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TMI Blog2014 (8) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... the valuation report was obtained post slump sale agreement in order to determine / record the values of various tangible and intangible assets acquired by the assesee - If there are defects in the valuation report, it cannot lead to conclusion that the whole agreement between the assesee and the other parties is bogus - tax planning through legitimate means is perfectly justified - it has never been the arguments of the revenue that the money paid by Saipen Italy was not paid or was of Mr. Binoy Jacob or was of TPPL own money routed through this manner - the conclusion by the authorities that the whole scheme was a colourable device cannot be sustained and is liable to be set aside. Depreciation of payment of intangibles – Held that:- CIT(A) has found that valuation report was prepared by a Chartered Accountant who was also appearing on behalf of the assessee in the appellate proceedings - numerous defects have been reported in the valuation report - the valuer has mentioned that in preparing the valuation report the valuer has relied upon and assumed without independent verification , the accuracy and completeness of all information provided by the company - the information pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard included provision for air conditioning facilities through AC plant and also power back up facilities through DG sets - CIT(A) has found the sum paid is excessive and he had substituted the same with this figure of ₹ 6 sq. ft. – there was no basis whatsoever for arriving at this figure of ₹ 6 per sq. ft. has been specified - even if the payment made is considered to be excessive and it cannot be substituted by any guess work or otherwise – thus, the matter is remitted back to the AO for fresh consideration – Decided partly in favour of assessee. - I.T.A. No. 5239/Del/2012 - - - Dated:- 25-7-2014 - Shri Shamim Yahya And Shri A. T. Varkey,JJ. For the Appellant : Shri Ajay Vohra, Advocate, Ms. Shikha Sharma, CA For the Respondent : Shri Ramesh Chandra, CIT(DR) ORDER Per Shamim Yahya ,AM This appeal by the assessee is directed against the order of CIT(A) dated 17.8.2012 and pertains to asstt. year 2007-08. The grounds of appeal read as under :- 1. That the Commissioner of Income Tax (Appeals) ['CIT(A)'] erred on facts and in law in upholding the action of the assessing officer in not excluding the sum of ₹ 18,07,786, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase of business from the seller, was a colorable device merely because Mr. Binoy Jacob was a shareholder in both the seller and the appellant companies. 2.8 That the CIT(A) erred on facts and in law in alleging that the appellant has sought to claim undue tax benefit by acquiring the business on a slump sale basis, not appreciating that the aforesaid transaction was governed by business considerations and the seller had paid due taxes on sale of business as per law. 3. That the CIT(A) erred on facts and in law in disregarding the transaction of purchase of business and in treating the entire purchase consideration of ₹ 45.68 crore paid by the appellant for purchase of business on slump sale basis, as income of the appellant by invoking the provisions of section 40A(2) of the Act, and thereby enhancing the income assessed by the assessing officer by ₹ 30.44 crores. 3.1 That the CIT(A) erred on facts and in l,aw in not appreciating that the provisions of section 40A(2) of the Act, which seeks to disallow expenditure incurred by an assessee, which as per the assessing officer is excessive or unreasonable, had no application on the facts of the present case, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Services including upstream and downstream, offshore and Onshore construction and drilling. 4. Triune Projects Private Ltd. (TPPL) Is an engineering and design services company. Vide agreement dated 22.09.2006 Mr. Binoy Jacob, the main promoter of TPPL had agreed to form a company Saipem Triune Engineering Private Ltd. STEP acquired the design engineering business of TPPL for a consideration of ₹ 45.85crores in slump sale. 5. The transfer of business in form of slump sale included following:- a. the business related fixed assets and net current assets of ₹ 2.56 crores and ₹ 2.71crores as per balance sheet as on 22.09.2006. b. all employees of TPPL. c. All sales literature brochures, catalogues of TPPL. d. All capabilities know how, design etc. in possession with TPPL. e. All ongoing jobs/clients. f. All existing, insurance policies. g. All bank guaranties provided by the TPPL. 3. The consideration of ₹ 45.85 crores comprises of net asset of ₹ 5.27 crores and for technical knowhow and other intangible assets of TPPL worth ₹ 4O.58 crores. 6. The assessee submitted valuation report for intangible assets in form of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to seller as provided in fifth proviso to section 32. In view of these provisions, the amount of depreciation will restrict as provided in fifth proviso i.e. depreciation as allowable to seller. The AO observed that above discussion makes the things clear as per Act that assessee is not entitled for the excess depreciation and its claim of depreciation is restricted to depreciation on opening wdv for that year before the slump sale took place. 