L & T TECHNOLOGIES SERVICES LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(2)(1), MUMBAI

The CIT(A) has erred in accepting the contention of AO that the transfer is not a valid slump sale even though the AO has not given any cogent reason for the same and has never controverted that the transaction in question is the transfer of an Undertaking as a Going Concern with the physical assets, manpower and live assignments/deeds in relation to the same being transferred to the buyer.

The CIT(A) has erred in treating the transfer as a demerger without appreciating the fact the transfer was not undertaken in pursuance to a Scheme of Arrangement under the Companies Act and the buyer Company did not issue shares as a consideration of the said transfer, both of which are the necessary conditions of section 2(19AA) of the Income Tax Act in order to be qualified as demerger

The CIT(A) erred in contending that even though the transfer was made in previous year to the relevant financial year (ie. AY 2014-15), but depreciation has not been claimed in that year and thus there is no question of opening depreciation in this block, failing to appreciate that depreciation on goodwill was claimed in AY 2014-15 as well and the same was even allowed during the original assessment proceedings of AY 2014-15 6. The AO and CIT(A) erred in disregarding the Valuation Report obtained from an Independent Professional without specifying any explicit irregularity in the same.

The CIT(A) has erred in confirming the disallowance of deprecation on goodwill of Rs 85,40,73,133/- when the issue is already settled in context of decision of Hon'ble Supreme Court in case of CIT vs. Smifs Securities (348 ITR 302)

That the Appellant may be granted deduction under section 37 of the Income Tax Act in respect of the taxes paid abroad, including state tax paid in USA and Japan, for which tax credit has not been allowed under section 90/91 of the Act.”

