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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & Shri GEORGE GEORGE K.
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by the assessee is directed against the order of the CIT(A) dated 6.1.2018 for the assessment year 2015-16. The assessee has raised following grounds of appeal:-
That the impugned order is opposed to facts and law in so far as it is pre-judicial to the General Ground interests of the Appellant. 2. That the Ld. CIT(A) erred in confirming the value of goodwill as "nil" instead of Rs.74,14,150 in the case of M/s Sasya Gentech and Rs.16,46,08,759 in case of M/s Indus Seeds and in doing so;
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a) The Ld CIT (A) failed to appreciate that the goodwill paid was not only towards the value of assets and liabilities taken over but was also towards various clauses in the Business Transfer Agreements (BTA) such as non-compete and non solicitation, transfer of distribution network, customer database, material contracts, value of ongoing Research & Development along with IPR and knowhow and sales 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.
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/-to M/s Indus Seeds, a sole proprietary concern of Managing Director of the assessee company. The assessee informed that the business of the said concern was taken over by it during the year under consideration in a slump sale. The assessee also informed that it had paid an amount of Rs.74,14,150/- to M/s. Sasya Gentech Private Limited, a company in which the MD of the assessee company was a Director as well as a substantial shareholder. This
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company was also taken over by the assessee company in a slump sale agreement. As regards balance amount of Rs.19,60,780/- the same was stated. to be value of intangible assets as recorded in the books of M/s. Indus Seeds, which was taken over by the assessee company in slump sale agreement. The assessee submitted that the value of the intangible assets being goodwill was the difference between book value of the assets and liabilities taken over and the sale consideration paid to both the concerns. The assessee also relied upon the decision in the case of' CIT vs Smif's. Securities Limited 348 ITR 302 (SC) and some other decisions to argue depreciation on goodwill needs to be allowed to it. After considering the replies of the assessee, the AO held that the assessee had failed to provide any basis for determining the value of the goodwill as Rs. 17,20,22,909/-. The AO observed that no such valuation of goodwill was provided by the assessee and that the assessee had not provided any material or justification to support its claim of having paid huge amounts for goodwill to concerns. The AO noted that M/s Sasya Gentech had negative net worth of Rs. 34,14,150/- but it was claimed by the assessee that the excess amount of Rs. 74,14,150/- paid by it was for goodwill. Similarly in relation to M/s Indus Seeds, although its net worth was only Rs.2,13,91,242/- but it was claimed by the assessee that the excess amount of Rs. 16,46,08,759/- paid by it to the said concern was for goodwill. The AO also noted that the value of intangibles recorded in the books of M/s. Sasya Gentech as on 29.03.2015 was Nil and that in the books of M/s Indus Seeds as on 31.10.2014 was a mere Rs.19,60,780/-. No valuation certificate was provided by the appellant to show how the value of the goodwill was determined. The AO noted that MD of the assessee company
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was proprietor of M/s Indus Seed and also had substantial interest in M/s Sasya Gentech. 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 amount paid to these concerns had duly been offered to tax by these concerns in their hands. The assessee submitted that intangibles are not recorded in the books as the accounting standard does not mandate a proprietor to record such assets. The assessee submitted that business of M/s. Indus Seeds and the other concern was purchased by it so as to attract investments and it had succeeded in doing so as it received foreign investments of Rs.18,97,20,000/-.
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The submissions of the assessee have duly been considered. The main argument of the assessee is that any excess of the amount of the consideration paid in the slump sale, which is over and above the net value of assets and liabilities taken over needed to be treated as goodwill of the concern purchased in the slump sale. So in order to examine the issue as to the purpose for which total consideration was paid by the assessee in the slump sale, the assessee was asked to produce copies of the business transfer agreement (BTAs) with M/s. Indus Seeds as well as M/s Sasya Gentech, in relation to purchase of their business in slump sales. The copies of the agreement were duly provided by the assessee. 'Both these BTAs are similarly worded, containing identical clauses, only modified to the extent of sales consideration or name of the concern being purchased.
