2010 (6) TMI 523 - AT - Income Tax

Slump sale or demerger - Depreciation Addition u/s 40(a) and 43B - AO has observed that the scheme approved by the Hon ble High Court u/s 391 to 394 of the Companies Act fulfils all the conditions stipulated u/s.2(19AA) of the Act - The AO has further held that s per Explanation 7A to Section 43(1), the actual cost to the assessee shall be taken to be same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business - AO has held that the purpose of enhancement of the actual cost to the assessee is for the purpose of reduction of tax liability by claiming high depreciation - Company is not fulfilling the conditions laid down at clause (iii), (iv) & (v) to section 2(19AA), therefore, it cannot be held as a case of demerger - Therefore, the value adopted by the company on the basis of revaluation of the assets is to be considered for depreciation purpose Regarding depreciation on brand and goodwill u/s 32(1)(ii) From the above it can be seen that trade mark or brand name has been used in conjunction and as an alternative to each other - Thus it can be concluded that even the legislature has intended that brand name or trade mark are similar intellectual properties - Brand falls within the ambit of section 32(1)(ii) of the I.T. Act and that the assessee is eligible for depreciation on the same - As far as goodwill is concerned, the assessee shall not be entitled to depreciation - Appeal is partly allowed Regarding the disallowance of expenditure - The AO has disallowed the claim of the appellant company on the plea that the company was started in the year under consideration and the question of allowing the expenditure incurred in the earlier years does not arise - Since the expenditure disallowed u/s. 40(a) and 43B of the I.T. Act is to be allowed on actual payment basis, therefore, it has to be allowed either in the case of the transferor company or the transferee company - Hon ble Mumbai Tribunal has decided the issue in the case of M/s Anil Engineering Corporation vs. ITO 50 ITD 99 where it is held that the transferee of the business would be eligible to claim the deduction in respect of the liability taken over from the transferor for which the payment was made by the transferee subsequently - Therefore, this ground of appeal is allowed in appellant s case

Summary

Issues Involved:
1. Allowability of depreciation on 'Brand' received by the assessee under the Scheme of Arrangement u/s 391 to 394 of the Companies Act, 1956.
2. Depreciation allowed by the CIT(Appeals) on certain assets.
3. Deletion of addition made under the proviso of section 40(a) and section 43B by the CIT(Appeals).

Issue-wise Detailed Analysis:

1. Allowability of Depreciation on 'Brand':
The assessee's appeal focuses on the allowability of depreciation on 'Brand' received under a Scheme of Arrangement sanctioned by the High Court. The AO disallowed the depreciation, treating the transaction as a demerger under section 2(19AA) of the Act and applying the written down value (WDV) method. The CIT(Appeals) held that the scheme did not fulfill the conditions of a demerger and thus, the revalued amounts should be considered for depreciation purposes. The Tribunal agreed with the CIT(Appeals) that the transaction was a slump sale, not a demerger, and that the brand falls within the ambit of section 32(1)(ii) of the Act, allowing depreciation on the 'Brand'. However, depreciation on goodwill was disallowed.

2. Depreciation Allowed by the CIT(Appeals) on Certain Assets:
The Revenue's appeal contested the CIT(Appeals) allowing Rs. 87.76 crores as depreciation against Rs. 15.98 crores allowed by the AO. The Tribunal upheld the CIT(Appeals)'s decision, noting that the Revenue did not dispute the factual findings that the transaction was a slump sale and the valuation was done at arm's length by an approved valuer.

3. Deletion of Addition Made Under the Proviso of Section 40(a) and Section 43B:
The AO disallowed deductions under sections 40(a) and 43B, arguing that the liabilities related to another company, KEC Infrastructure Ltd., and not the assessee. The CIT(Appeals), applying the decision of the jurisdictional Tribunal in Anil Engineering Corporation vs. ITO, held that the transferee of the business is eligible to claim deductions for liabilities taken over and paid subsequently. The Tribunal upheld this view, referencing the Supreme Court's decision in CIT vs. T. Veerabhadra Rao, K. Koteswara Rao & Co., which supports the right of the successor to claim such deductions.

Conclusion:
The Tribunal allowed the assessee's appeal in part, permitting depreciation on the 'Brand' but not on goodwill. The Revenue's appeal was dismissed, affirming the CIT(Appeals)'s decisions on the depreciation amount and the deletion of additions under sections 40(a) and 43B. The Tribunal's decision emphasizes the treatment of 'Brand' as an intellectual property right eligible for depreciation under section 32(1)(ii) and supports the transferee's right to claim deductions for liabilities assumed in a business transfer.