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TMI Blog2019 (11) TMI 1139X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectively of the Income-tax Act, 1961 (hereinafter called the Act ) for ay s: 2010-11 to 2012-13 respectively . As common issue is involved in all these three appeals, hence these three appeals for ay s : 2010-11 to 2012-13 were heard together and disposed of by this common order. First we shall take up appeal filed by Revenue for ay: 2010-11. 2. The grounds of appeal raised by Revenue in memo of appeal filed with the Income-Tax Appellate Tribunal, Chennai (hereinafter called the Tribunal ) for ay: 2010-11 read as under:- 1. The order of the Ld. CIT(A) is contrary to law, facts and circumstances of the case. 2.1. The CIT(A) erred in allowing the depreciation to the assessee relying on the decision of the Hon'ble Supreme Court in the case of M/s. Smifs Securities Ltd. and the ITAT's decision in the case of R.G. Keswani and failed to appreciate that following the principle of ejusdem generis, the goodwill accounted as balancing factor or non-compete fee is not a depreciable asset in nature of any other business or commercial rights' specifically similar to knowhow/ patents/ copyrights / trademarks/ licence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-compete clause as supporting clause. 2.8 The CIT(A) ought to have appreciated that the relied upon decision in the case of M/s. Rentokil India Private Limited (ITA No.2660/Mds/2016) has not been accepted by the Department and further appeal is pending before the Hon'ble High Court of Madras. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. CIT(A) be set aside and that of the AO restored. 3. The only issue raised by Revenue in these appeals is with regard to allowability of depreciation on goodwill generated on acquisition of businesses of two entities namely GTS Exports Private Limited and Arc Trend Systems Private Limited by assessee, by learned CIT(A) . The assessee is engaged in manufacturing and wholesale trading of automatic door operators , door controls and accessories. The AO noted during the course of assessment proceedings that assessee has claimed depreciation on goodwill purported to be generated on acquisition of two businesses namely GTS Exports Private Limited and Arc Trend Systems Private Limited which in the opinion of the AO cannot be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal revenues and operational benefits. 2. Depreciation on goodwill Schedule 18.3 to the Financial Statements of the Company for the year ended 31 March 2010, relating to Acquisition of business of Certified Business Partners (enclosed as Attachment 1) reflect the following assets and liabilities taken over by the Company pursuant to the BTAs executed with ATS and GTS: Particulars Amount in INR Millions Inventory 22.06 Sundry debtors 53.08 Loan and advances 5.05 Fixed assets 0.75 Current Liabilities (41.68) Goodwill 174.55 Total 213.81 The net assets of INR 39.26 were taken over at book value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails are noticed. Fixed Assets (in Rs.) Gross Block - 4484040 Accumulated Depreciation - 2054588 Net Block - 2429452 Current Assets (Loans Advances)(in Rs.) Stock in Trade :- 14192036 Sundry Debtors :- 38246524 Advances Deposits :-12974645 Cash Bank Balances :- 4633935 70047141 LESS:- Current Liabilities :- 38938714 Net Current Assets :- 31108427 Only Unsecured Loans are from Directors and Family membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the view that in the absence of such an exercise, it could not be said that the assessee incurred certain amounts for goodwill. Thus, in the absence of such exercise to identify fair market value of assets and liabilities acquired by assessee, the AO observed that it could not be said that the assessee had paid for purchase of goodwill in the nature of commercial rights. Thus, the AO observed that the assessee could not prove that it had purchased goodwill and hence consequentially no depreciation can be allowed on goodwill. The AO relied upon decision of Mumbai-tribunal in the case of DCIT v. Toyo Engineering India Ltd., (2013) (33 Taxman.com 560) (Mumbai Trib.). 3.2 Regarding non-compete clause in slump sale agreements ,the AO observed from slump sale agreements entered into by assessee with GTS and Arc Trend, vide clause 13.2 as under: 13.2 Non-Compete 13.2.1 The parties agree that the Company and the Key Employee shall not for a period of five years (hereinafter referred to as the Non-Compete Period ) directly or indirectly, either for itself or for any other person, partnership, corporation or company, own, manage, control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s.YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT, for short]. We see no reason to interfere with the factual finding. The AO also observed that assessee has not made claim for depreciation on goodwill in the return of income filed with Revenue on 14.10.2010 , nor the said claim was made in revised return of income filed by assessee with Revenue on 14.02.2012 and AO was of the view that such a claim cannot be made otherwise than by filing of revised return of income u/s 139(5) of the 1961 Act. The AO rejected contentions of the assessee and held that no depreciation on goodwill can be allowed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anchises, or any other business or commercial rights of similar nature. Therefore, it was held that payments for any business or commercial rights would fall under the definition of intangible assets. The appellant also relied upon several judicial precedents, which have explained what constitutes intangible assets and assets in the nature of business or commercial rights. CIT(A)'s Inferences and Decision: The submissions of the appellant were considered vis-a-vis the findings of the