10. The AO further observed that assessee has purchased assets of net asset value of 5.72 crores. The difference of 45.58 crores has been attributed towards acquisition of intangible assets. That the slump sale agreement was made on 27.9.2006. That on that day itself assessee company has taken over all the assets liabilities in relation to design and engineering division of TPPL. AO further observed that as a matter of fact, it has been accepted by assessee company vide its submission dated 15.12.2009 that it was not having any registered brand name or trade mark or any commercial right, license, technical know-how and franchisee which could have been sold. It has been gathered that TPPL was also not having any patent, trademark, tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se consideration of ₹ 45.68 crores and also whether the valuation report submitted by the assessee inspires confidence. Learned CIT(A) observed that Shri Binoy Jacob was the main promoter of TPPL, i.e. the vendor company, in which he holds 74% equity stake. Similarly, in the appellant company, which bought the on-going business from TPPL, Shri Binoy Jacob holds 50% share. The other investor M/s Saipem, Italy, had acquired the balance 50% share at a premium of ₹ 45,840/- per share of ₹ 10/- each. But Shri Binoy Jacob did not have to pay a single rupee as premium on acquisition of the 50% equity falling in his share. That there is no plausible explanation as to why Saipem, Italy should be paying such a high premium for acquisition of a start-up company. That another interesting fact which flies on the face is that almost the entire premium (Rs. 45.84 crores) received from M/s Saipem, Italy was given away as purchase consideration for the on-going business concern to TPPL. That it is a fact that in TPPL, Shri Binoy Jacob held 74% of the equity and, therefore, he would be the largest beneficiary of the sale consideration received by TPPL from the appellant. That in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts circumstances of this case, the first two issues framed by me at Para 4.25 of this order are decided against the appellant. Hence, the price paid over and above the identifiable physical assets (Rs.2.56 crores) and net current assets (Rs.2.77 crores) is held to be excessive and unreasonable payment liable to be disallowed u/s 40A(2) of the I.T. Act. Thus, independent of the finding given by the Assessing Officer to disallow the depreciation of ₹ 10,14,68,882/- claimed on the intangible assets of ₹ 40,58,75,529/-, the A.O. is directed to disallow the entire sum of ₹ 40,58,75,529/- u/s 40A(2) of the I.T. Act as well. This results in enhancement of income under this head by ₹ 30,44,06,647/- (Rs.40,58,75,529 ₹ 10,14,68,882). 18. Thereafter, learned CIT(A) considered the issue as to whether the whole scheme was a colorable device to claim undue tax benefit. Learned CIT(A) referred to catena of case laws in this regard including that of Hon ble Apex Court in the recent judgment in the case of Vodafone International Holdings B. V. Vs. Union of India [2012] 341 ITR 1. He opined that this is a classic case of obtaining undue advantage through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores had been paid but no expert/competent valuer had been engaged to make a fair apportionment. Learned CIT(A) further observed that even when valuation has been done on the recommendation of the expert valuer, the auditor should have examined whether the same appears reasonable and based on adequate facts. Learned CIT(A) observed that auditors had failed in their duty and have blindly agreed to the valuation made by Shri S. Sampat. Learned CIT(A) thereafter referred to some extracts from the undated valuation report. He observed that it is clear that it was a design to apportion a major part of sale consideration towards acquisition of intangible assets and then claim depreciation thereon. 20. Learned CIT(A) examined the claim of know-how of ₹ 26.19 crores. He referred to the definition of know-how in Section 32. He observed that the seller company TPPL was never engaged in manufacturing or processing of goods. Hence, the first part of the definition of know-how shall not be applicable to it. It was undertaking engineering and design contract in all energy sectors both on-shore and off-shore. As far as off-shore project was concerned, it undertook contracts for co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee. Therefore, the valuer s assumption that such obligation was undertaken only for four years was absolutely wrong and therefore, the said incorrect assumption has vitiated the valuation. He also referred to some Tribunal s decisions that no depreciation under Section 32 would be allowed on non-compete fees. Learned CIT(A) concluded that no depreciation is allowable on the said non-compete obligation undertaken by the valuer. 24. Thereafter, learned CIT(A) considered the alternative claim of the assessee that depreciation on goodwill should be allowed. Learned CIT(A) did not accept the above alternative submission of the assessee. He observed that the difference between the actual purchase consideration and the book value of the tangible assets was initially debited as goodwill in the books but after obtaining the valuation report, the value of the goodwill was reduced to zero and assessee bifurcated the same into three components. Learned CIT(A) observed that exactly in similar fact situation, Hon ble Karnataka High Court in the case of CIT Vs. Mangalore Ganesh Beedi Works [2003] 264 ITR 142 had denied the depreciation on goodwill. 25. Learned CIT(A) observed that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 0.53 crore, the investments and surplus cash available with the TPPL. Similarly, all liabilities of the seller company were also taken over except a couple of unrealizable and long-pending customer bills. 