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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 ..... ereinafter called "the AO") u/s.143(3) r.w.s.92CA(3) , 143(3) and 143(3) r.w.s. 92CA respectively 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/ cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht 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 . The AO asked assessee to explain the same as to how depreciation on goodwill can be allowed within the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and goodwill amounting to INR 174.55 million was created as a result of the said acquisition. In this regard, it is submitted that the Company has inadvertently not claimed the depreciation on goodwill amounting to INR 38,183,955 (refer Attachment 2 for the computation of depreciation under the Act. 2.1 Our Submission 2.1.1. Eligibility to claim depreciation It is submitted that schedule 4B of the Financial Statement of the Company reflects depreciation on goodwill as per the Companies Act, 1956 (refer Attachment 1). However, the same was inadvertently not claimed by the Company in the computation of taxable income." The assessee company relied on the following case laws:- (i) CIT v. Smifs Securities Ltd., (348 ITR 302)(SC) (ii) Areva T & D India Ltd., v. DCIT (345 ITR 421) (Delhi) ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reditors :- 18516984 Advances..... :- 1419137 The AO observed that assessee has allocated lesser value out of business consideration towards tangible assets and had claimed balance amount to be towards goodwill on acquisition of businesses. The AO observed that if proportionate allocations in value are done towards tangible assets based on book value, then there will not be any allocation remaining towards goodwill . The AO rejected contention of the assessee that consideration paid over and the above towards net worth of tangible asset is towards goodwill. The AO observed that since it is a case of slump sale, the book values were incorporated and fair market value of each of the asset was not considered by the assessee. The AO observed that if assessee had considered fair market value of each of the assets and also fair market value of liabilities, then there was a case for claiming that the assessee has incurred certain amounts towards goodwill. The AO was 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 liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so observed by AO that assessee has admitted that there is no non-compete fee and assessee is claiming excess amount paid over and above net assets acquired towards goodwill. The AO also observed that it is the assessee who has himself admitted that there is no non-compete fee. The AO observed that assessee's reliance upon decision of Hon'ble Supreme Court in the case of CIT v. Smifs Securities Ltd., reported in (2012) 348 ITR 302 (SC) is not correct because facts of the assessee's case are distinguishable with facts in the case of Smifs Securities Ltd.(supra) and ratio of decision in the case of Smifs Securities Limited(supra) is not applicable in the case of the assessee. The AO observed that Hon'ble Supreme Court held in the case of Smifs Securities Limited(supra) , as under: "The Commissioner of Income Tax (Appeals) ['CIT(A)', for short] has come to the conclusion that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, information relating to clients, and so forth. These benefits in the nature of bundled rights acquired by the company in the form of business or commercial rights were to be taken into consideration for the purpose of determining the purchase consideration. The appellant stated that the net assets of Rs. 39.26 million were taken over at book value and the excess consideration amounting to Rs. 174.55 million was, in fact, in the nature of business or commercial rights acquired by the, appellant as a result of the acquisition. The appellant, while discussing the issue of depreciation on goodwill, referred to the provisions of section 32 of the Act. It was pointed out that the explanation 3 to section 32(1) defines intangible asset being know how, patents, copy rights, trade marks, licences, franchises, 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -compete fee in a composite agreement. The appellant submitted that Depreciation; on goodwill for A.Y. 2010-11 amounting to Rs. 38,183,955/- and the depreciation for A.Y. 2011-12 amounting to Rs. 28,637,966/- were claimed during the course of the assessment proceedings and not by filing revised return. In this context, the appellant referred to Explanation 5 to section 32 of the Act: "For the removal of doubts, it is hereby declared that the provisions of this subsection shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income." Furthermore, the appellant referred to the decision of Chennai Tribunal 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of the international transactions, provided for the expression intangible property to include intangible assets such as customer list in Sec. 92B then an interpretation difference from the same cannot be taken that under the same applicable act and that too to the detriment of local business and citizens. In these circumstances, we are of the view that the assesses is entitled to the claim of depreciation on the intangible assets, being the goodwill/customer list, as claimed by the assessee. In the result, Ground Nos.2 to 2.5 of the asessee's appeal stand allowed. Taking into account these touchstones provided 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 Rs. 2,14,78,475 2013-14 Rs. 1,61,08,856 2014-15 Rs. 1,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur attention to ground number 2.8 filed by Revenue wherein it is stated that tribunal decision in the case of Rentokil India Private Limited in 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 Pentas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts and related installation services. Perusal of the terms 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 Rs. 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 cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tables and chairs located at its GK-II and 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 Rs. 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 receivables , loans and ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 Technology accessories, office equipments , inventories, acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioners, 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, when the fair value of each asset and liability is much higher. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee in our view reflect their fair market value, unless rebutted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 even if assessee has not filed claim of depreciation in return of income filed with Revenue as well in r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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