGARDS THE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES THE ASSESSING OFFICER HAS TO CONSIDER THE OBJECTIONS OF THE ASSESSEE IN THE LIGHT OF DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHE M INVEST LTD. VS. CIT (SUPRA). 9. FOR THE ASSESSMENT YEARS 2008 - 09 & 2009 - 10 RULE 8D IS APPLICABLE AND THEREFORE THE QUESTION ARISES WHETHER FOR THE ASSESSMENT YEAR 2008 - 09 WHEN THE ASSESSEE HAS NOT RECEIVED ANY DIVIDEND INCOME THE DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE CAN BE MADE UNDER SECTION 14A R.W. RULE 8D. IT IS PERTINENT TO NOTE THAT THE ISSUE IS MORE OF FACTUAL IN NATURE AND IF IT IS FOUND THAT THE INTEREST BEARING FUND HAS BEEN USED BY THE ASSESSEE FOR THE PURPOSE OF INVESTMENT IN THE SHARE THEN THE INTEREST EXPENDITURE ON SUCH BORROWED FUND IS OTHERWISE NOT ALLOWABLE 10 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 UNDER SECTION 36(1)(III) AS WELL AS 37 OF THE IT ACT BEING NOT LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE . EVEN OTHERWISE WHEN THERE IS NO DIVIDEND INCOME THE SAID INTEREST EXPENDITURE IS AL S O NOT ALLOWABLE UNDER SECTION 57 OF THE ACT AS THE PURPOSE OF TAKING THE LOAN IS NOT CLAIMED BY THE ASSESSEE FOR THE INVESTMENT IN SHARES. THEREFORE IN ANY CASE THE I NTEREST EXPENDITURE ON THE BORROWED FUND WHICH IS NOT UTILIZED FOR THE PURPOSE OF ASSESSEE S BUSINESS IS NOT AN ALLOWABLE CLAIM. THEREFORE WITHOUT GOING INTO THE CONTROVERSY OF WHETHER THE DISALLOWANCE CAN BE MADE UNDER SECTION 14A ON ACCOUNT OF INTEREST EXPENDITURE WHEN THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME WE WOULD LIKE TO DEAL WITH THE ISSUE ON THE POINT THAT WHETHER THE ASSESSEE WAS HAVING SUFFICIENT FUND FOR MAKING THE INVESTMENT IN THE SHARES AND MUTUAL FUNDS. THE ASSESSEE HAS FILED THE F OLLOWING DETAILS OF INVESTMENT S AND ITS OWN FUNDS AS WELL AS THE DIVIDEND INCOME : 11 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 DESCRIPTION 2007 - 08 (RS.) 2008 - 09 (RS.) 2009 - 10 (RS.) 14A DISALLOWANCE UNDER RULE 8D(2)(II) & (III) 18 143 882 31 704 922 100 568 338 OWN FUNDS 5 576 353 000 6 112 597 000 10 815 479 000 TOTAL INVESTMENTS 590 699 000 1 040 709 000 1 940 957 000 INVESTMENTS MADE DURING THE YEAR 50 000 450 000 000 900 258 000 INVESTMENTS MADE DURING THE YEAR FOR ACQUIRING CONTROLLING INTEREST / STRATEGIC PURPOSE -- 450 000 000 -- INVE STMENTS IN MUTUAL FUNDS DURING THE YEAR -- -- 900 258 000 INVESTMENTS FROM WHICH NO DIVIDEND HAS BEEN RECEIVED 590 699 000 1 040 709 000 1 940 957 000 TOTAL DIVIDEND -- -- 4 89 53 951 FROM MUTUAL FUNDS EXEMPT DIVIDEND -- -- 48 953 951 10. AS REGARD S THE ORIGINAL INVESTMENT WHICH WAS MADE IN THE EARLIER YEAR THE ISSUE IS COMMON FOR THE ASSESSMENT YEAR 2006 - 07 AND THEREFORE TO THAT EXTENT IT IS REMITTED TO THE RECORD OF THE