27. Ld. CIT(A) further observed that after transfer of this business, no income under the head business has been earned by the seller company TPPL . There was no possibility of undertaking similar type of business by the transferer since it was bound by a non-complete clause. In this regard Ld. CIT(A) rejected the submission of the assessee that TPPL carried out project consultancy business subsequently. He observed that this is a wrong submission without any supporting evidence. In this regard Ld. CIT(A) referred to decision of Hon ble Apex Court in the case of CIT vs. K.H. Chambers 55 ITR 674. He observed that in view of the ratio of the above judgment there is no merit in assessee s claim that in order to attract S. 170 and consequently 5th provision to section 32 in case of succession under the I.T. Act the earlier identity of the person carrying on business need to be subsumed by the successor. Rather what the court has held is that if one of the business has been subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) observed that the book value on which the assets were acquired by the assessee company where the book value as per the depreciation schedule prepared under the Companies Act. The assessee has claimed deprecation on depreciation schedule prepared under the companies Act. The assessee has claimed deprecation on the aforesaid items by taking these as a written down value . In this regard Ld. CIT(A) referred to section 43(1) and observed that Explanation 3 therein provided that in case the asset in question has been previously used by any other person then under some special circumstances the actual cost thereof can be re-computed. Ld. CIT(A) observed that since all the assets has earlier been used by TPPL for its business purpose the main purpose of such transfer at an enhanced cost to the assessee was to claim higher depreciation. In this regard Ld. CIT(A) rejected the assessee s submission that only AO could have invoked this provision with the prior approval of JCIT / Addl. CIT. He held that there is no merit in this objection since time and again it has been held by the Supreme Court that the CIT(A) s power are co-terminus with that of the Assessing Officer and he has got a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost of running and fuel cost of the air conditioning plants and DG sets. In these circumstances Ld. CIT(A) examined whether payment of lease rental of ₹ 30/- per sq. ft. per month for the provision of air conditioning and power back us services was a reasonable payment. In this regard Ld. CIT(A) held that it was a duty of the assessee to prove and discharge its burden by leading proper evidence that the price paid was not excessive or unreasonable. He observed that no such evidence has been submitted either before the AO or before him. Ld. CIT(A) further observed that as in ordinary circumstances . the lease rental for space is always higher than the provision for air conditioning and power back up services. He observed that it does not appeal to reason that the assessee would be paying ₹ 20/- to ₹ 22/- per sq. ft. for rent of the space whereas it would be paying ₹ 30 per sq. ft. for taking a few air conditioning plants and DG sets on hire. The entire running and fuel cost of the air conditioning plants and DG sets and their repair expenses were to be borne by the assessee itself. The depreciable value of the assets were only ₹ 78,70, 576/- where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k up of intangible assets of ₹ 40,58,75,529/- was arrived at on the basis of valuation report obtained by the appellant to allocate the purchase consideration over various assets. The appellant claimed depreciation amounting to ₹ 10,14,68,882/- @ 25% on the written down value of the aforesaid intangible assets amounting to ₹ 40,58,75,529/-The assessing officer did not allow depreciation on the aforesaid intangible assets, doubting the existence of the aforesaid intangible assets and the basis of its valuation. It was held that the amount paid by the appellant to purchase design and engineering division of TPPL in excess of net asset value was not towards acquisition of any intangible assets and was not eligible for depreciation. The assessing officer alleged that the aforesaid sum of ₹ 40.58 crores represented value of goodwill and that for the purpose of claiming depreciation on the same, the appellant obtained valuation report which attributed the said amount towards technical knowhow, brand value, valuation of ongoing business, etc. On appeal, the CIT(A) upheld the action of the assessing officer and held as under: a) The appellant obtai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). The design and engineering business of TPPL was transferred as a going concern by way of slump sale to the appellant company for lumpsum consideration of ₹ 45.85 crores. The appellant carried on the said business acquired lock, stock and barrel, without any break / interruption. In the aforesaid admitted factual background, the slump sale is not sham / bogus in view of the following: a) Tangible assets and liabilities forming part of the design and engineering business of TPPL vested in the appellant company pursuant to slump sale; b) The appellant took over the intangible assets of TPPL in the form of technical knowhow, customer/vendor database, pending contracts, licenses, leases and permits, etc in the name of TPPL; c) The employees of TPPL were transferred and taken over by the appellant company; d) Actual cash consideration of ₹ 45.85 crores was paid by the appellant company to TPPL; e) TPPL had duly accounted for transaction of slump sale in its audited books of account and paid tax on capital gains on slump sale of the business; f) In the hands of the appellant, the AO/CIT(A) have accepted the factum of slump sale in as much as the AO / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant company at premium, except for notional increase in the value of his holding in the appellant company. The law does not take cognizance of any such notional increase in the valuation. It is thus submitted that the CIT(A) has treated the slump sale transaction as a colourable device without bringing on record, any evidence to substantiate its allegations, when it is undisputed that the design and engineering business was acquired by the appellant during the year from TPPL and further that the appellant has since been carrying on the business so acquired. Without prejudice to the above, it is