Assessing Officer. The AO rejected the appellant's claim for depreciation on goodwill as the financials indicated that the transactions did not yield any goodwill. No commercial rights were held to be purchased by the appellant. It was based on book entries and not on Fair Market Values. It was also held that if proportionate allocation of tangibles was based on book values, no consideration would be remaining to be allocated towards goodwill. The AO also examined the non-compete fee clause. It was maintained that the excess consideration paid over and above the business assets should be reckoned as non-compete fee rather than goodwill. Furthermore, the AO de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in this case of Shri Balaji Sago Starch Products (ITO No.2081 (Mds/2010) which referred to depreciation as a statutory allowance which is distinct from other expenditure and which has to be allowed. Taking into account the facts, circumstances the explanations furnished by the appellant and judicial precedents pertaining to this case, I am inclined to accept the contentions of the appellant. The company's claim for depreciation on goodwill is found to be admissible as it is in consonance with the requirement pertaining to the slump sale and the provisions of section 32 of the Act. It was also noted that in the case of M/s. Rentokil India Private Limited vs. DCIT (ITA No.2660/Mds/2016, the hon'ble ITAT had adjudicated on the claim of depreciation on goodwill on a similar set of facts. Paragraph 5 of the ITAT order cited supra states this: 5. We have considered the rival submissions. A perusal of the provisions of Sec. 32(1) Explanation-3 shows that the expression asset meant to include intangible assets being knowhow, patents, copyrights trademarks.......... any other business or commercial rights of similar nature. A perusal of the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the jurisdictional Tribunal, I hereby accept the submissions of the appellant and consider them to be tenable. This ground of appeal for the A.Y. 2010- 11 is allowed. On the same lines as in A.Y.2010-11, the appellant's claim of depreciation on goodwill is considered admissible for the following assessment years. The company is entitled to the consequential benefit of depreciation in the succeeding years. Assessment year Amount of depreciation on Goodwill 2011-12 Rs. 2,86,37,966 2012-13 ₹ 2,14,78,475 2013-14 ₹ 1,61,08,856 2014-15 ₹ 1,20,81,642 2015-16 ₹ 90,61,232 This ground of appeal is allowed. 4. Aggrieved by an appellate order passed by learned CIT(A), the Revenue has filed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA no. 2660/Mds/2016 , dated 15.11.2017 for ay: 2011-12 is not accepted by Revenue and appeal is filed with Hon ble Madras High Court. It was submitted that merely because an appeal filed by Revenue is pending before Hon ble Madras High Court could not be a reason to deny benefit to the assessee of the decision of co-ordinate benches of ITAT in the case of Rentokil (supra) allowing depreciation on goodwill. The learned counsel for the assessee also relied upon decision of Chennai-tribunal in the case of Rentokil India Private Limited in ITA No. 444 445 /Chny2018 dated 26.07.2018 for ay s : 2010-11 and 2014-15. It was submitted by learned counsel for the assessee that grant of depreciation is a statutory deduction and keeping in view Explanation 5 to Section 32 , even if depreciation is not claimed in return of income, still Revenue has to allow the same. 4.3 The learned DR in rejoinder drew our attention to non compete clause in agreement vide clause 13.2 . It was submitted that learned CIT(A) relied upon decision in the case of Pentasoft Technologies Limited (supra) which was a case of payment of non compete fee which was part of agreement and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms and conditions of the agreement undisputedly made it clear that the assessee intends to acquire business of GTS and not the company GTS Exports Private Limited per-se. The total composite consideration stated for acquisition for the business of GTS as stated in Slump Sale Agreement is ₹ 7.60 crores lumpsum consolidated for business of GTS related to trading of Dorma products and related installation services being acquired by assessee as stipulated in slump sale agreement dated 21.11.2008. The Business Assets as defined in the agreement to be acquired by assessee from GTS are Net current assets, Business Movable Assets, Business Goodwill, Business Intellectual Property, Business Contracts including rights thereunder, Business information and all of the assets which are used in the Business, to be sold and transferred to the assessee in accordance with the slump sale agreement. Business Contracts are defined as meaning contracts, agreements and undertakings pertaining to the Business , which shall also be taken over by assessee under the aforesaid slump sale agreement. The agreement also stipulates that all pending customer orders shall also stand transferred to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Anand Parbat office at New Delhi which shall stand transferred to assessee under this slump sale agreement . There is also transfer of inventories, account receivables , loans and advances outstanding in the books of accounts of GTS on effective date to the assessee under the aforesaid slump sale agreement but there is no land and building which is transferred to the assessee under the said agreement. The amounts received by GTS from its debtors of trading in Dorma Products and related installation services businesses directly post effective date shall have to be accounted for by GTS to the credit of assessee b) The second agreement is dated 29.11.2008 which is again termed as Slump Sale Agreement and is between assessee and M/s Arc Trend Systems Private Limited . The