Tersely, we advert the fact of the case that the assessee had acquired the Product Engineering Service (in short PES) division businessfrom L&T Infotech Ltd (in short LTIL) during Assessment Year 2014-15 & 2015-16by way of slump sale on a going concern basis as the physical assets, manpower and other live assignments/lease/deeds. The assessee filed its revised return of income for the year under consideration on 29/03/2017. Therein, its inter-alia claimed deduction of depreciation on goodwill of Rs.85,40,73,133/- while computing its income as per the regular provisions of the Act.The ROI was selected for scrutiny and assessment order was passed under section 143(3) of the Act. During theassessment proceedingthe Ld. AO held that since under a slump sale, the buyer acquires an undertaking as defined u/s 2(19AA) of the Act, the buyer becomes a successor of the business and hence the transaction cannot be treated as a slump sale.The Ld. AO observed that the transfer of PES business is covered by the provision of Section 170 of the Act which deals with succession and the sump sales is not regarded as a transfer for the purpose of capital gains and no capital gains is chargeable to tax in the hands of the seller. So, it was held that the 5th Proviso to section 32(1) of the Act would be applied and restrict the claim of depreciation on same set of assets which it received owing to succession. The assessee reiterates that the acquisition of the PES business unit of the seller as a going concern under a slump sale arrangement. The assessee objected that the Ld. AO has re-characterised this transaction without bringing on record any cogent reason to do so. The assessee submitted that the same transaction has been offered to tax by LTIL wherein capital gains of Rs. 377.50 Cr. was declared in their return of income.Pursuant to acquisition of PES business, the goodwill has been determined at Rs. 389.09 Cr. which represents the difference between purchase consideration and value of net assets taken over and the same was accounted in accordance with accounting standards followed by the assesssee. The assessee claimed the depreciation on goodwill amount to Rs. 85,40,73,133/-. The Ld. AO respectfully noted the order of the Hon’ble Supreme Court in the case of CIT vs. Smifs Securities348 ITR 302but rejected the claim depreciation on the ground that the acquisition of any goodwill as entire scheme of arrangement was a demerger as per provision of Section 2(19AA) of the Act and the same is not regarded as transfer under the meaning of Section 47(vib) r.w.s. 45(1) of the Act. So, the addition was confirmed amount to Rs.85,40,73,133/-. Aggrieved assessee filed as appeal before the Ld. CIT(A) but the appeal was rejected. Being aggrieved on appeal order the assessee filed an appeal before us. 4. The Ld. AR argued and filed paper book which is kept in record. For argument on slump sales, it is stated that the provisions relating to taxation of slump sale are governed by Section 50B of the Act and is a special provision for computation of capital gains in the case of a slump sale in the hands of the seller. Thus, it can be seen that the term slump sale has a specific connotation under the Act and cannot be equated with other modes of transfer of an undertaking. In the present case, all the conditions are fulfilled for acquisition of PES to be treated as a slump sale such as transfer of the undertaking in lump sum consideration without assigning values to individual assets & liabilities as per provisions of sec. 2(42C) of the Act. 5.The Ld. AR argued that the same transaction has been offered to tax by LTIL wherein capital gains of Rs. 377.50 Cr. was declared in their return of income. In this regard the Form 3CEA field by LTIL, annexed in Annexure 4 Page 58 to 57 and computation of income of LTIL for AY 2014-15, attached in Annexure 5. Page 58 to 60) wherein the income as per return isRs.610.91 Cr. This transaction has been assessed as such by the same AO in case of LTIL in AY 2014-15. The relevant extract of assessment order of LTIL for AY 2014-15 is enclosed in Annexure 6, Page 61 to 62. So, the transaction is already recognized by the Ld. AO in case of LTIL. 6. In acquisition of PES business, the goodwill has been determined at Rs.389.09Cr. which represents the difference between purchase consideration and value of net assets taken over and the same was accounted in accordance with accounting standards followed by the assesssee. The Ld. AR relied on the decision of Hon’ble Delhi High Court in the case of Triune EnergyServices (P.) Ltd. v. DCIT (2016) 65 taxmann.com 288 wherein under similar circumstances, depreciation on goodwill from slump sale was allowed under Section 32 of the Act. 7. The Ld. AR further stated that the slump sale cannot be treated as succession. The Ld. AO held that the transfer of PES business is covered by the provisions of section 170 of the Act which deals with succession to business otherwise than on death. The Ld. AO considered that a slump sale is not regarded as a transfer for the purpose of capital gains and hence no capital gains is chargeable to tax in the hands of the seller.Accordingly, it was held that the 5th proviso to sec. 32(1) of the Act would apply as it would restrict the claim of the assessee on claiming excessive depreciation on same set of assets which it received owing to succession. He argued that the Ld. AO has erred in invoking Section 170 of the Act (forming part of Chapter XV) which deals with succession to business or profession. These provisions are not applicable in assessee’s case since pursuant to acquisition of PES undertaking, the transferor i.e. LTIL did not cease to exist. At the time of transfer of PES undertaking LTIL had 3 Business Segments viz. Services Cluster, Industrials Cluster and Telecom. LTIL operates in the same field of business in respect of all these Business Segments le. software development & allied services. Thus, it cannot be said that the appellant succeeded the whole business of LTIL as it continued to operate its business in Services and Industrial Cluster.The Ld. AO has relied on the decision of the Hon'ble Supreme Court in the case of CIT v. KH Chambers 55 ITR 674 wherein according to the Ld. AO, it has succession.The Ld. AR respectfully considered the said decision and stated that theruling of the Hon’ble Supreme Court held as Section 170 of the Income-tax Act, 1961 [Corresponding to section 25(4) of the Indian Income-tax Act, 1922] - Succession of business other than on death - Assessment year 1948-49 - Export business carried on by father was transferred to son - Identity of business was preserved and continued by son - However, some assets were retained by father for purpose of discharging debts so that son could run business more effectively - Ultimately business carried on by son was transferred to a limited company during relevant accounting year and he claimed benefit under section 25(4) of 1922 Act - Whether on facts it could be said that there was a succession within meaning of section 25(4) of 1922 Act and assessee was entitled to benefit.

The Ld. ARrespectfully relied on the decision of the Hon’ble Gujarat High Court in the case of Premji Khimraj Shah v. ITO (1979) 118 ITR 216, wherein the Hon’ble High Court, after considering the decision of KH Chambers (supra) has held as the expression "succession to business" connotes the taking over the whole or substantially the whole business of the predecessor by the successor and continuing the same. Disintegration and division of whole into parts would not permit the parts to be treated as a whole and a successor to a part could not be treated as a successor to the original business carried on as one integral unit.

