2019 (11) TMI 1139 - AT - Income Tax

Allowability of depreciation on goodwill generated on acquisition of businesses - HELD THAT - Merely because tangible business movable assets were included by assessee in its books of accounts at the book value existing in the books of GTS/Arc on effective date will disentitle assessee from claiming depreciation on the excess consideration paid over and above book value of tangible assets acquired of GTS/Arc. The representations and warranties are made by GTS/Arc to the assessee vide these agreements that their books of accounts and records reflect true and correct state of affairs and for making false/wrong representation/warranties by the sellers, the consequences are provided in these agreements. We donot find any reasons to doubt the value of these tangible movable assets acquired by the assessee and the value incorporated in books of accounts by the assessee in our view reflect their fair market value, unless rebutted by Revenue. Revenue has also not done any exercise to valuing these tangible movable assets acquired by the assessee to rebut contention of the assessee that book value of these acquired tangible assets represent fair market value of these assets. AO has proceeded on wrong notion that the assessee acquired companies namely GTS/Arc or acquired their entire assets and liabilities which is not correct .The assessee has discharged its primary onus and now it was for Revenue to have brought on record incriminating material to rebut the contentions of the assessee and in the absence of any cogent incriminating material on record , we reject this contention of the Revenue and hold that book value of these tangible movable assets acquired by assessee was indeed their fair market value. The excess paid by assessee over and above book value of tangible movable assets(net of liabilities) acquired is definitely towards intangibles assets acquired by assessee in the form of business contracts, customer orders, customers, business information, right to continue business as going concerns, non compete by GTS/Arc/key employees etc. Thus consolidated payments made by assessee over and above net assets acquired by it under a composite contract in the present case before us, in our considered view is towards goodwill and non compete agreement by GTS/Arc and its key employees and in our considered view depreciation is allowable both on the aforesaid excess amount paid towards goodwill and non compete agreement. Our aforesaid view is supported by case of Pentasoft Technologies Limited 2013 (11) TMI 1057 - MADRAS HIGH COURT . We have observed that co-ordinate Bench of Chennai-tribunal in the case of M/s. Rentokil India Private Limited v. DCIT 2017 (11) TMI 1862 - ITAT CHENNAI has allowed depreciation on the intangible assets viz. goodwill/customer list . The co-ordinate Bench of this tribunal in Rentokil 2017 (11) TMI 1862 - ITAT CHENNAI referred to Explanation to Section 92B of the 1961 Act to hold that intangible shall include customer list and depreciation shall be allowable u/s 32. We hold that Ld.CIT(A) has rightly allowed depreciation claimed by the assessee. The decision of Hon ble Supreme Court in the case of Smifs Securities Limited 2012 (8) TMI 713 - SUPREME COURT also support the contentions of the assessee that goodwill is an asset under explanation 3(b) to Section 32(1) and depreciation shall be allowable on goodwill - Decided in favour of assessee.

Issues Involved:
1. Allowability of depreciation on goodwill generated on acquisition of businesses.
2. Classification of excess consideration over net assets as goodwill or non-compete fee.
3. Admissibility of depreciation claims not made in the original or revised return of income.

Detailed Analysis:

Issue 1: Allowability of Depreciation on Goodwill Generated on Acquisition of Businesses

The primary issue raised by the Revenue was whether the depreciation claimed by the assessee on goodwill generated from the acquisition of businesses of two entities, GTS Exports Private Limited and Arc Trend Systems Private Limited, was allowable under the Income-tax Act, 1961. The assessee claimed depreciation on goodwill created in its books after acquiring the assets and liabilities of these entities.

The Assessing Officer (AO) rejected the claim, stating that the goodwill was not a depreciable asset as per Section 32(1)(ii) and explanation 3(b) of the Act. The AO contended that the excess consideration over net assets was not towards goodwill but rather a non-compete fee, which does not qualify for depreciation. The AO also noted that the assessee did not claim depreciation on goodwill in its original or revised return of income.

The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim, relying on judicial precedents, including the Supreme Court's decision in CIT v. Smifs Securities Ltd. The CIT(A) held that the excess consideration paid over the net assets taken over was in the nature of business or commercial rights and thus eligible for depreciation under Section 32 of the Act.

Issue 2: Classification of Excess Consideration Over Net Assets as Goodwill or Non-Compete Fee

The AO argued that the excess consideration paid by the assessee should be treated as a non-compete fee rather than goodwill. The AO referred to the non-compete clause in the slump sale agreements and contended that no separate consideration was stipulated for non-compete agreements, implying that the excess paid was towards non-compete fee.

The CIT(A) disagreed, stating that the non-compete clause was a supporting clause to strengthen the commercial rights transferred to the assessee. The CIT(A) emphasized that the agreements were composite agreements for acquiring the businesses on a going concern basis, including tangible and intangible assets such as business contracts, customer relations, and intellectual property. The CIT(A) concluded that the excess consideration was towards goodwill and other intangible assets, thus qualifying for depreciation.

Issue 3: Admissibility of Depreciation Claims Not Made in the Original or Revised Return of Income

The AO rejected the depreciation claim on the grounds that it was not made in the original or revised return of income. The AO cited that such claims could not be made during the assessment proceedings without filing a revised return.

The CIT(A) allowed the claim, referring to Explanation 5 to Section 32 of the Act, which states that depreciation is to be allowed whether or not it was claimed in the return of income. The CIT(A) also cited judicial precedents supporting the view that depreciation is a statutory allowance and must be granted even if not claimed in the return.

Tribunal's Decision:

The Tribunal upheld the CIT(A)'s decision, dismissing the appeals filed by the Revenue. The Tribunal noted that the assessee had acquired the businesses on a going concern basis, including tangible and intangible assets, and the excess consideration was rightly classified as goodwill. The Tribunal also emphasized that depreciation on goodwill is allowable under Section 32, supported by the Supreme Court's decision in CIT v. Smifs Securities Ltd. and other judicial precedents.

The Tribunal further held that depreciation is a statutory deduction and must be allowed even if not claimed in the return of income, as per Explanation 5 to Section 32. The Tribunal dismissed the Revenue's appeals for all assessment years involved, affirming the CIT(A)'s order.

Conclusion:

The Tribunal's judgment comprehensively addressed the issues of depreciation on goodwill, classification of excess consideration, and admissibility of depreciation claims not made in the original or revised return. The Tribunal upheld the CIT(A)'s decision, allowing the assessee's claim for depreciation on goodwill and dismissing the Revenue's appeals.

← Previous Next →