2015 (11) TMI 1218 - HC - Income Tax

Valuation of Goodwill - Matter remitted to AO - question whether the valuation of goodwill is appropriate - calculation of the intangible and deprecation thereon - Held that - The issue whether depreciation is allowable on goodwill is no longer res integra. In Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT), the Supreme Court had answered the question Whether goodwill is an asset within the meaning of section 32 of the Income-tax Act, 1961, and whether depreciation on goodwill is allowable under the said section in favour of the Assessee. From an accounting perspective, it is well established that goodwill is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net tangible assets, that is, assets less liabilities. The difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts. Thus we are inclined to accept the contention advanced on behalf of the Assessee that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill In the facts of the present case, the ITAT has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The Agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The Agreement itself indicates that slump sale included sale of goodwill and the balance sheet drawn up on 22nd September, 2006 specifically recorded goodwill at ₹ 40,58,75,529.40/-. As indicated hereinbefore Goodwill includes a host of intangible assets, which a person acquires, on acquiring a business as a going concern and valuing the same at the excess consideration paid over and above the value of net tangible assets is an acceptable accounting practice. Thus, a further exercise to value the goodwill is not warranted. The question framed is answered in the negative, that is, in favour of the Assessee and against the Revenue

Issues Involved:
1. Whether the ITAT was justified in remanding the issue of calculation of goodwill to the Assessing Officer.
2. Whether the slump sale agreement was a colorable device to minimize tax liability.
3. Whether the depreciation on goodwill is allowable under Section 32 of the Income Tax Act.
4. Whether the consideration paid in excess of the value of tangible assets should be classified as goodwill.
5. Whether the ITAT's findings regarding the residual amount of Rs. 40.58 crores being towards the acquisition of goodwill are correct and not perverse.

Issue-wise Detailed Analysis:

1. Remanding the Issue of Calculation of Goodwill:
The ITAT remitted the matter to the Assessing Officer (AO) to reconsider the valuation of goodwill worth Rs. 40.58 crore. The Assessee argued that the value was derived by subtracting the value of fixed and net current assets from the slump sale consideration of Rs. 45.85 crores. The ITAT accepted the slump sale agreement but questioned the specific valuation of goodwill, leading to the remand.

2. Colorable Device to Minimize Tax Liability:
The AO and CIT(A) initially held that the slump sale agreement was a colorable device to minimize tax liability and maximize depreciation claims. The ITAT, however, overturned this conclusion, stating that the agreement was not a colorable device. This decision was upheld by the High Court, which accepted the agreement in its totality and rejected the notion of it being a colorable device.

3. Depreciation on Goodwill:
The Supreme Court in CIT v. Smifs Securities Ltd. confirmed that goodwill is an asset under Section 32 of the Income Tax Act, allowing depreciation on it. The High Court reiterated this position, stating that goodwill includes intangible benefits like brand reputation and customer base, which are eligible for depreciation.

4. Classification of Excess Consideration as Goodwill:
The Assessee contended that the entire excess amount over the tangible assets' value should be classified as goodwill. The ITAT, while recognizing the Assessee's right to claim depreciation on goodwill, remanded the matter for proper valuation. The High Court agreed with the Assessee, stating that the excess consideration was rightly classified as goodwill, and further valuation was unnecessary.

5. ITAT's Findings on Goodwill:
The Revenue questioned the ITAT's conclusion that Rs. 40.58 crores were towards goodwill, arguing that the slump sale agreement was silent on this. The High Court dismissed this argument, pointing out that the 'Business Identification Schedule' appended to the agreement explicitly included goodwill. The Court found no perversity in the ITAT's findings and dismissed the Revenue's appeal.

Conclusion:
The High Court allowed the Assessee's appeal, confirming that the entire excess consideration paid over the value of tangible assets should be classified as goodwill, eligible for depreciation. The Revenue's appeal was dismissed, as the High Court found no substantial questions of law arising from the ITAT's order. Both parties were left to bear their own costs.

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