ASSESSING OFFICER TO VERIFY AND DECIDE AS PER THE DIRECTIONS OF THE TRIBUNAL. AS IT IS APPARENT FROM THE DETAILS THAT FOR THE ASSESSMENT YEAR 2008 - 09 THERE IS A FRESH 12 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 INVESTMENT OF RS.45 CRORES WHEREAS THERE IS AN INCREASE IN THE ASSESSEE'S OWN FUND OF MORE THAN ABOUT RS.45 CRORES. SIMILARLY FOR THE A .Y. 2009 - 10 THERE IS INCR EASE IN THE INVESTMENT OF RS.90 CRORES WHEREAS THERE IS AN INCREASE IN THE ASSESSEE'S OWN FUND OF ABOUT RS.400 CRORES. THEREFORE FOR THESE TWO ASSESSMENT YEARS THOUGH THERE IS AN INCREASE IN THE INVESTMENT AS THE ASSESSEE MADE FRESH INVESTMENT HOWEVER TH E CORRESPONDING INCREASE IN THE ASSESSEE'S OWN FUND IS MUCH MORE THAN THE AMOUNT OF INVESTMENT MADE DURING THESE TWO ASSESSMENT YEARS. ACCORDINGLY WE ARE OF THE VIEW THAT SO FAR AS FRESH INVESTMENT IS CONCERNED THE ASSESSEE S OWN FUND IS MORE THAN SUFFIC IENT TO COVER THEM AND THEREFORE TO THAT EXTENT NO DISALLOWANCE IS CALLED FOR UNDER SECTION 14A ON ACCOUNT OF INTEREST EXPENDITURE. AS RECORDS THE OLD INVESTMENT WHICH WAS MADE PRIOR TO THE ASSESSMENT YEAR 2007 - 08 THE ISSUE HAS A DIRECT BEARING OF THE FI NDING AND FINAL OUTCOME ON THIS ISSUE FOR THE ASSESSMENT YEAR 2006 - 07. SINCE THE SAID ISSUE IS ALSO SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER THEREFORE THE ISSUE OF DISALLOWANCE OF INTEREST EXPENDITURE UNDER SECTION 14A OF THE ACT TO THE EXTENT OF OLD INVESTMENT IS SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER WITH SAME 13 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 DIRECTION AS GIVEN FOR THE ASSESSMENT YEAR 2006 - 07. SINCE THERE IS A DIVIDEND INCOME FOR THE ASSESSMENT YEAR 2009 - 10 THEREFORE THE DECISION OF HON'BLE DELHI HIGH COURT IN THE C ASE OF CHE M INVEST LTD. VS. CIT (SUPRA) WAS NOT APPLICABLE FOR THE ASSESSMENT YEAR 2008 - 09 REGARDING DISALLOWANCE OF ADMINISTRATIVE EXPENDITURE BEING 0.5% OF THE AVERAGE INVESTMENT. THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT THE INVESTMENT FOR THE PURPOS E OF DISALLOWANCE OF ADMINISTRATIVE EXPENDITURE SHOULD BE CONSIDERED ONLY ON WHICH THE ASSESSEE HAS EARNED DIVIDEND FROM MUTUAL FUNDS. THUS THE LD. AR HAS SUBMITTED THAT ONLY RS.90 CRORES AND RS.2 58 000 CAN BE CONSIDERED AS INVESTMENT FOR THE PURPOSE OF DISALLOWANCE AS PER RULE 8D(2)(III). ACCORDINGLY WE DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE DISALLOWANCE AS PER RULE 8D(2)(III) BY CONSIDERING THE INVESTMENT IN MUTUAL FUNDS WHICH HAS YIELDED DIVIDEND INCOME. 