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TMI Blog2022 (6) TMI 1295X X X X Extracts X X X X X X X X Extracts X X X X ..... e business of M/s. Indus Seeds and M/s. Sasya Gentech Pvt. Ltd. as a growing concern. 5th proviso to Section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. It is also pertinent to note that u/s 47(xiv) of the Act, any transfer of capital asset or intangible asset by a proprietorship concern to a company as a result of succession of the concern by a company is a recognized mode of transfer. Admittedly, the assessee had taken over proprietorship concerns and private company which are different entities and there were transfer of intangible asset by those two concerns to the assessee for a valuable consideration.Since the transaction is not covered under the above-mentioned clause of section 47, consequently fifth proviso of section 32 would also not be applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odwill from the books of the transferor is recorded by the transferee. Amendment by Finance Act 2021 clarifies the position on Goodwill depreciation - The Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an Assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. Amendments were made in section 55 of the Act, in relation to the meaning of cost of acquisition etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to April 1, 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. The intention of the legislature is that depreciation on goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documentation etc. b) The Ld CIT (A) failed to appreciate that the takeover of business of the Proprietary concerns were in pursuance of an existing negotiation with an unrelated foreign investor wherein the foreign investor had already valued the business of the concerns at an amount much higher than what the Appellant took over the said businesses. 3) The action of the Ld. CIT(A) in invoking explanation 3 to section 43(1), thereby treating the transaction relating to goodwill as sham and colorable in the absence of a valuation report is untenable and unwarranted inasmuch as the valuation report taken immediately after the takeover more than justifies the amount paid by, the Appellant to the proprietary concerns. 2. The grounds of appeal relate to the common issue of action of the AO in making a disallowance ofs.2,15,02,864/-. The facts of the issue are that during assessment proceedings it was observed by the AO that the assessee had claimed depreciation @ 25% on intangible assets of Rs. 17,39,83,689/-. The assessee was asked by the AO to provide the details of intangible assets. In response to the same the assessee informed that it had paid an amount of Rs.16,46,08,759/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of above the AO treated the transaction related to goodwill as sham and colorable device to claim higher depreciation by the assessee company. The AO invoked the provisions of Explanation 3 to Section 43(1) of the Act and restricted the value of intangible at Rs.19,60,780/-, as already recorded in the books of Indus Seeds as on 31.10.2014 the date immediately before the said concern was taken over by the assessee company. 3. During appellate proceedings the assessee has made detailed submissions. The assessee referred to the business transfer agreements (BTAs) with the two concerns purchased by it in slump sale. The BTAs define the words 'Intellectual Property Rights' and 'know-how'. The assessee submitted that the concerns taken over by it produced genetically qualified and developed seeds of high quality and the sale consideration paid by it to these concerns included value of intangibles like Intellectual Property Rights and know-how. The assessee submitted that the consideration paid by it over and above the net value of assets and liabilities taken over by it needed to be attributed to intangible assets being goodwill. The assessee submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to become engaged in any business that competes with the business of the appellant. In addition to above the said concerns are also required to carry out certain activities and also give certain assurances (clause10.1), the relevant clausespertaining to same have already been reproduced supra. As per clause 8 of the agreement the vendor has made and given various warranties with the intention of inducing the purchaser to enter into the agreement and the vendor has indemnified the purchaser against all liabilities or loss arising directly or indirectly from breach of any warranty. As per clause 5.8, the vendor is required to use its best endeavours to obtain the consent of other parties to any contracts specified by the assessee to the assignment of those contracts to the assessee. As per clause 7, the vendor has agreed to ensure that all Divisional Personnel take employment of the assessee. As per clause 5.8, the vendor is required to assist the assessee with the necessary forms and contents to enable the utility service provided to the business, to be transferred to the assessee without any interruption of services. Thus, the claim of the assessee that the difference between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 32(l) of the Act. Therefore, there is no quarrel on the issue that goodwill is eligible for depreciation. However, the said judgment would not override the other provisions of the Act, as in the case under consideration the value of goodwill itself is disputed by the AO. The assessee has called to justify the value of goodwill as adopted by it. As regards other decisions on the issue that differential price needs to be treated as goodwill, the said decisions are found to be rendered on different facts and above discussed facts were not before the appellate authorities. So the reliance of the assessee on such decisions is found to be misplaced e.g. in the case of Triune Energy Services (P) Ltd. Vs. Deputy Commissioner of Income Tax (2016) 65 taxmann.com 288 (Delhi), as relied upon by the assessee, the issue was not discussed on merits but the HC only held that no substantial question of law arose. 8. Against this, assessee is in appeal before us. The contention of the Ld. A.R. is that the assessee purchased the business of M/s. Indus Seeds and its various divisions (a proprietary concern of Mr. Praveen Noojibail and M/s Sasya Gentech Private Limited (a company engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,03,462) (1,77,05,260) 3 Net Assets (3) = (1) - (2)2,13,91,242 (34,14,140) 4 Actual Consideration Paid (4) 18,60,00,000 40,00,000 5 Goodwill recognized in books as per AS - 10 (5) = (4) - (3) 16,46,08,759 74,14,140 Applicability of AS - 10 11.1 The Assessee has recognized the above goodwill in its books of account as per the provision of Accounting Standard 10 issued by the Ministry of Corporate Affairs. The relevant extract of which reads as under: "16.1 Goodwill, in general, is recorded in the books only when some consideration in money or money's worth has been paid for it. Whenever a business id acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net assets of the business taken over, the excess id termed as 'goodwill'. Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise." 11.2 Ld. A.R. stated that it has been consistently held in plethora of cases that unless the provisions of the Act are contrary, the Assessee is permitted to use the Accounting Standard applicable to it under the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts." 11.7 In view of the above, it was held by the Hon'ble Court that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill. On the issue of invoking the provision Explanation 3 to Sec 43(1) 11.8. He drew our attention on the said provisions of the Act. The relevant portion of Sec 43(1) is extracted below: "Explanation 3.-Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Assessing Officer may, with the previous approval of the Joint Commissioner, determine having regard to all the circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e four sets were subject to audit u/s 44AB and the balance sheet s at 31.3.2014 contained all the four. On 31.10.2014 when the business transfer took place only the assets and liabilities of the three business divisions were taken over and the personal assets and liabilities remained with the proprietor. The Chartered Accountants certificate regarding the assets and liabilities taken over were based on these figures as extracted from the books on 31.10.2014. This is evident from the page no.271 of assessee paper book. 2. The above clause requires that the sole proprietor should not receive any consideration or benefit other than by way of allotment of shares in the company, where in the present case, the consideration is paid through banking channels. 3. Besides, the seller has offered the above transaction for capital gains and paid the taxes accordingly. 11.12 Since the transaction is not covered under the above-mentioned clause of section 47, consequently fifth proviso of section 32 would also not be applicable in this case. 11.13 In the case of transaction with M/s. Sasya Gentech Pvt. Ltd., provisions of section 47(vi) of the Act is not applicable. In our opinion, to appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction. Hence, the claim of the assessee cannot be allowed. Findings:- 13. We have considered the rival submissions and perused the record. The issue before us with regard to the valuation of goodwill and granting depreciation on the same. In the assessment year under consideration, the assessee claimed depreciation on 25% of intangible assets i.e. goodwill at Rs.17,39,83,689/- in the return of income worked out at Rs.2,15,02,864/- on the reason that assessee company has paid for goodwill of Rs.16,46,08,759/- to M/s. Indus Seeds, sole property concern of Managing Director of the assessee company and Rs.74,14,150/- to M/s. Sasya Gentech Pvt. Ltd., the company in which the Managing director of assessee company is the substantial shareholder and Director. The assessee has taken over the business/assets and liabilities of M/s. Indus Seeds and also M/s. Sasya Gentech Pvt. Ltd. by a slump sale arrangement. The value of intangible asset was the difference between the book value of assets and liabilities taken over and the sale consideration paid to both the concerns. In other words, the difference between net-worth over the sale consideration is considered as goodwill and claimed d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4 It is noteworthy to mention herein that 5th Proviso to section 32(1) of the Act restrict the total depreciation, which can be claimed in case of succession, etc. to the depreciation which would have been allowable and there has been no succession. The 5th Proviso to section 32(1) was inserted by Finance Act, 1996 to restrict the claim of aggregate deduction, which is evident from the memorandum of Finance Bill, 1996, which reads as under:- In cases of succession in business and amalgamation of companies, the predecessor of the business and successor the amalgamating company and amalgamated company as the case may be, are entitled to depreciation allowance on same assets which in aggregate exceeds depreciation allowance for Previous year at the prescribed dates. It is proposed to restrict the aggregate deduction in a year to the deduction computed at the prescribed rates and apportion the allowance in the ratio of number of days for which the assets were used by them. 13.5 Thus, it is evident that 5th proviso to Section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable only in cases where the assets were at any time used by any other person for the purpose of his business or profession, but in the present case, the asset in question, "goodwill which is arising due to the transfer of business, which is explained in earlier para and assets were not used by any other person", therefore, it cannot be said that the said explanation is applicable to the present facts of the case. Goodwill arising on slump sale - eligible for depreciation 13.10. In this case, the AO did not principally contend against the position of the Appellant, that the goodwill recorded by it is an intangible asset eligible for depreciation under Section 32(1) of the Act. In our opinion, the claim of assessee is to be allowed on the following lines:- i. The said goodwill is in the nature of any other commercial or business right under the category of an intangible asset that is eligible for depreciation under section 32 of the Act. The issue whether Goodwill arising on transfer is eligible for depreciation or not, is no longer Res-Integra, and has been settled by the Hon'ble SC in the case of Smifs Securities Ltd. (348 ITR 302), wherein held that "in the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on a valuation report), and no goodwill from the books of the transferor is recorded by the transferee. Amendment by Finance Act 2021 clarifies the position on Goodwill depreciation 13.13. The Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an Assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. 13.14. Further, amendments were made in section 55 of the Act, in relation to the meaning of 'cost of acquisition' etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to April 1, 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. 13.15. Therefore, the intention of the legislature is that depreciation on goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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