respectfully submitted that even if it were to be assumed for the sake of arguments though not admitting, that the slump sale was bogus, no part of the consideration paid can, by any stretch of imagination, be treated as the income of the purchaser. It defies any logic that an amount paid by an assessee (for acquisition of business), even if, such acquisition is treated as sham / collusive, is, sought to be taxed as the income of the purchaser. The amount that has gone out of the coffers of the purchaser can, under no provision of the Act, be regarded as part of the taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... talised in the books of accounts for which no deduction was claimed in computing income under the head profits and gains of business or profession . On a parity of reasoning, section 40A(2) of the Act has been wrongly invoked by the CIT(A) to deny deduction for part of slump price paid for acquisition of the design and engineering business of TPPL. Reference may be drawn to the prima facie observations made by the Hon ble High Court while staying the demand for the captioned assessment year @pg 5 para-8 wherein it was held that even if sale was to be construed as sham or not a slump sale at all, the amount of consideration could not be added under section 40A(2) of the Act as the appellant never claimed the said amount as an expenditure. Without prejudice, the CIT(A) has also failed to discharge the onus cast on the Revenue under section 40A(2) of the Act for establishing that the amount of expenditure was excessive having regard to the legitimate needs of business in the absence of any comparable transactions or other evidence being brought on record to support the above allegation. Re: Depreciation on intangible assets Under the slump sale agreement, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the appellant as successor of TPPL was only entitled to depreciation apportioned to the number of days of user of the assets acquired from TPPL, in terms of fifth proviso to section 32(1) read with section 170 of the Act. Re: Provisions of section 170 not applicable In order to attract section 170, there has to be, in our respectful submission, succession of the person carrying on the business and not of the business itself. Thus, in order for succession to take place, identity of the person should be subsumed by that of the successor, without disturbing the continuity and integrity of the business; that is, the predecessor should cease to exist as a legal entity in the eyes of law. The CIT(A) has misapplied the provisions of section 170 of the Act and has not appreciated that the appellant could not be treated as a successor since the identity of the transferor entity has been preserved; TPPL did not cease as a legal entity on transfer of the aforesaid design and engineering business to the appellant and in fact, did carry out project consultancy business subsequently. The aforesaid contention is fortified by the provisions of section 47(xiii)/(xiv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assets. Further, under the scheme of the Act, depreciation under section 32 of the Act is allowable on WDV of the block of assets as on the last date of the relevant previous year. WDV of the block assets as on the last date of relevant previous year, it will kindly be appreciated, would be the amount as reduced by the WDV of the assets transferred by way of slump sale as mandated by item (C) of section 43(6)(c)(i) of the Act. The said WDV, as on the last date of the previous year, would thus not include the WDV of the assets transferred by way of slump sale and consequently, depreciation under section 32 of the Act is allowed on the reduced WDV of the relevant block (as reduced by the WDV of the assets transferred). [Re: the decision of the Delhi Bench of the Tribunal in the case of Dharampal Satyapal vs. DCIT: 138 TTJ 74. In view of the aforesaid, depreciation under section 32 of the Act is not admissible in the hands of the transferor in the year of transfer on assets transferred by way of slump sale. Fifth proviso to section 32(1) was inserted in order to plug the loophole where more than 100% depreciation in the aggregate is admissible to two persons, in the year i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the appellant and not with reference to the values placed on such assets by the appellant, on the basis of valuer s report. The mischief of Explanation 3 to section 43(1) of the Act can be invoked only if the main purpose of transfer of assets (previously used for purposes of business) is deduction of tax liability by claiming depreciation with reference to enhanced cost. The provisions of the said Explanation are not applicable to the present facts for the following reasons: a) The appellant acquired design and engineering business of TPPL by way of slump sale for lumpsum consideration of ₹ 45.85 crores. b) The aforesaid consideration was actually discharged in cash by the appellant. The same, therefore, constituted actual cost of the tangible and intangible assets acquired by the appellant as part of purchase of the design and engineering business of TPPL on slump sale basis. c) The consideration paid by the appellant for acquisition of design and engineering business of TPPL on slump sale basis was based on the value of such business. d) Saipem International BV, a Fortune 500 company had invested ₹ 45.85 crores for acquiring 50% equity of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per sq. ft per month was charged. Accordingly the appellant paid ₹ 69,74,000/- to TPPL as lease rental which was claimed revenue deduction. The CIT(A) enhanced the assessment to disallow ₹ 55,79,200 out of lease rental paid for air-conditioning equipment and DG sets, invoking section 40A(2) of the Act. The CIT(A), without bringing any comparable cases on record, held ₹ 6 per sq ft as reasonable charges for lease of