JUDGMENT
Bhargav D. Karia, J. – Heard learned advocate Mr. Dharan Gandhi appearing for learned advocate Mr.Darshan B.Gandhi for the petitioner and learned Senior Standing Counsel Mr.Nikunt K.Raval for the respondents.
2. Having regard to the controversy involved, which is in narrow compass, with the consent of learned advocates for the respective parties, both the matters are taken up for final hearing.
3. Rule returnable forthwith. Learned Senior Standing Counsel Mr. Nikunt K.Raval, waives service of notice of rule on behalf of the respondents.
4. Both these petitions are filed under Article 226 of the Constitution of India with a prayer to quash and set aside the notice issued under Section 148A(b) of the Act dated 10th February, 2024 for the Assessment Years 2017-18 and 2018-2019 and the order dated 30th March, 2024 passed under Section 148A(d) of the Act and the consequent notice issued under Section 148 of the Act of the even date.
5. The brief facts of the case are that the respondent-Assessing Officer issued notice under Section 148A(b) of the Act on the basis of the audit objections which reads as under :-
In your case, assessment 143(3) r.w.s. 144B of the Incometax Act, 1961 (hereinafter referred as “Act”) for the AY 2018-19 was finalized on 15.06.2021 by accepting return income as total assessed income of Rs. Nil-. Subsequently, in your case the following audit objection which forms information as per Explanation 1(ii) to section 148 of the Act and which suggests that income of Rs.6,17,70,240/- chargeable to tax has escaped assessment; was raised:-
“On perusal of the financial statements and tax audit report of the assessee, it was seen that assessee had shown opening WDV of intangible asset worth Rs.24,70,80,959/- on which 25% depreciation i.e. Rs.6,17,70,240/- had been claimed while computing the total income On perusing the case records further, it was observed that the said Intangible asset had been created by the assessee company as goodwill during FY 2014-15 on amalgamation of its sister concern M/ s Songwon International India Pvt Ltd with it. While giving effect to the amalgamation in its books of account for FY 2014-15, the assessee, company had created goodwill of Rs.67,50,06,719/- in its books under the head intangible asset on which 25% depreciation had been claimed in AY-2015-16, 2016/17 and AY 2017-18.
The relevant paras in this respect, of the scheme of amalgamation as approved by Hon’ble High Court are as under:-Para 15. For accounting treatment
(d) The difference (if any) arising as a result of giving effect to sub-clauses 15(a) to (c) above, shall be credited or debited to Capital reserve account and/or Goodwill, as the case may be;
(f) The accounting treatment as stated in the Scheme is in compliance with the accounting treatment as prescribed under Accounting Standard-14 i.e. accounting for amalgamations governed by the Companies (Accounting Standards) Rule, 2006;
From the above facts and discussion, it is clear that the creation of goodwill of Rs.67.50 Cr by the assessee in its books was a mere book entry whereby the excess over the book value of the net worth/fixed assets of the amalgamating company has been recognized as goodwill by the amalgamated company. Further, in the considered opinion of the undersigned, the terms of a scheme of amalgamation cannot override the explicit provisions of the Income-Tax Act, 1961. In this context, of specific mention are the explanations to section 43 which govern the amount of recognition of capital assets including goodwill in the books of amalgamating company. The relevant explanations are reproduced here as under Explanation 7.[to section 43(1))-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, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business.
Explanation 2[to section 43(2)). Where in any previous year, any block of assets is transferred,-
(a) by a holding company to its subsidiary company or by a subsidiary company to its holding company and the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied; or
(b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.
In view of the above provisions of the Income-tax Act, it is clear that the amount of goodwill. if any allowable to be recorded in the books of the assessee company is only to the extent it is recorded in the books of Songwon International India Pvt. Ltd before amalgamation which is in complete contradiction with the recording of goodwill worth Rs.67.50 Cr by Songwon Speciality Chemicals India Pvt Ltd. Hence the claim of depreciation by the assessee was clearly in violation of the explicit provisions of I.T Act.
Hence the assessing office should not have allowed the claim of depreciation of Rs.6,17,70,240/- on account of goodwill while computing the total income of the assessee.