agreement stipulates that Arc is engaged , inter-alia , in the business of investment of funds, trading of Dorma Products, including door controls, automatic doors, glass fittings, accessories and providing related installation services which has been in existence for a period of more than three years. The assessee has only intended to acquire business related to trading of Dorma Products and related in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities of the business so acquired under slump sale agreement uninterruptedly on going concern basis. The assessee under the agreement is entitled to carry on the business so acquired in its own name and for its own sole benefit. There is also a non compete clause in the agreement which stipulates that Arc and its key employees shall not directly or indirectly compete for a period of five years with assessee and the products produced by it or in the process of developing anywhere in the world. No separate consideration is specified for non compete agreement entered into by assessee with Arc and key employees and composite lumpsum consideration of ₹ 13.72 crores stipulated in slump sale agreement also, inter-alia includes payment of noncompete agreement entered into by assessee with Arc. The aforesaid agreement also contains details of business movable assets which are mainly personal computers, printers, fax machines , laptops, air conditioners, refrigerators , stabilizers , Dlink switch, etc located at Mumbai and Pune which shall also stood transferred to assessee under slump sale agreement . There is also transfer of inventories, account re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representations and warranties are also provided in these agreements. . Any realization of accounts receivable existing in the books of GTS and Arc on effective date of transfer directly by GTS and Arc subsequently is to be accounted by GTS and Arc to the credit of assessee. The key employees, employees working in the business of related installation services run by GTS and Arc shall resign from GTS and Arc , and join employment with assessee on terms and conditions freshly agreed by assessee with these personnel. The Agreement also stipulates Key employees of GTS/Arc as well the entities namely GTS/Arc shall not compete with assessee for a period of five years with respect to products produced by assessee and/or under development by assessee. The assessee has also acquired alongwith customers, business contracts, customer orders, business information etc. which are intangibles assets associated with these businesses. The lumpsum consolidated consideration agreed by assessee to be paid is for acquisition of these businesses by assessee on going concern basis along with specified tangible assets such as computers, laptop, printers, fax machines , Information Technolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputers, laptop, printers, fax machines, air conditioners, refrigerators, business stocks, accounts receivables , loans and advances etc. along with intangible assets such as business contracts, customers, business information, right to continue business as going concern basis , non compete clauses etc. which stood acquired by the assessee under these agreements for aforesaid consolidated lump sum consideration . Thus, to this extent decision relied upon by Revenue in the case of Toyo Engineering India Limited (supra) is distinguishable as in the case of Toyo Engineering India Limited(supra) , the acquisition consisted predominantly of land admeasuring 5559.90 square meters and a building thereon , on which Toyo House was situated and hence non allocation of fair market value of land and building on the date of transfer weighed heavily on tribunal in coming to conclusion that no payment for goodwill was made. The relevant part of decision of Mumbai-tribunal in the case of Toyo Engineering India Limited(supra) is reproduced hereunder: The consideration in the form of cancellation of investments, cannot be said to have been made for purchase of assets at book value, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or incorporating in books of accounts of assessee which is not the correct thing to do as the assessee did not acquire these companies GTS/Arc nor acquire their entire assets /liabilities/businesses in toto but only acquired business related to trading in Dorma Products and related installation services business erstwhile carried on by these two entities. Thus, we donot agree with this contention of Revenue that merely because these 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. Thus, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 for ay s: 2010-11 2014-15 vide common order dated 26.07.2018 has followed its earlier decision in the case of M/s.Rentokil India Pvt. Ltd. v. DCIT in ITA No.2660/Mds/2016 for ay: 2011-12 and has granted relief to the assessee by allowing depreciation on goodwill. Thus, keeping in view of the aforesaid decisions, we hold that Ld.CIT(A) has rightly allowed depreciation claimed by the assessee by following the decision of the tribunal in the case of M/s.Rentokil India Pvt. Ltd. v. DCIT in ITA no. 2660/Mds/2016, vide order dated 15.11.2017 in allowing relief to the assessee. The decision of Hon ble Supreme Court in the case of Smifs Securities Limited (supra) 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 . Revenue has relied on decision of ITAT in the case of Chogule Co. Private Limited We are of the view that the Ld.CIT(A) has rightly allowed claim of depreciation to the assessee by following Explanation-5 to Sec.32(1) of 1961 Act, which clearly stipulates that depreciation is to be allowed even if assessee has not claimed depreciation while computing income. Thus ev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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