11. THE NEXT ISSUE INVOLVED IN THE ASSESSEE'S APPEAL IS REGARDING THE DISALLOWANCE OF CLAIM OF DEPRECIATION ON GOODWILL AS WELL AS VALUATION OF GOODWILL. THE ASSESSEE IS IN THE BUSINESS OF PRODUCTION AND SALE OF BEER. DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER 14 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 CONSID ERATION THE ASSESSEE'S SUBSIDIARIES NAMELY KARNATAKA BREWERIES & DISTILLERY LTD. (KBDL) LONDON DRAFT PUBS PVT. LTD. (LDPPL) AND LONDON PIL L SNER B REWERIES PVT. LTD. (LPBPL) WERE AMALGAMATED WITH THE ASSESSEE. THE ASSESSEE CLAIMED DEPRECIATION OF RS.15 5 7 54 392 ON GOODWILL OF RS.62 30 17 566. THUS GOODWILL WAS SHOWN AS A RESULT OF MERGER / AMALGAMATION OF KBDL. THEREFORE THIS DISPUTE IS CONFINED ONLY WITH RESPECT TO THE VALUATION OF THE ASSETS RECORDED BY THE ASSESSEE IN ITS BOOKS POST AMALGAMATION WHI CH WERE TAKEN FROM KBDL. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN HOW THIS GOODWILL CAME TO BE ADDED TO THE FIXED ASSETS. IT WAS EXPLAINED THAT GOODWILL AROSE ON ACCOUNT OF ACQUIRING KBDL FOR A PURCHASE CONSIDERATION EX CEEDING FAIR VALUE OF TA NGIBLE ASSETS AND OTHER NET CURRENT ASSETS FROM THAT COMPANY. KBDL BECAME A WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE IN THE PRECEDING YEAR BY VIRTUE OF ACQUISITION OF SHARES OF THE SAID COMPANY FROM SHAREHOLDER S FOR A CONSIDERATION OF RS.180.52 CRORES. DU RING THE YEAR UNDER CONSIDERATION KBDL GOT AMALGAMATED WITH THE ASSESSEE AS PER THE ORDER OF THE HON'BLE HIGH COURT. CONSEQUENTLY ALL ASSETS AND LIABILITIES AS ON 1.4.2006 WERE TAKEN OVER INTO ACCOUNT FOR THE TAX PURPOSE BY THE 15 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 ASSESSEE. THE ASSESSEE EX PLAINED BEFORE THE ASSESSING OFFICER THAT WHILE ENTERING THE TANGIBLE ASSETS I.E. LAND BUILDING AND PLANT AND MACHINERY IN ITS BOOKS THE FAIR MARKET VALUE (FMV) AS ON TH AT DATE ONE ENTERED . THE ASSESSEE HAS ALSO PRODUCED THE VALUATION REPORT OF THE VALU ER WHO HAS COMPUTED THE FMV OF THE TANGIBLE ASSETS ON THE BASIS OF REPLACEMENT METHOD AND AFTER REDUCING THE DEPRECIATION FROM THE REPLACEMENT PRICE THE FMV HAS BEEN ARRIVED BY THE VALUER SRI A. V. SETHI & ASSOCIATES. THUS THE DIFFERENCE BETWEEN THE FAIR VALUE AND CONSIDERATION WAS SHOWN AS GOODWILL. THE ASSESSING OFFICER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND OBSERVED THAT THE INSTEAD OF FAIR VALUE OF ASSET BASED ON THE REPLACEMENT VALUE OF THE ASSET ADOPTED IN THE VALUATION REPORT THE FAIR MA RKET VALUE (FMV) OF ASSETS SHOULD HAVE BEEN ADOPTED IN THE BOOKS OF ACCOUNTS AND CONSEQUENTLY THE VALUATION OF THE GOODWILL WOULD BE REDUCED BY RS.24.48 CRORES. THE ASSESSING OFFICER HAS ALSO OBSERVED THAT ON THE LAND VALUATION THE VALUER HAS ADOPTED THE GUIDANCE RATE WITHOUT CONSIDERING THE SALE IN CIDENTS OF COMPARABLE LAND. THUS THE ASSESSING OFFICER OBSERVED THAT IF THE REPLACEMENT OF COST OF BUILD ING PLANT AND MACHINERY AND HIGHER VALUE OF LAND IS TAKEN TO THE BOOKS THERE 16 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 WOULD NOT BE ANY GOODWILL. THE