Keva Fragrances Private Limited v. Assistant Commissioner Of Income-Tax-4(2)(2) & Ors

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.554 OF 2019 Keva Fragrances Private Limited.... Petitioner versus Assistant Commissioner of Income-tax-4(2)(2) & Ors.... Respondents….... Mr.Percy Pardiwala, Senior Counsel, a/w Mr.Atul Jasani, Advocate for Petitioner.Mr.Percy Pardiwala, Senior Counsel, a/w Mr.Atul Jasani, Advocate for Petitioner. Mr.Suresh Kumar, Advocate for Respondent.Mr.Suresh Kumar, Advocate for Respondent. CORAM : AKIL KURESHI &SARANG V. KOTWAL, JJ.DATE: 15[th] MARCH, 2019. P.C. : 1. The Petitioner has challenged the orders passed by the Assessing Officer and the Commissioner of Income Tax requiringthe Petitioner to deposit 20% of the tax demand arising out ofthe order of assessment pending Appeal. The Petitioner praysthat a complete stay be granted against the recoveries till suchAppeal is disposed of by the Appellate Commissioner. 2. 2 / 10 908-WP-554-19.odtBrief facts may be noted at the outset -: Petitioner is a private limited company. Originally oneK.V. Arochem Private Limited was the wholly owned subsidiaryof one S.H. Kelkar and Company. This parent company hadanother subsidiary company Keva Fragrances Private Limited,under scheme of amalgamation envisaging dated 01/05/2015.Said Keva Fragrances Pvt. Ltd. was amalgamated with K.V.Arochem Private Limited. The scheme was sanctioned by theBombay High Court by an order dated 22/09/2016. K.V.Arochem Pvt. Ltd. was renamed as Keva Fragrances Pvt. Ltd.,the Petitioner herein. For the assessment year 2016-17 thePetitioner filed the return of income in November 2016declaring loss of Rs.14.05 Crors (rounded of). In its return thePetitioner had claimed a refund of a sum of Rs.11,07,05,288/-which comprised of the advance tax of Rs.11 Crores and taxdeducted at source of Rs.7,05,288/-. 3. The Assessing Officer took the return of the Petitionerin scrutiny and passed order of assessment under section 143(3) 3 / 10 908-WP-554-19.odtof the Income Tax Act, 1961 (for short 'the Act') on 29/12/2018.In this order of assessment Assessing Officer had computed theassessee's total income at Rs.299.92 Crores (rounded of). Thisgave rise to a total demand of Rs.137,95,82,948 crores whichincludes tax of Rs.103.72 crores and interest of Rs.34.23 crores. 4. The Petitioner filed appeal against the said order ofassessment on 09/01/2019. On the same day the Petitioner alsofiled an application before the Assessing Officer requesting thattill such Appeal is disposed of, recovery of tax arising out of theorder of assessment may be kept in abeyance. The AssessingOfficer passed an order dated 23/01/2019 in which he providedthat if the Petitioner deposited 20% of the outstanding demand,remaining recovery would be stayed pending Appeal. ThePetitioner thereupon approached Principal Commissioner ofIncome Tax on 29/01/2019 and made the same request. Thisapplication was rejected by the Principal Commissioner by anorder dated 15/02/2019, which is impugned in the presentPetition. 5. Learned Senior Counsel Mr.Pardiwala, appearing for Petitioner, pointed out that the additions made by the AssessingOfficer in the order of assessment relate to 3 separate heads asunder; (i)Addition of sum of Rs.251.18 Crores (rounded of)under section 56 (2)(viib) of the Act. In this context, learned Counsel argued that thetransaction in question would not be covered under the saidprovision. The Assessing Officer committed a serious error inmaking additions in terms of section 56(2)(viib) of the Act.Counsel submitted that the Petitioner had followed the sharevaluation method which was also approved by the High Court byconfirming scheme for amalgamation. The Assessing Officercannot insist that the said method was inappropriate. (ii)Disallowance of claim of depreciation of goodwill ofRs.62.79 Crores (rounded of). 5 / 10 908-WP-554-19.odt (i)Addition of sum of Rs.251.18 Crores (rounded of)under section 56 (2)(viib) of the Act. In this context, learned Counsel argued that thetransaction in question would not be covered under the saidprovision. The Assessing Officer committed a serious error inmaking additions in terms of section 56(2)(viib) of the Act.Counsel submitted that the Petitioner had followed the sharevaluation method which was also approved by the High Court byconfirming scheme for amalgamation. The Assessing Officercannot insist that the said method was inappropriate. (ii)Disallowance of claim of depreciation of goodwill ofRs.62.79 Crores (rounded of). 5 / 10 908-WP-554-19.odt In this context, the Counsel contended that thedepreciation on goodwill upon amalgamation is an acceptedprinciple as held by the Supreme Court in case of CIT Vs. Simfs Securities Ltd., reported in (2012) 348 ITR 302. The AssessingOfficer therefore committed a serious error in disallowing theclaim of depreciation of goodwill. (iii) Disallowance of set off of brought forward loss ofRs.12.61 Crores (rounded of) and unabsorbed depreciation ofRs.29.07 Crores (rounded of). In this context learned Counsel for the Petitioner hadargued that the Assessing Officer had incorrectly assumed thatthe amalgamation was done to set off the loss against the profitsin order to evade the tax. Even if the amalgamation had takenplace in a reverse sequence, there would be no difference interms of the tax liability of the amalgamated company. 