air-conditioning equipment and DG sets as against rate of ₹ 30 per sq. ft paid by the appellant. It had not been appreciated by the CIT(A) that the rent of ₹ 20.87/- per sq. ft paid by the appellant to Amlo Engineering and ₹ 22/- per sq. ft paid to Shri Manmohan Singh for adjacent premises was for the bare shell. TPPI had incurred substantial expenditure on providing air conditioning ducts, other fixtures and fittings within the building, in addition to the air-conditioning equipment. The said rent of ₹ 50 per sq. ft paid by the appellant for an airconditioned building could not, by any set of imagination be regarded as excessive. The CIT(A) erred in not taking into account the aggregate rent of ₹ 50 per sq. ft. p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 006 Balance Sheet shows value of Goodwill at 40.58 cr. (b) Valuation Report (undated) splits Goodwill value of 40.58 Cr into (a) Know-how at 26.20 cr. (b) Business on Hand at 12.50 cr. (c) Non-competitive at 1.88 cr. Assets which have not been transferred/sold are leased out by TPPL to Saipem. 1. In the present appeal it will be important to keep in mind the documents/agreements entered into and the conduct of the parties thereto. In the context of the interpretation of various agreements referred to above it will be relevant to keep in mind the principle laid down by the Supreme Court in Delta International Ltd. v. Shyam Sunder Ganeriwala others (1999) 4 SCC 545 that the documents have to be construed in accordance with well-established principles and in case of camouflage or attempt to avoid the rigours of any legislation, the mask is to be removed or veil lifted from the self-serving instruments and true intention gathered from the relevant circumstances. 2. Likewise, Delhi High Court in DIT-1, International Taxation v. Alcatel Lucent USA INC (judgment dated 07-11-2013) referring Esthuri Aswathiah v. CIT Mysore (1967) 66 ITR 478 SC has emphasized that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 10.14 cr {@25%} on intangibles being Goodwill of 40.58 cr. trifurcated into Tech know how; Existing business in Brand name TPPL Brand Name/Non compete fee. The CIT(A) says original transaction was treated as Slump sale subsequent assignment was a colourable devise to gain tax. To buttress AO takes note of shareholding of Mr.Binoy Jacob (74% in TPPL and then 50% in Saipem, the appellant ) and says claim of depreciation results in tax gain of 10% over the period of time. It was emphasized that TPPL did not have any registered brand name/licence etc which would have supported assessee s case. Qua valuation, it was observed that the Valuer was the not an independent person as he was the one representing the assessee before AO/CIT(A) in assessment. Also referred the assessment order for AY 8-9 and noted that the assessee had failed to file specific details qua intangibles except the vague reply that it (TPPL) was in business for last 15 years, but still failed to explain how assets were used in business. Regarding the various arguments made out in the Broad Propositions it it to be noted that the CIT(A) on lifting the Corporate Veil found inter alia that net gain would be 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant was not bonafide. After careful perusal of the documents produced before him CIT(A) inter alia Held: -Deal was designed to benefit Mr. Binoy in the form of consideration being the huge premium of 45,840 per share got from Saipem Italy. CIT(A) found there to be no explanation why Saipem Italy paid premium when other shareholder Binoy Jacob was not paying any such pemium. -Deal was clearly a colourable device hence Delhi HC judgment in Areva T D India Ltd on which the Assessee was placing reliance will not apply. -Valuer, whose report is banked to determine the valuation, is not independent person. Valuation Report was found to be just on wrong assumptions (4 years non-competition whereas it was in perpetuity). -Mr. Binoy Jacob who was 74% partner/shareholder in TPPL was the largest beneficiary hence 40A(2)(b) would apply i.r.o 40.58 Cr which is about 15 times the value of physical assets hence price paid over the identifiable tangible physical assets-Furniture Fixtures; Vehicles etc- (of 2.56 cr) other current assets-sundry creditors- (2.77 cr) is excessive unreasonable. CIT (A) finally does enhancement by ₹ 30.44 Cr. (40.58 Cr less 10.14 Cr d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPPL where the physical assets stood just at 2.58 crores) it is submitted that the appellant has not appreciated the matrices of the case in entirety. It is pointed out that if the multiple agreements entered into are examined conjointly carefully, it would become apparent that findings of the CIT(A) are in order. Undeniably, the TPPL where Mr. Jacob was 74% shareholder paid tax at a lesser rate by offerring the income u/s 50B as compared to normal tax rate which had gone to benefit Mr. Jacob substantially, and likewise it be noted that while Mr. Jacob became shareholder in Saipem (50%) without paying any premium Saipem Italy had to acquire shareholding by paying huge premium. It is not understood why the appellant ignores this tangible benefit got by Mr. Jacob. CIT(A) has clearly pointed out that kingpin in the TPPL was Mr. Jacob around whom the entire business was hovering. To put blinkers in the eyes of the Revenue the TPPL agreed (clause 14) to not to compete with Saipem for unspecified period unlike in case of Jacob though Mr. Jacob after 3 years (at least for 4 years from signing of SHA) was entitled to run the similar business may be in own name or by creating a differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of ₹ 40.58 Cr which is about 15 times of the value of physical assets goes to show that it had unreasonably arrived at. Precisely for the disproportionate rate vis- -vis the physical value of assets the CIT(A) held that provisions of sec 40A(2)(b) are clearly attracted hence holding price paid over the identifiable physical assets (2.56 cr) sundry current assets/creditors (2.71 cr) to be excessive unreasonable disallowed resulting in enhancement of 30.44 Cr.