2017 (7) TMI 416 - AT - Income Tax

Disallowing depreciation on one of the intangible asset Distribution Network - slump-sale proof - Held that - In the present case, the very fact that the seller of the business had 50% interest in the company i.e. assessee-company by virtue of holding 50% shares, and the assessee-company had failed to controvert the misgivings of the AO as to the inflation of the actual cost of the asset. These circumstances would certainly justify the AO to infer that fictitious price has been put on the asset in order to avail higher depreciation under the IT Act, perhaps with some other ulterior motive which the AO had chosen not to probe. In any event, right to use distribution network does not result in creation of any intangible asset as either the transferor company or the assesse company had paid any money to the distributors for giving them distributorship of dealing in the products of the assesseecompany. Thus AO is justified in denying depreciation claim on the intangible asset of distribution network on the inflated value of the asset. It is very ingenious attempt by the assessee-company to claim higher depreciation and avoid payment of tax in the hands of the transferor of the business by claiming to be slump sale transaction. See McDowell& Co. Ltd v. CTO (1985 (4) TMI 64 - SUPREME Court) - Decided against assessee. Addition made invoking Explanation 3 to section 43(1) - Held that - In this case, it is undisputed fact that M/s.BPL Ltd., from whom the assessee company had acquired the assets had used the asset and claimed depreciation. Thus this condition is satisfied. (2) The main purpose of transfer of such assets directly or indirectly to the assessee-company was for reduction of liability to income-tax. In the present case, transaction of acquisition business as a going concern is between two related parties and the seller had a substantial interest by holding 50% share. The assets were already depreciated in the hands of the seller i.e. M/s.BPL Ltd., higher values were assigned by the assessee-company in order to avoid tax liability. Thus, ingredients which are necessary for invoking Explanation 3 to section 43(1) are satisfied and the AO is justified in his action in restricting the allowance of depreciation on WDV at higher than 25% of the closing stock. The findings given by us in respect of depreciation on distribution network vide para 10 equally holds good even in respect of valuation of depreciable assets. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on "distribution network" as an intangible asset.
2. Disallowance of depreciation on revalued fixed assets acquired from BPL Ltd.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on "Distribution Network" as an Intangible Asset:

The assessee claimed depreciation on an intangible asset labeled as a "distribution network," valued at ?44,29,80,000. The AO disallowed this claim on the grounds that the valuation was excessively high and that there was no actual transfer of any distribution network from BPL Ltd. The AO noted that the distribution network was not exclusive to the CTV division but included dealers and distributors for all BPL brand goods. Additionally, BPL Ltd. retained a 50% shareholding in the assessee company, indicating that there was no real transfer of the distribution network. The AO concluded that the valuation was inflated to claim higher depreciation and disallowed the depreciation of ?5,53,72,500.

The CIT(A) upheld the AO's decision, agreeing that there was no transfer of the distribution network and it did not qualify as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act.

The Tribunal considered the argument that even if the distribution network did not qualify as an intangible asset, the excess consideration paid over the assets taken over should be treated as goodwill, which is eligible for depreciation as per the Supreme Court's decision in CIT vs. Smifs Securities Ltd. However, the Tribunal found that the valuation of the distribution network was inflated and that the assessee's attempt to claim higher depreciation was a tax avoidance strategy. Therefore, the Tribunal upheld the disallowance of depreciation on the distribution network.

2. Disallowance of Depreciation on Revalued Fixed Assets Acquired from BPL Ltd.:

The assessee acquired the CTV division from BPL Ltd. on a slump sale basis for ?360 crores and valued the fixed assets at ?81.19 crores. The AO found that the assets were overvalued compared to the closing WDV in BPL Ltd.'s books, which was only ?15.75 crores. The AO invoked Explanation 3 to Section 43(1) of the Income Tax Act, which allows the AO to determine the actual cost of assets if they were previously used by another person and the transfer's main purpose was to reduce tax liability by claiming higher depreciation.

The AO determined that the actual cost of the assets should be the closing WDV in BPL Ltd.'s books plus 25%, resulting in a disallowance of depreciation amounting to ?9,53,09,059. The CIT(A) upheld the AO's decision, agreeing that the assets were overvalued to claim higher depreciation.

The Tribunal noted that the assessee's valuation of fixed assets was based on an independent valuer's report, but the AO found discrepancies, such as undervaluation of land and overvaluation of other assets. The Tribunal agreed with the AO's application of Explanation 3 to Section 43(1), as the transaction involved related parties and the assets were previously used by BPL Ltd. The Tribunal upheld the disallowance of depreciation on the revalued fixed assets, concluding that the assessee's valuation was inflated to avoid tax liability.

Conclusion:

The Tribunal dismissed the assessee's appeal, upholding the disallowance of depreciation on both the "distribution network" as an intangible asset and the revalued fixed assets acquired from BPL Ltd. The Tribunal found that the assessee's valuation was inflated to claim higher depreciation and avoid tax liability, justifying the AO's application of Explanation 3 to Section 43(1) of the Income Tax Act.