It is mentioned during argument that slump sale and demerger are different. The Ld. AO has referred to the definition of demerger u/s. 2(19AA) and held that transaction fulfills all conditions laid down u/s. 2(19AA) of the Act. But the transaction is not regarded as transfer u/s 47 of the Act in the hands of the seller, LTIL. Since the transaction is not a transfer, any payment made in lieu of such transfer cannot be regarded as a genuine business transaction incurred wholly and exclusively for the purpose of business. The Ld. AO observed that the transaction is a colorable device adopted by the assessee to drain the ex-chequer by claiming fictitious goodwill to the extent of Rs. 398.48 Cr. and claiming depreciation thereon of Rs. 85.41 Cr. which is not admissible. The Ld. AR stated that once the transaction is held to be a slump sale, the question of it being treated as a demerger does not arise. A transaction to be treated as a demerger u/s. 2(19AA), all conditions laid down therein need to be fulfilled. He stated that the following key conditions which have not been fulfilled in assessee’s case which are as follows: - i. Transaction is not pursuant to a scheme of arrangement u/s. 391-394 of the Companies Act, 1956. ii. Resulting company i.e. the assessee has not issued any shares inconsideration of the demerger. It is worth noting that consideration has beenactually discharged by way of payment to LTIL for acquisition of theundertaking. 10. The Ld. AR argued that goodwill acquired by the assessee is eligible for depreciation. The Ld. AO on the ground that the transaction is a demerger, has held that no payment was made for acquiring goodwill and hence depreciation on goodwill cannot be claimed. In argument it is placed that the Ld. AO has incorrectly mentioned the amount of goodwill as Rs. 398.48Cr whereas the correct value is Rs. 389.09 Cr. The Ld.AO has disregarded the fact that payment for acquiring PES business from LTIL has been made through banking channel. The difference between purchase consideration and value of net assets taken over was accounted as goodwill. The computation of goodwill was disclosed in the Notes to Accounts of the appellant for the preceding year i.e. AY 2014-15, relevant extract of which is enclosed, in Annexure 7, Page 63 to 64. The Ld. AR stated that acquired goodwill is an intangible asset eligible for depreciation u/s 32(1) of the Act. This issue stands settled in the context of the Hon'ble Supreme Court decision in case of CIT v. Smifs Securities, 348 ITR 302 wherein the Hon’ble Apex Court has held as under: "2. It was further explained that excess consideration paid by the assesses over the value of net assets acquired of YSN Shares and Securities Private Limited[Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. 3.……………. 4. Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know- how, patents, copyrights, trademarks, 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 eju em generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 5. In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act."

During the argument, the Ld.AR narrated the fact that the previous yearrelevant to assessment year 2014-15 the assessee had accounted for goodwill arising on acquisition of the Indian PES business of LTIL of Rs.379,69,67,332/-. In its computation of income filed for the AY 2014-15, out of total depreciation of Rs, 51,07,25,862, depreciation of Rs.47,46,20,917 was claimed in respect of the said goodwill. In the course of assessment proceedings for the AY 2014-15, notice dated 18.10.2016 was issued by the Ld. AO under section 142(1) of the Act, wherein, the assessee was inter-alia asked to explain introduction/addition of intangible assets during the year. The assessee responded to the same by its letter dated 15.12.2016, wherein, in paragraph 20 it explained that it had acquired PES business unit from L&T Infotech Limited. The excess of consideration paid over the net value of assets represented goodwill. 12. Pursuant thereto, an assessment order dated 20.12.2016 has been passed under section 143(3) of the Act for the said year, accepting the income a per the return of income. Therefore, the existence of intangible assets which has been referred to a: Goodwill and quantum thereof with respect to acquisition of Indian Product Engineering Services business of L&T Infotech Ltd. stands accepted by the Ld. AO in the assessment proceedings for the AY 2014-15. In the absence of any revision or reassessment proceedings was initiated to change such position, it is submitted that, depreciation on asset which forms part of the block of assets cannot be denied in a later year. During the year under consideration, an Addendum dated 31.03.2014 was executed to the Business Transfer Agreement clarifying that the product engineering services business is carried out by Larsen & Toubro Infotech GmbH. That the parties expected the German business to be operational during the quarter of April - June 2014 and, consequently, the said transfer would get executed during the said period. The consideration of the said transfer was fixed at Rs.12.92 crore. Excess of consideration paid over the net value of the said assets was Rs.9,39,46,117 which has been reflected as addition to goodwill in the audited Financial Statements for the year under. 13. During the hearing, the Ld.DR argued vehemently and relied on the order of the revenue authorities. The Ld.DR invited our attention to para 4.2.9 of the impugned appeal order which is reproduced as below:- “4.2.9 The A.O. further said that in the case of demerger, the acquisition of assets cannot said to be a transfer, u/s 45 of the Act. Once it is not a transfer then there cannot be claim of depreciation as the appellant is not owner of these assets. On the other hand the appellant has submitted that it is not a demerger as the conditions laid down for demerger are not met in his case, such as the assets in this case are not transferred in lieu of shares but these are transferred through actual money. Appellant further said that the buyer had paid capital gain tax on the amount realized on the sale of assets to the appellant. The appellant also claimed that the A.O. even not allowed the depreciation on the opening value of this block of assets namely goodwill. I have gone through the AO. order and the submissions made by the appellant and found that the A.O. has rightly rejected the depreciation claim of the appellant as it is not a slump sale but a mechanism where appellant claimed depreciation to reduces his profit. It is further noted that the so called acquisition of assets happened in the previous year to the relevant financial year, but the appellant has not claimed depreciation in that year, which is not understandable. Now the A.Ο. disallowed the entire depreciation on the said acquisition of asset, so there is no question of opening depreciation in this block. However the A.O. is directed to allow depreciation on the other assets in this block which are not part of this transaction. The order of the A.O. is confirmed with subject to above observations.”

