2020 (8) TMI 309 - AT - Income Tax

Assets acquired under slump sale - depreciation on the assets acquired under slump sale - invocation of the 5th proviso to section 32(1) to the case of Slump Sale - section 170 applicability - acquisition cost of (i) Motor Vehicle and (ii) Furniture and Fixture acquired under Slump Purchase as per Valuation Report - CIT-A directing the AO to adopt the acquisition cost of Motor Vehicle and Furniture and Fixture as per corresponding WDV of the Seller instead of their fair value as per the Valuation Report - HELD THAT - When there is no mention whatsoever about the issue of depreciation on assets acquired under slump sale under section 5OB the natural, corollary is that the depreciation on assets acquired under slump sale is to be governed by the general provisions given in the income tax act for the depreciation on assets. In the present case we find that assessee had acquired the said assets under slump sale. There is a business transfer agreement and by way of this agreement the assessee has purchased an undertaking under slump sale. In our considered opinion the facts in the present case clearly show that the assessee company has acquired the assets under a business transfer agreement. Hence it has succeeded the transferee company. The provisions of section 170 are clearly applicable on the facts of the present case. The submission of the assessee that there are separate provisions for dealing with slump sale is not sustainable with regard to the depreciation on assets obtained under slump sale. As we have already noted above the concerned sections that is section 2(42)c and section 50B referred by the learned counsel of the assessee do not deal with the issue of depreciation on assets acquired under slump sale. As submitted by learned Counsel of the assessee the Assessing Officer has accepted the value of goodwill attributed by the assessee as a balancing figure in the value of sump sale and value attributed to specific asset taken over. 5th proviso to section 32 is evidently applicable for the computation of depreciation on assets which have been taken over from the transferor company. Hence the computation of depreciation on assets which have been taken over has to be in accordance with the said proviso. Hence the computation of depreciation on these assets transferred in terms of the said proviso by the assessing officer is correct. Treatment of difference between the WDV of assets taken over and the slump sale amount - Honourable Supreme Court in the case of Arevat T D India Ltd. 2015 (7) TMI 620 - SC ORDER has confirmed the order of honourable Delhi High Court. The Hon ble High Court held that excess amount paid over and above the tangible assets for acquisition of various business and commercial rights under slump sale can be categorised under the head goodwill. This view also supported by Hon'ble Delhi High Court decision in the case of Triune Energy Services Pvt. Ltd. Vs. DCIT 2015 (11) TMI 1218 - DELHI HIGH COURT held that the same being a balancing figure the value of goodwill was to be allowed. Hence the direction to treat the balance amount of WDV of assets taken over and slump sale as goodwill is correct and in accordance with the above case law. Accordingly we conclude as under Invocation of 5th proviso to section 32 is correct to the extent of computation of depreciation on the WDV of assets taken over from the transferor company. Balancing figure between the value of slump sale and the value of WDV of assets taken over shall qualify as goodwill, and eligible for consequent depreciation.

Issues Involved:
1. Incorrect ignorance of acquisition cost of Motor Vehicle and Furniture and Fixture acquired under Slump Purchase.
2. Actual cost of Motor Vehicle and Furniture and Fixture acquired under Slump Purchase directed to be adopted at Written Down Value (WDV) of the Seller.
3. Applicability of provisions of section 170 in the case.
4. Eligibility for depreciation on the fair market value of assets received pursuant to succession.
5. Consideration of the difference of the balancing figure as goodwill for eligibility of depreciation.
6. Disallowance of depreciation on Customer Distribution Network (CDN) acquired under the Business Transfer Agreement.

Detailed Analysis:

1. Incorrect Ignorance of Acquisition Cost:
The assessee argued that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in concluding that the appellant could not explain the basis for valuing the Motor Vehicle and Furniture and Fixture acquired under slump purchase and ignored the valuation report obtained in the matter. The CIT(A) directed the Assessing Officer (AO) to adopt the acquisition cost as per the Written Down Value (WDV) of the Seller instead of their fair value as per the Valuation Report.

2. Actual Cost Directed to be Adopted at WDV:
The CIT(A) directed the AO to adopt the acquisition cost of Motor Vehicle and Furniture and Fixture as per the corresponding WDV of the Seller instead of their fair value as per the Valuation Report. This resulted in a reduction of tax depreciation claimed by the assessee. The AO computed proportionate depreciation allowable in the hands of the assessee based on the value and rates in the transferor company’s books, as per the 5th proviso to section 32(1) of the Act.

3. Applicability of Provisions of Section 170:
The CIT(A) held that the provisions of section 170 are not applicable in the present case. The CIT(A) agreed with the assessee that the case was not of succession. The CIT(A) referred to the submission of the assessee before the ITAT Delhi in the case of Saipem Triune Engineering Pvt. Ltd. Vs. DCIT, stating that section 170 applies to the succession of the "person" carrying on the business, not the "business" itself. The ITAT concluded that the provisions of section 170 were not attracted in this case.

4. Eligibility for Depreciation on Fair Market Value:
The CIT(A) directed that the difference between the cost of acquisition of the business and the cost of individual assets (excluding goodwill) should be treated as the cost of goodwill. The rate of depreciation admissible for Goodwill and Customer Distribution Network (CDN) was found to be the same. The AO was directed to consider the balancing figure as goodwill for eligibility of depreciation.

5. Consideration of Balancing Figure as Goodwill:
The ITAT upheld the CIT(A)’s direction to treat the balancing figure between the value of slump sale and the WDV of assets taken over as goodwill, eligible for depreciation. This was supported by the Hon’ble Supreme Court decision in the case of Arevat T&D India Ltd., confirming that excess paid over tangible assets under slump sale can be categorized as goodwill.

6. Disallowance of Depreciation on CDN:
The AO treated the cost of Customer Distribution Network (CDN) as nil. The CIT(A) held that the provisions of section 170 were not attracted, and the difference between the cost of acquisition and the cost of individual assets should be treated as goodwill. The ITAT noted that the rate of depreciation for Goodwill and CDN was the same, making this ground purely academic.

Conclusion:
The ITAT concluded that the invocation of the 5th proviso to section 32 was correct for computing depreciation on the WDV of assets taken over from the transferor company. The balancing figure between the value of the slump sale and the WDV of assets taken over qualifies as goodwill, eligible for depreciation. Accordingly, the assessee’s appeal and the cross-objection were dismissed, and the Revenue’s appeal was partly allowed.

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