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2021 (3) TMI 341 - AT - Income TaxDisallowance of the claim of depreciation on intangible asset - amalgamation scheme initiated - As per assessee's contention the business has been transferred as a going concern to the transferee - valuation for the purpose of slump sale -HELD THAT - As per assessee's contention the business has been transferred as a going concern to the transferee, but, as per the above section 2 the intellectual property of the transferor has not been transferred the above assets, then how the assessee has calculated all intangible assets in the form of goodwill. We observe that when there is no transfer of the asset as well as there is no valuation of the asset, there cannot be any claim of ownership or claim of depreciation. With regard to non-compete agreement, there is no such agreement on record and even if it exists, the amount paid for non-compete agreement is capital payment and not eligible for depreciation. Clauses 10.2.7 and 10.2.8 of the valuation report clearly indicate that the amount is only a balancing entry and may exclude certain closing account adjustments and the conclusion does not reflect the outcome of any due diligence procedures. The balancing entry treated as goodwill as per accounting standards is fictional in nature in the present case and does not represent any real intangible and the accounting procedure in double entry accounting system cannot override the provisions of Income Tax Act. We observe that the cost in the hands of transferor company is 'nil' by virtue of section 55(2)(a)(ii) and therefore the cost is 'nil' in the hands of the transferee-assessee also. We are of the opinion that this is a fit case for application of third proviso to section 43(1) because the business transfer agreement is part of a comprehensive international arrangement between two groups and there is no rationale for the fixation of the transfer price. No infirmity in the order of CIT(A) in confirming the disallowance of the claim of depreciation and dismiss the ground Nos. 2 to 6 raised by the assessee on this count. Rectification of mistake u/s 154 - Enhance depreciation - Disallowance of the claim of depreciation by the AO as per order u/s. 154 was ₹ 99,09,96,797/- and not ₹ 44,04,03,000/-, therefore, the CIT(A) ought to have decided the appeal against disallowance of depreciation of ₹ 99,09,96,797/- We find that the assessment order was passed on 30/12/2016 u/s. 143(3) of the Act by making disallowance of depreciation at ₹ 44,04,43,000/-. The AO enhanced the addition to ₹ 99,09,96,797/- by issuing notice u/s. 154 dated 21/24/04/2017 and passed order u/s. 154 on 24th August, 2017 enhancing the disallowance to 99,09,96,797/- instead of ₹ 44,04,43,000/- made u/s. 143(3) order. On perusal of grounds raised by the assessee before the CIT(A), which were mentioned at page 2 of CIT(A)'s order, in ground No. 2 the assessee mentioned disallowance of depreciation of ₹ 99,09,96,797/- and nowhere in the grounds mentioned the appeal is against 154 order. The CIT(A) nowhere discussed about the enhancement of disallowance u/s. 154 order. The CIT(A) decided the issue against 143(3) order. Therefore, the issue of enhancement addition is raised before us for the first time which is not decided by CIT(A) cannot be accepted, hence, this ground raised by the assessee in regard to enhanced depreciation is not entertained and accordingly, dismissed. Assessee appeal dismissed.
Issues Involved:
1. Erroneous order by CIT(A) on facts and law. 2. Disallowance of depreciation claim by the Assessing Officer (AO). 3. Non-consideration of enhanced disallowance amount by CIT(A). 4. Acquisition of goodwill and its valuation. 5. Legal precedents on depreciation of goodwill. 6. Applicability of various provisions of the Income Tax Act, 1961. Detailed Analysis: 1. Erroneous Order by CIT(A) on Facts and Law: The appellant argued that the CIT(A) dismissed the grounds of appeal without considering the detailed explanations submitted. The CIT(A) upheld the AO's order, which disallowed the claim for depreciation on the grounds that the goodwill introduced in the appellant's books was new and artificial and not equitable to commercial rights or business rights as defined in the Act. 2. Disallowance of Depreciation Claim by the Assessing Officer (AO): The AO disallowed the depreciation claim of ?44,04,03,000 on intangible assets, specifically goodwill, arguing that the goodwill was not recorded in the books of the seller, ITW India Limited, and was artificially introduced by the appellant. The AO cited that ITW India Limited recorded goodwill on account of its acquisition of Wintek Flexo Prints, which was unrelated to the unit purchased by the appellant. The AO found the valuation report by BSR & Co. to be unjustifiable and unsupported by factual or legal rights. 3. Non-Consideration of Enhanced Disallowance Amount by CIT(A): The appellant contended that the CIT(A) failed to consider that the disallowance of the claim of depreciation by the AO was enhanced to ?99,09,96,797 by an order u/s 154 of the IT Act. The CIT(A) decided the appeal based on the initial disallowance of ?44,04,03,000, ignoring the rectified amount. The Tribunal noted that the issue of enhancement was raised before it for the first time and was not decided by the CIT(A), thus it was not entertained. 4. Acquisition of Goodwill and Its Valuation: The appellant argued that the goodwill was acquired as part of the industrial packaging unit from ITW India Limited and was valued by independent valuers, BSR & Co. The appellant claimed that the excess consideration paid over the net asset value was recorded as goodwill. However, the AO and CIT(A) found that the valuation report was based on unaudited financial data and management assumptions, making it unreliable. The Tribunal observed that the valuation report contradicted the Business Transfer Agreement and did not justify the claimed goodwill. 5. Legal Precedents on Depreciation of Goodwill: The appellant relied on various legal precedents, including the Supreme Court's decision in CIT Vs. Smifs Securities Limited, which allowed depreciation on goodwill. However, the Tribunal found that the facts of the appellant's case were distinguishable from those precedents. The Tribunal cited the decision in United Breweries Ltd. [2016] 76 Taxmann.com 103 (Bang. Trib.), which restricted the claim of depreciation on goodwill in cases of amalgamation or succession. 6. Applicability of Various Provisions of the Income Tax Act, 1961: The Tribunal discussed the applicability of Explanation 4A to section 43(1) and the fifth proviso to section 32(1) of the IT Act. It concluded that the cost of goodwill in the hands of the transferor was 'nil' by virtue of section 55(2)(a)(ii), and thus, the cost in the hands of the transferee was also 'nil'. The Tribunal also noted that the business transfer agreement was part of a comprehensive international arrangement, making the claimed goodwill fictional and unjustifiable. Conclusion: The Tribunal dismissed the appeal, upholding the disallowance of the depreciation claim on goodwill and other intangibles. It found that the valuation report was unreliable, the claimed goodwill was fictional, and the legal precedents cited by the appellant were not applicable to the facts of the case. The Tribunal also did not entertain the issue of enhanced disallowance as it was not decided by the CIT(A).
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