2020 (2) TMI 505 - AT - Income Tax

Depreciation on intangibles - sale as slump sale and offered profit derived therefrom as Long term capital gain in the return of income filed for the impugned assessment year - HELD THAT - AO apparently has not obtained such approval of the Joint Commissioner before determining the value of the asset at Nil . Atleast no such material has been placed before us by the Revenue to show that the Assessing Officer has obtained any approval of Joint Commissioner of Income tax. Even a reading of paragraph 3.3 of the assessment order reveals that the Assessing Officer by referring to a wrong/incomplete provision has proceeded to exercise his power in determining the value of the asset at Nil . For this reason alone the disallowance made by the Assessing Officer cannot be sustained. As rightly observed by Commissioner (Appeals) there cannot be any doubt with regard to the genuineness of the transaction as M M Ltd. has treated the sale as slump sale and offered profit derived therefrom as Long term capital gain in the return of income filed for the impugned assessment year. Even the business transfer agreement also clearly speaks of transferring not only the physical assets but various other intangible assets such as contractual rights licenses customer base etc. All these intangible assets transferred to the assessee have a commercial value and a part of sale consideration has to be allocated to such assets. For the purpose of such allocation the assessee has obtained valuation report from a technically qualified person. If the Assessing Officer was not satisfied with the valuation report he should have got the assets valued through another technically qualified person instead of rejecting the valuation report purely on the basis of conjectures and surmises. Further the observations of the Assessing Officer that the assessee has designed the transaction in a manner to create fictitious asset is without any material basis. In the case of ACIT vs. Dorma India Pvt. Ltd. (2019 (11) TMI 1139 - ITAT CHENNAI) the co-ordinate Bench while considering a dispute of similar nature has observed a consolidated payment made by the assessee over and above net assets acquired by it under a composite contract is to be viewed as towards goodwill and has to be treated as intangible asset on which depreciation is allowable. assessee is eligible to claim depreciation on the intangible assets acquired by way of congeries of rights. Therefore the order of learned Commissioner (Appeals) on the issue is upheld. The ground raised is dismissed. Allowance of depreciation on goodwill - HELD THAT - Undisputedly the depreciation claimed by the assessee is on goodwill. As held by the Hon ble Supreme Court in the case of CIT vs. Smif Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT goodwill is an intangible asset as defined u/s. 32(1)(ii) of the Act hence eligible for depreciation. In view of the ratio laid down by the Hon ble Supreme Court as discussed above assessee s claim of depreciation has been rightly allowed by learned Commissioner (Appeals). Hence no interference is called for. This ground is also dismissed. Allowance of fees paid towards valuation report - HELD THAT - Though it may be a fact that expenditure incurred by the assessee was for valuation of the assets however such expenditure per se is not for acquiring any capital asset. Therefore in our considered view learned Commissioner (Appeals) was justified in allowing assessee s claim. This ground is dismissed. Disallowance of expenditure under the head services/operations - notices issued u/s. 133(6) have returned back un-served - HELD THAT - As it appears from the orders of the Assessing Officer as well as learned Commissioner (Appeals) due to non-response to the notices issued u/s. 133(6) of the Act a part of the expenditure has been disallowed and added back. However it is a fact on record that all payments have been made by the assessee in cheque and the assessee has furnished the name address PAN etc. of all payees. In fact the assessee has also deducted tax in applicable cases which is evident from the TDS certificates filed in the paper-book. Non-response to the notices issued u/s. 133(6) of the Act could be for various reasons. However that itself would not lead to the conclusion that the payments made are non-genuine particularly when the payments have been made through banking channels. Moreover considering the nature of business and the turnover involved we are of the view that the disallowance made is not justified. - Decided in favour of assessee.

Summary

Issues Involved:
1. Allowance of depreciation on intangibles.
2. Allowance of depreciation on goodwill.
3. Allowance of fees paid towards valuation report.
4. Disallowance of expenditure amounting to Rs. 25,81,000/-.

Issue-wise Detailed Analysis:

1. Allowance of Depreciation on Intangibles:
The primary dispute in ITA No. 6645/Mum/2018 for A.Y. 2009-10 revolves around the allowance of the assessee's claim of depreciation on intangibles. The assessee, a subsidiary of Mahindra & Mahindra Ltd., acquired the logistics division of M&M on a slump sale basis for Rs. 32 crores, which included intangible assets like customer database and goodwill. The assessee claimed depreciation on these intangibles. The Assessing Officer (AO) disallowed the claim, arguing that the transaction was designed to claim high depreciation on fictitious assets and invoking Explanation 3 to section 43(1) of the Act to determine the value of intangibles at 'Nil'. The Commissioner of Income Tax (Appeals) [CIT(A)] found the transaction genuine, noting that M&M treated it as a slump sale and offered capital gains tax. The CIT(A) allowed the depreciation claim, which was upheld by the Tribunal, noting that the AO did not obtain prior approval from the Joint Commissioner as required under Explanation 3 to section 43(1).

2. Allowance of Depreciation on Goodwill:
The next issue pertains to the allowance of depreciation on goodwill. The assessee initially did not claim depreciation on goodwill but later raised the issue before the CIT(A) based on the Supreme Court's decision in CIT vs. Smif Securities Ltd., which held that goodwill is an intangible asset eligible for depreciation. The CIT(A) admitted the additional ground and directed the AO to allow the depreciation claim. The Tribunal upheld this decision, affirming that goodwill is eligible for depreciation under section 32(1)(ii) of the Act.

3. Allowance of Fees Paid Towards Valuation Report:
In ITA No. 6646/Mum/2018 for A.Y. 2010-11, the Revenue challenged the allowance of fees paid for the valuation report. The AO disallowed the expenditure of Rs. 2,24,720/- as capital in nature. The CIT(A) allowed the claim, and the Tribunal upheld this decision, noting that the expenditure was not for acquiring any capital asset but for valuation purposes, thus justified as revenue expenditure.

4. Disallowance of Expenditure Amounting to Rs. 25,81,000/-:
In ITA No. 6453/Mum/2018 for A.Y. 2011-12, the only issue raised by the assessee is the disallowance of expenditure amounting to Rs. 25,81,000/-. The AO disallowed this amount as unexplained investment under section 69 of the Act due to non-response from parties to notices issued under section 133(6). The CIT(A) upheld the disallowance. The Tribunal, however, noted that all payments were made by cheque, and the assessee provided details of the payees, including PAN and TDS certificates. The Tribunal concluded that non-response to notices does not necessarily indicate non-genuine transactions and deleted the disallowance.

Conclusion:
The Tribunal dismissed the Revenue's appeals and allowed the assessee's appeal, affirming the CIT(A)'s decisions on all issues. The order was pronounced on 5th February 2020.