ASSESSING OFFICER CONCLUDED THAT DIFFERENTIAL AMOUNT BEING SHOWN AS GOODWILL CANNOT BE CONSIDERED AS AMOUNT PAID FOR BREWING LICENSE AS THE ASSESSEE HAS NOT GOT THE VALUATION OF THE LICENSE. ACCORDINGLY THE ASSESSING OFFICER HAS DISALLOWED THE DEPR ECIATION ON THE GOODWILL ON THE GROUND THAT THERE IS NO GOODWILL IF PROPER VALUATION IS ASSIGNED TO THE TANGIBLE ASSET AND LAND. ON APPEAL THE CIT (APPEALS) HAS CONCURRED WITH THE DECISION OF THE ASSESSING OFFICER BY CONSIDERING THE FACT THAT THE VALUE O F THE GOODWILL IN THE BOOKS OF THE KBDL IS ONLY RS.7.45 CRORES WHICH HAS BEEN SHOWN BY THE ASSESSEE AT RS.62.30 CRORES. THE CIT (APPEALS) WAS OF THE VIEW THAT WHEN THE FINANCIAL RESULTS OF THE KBDL SHOWS THAT THERE WAS A PROFIT OF RS.2.14 CRORES FOR THE ASSESSMENT YEAR 2004 - 05 AND LOSS OF RS.1.89 CRORES FOR THE ASSESSMENT YEAR 2005 - 06 THEN T HE ASSESSEE HAS FAILED TO JUSTIFY THE VALUATION OF GOODWILL ESTIMATED AT RS.62.30 CRORES WITH REFERENCE TO THE AVERAGE PROFIT. THUS THE CIT (APPEALS) HELD THAT THERE IS NO JUSTIFICATION FOR ADOPTING THE BALANCE FIGURE OF EXCESS CONSIDERATION OVER THE NET ASSET WITHOUT ADMITTING TO SUPPORT THE SAID VALUATION. 17 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 12. BEFORE US THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT ISSUE OF DEPRECIATION ON GOODWILL IS CONCERNED THE SAME IS COVERED BY THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SMIFS SECURITIES LTD. 252 CTR 233 (SC). HE HAS FURTHER SUBMITTED THAT VALUATION OF GOODWILL IS NOTHING BUT THE DIFFERENTIAL FIGURE BETWEEN THE CONSIDERATION AND THE FMV OF THE TANGIBLE ASSET AND THEREFORE THE CLAIM OF DEPRECIATION CANNOT BE DENIED ON THE GROUND THAT THERE IS NO GOODWILL AND THE ASSESSEE HAS FAILED TO SHOW THE JUSTIFICATION FOR EXCESS CONSIDERATION EX CLUDING THE VALUE OF TANGIBLE ASSETS. HE HAS REFERRED T O THE VALUATION REPORT AND SUBMITTED THAT VALUER HAS ADOPTED THE REPLACEMENT COST METHOD AND AFTER ALLOWING THE DEPRECIATION FOR A PERIOD DURING WHICH THE ASSETS WERE ALREADY UNDER USE THE FMV HAS BEEN ARRIVED. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CHOWGULE & CO. PVT. LTD. VS. ADDL. CIT (2016) 95 CCH 0021 (MUM HC) AS WELL AS THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF A.P. PAPER MILLS LTD. VS. ACIT DT.4.11.2009 IN ITA NO.218/HYD/2006. THUS THE LD.AR HAS SUBMITTED THAT WHEN THE ASSESSEE HAS PRODUCED THE VALUATION REPORT 18 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 AND VALUED OF THE TANGIBLE ASSET THEN WITHOUT GIVING THE CORRECT VALUE BY THE ASSESSING OFFICER THE REJECTION OF THE VALUATION REPORT IS NOT JUSTI FIED. HE HAS FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAS NOT DETERMINED THE CORRECT VALUATION IF THE VALUATION REPORT PRODUCED BY THE ASSESSEE WAS DOUBTED OR