6. On the basis of such contentions, Counsel strenuouslyurged before us that the Petitioner has strong case in the Appeal 6 / 10 908-WP-554-19.odt which is pending before the Commissioner. In the meantime, toinsist that the Petitioner complies with the general formula ofdepositing 20% tax pending appeal as provided in the CBDTcirculars would be whollely unjust. Learned Counsel pointed out that the Commissioner in his impugned order refused to takeinto account the question of prima facie case of the assessee,which would be one of the relevant considerations whiledeciding to impose condition for staying recovery pendingPetition. 7. Counsel pointed out that the Petitioner had alreadypaid advance tax of Rs.11 Crores and tax at sourceRs.7,05,288/- which the Commissioner in impugned order hastotally ignored. Counsel pointed out that the Petitioner hasfurther deposited a sum of Rs.1 Crore with the Department.paid advance tax of Rs.11 Crores and tax at sourceRs.7,05,288/- which the Commissioner in impugned order hastotally ignored. Counsel pointed out that the Petitioner hasfurther deposited a sum of Rs.1 Crore with the Department. 8. On the other hand, learned Counsel Mr.Suresh Kumarappearing for the Respondent pointed out that the AssessingOfficer has undertaken detailed exercise while passing the orderappearing for the Respondent pointed out that the AssessingOfficer has undertaken detailed exercise while passing the order 7 / 10 908-WP-554-19.odtof assessment. He has given reasons for making disallowancesand additions. He pointed out that the Assessing Officer hascited reasons to come to the conclusion that the method adoptedby the assessee for valuation was designed to evade the tax andto avoid genuine evaluation of the goodwill. The AssessingOfficer had held that the entire arrangement of amalgamationwas a colourable devise. Learned Counsel relied on the CBDTcircular dated 29/02/16 and 31/07/2017 which lay downgeneral conditions for granting stay of recovery pendingAppeals. 7 / 10 908-WP-554-19.odtof assessment. He has given reasons for making disallowancesand additions. He pointed out that the Assessing Officer hascited reasons to come to the conclusion that the method adoptedby the assessee for valuation was designed to evade the tax andto avoid genuine evaluation of the goodwill. The AssessingOfficer had held that the entire arrangement of amalgamationwas a colourable devise. Learned Counsel relied on the CBDTcircular dated 29/02/16 and 31/07/2017 which lay downgeneral conditions for granting stay of recovery pendingAppeals. 9. Having heard learned Counsel for the parties andhaving perused documents on record, what prima facie emergesfrom the record is that, the Petitioner undisputedly has anarguable case on the three additions which the Assessing Officerhas made. Prima facie case is one of the considerations whichwill weigh while imposing condition of deposit of disputed taxpending Appeal as held and observed by this Court in case ofUTI Mutual Fund Vs. Income Tax Officer in judgment dated 8 / 10 908-WP-554-19.odt06/03/2013 in Writ Petition (LODG.) No.523 of 2013. We maynotice that in the CBDT Circular dated 29/02/2016 whileproviding that the Assessing Officer shall stay pending Appeal ondeposit of 15% of the disputed amount, (which was later onrevised to 20% by virtue of the circular in 2017, other conditionsremained constant.) The circular also envisaged cases wheresuch requirement can either be increased or decreaseddepending on facts of the case. Thus requirement of 20% depositof tax pending the Appeal is not a rigid one and cannot beimplemented in all cases, irrespective of relevant facts. 10. Since the Appeal of the Petitioner is pending before theAppellate Commissioner, we would be well advised not toconsider the Petitioner’s argument on merit of disallowancesthreadbare. Suffice to reiterate that the Petitioner has a primafacie case on such disputed issues. With this background, wemay recall, that the Petitioner had already deposited advance taxof Rs.11 Crores and TDS of Rs.7,05,288/- by the time of filing ofthe return. The Petitioner has deposited further sum of Rs.1 9 / 10 908-WP-554-19.odtCrore with the tax department. Impugned order passed by theCommissioner does not take into account the sum ofRs.11,07,05,288/-, perhaps due to oversight since it appears thatthe Petitioner may not have brought such facts to his notice. Bethat as it may, whatsoever direction we may issue for depositingthe tax pending appeal, this amount must be taken intoconsideration. 11. Under the circumstances, the Petition is disposed ofwith following directions; (i)Petitioner shall deposit a further sum of Rs.3Crores with the Department latest by30/03/2019. This shall, along with the amountsalready deposited by the Petitioner representroughly 15% of the basic tax demand.Crores with the Department latest by30/03/2019. This shall, along with the amountsalready deposited by the Petitioner representroughly 15% of the basic tax demand. (ii)Subject to the Petitioner depositing the same,there shall be no further recovery of the tax andinterest pursuant to the order of assessment tillthe Petitioner’s Appeal is disposed of by theCommissioner (A).there shall be no further recovery of the tax andinterest pursuant to the order of assessment tillthe Petitioner’s Appeal is disposed of by theCommissioner (A). (iii)The Petitioner shall not cause any delay indisposal of the Appeal. If the department is ofthe opinion that the Petitioner is deliberatelydelaying the disposal, it would be open to thedepartment to apply to the Court for vacatingthe stay.disposal of the Appeal. If the department is ofthe opinion that the Petitioner is deliberatelydelaying the disposal, it would be open to thedepartment to apply to the Court for vacatingthe stay. (iv)Petition is disposed of accordingly. (SARANG V. KOTWAL, J.) (AKIL KURESHI, J.)