2021 (3) TMI 919 - AT - Income Tax

Deprecation u/s 32 on goodwill - intangible assets acquired by Appellant under Business Transfer Agreement ( BTA ) and their apparent financial benefits to Appellant in early years of its operations - HELD THAT - Assessee company acquired the micro finance business from the society Swayamkrishisangam and has paid towards customer costs, one time reimbursement of ₹ 82 lakh towards cost of Internal control systems, computer software and towards corporate, services including strategic planning, market survey, introduction of new products, impact assessment etc. AO therein took the view that the client acquisition cost of ₹ 3 .97 crores would not be eligible for depreciation as it is not in the nature of intangible asset or in the nature of commercial business rights. CIT(A) in that case took the view that the customer base acquired by the assessee cannot be termed as know-how, patent, copyright or trademark or franchise; and it cannot be considered as license. or business or commercial, right of similar nature and relied on the decision of the Hon ble Bombay High Court in the case of CIT Vs. Techno Shares Stocks Ltd 2009 (9) TMI 18 - BOMBAY HIGH COURT The Hon ble Tribunal following the decision of the Hon ble Delhi High Court in the case of Areva T D India Ltd. Others 2012 (4) TMI 79 - DELHI HIGH COURT and the Apex Court decision in the case of Smifs Securities Ltd 2012 (8) TMI 713 - SUPREME COURT held that the client acquisition cost would fall within the category of business or commercial rights referred in clause (ii) of Sec. 32 (1) and would be eligible for depreciation. Depreciation could not be denied to the Taxpayer merely for the reason that the assets were classified as goodwill in the books of account without appreciating the true nature of the assets if they can fall under the scope of any other business or commercial rights of similar nature . We are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of business or commercial rights of similar nature specified in section 32(1)(ii) of the Act and were accordingly eligible for depreciation under that section. Owing to the entire facts and circumstances of the case Viz., the value paid by the assessee, the valuation report, the profits earned by the assessee, the tax payment by the recipient, the right and process of the assessee to raise the goodwill and the accounting thereof, the provisions relating to depreciation on intangibles, the judgments relating to treating of intangibles as goodwill, it can be concluded that the difference between the cost of the asset and the consideration paid would constitute goodwill and that goodwill is an asset eligible for depreciation under section 32 (1)(ii) of the I.T. Act. Appeal of the assessee is allowed.

Summary

Issues Involved:

1. Legality of the order passed by the Commissioner of Income Tax (Appeals) and Deputy Commissioner of Income Tax.
2. Disallowance of depreciation on goodwill claimed under section 32 of the Income Tax Act, 1961.
3. Disregard of material and submissions placed on record by the assessee.
4. Consideration of various intangible assets acquired under the Business Transfer Agreement (BTA).
5. Tax implications of the gain arising to the transferor company under BTA.
6. Adherence to judicial precedents by the lower authorities.
7. Levy of interest under sections 234A, 234B, and 234C of the Act.
8. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Legality of the Order:

The assessee challenged the orders passed by the Commissioner of Income Tax (Appeals) - 1, Gurgaon, and the Deputy Commissioner of Income Tax, Circle - 2(1), Gurgaon, asserting that they were "bad in law and liable to be quashed."

2. Disallowance of Depreciation on Goodwill:

The core issue was the disallowance of depreciation on goodwill amounting to ?13,46,78,733/- claimed under section 32 of the Income Tax Act, 1961. The assessee had capitalized goodwill totaling ?107,74,29,864/- generated from the purchase of the "Eneos business segment" from Tide Water Oil Company (India) Limited (TWO) under a Business Transfer Agreement (BTA) dated 24.09.2014. The Assessing Officer (AO) held that the assessee had not acquired any commercial rights or goodwill, apart from a storage tank, and thus disallowed the depreciation claim. The AO's stance was that the amount paid did not constitute the purchase of any commercial rights or goodwill.

3. Disregard of Material and Submissions:

The AO and CIT(A) were criticized for disregarding material placed on record, including various agreements and submissions by the assessee, and for denying legitimate claims based on "mere suspicions, conjectures, and surmises."

4. Intangible Assets Acquired Under BTA:

The assessee argued that various intangible assets acquired under the BTA, such as customer relationships, strategic support, and marketing services, were not adequately considered by the lower authorities. The AO and CIT(A) concluded that the valuation of assets transferred was done without any basis, primarily to claim depreciation on the generated goodwill.

5. Tax Implications of Gain Arising to Transferor Company:

The assessee contended that the gain arising to the transferor company under BTA, amounting to ?107.82 crores, had already been offered to tax, with a tax liability of ?24.43 crores discharged for AY 2015-16, which was not disputed by the lower authorities.

6. Adherence to Judicial Precedents:

The assessee argued that the lower authorities failed to follow decisions of higher courts that granted relief in similar cases, particularly the Hon'ble Supreme Court's decision in CIT Vs. Smifs Securities Ltd. (348 ITR 302), which held that goodwill is a depreciable asset under section 32(1)(ii).

7. Levy of Interest:

The assessee contested the AO's proposal to levy interest under sections 234A, 234B, and 234C of the Act, asserting that the disallowance of depreciation on goodwill was unjustified.

8. Initiation of Penalty Proceedings:

The AO's initiation of penalty proceedings under section 271(1)(c) of the Act was also challenged by the assessee.

Judgment:

The Tribunal addressed the core issue of whether the payment of ?108 crores for the BTA was justified and whether the resultant goodwill was eligible for depreciation under section 32(1)(ii). The Tribunal examined the valuation report, the nature of the goodwill, and relevant judicial precedents.

The Tribunal concluded that the price paid for the BTA could not be disputed, and the goodwill generated was legitimate. It held that goodwill is an intangible asset eligible for depreciation under section 32(1)(ii), relying on the Supreme Court's decision in CIT Vs. Smifs Securities Ltd. The Tribunal allowed the appeal, thereby granting the depreciation claim on goodwill and rendering the stay application redundant.