We heard the rival submissions and considered the documents available in the record. The issue was agitated, whether the transaction of the assessee with the PES is a slump sale or the revenue has treated it as a demerger. The present is alleged to be a case of succession of business and, hence, the present sixth proviso to section 32(1) of the Act shall be applicable. In such a scenario, since be allowed it respect of the same in the assessee's hands as a transferee thereto. The said proviso would inter alia apply to a case of succession which is not the position in the present case. Further, it overlooks that the said proviso would apply only to such assets which were earlier held by the transferor entity and upon transfer have been acquired by the transferee. It cannot apply to assets like goodwill in the present case, which has come into existence as a result of the slump sale. Lastly, this proviso applies only to the year of transfer and its purpose is to proportionately allocate depreciation for the year of transfer between the transferor and the transferee. It will not apply to the component of goodwill arising in respect of Indian business as the said business already stood acquired in the earlier year and goodwill forms part of its block of assets. With respect to the goodwill relatable to acquisition of German business, which is during the year under consideration, the said proviso would not apply as the German entity is not claiming any depreciation under the Act and, hence, there is no requirement to proportionately allocate the same between the transferor and the transferee entity. 14.1. The Ld. AO thereafter treated the slump sale to be in the nature of a 'demerger' which would be exempt from charging of capital gains tax in hands of the transferor as per section 47(vib) of the Act. This again is with a view to apply the sixth proviso below section 32(1) of the Act and that depreciation claim should be restricted to an amount as if such transfer had not taken place. We find that the Ld. AO has interchangeably used the concept of slump sale, succession and demerger. The action of the Ld. AO in taking contrary stands is unjustified. The Ld. AO wrongly observed that the present is a case of demerger as per section 2(19AA) of the Act which would be exempt under section 47(vib)) as the transfer of the undertaking is not pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956. Further, the conditions in clause (iv) thereto being consideration being discharged by the resulting company by issue of its shares on a proportionate basis to the shareholders of the demerged company and clause (v) thereto being shareholders holding not less than three fourths of the shares in the demerged company become shareholders of the resulting company by virtue of the demerger are not satisfied. LTIL has offered the capital gains arising on the said transfer of PES business unit for tax purpose which has been assessed as such in the assessment order passed on them. They have offered the income to tax by applying the provisions of section 50B dealing with computation of capital gains in the case of slump sale. Therefore, neither the transaction is in the nature of demerger nor have the parties treated it to be so.