The Ld. CIT(A) observed that Business Transfer Agreement (BTA) with M/s. Indus Seeds Sales and M/s. Sasya Gentech in relation to purchase of their business in slump sales shows that the sale consideration was not only for the value of net assets and liabilities taken over at book value but the same also included the value of intangibles, goodwill, other interest. In addition to the above, there is a “Non-compete and Non-solicitation clause in the BTAs, which provide that for a period of 5 years from the date of slump sale, the seller shall not directly or indirectly engage in any business in any territory where the purchaser had its business including India and all other territories outside India, that competes
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with the business of the assessee. The said sellers are also prevented for a period of five years to own an interest in, manage, operate, join, control, lend money or render financial or other assistance participate in or be connected with, as a partner, stockholder, co-venturer. consultant or otherwise. any person that is engaged or planning 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 the total consideration paid by it to these two concerns and the value of the net assets and liabilities taken over and as recorded in the books of account, is the goodwill of such concerns is totally far-fetched. The difference value includes the consideration for the various aspects as listed above
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includingcovenants relating to Non-compete and Non- solicitation, the clauses relating totransfer of distribution network, Division personnel, material contracts etc, the value of IPR and know-how, sales documentation etc.
Further, it was observed by Ld. CIT(A) that the assessee has not produced any documents to support its contention that the amount which is reflected as goodwill -in its books of account is actually the goodwill for which it had paid lump sum consideration. The assessee has just submitted that the differential price between the value of the assets asdetermined by the valuer and that of lump-sum consideration paid was treated as goodwill and the same was as such brought into the books of account. Since the assessee has failed to substantiate its claim of having paid entire differential amount for goodwill, the claim of the assessee needs to be rejected. Anyhow, since the details provided by the assessee are not sufficient to compute the value of goodwill, so the value of same remains undetermined. Since the assessee has' failed to prove that the amount on which it had sought to claim depreciation was actually paid in relation to goodwill, the issue of allowingdeprecation on the same would not arise. Reliance of the AO on the decision of Jurisdictional ITAT in the case of Sanyo BPI, (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle 12(3), Bengaluru (2016) 75 taxmann,com 253 (Bangalore - Trib.) is also found to be well placed. In view of above, the disallowance or depreciation as made by the AO is upheld.
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Further, it was observed by the Ld. CIT(A) that the assessee has relied upon certain decisions to support its contention that differential price paid by it was for goodwill and that goodwill is eligible for depreciation. As regards the decision of Hon'ble Supreme Court in the case of Smifs Securities Ltd.(supra), the said ruling of the Hon’ble Supreme Court is only on the point whether the goodwill falls in the category of intangible assets or any other business or commercial rights of similar nature as per the provisions 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 over- ride 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.
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
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company engaged in R&D with Mr Praveen Noojibail having full controlling interest) on 1/11/2014 and 30/03/2015 respectively as a going concern by way of a Business Transfer Agreements (BTA) and paid Rs. 18.60 crores to Indus Seeds and Rs. 40 lakhs to M/s.Sasya Gentech Private Limited respectively. The net assets taken over from these entities were as follows:
The takeover of the above-mentioned entities were in pursuance of and in continuation of ongoing negotiation which the Mr. Noojibail was having with a foreign investor. The entities which were taken over were in the relevant field for many years and had built a formidable reputation for themselves. The foi7eign investor, M/s W. Atlee Burpee, a century old US based multinational company had already evinced interest in taking a 30% stake in the consolidated business for a sum of USD 3.10 million with a condition that the business shall be corporatized before their entry.