FOUND TO BE INCORRECT. T HE ASSESSING OFFICER HAS ASSIGNED MORE VALUE TO THE TANGIBLE ASSET WHICH MEANS THE DEPRECIATION ON THE TANGIBLE ASSET HAS BEEN ACCEPTED ON THE HIGHER VALUATION. THE METHOD ADOPTED BY THE VALU E IS WELL ACCEPTED METHOD OF VALUATION AND THEREFORE WITHOUT GIVING ANY VALUATION BY THE ASSESSING OFFICER THE CLAIM OF DEPRECIATIO N CANNOT BE REJECTED ONLY BY DOUBTING THE VALUATION OF THE ASSESSEE. 13. ON THE OTHER HAND THE LD. DR HAS SUBMITTED THAT THE ASSESSING OFFICER HAS CLEARLY BROUGHT ON RECORD THAT THERE IS NO JUSTIFICATION OF THE VALUATION OF THE GOODWILL WHEN THE ASSE SSEE HAS NOT ACQUIRED ANY INTANGIBLE ASSET FROM THE KBDL AND FURTHER THE ALLEGED LICENSE HAS NOT B EEN VALUED BY THE ASSESSEE. T HEREFORE THE VALUATION OF THE SAID LICENSE AT A VALUE OF RS.62.30 CRORES UNDER GOODWILL IS NOT BASED ON THE ACTUAL VALUATION OF THE ALLEGED LICENSE. HE HAS FURTHER CONTENDED THAT EVEN 19 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 OTHERWISE THE CLAIM OF DEPRECIATION CANNOT BE ALLOWED IN THE HAND OF THE ASSESSEE MORE THAN THE DEPRECIATION WHICH WOULD HAVE BEEN ALLOWED IN THE HAND OF KBDL AS PER THE 5 TH PROVISO TO SECTION 32(1 ) OF THE IT ACT. HE HAS REFERRED TO THE ASSESSMENT ORDER AND SUBMITTED THAT THE ASSESSING OFFICER HAS CONSIDERED THE SAID PROVISO WHILE DISALLOW ING THE CLAIM OF DEPRECIATION. T HE CIT (APPEALS) HAS CONFIRMED THE ACTION OF THE ASSESSING OFFICER AND THEREF ORE THE CLAIM OF DEPRECIATION IS NOT ALLOWABLE AS PER THE 5 TH PROVISO TO SECTION 13(2)(I) OF THE ACT. THE LD. DR HAS ALSO REFERRED TO THE EXPLN. 3 TO SECTION 43(1) AND SUBMITTED THAT THE ASSESSING OFFICER HAS THE POWER TO EXAMINE THE VALUATION OF THE ASS ETS ACQUIRED BY THE ASSESSEE IF THESE ASSETS WERE ALREADY IN USE FOR BUSINESS PURPOSE AND IF THE ASSESSING OFFICER IS SATISFIED THAT THE MAIN PURPOSE OF TRANSFER OF SUCH ASSETS WAS THE RE DUC TION OF THE LIABILITY TO INCOME - TAX THEN THE ACTUAL COST OF THE A SSET TO THE ASSESSEE SHALL BE SUCH AN AMOUNT AS THE ASSESSING OFFICER DETERMINES. THEREFORE THE ASSESSING OFFICER HAS RIGHTLY DETERMINED THE VALUATION OF THE GOODWILL AT NIL AND THE ASSESSEE HAS FAILED TO SUBSTANTIATE THE VALUATION OF THE GOODWILL. THE LD. DR HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 20 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 13.1 IN A REJOINDER THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT WHEN THE ASSETS ARE INTRODUCED IN THE BOOKS OF THE ASSESSEE BEING THE BALANCING FIGURE OF EXCESS CONSIDERATION OVER THE VAL UE OF THE TANGIBLE ASSETS THEN 5 TH PROVISO TO SECTION 32(1) IS NOT APPLICABLE. HE HAS FURTHER SUBMITTED THAT IN ALL THE CASES BEFORE THE HON'BLE SUPREME COURT AS WELL AS HON'BLE HIGH COURTS THE REVENUE HAS NOT RAISED THIS OBJECTION OF RESTRICTING THE CLA IM OF DEPRECIATION BY APPLYING 5 TH PROVISO TO SECTION 32(1) OF THE ACT. THEREFORE THE REVENUE CANNOT RAISE THIS OBJECTION WHEN IT WAS NOT RAISED IN THE OTHER CASES BEFORE THE HON'BLE SUPREME COURT AND HON'BLE HIGH COURTS. