Suppose there is a merger of 2 comanies A Ltd and B Ltd . Let us assume that A Ltd is buying B Ltd for Rs 50 crores. Net assets of B Ltd is Rs 30 crores. The amalgamation is duly approved by the court and is regularized . As per accounting principles the combined entity will recognize Rs 20 Crores as "Goodwill". This type of Goodwill is called "Acquired Goodwill" and is a genuine expenditure unlike a fictitious asset being created in the books. This is carried over to the Assets side in B/S and is amortized for a definite period. The situation is
1. The Income Tax officer takes up the amount goodwill allowed in an earlier year and opens the case u/s 147 and contends the allowability of Goodwill and challenges u/s 28 (4) which reads "The value of any benefit or perquisite whether convertible into money or not , arising from business or the exercise of profession". I presume that he is saying goodwill is not covered under Business Income, since Goodwill does not fit in the above deinition. He decides to disallow the entire goodwill of Rs 20 crores in the Balance sheet.
2. I am perplexed on 2 counts ...
First of all I have not amortized the entire amount of goodwill and if at all disallowance to be made it should be on the amount debited to P& L ( say I write off Rs 2 crores over 10 yrs, then I feel the AO can disallow only Rs 2 Cr)
Secondly, suppose the original order for the assessment year is pending before CIT (A), Can AO issue a re-assessment order?
is there any case law to support my views...What is the way to counter AO's stand? Best of all which treatment is correct disallowfully (10cr) /partly disallow(2 cr) / Allow ?
Friends or Experts who have faced a situation like pls answer this
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