(40.58 Cr less 10.14 Cr depreciation disallowed by AO. (a) Qua the argument advanced by the appellant that section 40A(2)(b) is only restricted to revenue expenditure debited in the P L A/c and not otherwise, it is pointed out that this argument has no merits because the appellant fails to appreciate that firstly there is nothing in the law to exclude the application of section 40A(2)(b) to non-revenue expenditure and secondly even the payment on a/c of capital expenditure was going to be routed through the P L A/c only though in the garb of depreciation etc- which figure would not have been so high if the payment made was reasonable. (b) This apart, if for argument sake it is presumed that the argum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all it is so then how it is pointed out that the applicability of this principle was not at all argued there. It is just a case that their lordships invoked it at their own and further it is a case of ratio sub silentio which itself is enough to weaken the precedential value of the judgment. 5.2.3 As a matter of fact, with respect it is pointed out that principle of ejusdem generis is not applicable in the present case because unlike the Goodwill all other intangible assets enumerated u/s 32(1)(ii) depreciates because of efflux of time and other factors which are not in the hands of the assessee. Third party can cause the demise of these rights and hence these are clearly depreciable assets. This apart it needs to be noted that wherever the Legislature intended to deal with Goodwill, it has done so, as would be noticed u/s 55(2)(a) whereby along with trade mark, brand name it has made specific provision for Goodwill. Had these been pointed out, the Supreme Court would not have proceeded to apply the principle of ejusdem generis . Clearly because of this difference it is submitted that Goodwill does not belong to the genus know-how, patent, copyrights, trade-marks etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... succession of TPPL, the seller. (c) In regard to reliance of the appellant on section 47(xiii)(xiv) it is submitted that this section has no application at all here. It has applicability only in reference to section 45 i.e. qua the Capital Gains and not in reference to the issue of Depreciation to be allowed while computing income u/h Business Profession . (d) In regard to applicability of 5th proviso to Sec.32(1) it is submitted that the AO was dealing with the assessment of the appellant where it was to be ensured by him that all applicable provisions of the statute are pressed into service which inter alia included 5th proviso also which necessarily mandated restricting the depreciation in the case of successor of a business in proportion to the number of days of the use by the buyer. This means that even if the seller has not claimed depreciation still the claim of the buyer needs to be restricted on proportionate user basis. 7. Tangible acquisition Book value (GoA 5): 7.1 Tangible assets were acquired for 2.56 cr. (as per Companies Act valuation) whereas WDV as worked out as per the Income Tax Act was 1.42 cr. This clearly means that the assessee enhanced cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te that it is a normal experience of life that the rental for the immovable space are always higher as compared to the payment for facilities obviously because of inherent cost/value involved which is in most of the cases higher. While holding the payment @ ₹ 30 as excessive the CIT(A) has been judicious enough in making reduction @ ₹ 6/- per sq.ft as a reasonable payment on a/c of lease rent for the utilities. This resulted in enhancement of ₹ 55.79 lacs. 8.2 Apart from reiterating the submissions made earlier before the CIT(A), the appellant has submitted that the DG Set and AC Plants were non-critical assets that is why these were not acquired in the Slump sale. It is further submitted that rental paid @ ₹ 20 to 22 were for bare shell whereas payment @ ₹ 30 for Utilities were considering the fact that TPPL had made substantial investment for acquiring this. 8.3.1 Qua these two arguments it is submitted that these arguments were firstly not raised before the AO and secondly no details of the investment made by TPPL in installing these facilities have been filed which would have been useful to ascertain further the reasonableness of the payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taxing authority to unravel the device and to determine the true character of the relationship. 2. Mac Dowell Co. 154 ITR 152 SC tax avoidance is the art of dodging tax without breaking the law . This is a five judge judgment which has not been over-ruled or diluted nor it was possible to do so for the subsequent Benches of the SC having the smaller constitution. The decisions relied by the assessee (including that of Vodafone BV ) were having smaller constitution. 3. Vodafone International Holdings BV 341 ITR 1 SC does not come in Revenue s way because the facts involved there are distinguishable from the facts of the present appeal. 