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2022 (6) TMI 1295 - AT - Income TaxDepreciation on the Goodwill - Slump sale - Assessee taking over the business - amount paid by the Appellant for the purchase of existing businesses - scope of relevant provisions applicable to the facts of the case are section 32(1) 43(1) 47(xiv)/47(vi) 47(via) - AO has denied the claim of 25% depreciation on the Goodwill amount so recognized by the assessee on the grounds that the valuation of goodwill at the above said amounts was not justifiable in terms of Explanation 3 to section 43(1) - main argument of the assessee is that any excess of the amount of the consideration paid in the slump sale which is over and above the net value of assets and liabilities taken over needed to be treated as goodwill of the concern purchased in the slump sale - Whether the amount paid by the Appellant over and above the net assets taken over constitutes Goodwill entitled for depreciation? - HELD THAT - In the present case assessee has taken over the business of M/s. Indus Seeds and M/s. Sasya Gentech Pvt. Ltd. as a growing concern. 5th proviso to Section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction the 5th proviso does not apply. Thus it is axiomatic that until and unless it is the case of aggregate deduction the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. It is also pertinent to note that u/s 47(xiv) of the Act any transfer of capital asset or intangible asset by a proprietorship concern to a company as a result of succession of the concern by a company is a recognized mode of transfer. Admittedly the assessee had taken over proprietorship concerns and private company which are different entities and there were transfer of intangible asset by those two concerns to the assessee for a valuable consideration.Since the transaction is not covered under the above-mentioned clause of section 47 consequently fifth proviso of section 32 would also not be applicable in this case. Erroneous invocation of the explanation 3 to section 43(1) - The invoking of this Explanation 3 to section 43 of the Act by the AO in the present case is totally misplaced and not justified. The said explanation does not restrict the claim of depreciation on goodwill arising pursuant to a slump sale. It is applicable if the impugned goodwill has been appeared in the books of accounts of transferee and this goodwill never appeared in the books of seller. In our humble opinion the explanation 3 to section 43 will be applicable only in cases where the assets were at any time used by any other person for the purpose of his business or profession but in the present case the asset in question goodwill which is arising due to the transfer of business which is explained in earlier para and assets were not used by any other person therefore it cannot be said that the said explanation is applicable to the present facts of the case. Goodwill arising on slump sale - eligible for depreciation - In this case the AO did not principally contend against the position of the Appellant that the goodwill recorded by it is an intangible asset eligible for depreciation under Section 32(1) The sixth proviso to Section 32(1) of the Act also not applicable. It is applicable only in case of assets already existing in the books of predecessor company on which predecessor company was claiming depreciation before slump purchase and it is not applicable on assets recognized only by successor company pursuant to such slump purchase. The legislative intent behind the introduction of the said proviso was to curb the practice of claiming depreciation on the same assets by both the predecessor company and the successor company. This evident from the memorandum explaining the provisions of Finance Bill 1996 which introduced the sixth proviso (erstwhile fifth proviso) to section 32(1) of the Act. Thus a commonality of assets should exist between predecessor and the successor goodwill arising pursuant to acquisition belongs only to successor company. In the case of Urmin Marketing Pvt. Ltd. 2020 (11) TMI 47 - ITAT AHMEDABAD rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger on the basis of purchase Consideration paid (which is determined based on a valuation report) and no goodwill from the books of the transferor is recorded by the transferee. Amendment by Finance Act 2021 clarifies the position on Goodwill depreciation - The Finance Act 2021 inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments no depreciation is allowable to an Assessee on goodwill. However it has been specifically provided that the aforementioned amendments will take effect from April 01 2021 and will accordingly apply in relation to AY 2021-22 and subsequent AYs. Amendments were made in section 55 of the Act in relation to the meaning of cost of acquisition etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to April 1 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed for determining the cost of acquisition. The intention of the legislature is that depreciation on goodwill is allowable prior to the said Amendments is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be rejected. Once the department accepted the capital gain offered by individual assessee in the respective hand the same transaction cannot be doubted in the hands of purchaser. On this count also we find force in the argument of Ld. A.R. that AO not established that the main purpose of transfer of such asset was reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish aforesaid fact it has to be established that apart from claiming additional depreciation on enhanced cost there is other main purpose for acquiring the asset i.e. goodwill in question. AO in the instant case wrongly invoked the explanation 3 to section 43 of the Act. Our above decision is also supported by the order of the Tribunal relied by the Ld. A.R. in the case of M/s. Dorma India Pvt. Ltd. Chennai 2019 (11) TMI 1139 - ITAT CHENNAI . Further we also place reliance on the judgement Padmini Products (P) Ltd. 2020 (10) TMI 424 - KARNATAKA HIGH COURT wherein similar circumstances Hon ble High Court has allowed the claim of the assessee. - Appeal of assessee allowed.
Issues Involved:
1. Whether the amount paid by the Appellant over and above the net assets taken over constitutes Goodwill entitled for depreciation. 2. Whether the amount paid by the Appellant for the purchase of existing businesses is fair and reasonable. 3. Whether the AO was right in invoking the provisions of Explanation 3 to Section 43(1). Issue-wise Detailed Analysis: 1. Goodwill Entitlement for Depreciation: The assessee claimed depreciation on intangible assets (goodwill) valued at Rs. 17,39,83,689/-. The AO disallowed the claim, treating the transaction as a sham and invoking Explanation 3 to Section 43(1). The assessee argued that the excess amount paid over the net value of assets and liabilities should be treated as goodwill, citing various clauses in the Business Transfer Agreements (BTAs) and referencing the decision in CIT vs. Smifs Securities Limited. The Tribunal found that the goodwill paid was justified by the synergistic performance of the merged business and the foreign investment received. It was held that goodwill is an intangible asset eligible for depreciation under Section 32(1), supported by the Supreme Court decision in Smifs Securities Ltd. and other relevant case laws. 2. Fair and Reasonable Amount Paid: The assessee provided details of the net book value of assets and liabilities taken over through slump sale agreements with M/s. Indus Seeds and M/s. Sasya Gentech Pvt. Ltd. The Tribunal noted that the valuation was determined as per the BTAs and applicable accounting standards. The assessee justified the amount paid by highlighting the reputation and business connections of the acquired entities, which attracted foreign investment. The Tribunal accepted the assessee's contention that the differential amount paid was for goodwill, including various intangible benefits like non-compete clauses, distribution networks, and intellectual property rights. 3. Invocation of Explanation 3 to Section 43(1): The AO invoked Explanation 3 to Section 43(1), suggesting the main purpose of the transfer was to reduce income tax liability by claiming higher depreciation. The Tribunal disagreed, stating that the explanation applies only if the assets were used by another person for business purposes before the transfer. Since the goodwill was recognized only upon the takeover and did not exist in the seller's books, the explanation was deemed inapplicable. The Tribunal emphasized that the goodwill arising from the slump sale is eligible for depreciation and that the legislative intent supports this interpretation. Conclusion: The Tribunal concluded that the assessee's claim for depreciation on goodwill was justified and allowed the appeal. The decision was based on the interpretation of relevant statutory provisions, accounting standards, and judicial precedents, confirming that goodwill arising from a slump sale is eligible for depreciation under Section 32(1). The AO's invocation of Explanation 3 to Section 43(1) was found to be erroneous. The Tribunal's detailed analysis upheld the assessee's position, allowing the depreciation claim on the recognized goodwill. Order Pronouncement: The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 15th June 2022.
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