2023 (4) TMI 384 - AT - Income Tax

Depreciation on the goodwill - slump sale to subsidiary company - assessee company has valued goodwill on Discounted Cash Flow Method DCF - As per AO assessee overvalued the valuation of goodwill - transaction of sale of slump sale to subsidiary company is not regarded as transfer within the meaning of Section 47(iv) and the discounted cash flow method to value the goodwill was found by the AO to be erroneous - As per AO figures adopted for free cash flow are imaginary when compared to the actual figures of cash flow upto F.Y. 2014-15 - HELD THAT - AO has completely ignored the commercial prudence of an assessee relating to valuation of an asset. Determination of fair market value has to be as per prescribed methodology and even the AO has accepted the discounted cash flow method as appropriate method for valuation of goodwill. Valuation is done on the basis of information and material available on the date of valuation and projection of future Revenue. Merely because performance did not match projections, valuation cannot be challenged, as such approach is not only irrational but lacks material foundation since the valuation is intrinsically based on projections which can be affected by various factors. One must not forget that valuation is not an exact science and, therefore, cannot be done with arithmetic precision and such technical and complex problem should be left to the consideration and wisdom of experts in the field of accountancy. Due Diligence Report of the assessee company was provided by Price Waterhouse Cooper, a well known global accounting firm, which shows that the market value of goodwill was acceptable by an independent third party. Revenue has challenged that transaction of sale of slump sale to subsidiary company is not regarded as transfer within the meaning of Section 47(iv) of the Act. But, we find that in the hands of TIEL, while framing the assessment order u/s 143(3) for A.Y 2012-13 AO has accepted income from long term capital gain for slump sale of business, thereby accepting the transfer u/s 47(iv). See cases TRIUNE ENERGY SERVICES PRIVATE LIMITED 2015 (11) TMI 1218 - DELHI HIGH COURT and SMIFS SECURITIES LTD. 2012 (8) TMI 713 - SUPREME COURT - Ground raised by the Revenue is dismissed.

Summary

Issues involved:
The judgment involves the issue of allowing depreciation on goodwill in the context of a transaction of sale of slump sale to a subsidiary company, and the valuation method used for the goodwill.

Depreciation on Goodwill:
The Revenue appealed against the order of the ld. CIT(A) regarding the allowance of depreciation on goodwill. The Revenue contended that the transaction of sale of slump sale to a subsidiary company did not qualify as a transfer under Section 47(iv) of the Income-tax Act, 1961. The Assessing Officer found the discounted cash flow method used by the assessee for valuing goodwill to be erroneous, leading to the disallowance of depreciation. The Assessing Officer believed that the projections for free cash flow used by the assessee were inflated, resulting in the overvaluation of goodwill. Referring to the judgment in the case of McDowel & Co. Ltd, the Assessing Officer disallowed the claim of depreciation on goodwill, alleging the use of colorable devices. However, the ld. CIT(A) disagreed with the Assessing Officer, stating that the claim of depreciation on goodwill was valid under the law. Citing precedents like the decision in the case of Smifs Securities Ltd and Triune Energy Services Pvt Ltd, the ld. CIT(A) deleted the disallowance of depreciation on goodwill.

Valuation of Goodwill:
The assessee, engaged in organizing events, entered into a Business Transfer Agreement to acquire a business from another company. The consideration for the acquisition included the valuation of goodwill. The Assessing Officer raised concerns about the valuation of goodwill using the Discounted Cash Flow Method, alleging inflated projections of free cash flow. However, the Tribunal noted that the Assessing Officer overlooked the commercial prudence involved in asset valuation. The Tribunal emphasized that valuation is not an exact science and must consider various factors. The Tribunal highlighted that the valuation method employed by the assessee was accepted by an independent third party, Price Waterhouse Cooper. Additionally, the Tribunal pointed out that the Assessing Officer accepted the transaction as a transfer under Section 47(iv) of the Act in the assessment order of the other party involved, thereby supporting the validity of the transaction. Relying on judicial decisions, the Tribunal upheld the ld. CIT(A)'s decision to allow depreciation on goodwill and dismissed the Revenue's appeal.

This judgment from the Appellate Tribunal ITAT Delhi addressed the issues of depreciation on goodwill and the valuation method used in the context of a business transfer agreement. The Tribunal upheld the allowance of depreciation on goodwill, emphasizing the commercial prudence involved in asset valuation and the acceptance of the transaction as a transfer under the Income-tax Act.