4. Vodafone International is considered by the Karnataka HC in Bhouruka Engg. Ltd. 356 ITR 40 where it is viewed that a colourable device cannot be a part of tax planning which exactly is the case in hand. 5. To buttress that the judgments relied by the appellant including the Supreme Court judgment in SMIFS Securities 348 ITR 302 SC is not applicable, reference was invited inter alia to following; 5.1 No judgment can be cited as a precedent, however similar the facts may be. Each case must rest on its own facts and the mere s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is group including that of his Group companies ( which were independent of the appellant) which brings the case of the appellant within the scope of tax evasion. Paper Book: To show that attempt of the appellant is based on change of opinion or after thought based on unreliable incomplete documentation which is enough to show that case laws relief by the appellant on Vodafone BV or of SMIFs securities cannot be applied ( First Goodwill then trifurcation then pressing for alternative claim whereby Revenue s interest get compromised) specific reference was made of the following pages of the Paper Books placed on record by the Appellant; Page 50: to show that this document titled Slump Sale/Business Transfer Agreement is used as a colourable device to defeat Revenue s interest. If it was a slump sale really it would have contained words business Transfer agreement . Pages 64-76- which is a Valuation Report(VR) which is undated-self serving-based on incorrect facts/misrepresentation-not independent-prepared by Assessee s own interested Counsel hence does not enthuse confidence to decide the lis. Inter alia reference was made of Paragraph/clause No. 1.3 shows that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that that was the case where provisions of section 45 were under consideration whereas it is not so in the present case. Clearly this decision is not applicable for the simple reason that the controversy involved in this case is entirely different from the controversy under consideration in the case in hand. 3. CIT v. Techno Shares Stocks Ltd. v. CIT 327 ITR 323 SC This decision is firstly not on Goodwill. Secondly, the SC itself confined its decision only to right of membership conferred by BSE . Thus, qua Goodwill this decision cannot be relied upon. 4. Areva T D India Ltd 345 ITR 421 The CIT(A) himself has highlighted as to how this decision is not attracted. In the cases of colourable device the decision cannot be relied upon. 5. Hindustan Coca Coa Beverages P. Ltd. 331 ITR 192 Del. Decision is not applicable because this decision was given in reference to action taken by the CIT u/s 263 of the Act. Further, since no question of law was found to be arising this decision loses precedential value. It needs to be appreciated that the High Court would have got the jurisdiction when the question of law arose otherwise not. 6. SMIFS Securities Ltd. 348 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t money has actually been exchanged but in what form is not clear. The onus lies on the assessee to show with documentary evidences as to in what form the consideration was received. II. It was argued that the appellant had an intention to evade tax and the transaction of slump sale was colourable device. According to the Ld. CIT DR, the appellant knew that no depreciation was allowable on goodwill. The appellant thus changed stand by trifurcating the excess amount paid over and above book value of assets viz., ₹ 40.58 crores, initially treated as goodwill into know how, brand name and non compete fee in order to claim depreciation and thereby reduce the tax outgo. The appellant itself claimed the value of goodwill to be zero. III. The valuation report was prepared by a valuer who was not an independent person, based on wrong assumptions and was tailormade to defraud Revenue. On perusal of the valuation report, it could not be inferred as to whether the transaction had already taken place or was to take place in future based on said valuation of intangibles. IV. Mr. Binoy Jacob was the controller/master and proprietor being holder of 74% shares in TPPL. The transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counted for transaction of slump sale in its audited books of account and paid tax on capital gains on slump sale of the business; In view of the aforesaid admitted / undisputed facts, the CIT DR clearly erred in holding that the slump sale agreement between TPPL, on the one hand, and the appellant, on the other, was sham / collusive. The decisions relied upon by the CIT DR were distinguishable on facts. In Delta International Ltd. v. Shyam Sunder Ganeriwala Others relied upon by CIT DR, the issue before the Supreme Court was to ascertain as to whether document in question was a lease agreement or 'leave and license' agreement. In order to determine the true nature of the tenancy transaction, it was held that the real test was the intention of the parties which may be gathered from the document itself. Only when the document is camouflaged that the surrounding circumstances and conduct of parties may be looked into. In the appellant s case, there is no evidence that documents including slump sale, subscription agreements, memorandum of understanding etc. were camouflaged so that it is difficult to ascertain the real intention of the parties and to term the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le assets which was attributed to the intangible assets viz., technical know how, executing business sin brand name, non compete fee. Goodwill, it may be appreciated, is compendious name given to aforesaid intangible assets. There is no single generally accepted definition of goodwill and it is made up of a whole lot of factors, each influencing the final make up of business. It is thus, respectfully submitted that there has been no change in stand of the appellant. IV. The valuation report has also been questioned by the CIT DR on the ground that it is not dated and hence it is not known whether the same was obtained before or after the entering of the slump sale agreement. It has also been stated that the valuation should have been made on historical and not future data/projections. In this regard it is stated that the valuation report was obtained post the slump sale agreement, in order to determine/record the value of various tangible and intangible assets acquired by the appellant under the slump sale agreement, in its books of accounts. This would be clear on perusal of the valuation report, which, in