2. We note that the Ld. AO referred to Explanation 3 section 43(1) of the Act, alleging the main purpose of transfer as the reduction of liability to income tax by claiming depreciation on the enhanced cost. He has failed to appreciate that the main purpose of transfer was that LTIL wanted to focus on its core business of providing Information Technology services to financial services sector and the manufacturing sector. Further, rendering of such services to telecom sector was required to consolidated as the PES in relation thereto we provided by LTIL while the integrated engineering service were provided by Larsen & Toubro Ltd. Therefore, the said transaction of slump sale was driven by principles of business and commercial expediency. It is also submitted that, in the present case, depreciation on goodwill has not been claimed on enhanced cost. As stated above, the acquisition of the said business is based on a value determined by the Valuer. The Ld. AO has not pointed out any explicit irregularitiesin alleged valuation report of the assessee. Therefore, the existence of intangible assets which has been referred to as Goodwill and quantum thereof with respect to acquisition of Indian PES business of LTIL stands accepted by the Ld. AO in the assessment proceedings for the assessment year 2014-15. In the absence of any revision or reassessment proceedings being initiated to change such position. 14.3. We further note that the reference has been made to section 40A(2) alleging the consideration to be excessive and unreasonable. It overlooks that section 40A(2) applies to a claim of 'expenditure' it cannot apply to the consideration paid for acquisition of a business as a going concern. Further, depreciation under section 32 of the Act is an allowance and not an expenditure. 14.4. We note that reliance placed by the Ld. AO on the decision of Hon'ble Karnataka High Court in the case of CIT v. Mangalore Ganesh Beedi Works 264 ITR 142 is distinguishable for the following reasons: i. Issue involved was on allowance of depreciation in relation to trademark, copyright, technical know-how and not goodwill. ii. In the year under appeal (AY 1995-96), Section 32 did not include intangible assets as a class of depreciable assets. iii. The decision of Hon’ble Karnataka High Court has been reversed by Supreme Court [378 ITR 640] 14.5. We note that Goodwill is a depreciable asset as upheld by the Hon'ble Apex Court in the case of CIT v. Smifs Securities Ltd(supra). It is also clarified therein that;the goodwill shall be represented by excess of consideration paid over the net value of the assets and shall be treated as goodwill which shall quality as an intangible asset for grant of depreciation thereon. The excess of the payment was treated as goodwill and the depreciation on the goodwill is allowable under section 32 Proviso (6) of the Act. The issue is squarely covered by the order of the ITAT, Mumbai Bench “C” in the case of Culver Max Entertainment Private Limited vs. ACIT 13(2)(2), Mumbai bearing ITA No.7685 /Mum/2019 and 925/Mum/2021, date of pronouncement 02/05/2024. Whether the Tribunal has relied on the order of the Hon’ble Supreme Court in the case of Smifs Securities Ltd (supra) where the goodwill is eligible for depreciation, since it is in nature of an intangible asset. Since the claim of the assessee is supported by said decision rendered by the Hon’ble Apex Court, so the eligibility of depreciation is duly accepted under section 32 of the Act. Considering the transactions related to slump sale or demerger, it has already discussed that the said agreement was duly submitted before the Bench and it is in the nature of slump sale, so section 45 related to demerger is not applicable. We set aside the observation of the Ld. CIT(A). We uphold the contention of treating the transaction as 'slump sale and consequently delete the denial of depreciation of Rs. 85.41 Cr. on goodwill made by the Ld. AO. Accordingly, the grounds of the assessee are allowed. 15. Additional Grounds: The assessee filed the additional ground with the submission. The issues are first time agitated before the Bench. The Ld. AR argued and prayed for remanding the matter to the file of the Ld. AO. The submission of the assessee is reproduced as below: -

We consider the submission of the Ld. AR. The Ld. DR has not made any strong objection against the submission of the Ld. AR. In our considered view we remand the Additional ground to the file of the Ld. AO. We refrain from expressing any views on the merits of the case to avoid prejudicing the reassessment proceedings. Both parties have agreed to remand the matter to the file of the Ld. AO. It is imperative that the Ld. AO provides the assessee with a fair and adequate opportunity of being heard during the proceeding. Any evidence or explanation submitted by the assessee in its defence must be admitted and considered by the Ld. AO, who shall adjudicate the matter on its merits in accordance with the law. Similarly, the assessee is expected to act diligently and cooperate fully during the reassessment proceedings. 17. In the result, the additional grounds of the assessee are allowed for statistical purposes. 18. In the result, the appeal of the assessee bearing ITA No. 4255/Mum/2024 is allowed. Order pronounced in the open court on 06th day of February 2025. (B.R. BASKARAN) JUDICIAL MEMBER Mumbai,दिन ांक/Dated: 06/02/2025 Pavanan

अपील र्थी/The Appellant , 2. प्रदिव िी/ The Respondent. 3. आयकरआयुक्त CIT 4. दवभ गीयप्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 5. ग र्डफ इल/Guard file.