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE INTER ALIA AMALGAMATED ITS WHOLLY OWNED SUBSIDIARY KBDL. THE ASSESSEE ACQUIRED THE ENTIRE SHAREHOLDING OF THE COMPANY FROM THE SHAREHOLDER S FOR CONSIDERATION OF RS180.52 CRORES. IN THE BOOKS OF ACCOUNTS THE ASSESSEE HAS 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 HAS NOT ACCEPTED THE CLA IM OF DEPRECIATION ON 21 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 GOODWILL BY HOLDING THAT THE ASSESSEE HAS NOT ACQUIRED ANY INTANGIBLE ASSETS IN PURSUANT TO THE AMALGAMATION OF ITS SUBSIDIARY WITH THE ASSESSEE AND THEREFORE AS PER THE ASSESSING OFFICER THE GOODWILL WAS NOT AT ALL IN EXISTENCE. IT IS PERTINENT TO NOTE THAT THE ASSESSING OFFICER HAS THE JURISDICTION AND POWER TO EXAMINE THE VALUATION OF THE ASSETS AS PER EXPLN.3 TO SECTION 43(1) OF THE ACT WHICH READS AS UNDER: 43 (1) .. EXPLANATION 1 - .. EXPLANATION 2 - .. EXPLANATION 3. W HERE BEFORE THE DATE OF ACQUISITION BY THE ASSESSEE THE ASSETS WERE AT ANY TIME USED BY ANY OTHER PERSON FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND THE ASSESSING OFFICER IS SATISFIED THAT THE MAIN PURPOSE OF THE TRANSFER OF SUCH ASSETS DIRECTLY OR INDIRECTLY TO THE ASSESSEE WAS THE REDUCTION OF A LIABILITY TO INCOME - TAX (BY CLAIMING DEPRECIATION WITH REFERENCE TO AN ENHANCED COST) THE ACTUAL COST TO THE ASSESSEE SHALL BE SUCH AN AMOUNT AS THE ASSESSING OFFICER MAY WITH THE PREVIOUS APPROVAL OF THE JOINT COMMISSIONER DETERMINE HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. AS IT IS CLEAR FROM THE EXPLN.3 TO SECTION 43(1) THAT 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 THEN THE ACTUAL COST TO THE ASSESSEE SHALL BE DETERMINED BY THE ASSESSING OFFICER. IN THE CASE ON HAND SINCE THERE IS AN AMALGAMATION OF THE SUBSIDIARY WITH THE ASSESSEE THEREFORE ALL THE ASSETS WHICH CAME TO THE ASSESSEE ARE ALREADY IN USE BY THE SUBSIDIARY AND 22 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 CONSEQUENTLY THE VALUATION OF ALL THE ASSETS ARE SUBJECTED TO THE VERIFICATION OF THE ASSESSING OFFICER AS PER EXPL.3 OF SECTION 43(1) OF THE ACT. HOWEVER THE ASSESSING OFFIC ER CHOSE TO EXAMINE THE VALUATION OF GOODWILL ALONE IN ORDER TO DISALLOW THE CLAIM OF DEPRECIATION ON THE ENHANCED VALUE OF GOODWILL. WE FIND THAT THE ASSESSING OFFICER HAS NOT ADOPTED ANY PRESCRIBED OR WELL ACCEPTED METHOD FOR VALUATION OR ACTUAL COST OF THE GOODWILL IN THE HANDS OF THE ASSESSEE BUT HE HAS DOUBTED THE VALUATION OF THE TANGIBLE ASSETS AND WAS OF THE VIEW THAT THE ASSESSEE HAS DE FLA TED THE VALUATION