The mistake has resulted in under assessment of Rs.6,17,70,240/- having revenue effect (notional) of Rs.2,13,77,444/-,”
2. Therefore, you are requested to show cause as to why a notice u/s. 148 should not be issued to you on the basis of above Information which suggests that Income of Rs.6,17,70,240/-chargeable to tax has escaped assessment in your case for the AY 2018-19. Your reply to this show cause notice may please be furnished electronically positively by 20.02.2024 along with relevant documentary evidence in support of your claim.
6. In response to the above notice issued under Section 148A(b) of the Act, the petitioner filed a detailed reply dated 20th February, 2024 contending that the case of the assessee was selected for scrutiny assessment for the year under reference during which the return income was accepted as assessed income vide order dated 15.6.2021 passed under Section 143(3) of the Act. It was further contended that the show cause notice was issued only on the basis of the audit objections which is incorrect and invalid, as audit objections contained various factual mistakes. It was also pointed out by the assessee-petitioner that the petitioner is granted depreciation on the goodwill from Assessment Year 2015-16 onwards and therefore, for the year under consideration, the respondents could not have issued the notice for reassessment on the ground that the income has escaped assessment only on for disallowance of the depreciation of the goodwill, in view of the audit objections raised in the case of the petitioner.
7. The respondent-Assessing Officer however passed the impugned orders dated 30th March, 2024 for both the years under Section 148A(d) of the Act rejecting the explanation tendered by the petitioner observing as under:-
“5. Now, the written submission of the assessee dated 20.2.2024 is adverted to :-
The comments of the above submission of the assessee go as as under :-
In response to the show cause notice dated 10.2.2024, the assessee made a written submission on 20.02.2024 and in the said submission the assessee averred that the audit objection, based on which notice u/s. 148A(b) was issued, is incorrect. The assessee also claimed that the provisions of Explanation 7 to section 43(1) and Explanation 2 to section 43(6) are not applicable in its case. But in its reply dated 20.02.2024, the assessee has clarified that its claim of depreciation on goodwill was on account of its acquisition of one Sequent Scientific Limited, Gujarat during the financial year 2014-15 on a going concern basis. The assessee has itself admitted that a lumpsum consideration of Rs. 1,17,10,12,297 was paid for the purchase of speciality chemical business of Sequent Scientific Limited, Gujarat whose assets and liabilities were taken over. Finally, the assessee itself admitted that the excess of purchase consideration paid over and above the value of assets and liabilities as determined, was quantified at Rs.18,02,60,252 and the same was treated as Goodwill. Thus, the assessee itself has proved that it had created goodwill of Rs. 18,02,60,252 in its books and the same was a mere book entry whereby the excess over the book value of the net worth/fixed assets of Sequent Scientific Limited, Gujarat were recognised as goodwill by the assessee. Thus, the audit objection is correct except to the effect that in the audit objection creation of goodwill was attributed to amalgamation of Songwan International India Pvt Ltd with the assessee whereas the assessee attributed the same to acquisition of one Sequent Scientific Limited, Gujarat.
Similarly, the assessee has given the bifurcation of intangibles assets of Rs.67.50 Crore respecting the acquisition of Sequent Scientific Ltd., Gujarat during the FY 2014- 15 in the following manner :-
| Sr. No. | Nomenclature of the Intangible asset | Value |
| I | Customer Relationship | Rs.25,59,09,595/- |
| II | Product Technology | Rs.23,88,36,872/- |
| III | Goodwill | Rs.18,02,60,252/- |
| Total | | Rs.67,50,06,719/- |
All the above three assets were created in the books of the assessee consequent upon acquisition of one Sequent Scientific Limited, Gujarat All the above three intangible assets were not recorded in the books of Sequent Scientific Limited, Gujarat. Therefore, provisions of Explanation 7 to Section 43(1) and Explanation 2 to Section 43(6) get triggered in the case of the assessee.