fact, refers to the slump sale agreement. Further, the valuer has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form a company Saipem Triune Engineering Private Ltd. (STEP). STEP acquired the design engineering business of TPPL for a consideration of ₹ 45.85crores in slump sale. 40. Mr. Binoy Jacob the main Director of TPPL had agreed to form a company being assessee company. The assesee company acquired the design engineering business of TPPL for a consideration of ₹ 45.85 crore in lumpsum. The consideration of ₹ 45.85 crore comprised of net asset of ₹ 5.27 crore and for technical know how and other intangible assets of TPPL worth ₹ 40.58 crore. The AO has rejected the assess s claim of depreciation for technical know how and other intangible assets worth ₹ 40.58 crores and accordingly has proposed the disallowance of ₹ 10,14,68,882/-. The Ld. CIT(A) in his appellate order has not only upheld the disallowance of above depreciation but he has held that the entire payment sum of ₹ 40.58,75,729/- was to be disallowed u/s 40A(2). In this regard Ld. CIT(A) has referred that Shri Binoy Jacob was main promoter of TPPL i.e. one company in which he holds 74% shares. Similarly in the assessee company which bought the ongoing business for TPPL Shri B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed on the said capital acquisition. Even if it is presumed that the entire payment was bogus and the assessee has gifted away the entire amount the same cannot be added as income in the hands of the assesee being the payer. Thus we hold that reference to these sections by the Ld. CIT(A) is uncalled for and not at all germane to the adjudication of the issue at hand. In these circumstances we hold that the enhancement of income by the Ld. CIT(A) amounting to ₹ 30,44,06,647/- is not at all sustainable and the same is liable to be set aside. Accordingly we delete the enhancement by the Ld. CIT(A). 43. Now we deal with the Ld. CIT(A) s decision that the whole scheme was a colourable device to obtain undue tax benefit. First we find that this finding of the Ld. CIT(A) is based upon his finding in preceding paragraphs where he has enhanced the income by ₹ 30,44,06,647/-. The above enhancement has already been set aside by us, for the reasons mentioned in the preceding paragraphs. Hence the premise on which the Ld. CIT(A) has considered the whole scheme as colourable is no more any existence. That there were certain defects in the valuation report submitted cannot lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us defects have been reported in the said valuation report and the same was also pointed out by the Ld. Departmental Representative before us . We note that in para 2.1 the valuer has mentioned that in preparing the valuation report the valuer has relied upon and assumed without independent verification , the accuracy and completeness of all information provided by the company. The valuer has clearly pointed out that the information provided there has not been verified by the valuer. It has also been mentioned that the valuation contained herein is purely for discussion purposes, it has further been pointed out that analysis are not and do not purport to be appraisals or otherwise reflective of the price at which the shares could actually be paid or sold. Thereafter we not that the valuer is a Chartered Accountant and he made his valuation only by taking into account the economic data and the ratio of turnover and profits. In these background we find that there is lack of credibility on the valuation assigned by the valuer towards technical know how, valuation of business and price for non-compete clause. Further we note that AO had observed that asessee has accepted that it was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove Explanation 3 to section 32(1) of the Act : Explanation 3 For the purpose of this sub section, the expressions assets and block of assets shall mean (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or an other business or commercial rights of similar nature. Explanation 3 states that the expression asset shall mean an intangible asset, being know-bow, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature. A reading the words any other business or commercial rights of similar nature in clause (b) of Explanation 3 indicates that goodwill would fall under the expression any other business or commercial right of a similar nature . The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. 46. Now a reading of the above shows that Hon ble Apex Court has expounded that good will is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) deals with depreciation in case of succession etc. We find that findings of the Ld. CIT(A) and the AO also in this regard are interalia based upon the premise that the whole scheme is a sham transaction . We find that as dealt with hereinabove we have already held that the whole scheme in this case cannot be termed as sham transaction. Further more we note that while dealing with enhancement on account of disallowance of depreciation by invoking 5th proviso to section 32(1) Ld. CIT(A) has observed that there is no need to give separate opportunity for this enhancement. We further note that AO has not considered these aspects. In our considered opinion interest of justice would be served if these issues are remitted to the file of the AO. The AO should consider these issues afresh keeping in mind our adjudication on issues herein above. Needless to say assessee should be granted adequate opportunity of hearing. 49. Now we consider the enhancement on account of rent for use of assets. In this regard we note that in the agreement the lease rent of ₹ 30 per sq. ft. p.m. was specified. The facilities in this regard included provision for air conditioning facilities through A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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