OF THE TANGIBLE ASSETS BY THE METHOD OF COST OF REPLACEMENT INSTEAD OF FMV. THE SCOPE AND O BJECTIVE OF THE EXPL.3 OF SECTION 43(1) OF THE ACT IS TO CHECK THE EXCESS CLAIM OF DEPRECIATION BY ENHANCING COST OF ASSETS ACQUIRED WHICH WERE ALREADY IN USE BY OTHER PERSON. THEREFORE IN CASE OF VALUATION OF GOODWILL THE ASSESSING OFFICER OUGHT TO HAVE EXAMINED THE VALUATION OF ALL THE ASSETS TAKEN OVER BY THE ASSESSEE UNDER THE AMALGAMATION AND THEREBY TO DETERMINE THE ACTUAL COST TO THE ASSESSEE FOR THE PURPOSE OF CLAIM OF DEPRECIATION. IN THIS CASE THERE IS NO DOUBT THAT THE VALUE OF THE GOODWILL WAS SHOWN IN THE BOOKS OF THE KBDL AT RS.7.45 CRORES WHICH HAS BEEN ENHANCED IN THE BOOKS OF 23 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 ACCOUNTS OF THE ASSESSEE TO RS.62.30 CRORES. THE ASSESSEE HAS FORCEFULLY CONTENDED THAT THE VALUATION OF THE GOODWILL IS NOTHING BUT ONLY THE DIFFERENTIAL VALUE BETW EEN THE CONSIDERATION AND FMV OF THE TANGIBLE ASSETS. THUS THE LD. AR HAS CONTENDED THAT ASSESSING OFFICER CANNOT DISTURB THE VALUATION OF THE GOODWILL WHEN IT IS A DIFFERENTIAL AMOUNT BETWEEN THE CONSIDERATION AND THE FMV OF THE TANGIBLE ASSETS. IF SUCH CLAIM OF GOODWILL AND DEPRECIATION IS ALLOWED THEN IT WOULD RENDER THE PROVISIONS OF EXPLN. 3 TO SECTION 43(1) OF THE ACT REDUNDANT OTHERWISE IN EVERY CASE OF TRANSFER SUCCESSION OR AMALGAMATION THE PARTY WOULD CLAIM EXCESSIVE DEPRECIATION BY ASSIGNING ARBITRARY VALUE TO THE GOODWILL. THEREFORE THE ENTIRE ASSETS TAKEN OVER BY THE ASSESSEE UNDER THE AMALGAMATION ARE SUBJECTED TO THE EXPL.3 OF SECTION 43(1) OF THE ACT AND IF THE ASSESSING OFFICER FINDS THAT THE ASSESSEE HAS CLAIMED EXCESS CLAIM OF DEPREC IATION BY ENHANCING THE COST OF GOODWILL THEN ACTUAL COST OF GOODWILL CAN BE DETERMINED ONLY BY CONSIDERING THE ACTUAL COST OF THE OTHER ASSETS SO ACQUIRED UNDER AMALGAMATION. 15. THERE IS ANOTHER ASPECT INVOLVED IN THIS ISSUE OF CLAIMING DEPRECIATI ON ON THE ENHANCED COST OF GOODWILL IN CASES OF S UCCESSION / 24 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 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 DAY S FOR WHICH THE ASSETS USED BY THEM. FURTHER THE DEDUCTION SHALL BE 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 GENERA TION 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: ........... ........... PROVI DED 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 NA TURE 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 25 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 47 OR SECTION 170 OR TO THE AMALGAMATING COMPANY AND THE AMALGAMATED COMPANY IN THE CASE OF AMALGAMATION OR TO THE DEMERGED COMPANY AND THE RESULTING COMPA NY 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 SHA LL 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 