In the audit objection, the initial figure of intangibles assets of Rs.67.50 Crore for the assessment year 2015-16 is considered as Goodwill in place of actual goodwill of Rs.18,02,60,252. The assessee was entitled to claim depreciation on intangible assets of Customer Relationship of Rs.25,59,09,595 and Product Technology of Rs.23,88,36,872 for the assessment year of 2015-16[it being the year of acquisition of Sequent Scientific Limited, Gujarat] as both the said intangible assets were there in the books of Sequent Scientific Limited, Gujarat prior to acquisition of the said company by the assessee-company. However, as the goodwill of Rs. 18,02,60,252 was created by the assessee and represented only a book entry in the books of assessee, the assessee was not entitled to claim any depreciation thereon for the assessment year 2015-16 and subsequent assessment years Thus, the assessee had claimed and was wrongly allowed inadmissible depreciation of Rs.6,17,70,240/- on intangible assets for the assessement year 2018-19 while finalizing the assessment dated 15.6.2021. Therefore, Explanation 7 to section 43(1) and Explanation 2 to section 43(6) are found to be applicable in its case in relation to creation of goodwill in its books at the time of acquisition of Sequent Scientific Limited, Gujarat during the FY 2014-15.
In the last para of its submission dated 20.02.2024, the assessee has requested for personal hearing before issuance of notice u/s. 148 of the Act. As per the following provisions of section 148A of the Act, which relate to conducting enquiry, providing opportunity before issue of notice u/s. 148, personal hearing is not possible in the case of the assessee as a notice u/s. 148A(b) is sufficient enough before issuance of notice u/s. 148 of the Act.
*b) provide an opportunity of being heard to the assessee, 23[***] by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);
In view above facts, it is concluded that the assessee contentions are not acceptable therefore rejected.”
8. On perusal of the above observations given in the impugned orders, it is apparent that the Assessing Officer has not taken into consideration the reply filed by the assessee stating in no uncertain terms that the assessee has claimed the depreciation from Assessment Year 2015-16 and the same has been accepted during the course of the regular assessment for the Assessment Years 2015-16 and 2016-17 and therefore, the Assessing Officer could not have reopened the assesssment for the subsequent years for Assessment Years 2017-2018 and 2018-2019 on the same facts which were earlier available with the Assessing Officer during the previous two years of 2015-2016 and 2016-2017. The Assessing Officer has conveniently ignored such facts and has reiterated what is stated in the audit objections. Thus, there is total non application of mind on behalf of the respondent -Assessing Officer which is also reiterated in the affidavit-in-reply filed pursuant to the order dated 24th September, 2024 passed by this Court.
9. In such circumstances, we are of the opinion that the impugned notice as well as the order passed under Section 148 and Section 148A(d) of the Act respectively are not tenable as the Assessing Officer could not have assumed jurisdiction in view of the audit objection which is contrary to the facts and evidence on record, more particularly when the department itself has accepted and granted depreciation on the goodwill claimed by the assessee for the earlier years. No reassessment proceedings could have been initiated by the respondent-Assessing Officer on the basis such audit objection.
10. It is true that as per provision of Section 148 as amended from 1.4.2021 even the audit objection can be considered for reopening the assessment as part of “information”. However, it does not mean that merely because the audit objection is raised, the Assessing Officer is bound to issue notice under Section 148 of the Act merely by reiterating what is stated in the audit objection ignoring the facts of the case and contents of the reply filed by the assessee pursuant to the notice issued under section 148A(b) of the Act.
11. Therefore, the impugned order passed under Section 148A(d) of the Act cannot be sustained as it can not be said to be a fit case to reopen the assessment by any stretch of imagination.
12. It is pertinent to note that merely producing of audit objection in the order under Section 148A(d) of the Act ignoring the reply filed by the assessee is nothing but non application of mind on the part of the respondent-Assessing Officer. The Assessing Officer merely reproduced the contents of the reply filed by the assessee without dealing with the same, which is apparent from the extract of the order reproduced hereinabove without considering the facts that the audit objection contained various factual mistake which is pointed out by the petitioner to the effect that the depreciation on the goodwill was being granted from the Assessment Year 2015-16 onwards to the petitioner and therefore, there is no question of escapement of income for the year under consideration by holding that the petitioner wrongly claimed the depreciation for the Assessment Year 2018-2019. The impugned order is therefore, contrary to the record and liable to be quashed and set aside.
13. In view of the foregoing reasons, both these petitions succeed and impugned notice issued under Section 148A(b) of the Act dated 10th February, 2024 as well as impugned order passed under Section 148A(d) of the Act dated 30th March, 2024 and the impugned notice issued under Section 148 of the Act dated 30th March, 2024 are hereby quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.