B Y THEM. THIS PROVISO PROVIDES THAT DEPRECIATION ALLOWABLE IN THE CASE OF SUCCESSION AMALGAMATION OR MERGER DEMERGER SHOULD NOT EXC EED THE DEPRECIATION ALLOWABLE HAD THE SUCCESSION NOT TAKE N PLACE. IN OTHER WORDS THE ALLOWANCE OF DEPRECIATION TO THE S UCCESSOR / 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 REGAR DED AS TRANSFER FOR THE PURPOSE OF CAPITAL GAIN AS PROVIDED UNDER SECTION 47(VI) OF THE ACT AND THEREFORE SUCH CASES ARE EX EMPTED FROM CAPITAL GAIN WHICH IS OTHERWISE CHARGEABLE TO TAX ON TRANSFER OF ASSETS. IN THE CASE ON HAND THE BUSINESS OF THE SUBSIDI ARY WAS TRANSFERRED TO THE ASSESSEE BY WAY OF AMALGAMATION THEREFORE IT WOULD NOT BE REGARDED AS TRANSFER OF ASSET FOR THE PURPOSE OF CAPITAL GAIN. 26 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 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 5 TH 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 F OR 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 ASS ESSEE COMPANY. AS PER 5 TH 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 T HE 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 DEPRECIATION ON GOODWILL. THEREFORE UNDER THIS PROVISION ALSO THE ASSESSEE IS NOT ELIGIBLE FOR DEPRECIATION ON GOODWILL. HOWEVER THE ASSESSING OFFICER HAS PROCE EDED 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 5 TH PROVISO TO SECTION 32(1)(II) THEN THE VALUATION ISSUE BECOME IRRELEVANT. THE CIT (AP PEALS) HAS ALSO CONCURRED WITH THE VIEW OF THE ASSESSING OFFICER 27 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 REGARDING THE APPLICABILITY OF THE 5 TH 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 DEPRE CIATION ON GOODWILL WAS CLAIMED BY KBDL BEFORE AMALGAMATION. THEREFORE AS PER THE 5 TH 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 5 TH PROVISO TO SECTION 32(1) THE DEPRECIATION O N 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 DEPRECIATION IS ALLOWABLE TO THE AMALGAMATING COMPANY. AS R EGARDS THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SMIFF SECURITIES LTD. (2012) 348 ITR 302 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 BU SINESS O R 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 28 IT A NO S . 722 801 1065 & 1066 /BANG/201 4 JUDGMENT WOULD NOT OVER - RIDE THE PROVISIONS OF 5 TH PR OVISO 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 TH E ASSETS TAKEN UNDER AMALGAMATION AND FOR THE PURPOSE OF 5 TH 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 5 TH PROVISO TO SECTION 32(1) OF THE ACT. ACCORDINGLY THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 16. IN THE RESULT THE APPEALS ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30TH SEPT. 201 6 . SD/ - ( S. JAYARAMAN ) ACCOUNTANT MEMBER SD/ - ( VIJAY PAL RAO ) JUDICIAL MEMBER *REDDY GP