The AO has denied the claim of 25% depreciation on the Goodwill amount so recognized by the assessee on the
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grounds that the valuation of goodwill at the above said amounts was not justifiable in terms of Explanation 3 to section 43(1). Thus, the following issues are involved in this appeal; i. Whether the amount paid by the Appellant over and above the net assets taken over constitutes Goodwill entitled for depreciation ii. Whether the amount paid by the Appellant for the purchase of existing businesses is fair and reasonable iii. Whether the Ld AO was right in invoking the provisions of Explanation 3 to Section 43(1)
The Ld. A.R. relied on the submitted that in the present case, the businesses of M/s. Indus Seeds and M/s. Sasya Gentech Private limited have been transferred to the Assessee company by way of slump sale. Details of the net book value of the assets and liabilities taken over in the slump sale are as under:
Proprietorship SasyaGentech SI.No Particulars concern . Private Limited Assets Taken Over 14,54,94,704 1,42,91,120 1 2 Liabilities Taken Over (12,41,03,462) (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 G o o d w i l l r e c o g n i z e d 5 16,46,08,759 74,14,140 i n b o o k s a s p e r A S - 1 0 ( 5 ) = ( 4 ) – ( 3 )
Applicability of AS - 10 11.1 The Assessee has recognized the above goodwill in its books of account as per the provision of Accounting
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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 relevant law.
Synergic effect of the slump sale justifies the amount of goodwill
11.3 The aforesaid goodwill paid by the Assessee is very much justified by the synergistic performance of the merged business as the Assessee has not only built a formidablereputation for themselves in the industry over the years but can also be evidenced by the fact that a US based Multinational company invested in the said business and there has been a continuous increase in profits, growth in net assets. All these justify the amount of goodwill paid by the Assessee.
Sellers considering the amount of goodwill as part of sale consideration for offering capital gain in their cases
11.4 Besides, the seller has offered the above transaction for capital gains andpaid the taxes accordingly. The assessment in the case of the seller has also been
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completedby accepting the original return of income filed without even doubting the amount received on account of such slump sale
Genuineness of goodwill
11.5 In Truine Energy Services (P.) Ltd. vs Deputy Commissioner of Income-tax (2016) 65 taxmann.com 288 (Delhi), the Hon'ble High court has explained as under:
"Goodwill is an intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base etc. The expression "goodwill" subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern." 11.6 In the present case, as per the Business Transfer Agreements, apart from the Tangible Assets and other assets which are transferred (as referred in the Para 2 of Transfer & Assumption) includes a clause (d) of Para 2.2 which specifically states that "any and all rights including, the goodwill and Intellectual Property Rights relating to all the Divisions" and further the business is continued to be as going concern in the purchaser hands. It is further held in the above referred order that:
"From an accounting perspective, it is well established that 'goodwill' is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net tangible assets, that is, assets less liabilities. The difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Suchgoodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts."
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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 circumstances of the case.”
11.9. He submitted that a plain reading of the above would show that in order to invoke the said explanation, it is necessary that the said asset in question should have been used by any other person for his business before transferring the same to the assessee. In the instant case the Goodwill was never appearing in the books of the sellers and came to be raised in the books of the assessee only upon the completion of the takeover. Thus, it is submitted that the action of the Ld AO in invoking the provision to deny- depreciation to the assessee is untenable and unwarranted.
Non-applicability of section 47(xiv) /47(vi)
11.10 Provision of clause (xiv) of Section 47 is reproduced below:
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"xiv) where a sole proprietary concern is succeeded by a company in the business harried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company :
Provided that— (a) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;
(b) the shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and (c) the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;"
11.11 Ld. A.R. submitted that above clause does not apply to the facts of thepresent case on the following reasons:
All the assets and liabilities of the proprietary concern were not transferred to the succeeding company which is otherwise a requirement under the above clause. Only the assets forming part of undertaking were transferred to the succeeding company, which means the assets which were left in the sole proprietorship. It is also brought on record by assessee that erstwhile proprietary concern M/s. Indus Seeds had three divisions namely Indus Seeds (Main), Seed & Plant Science & Sri Krishna Nursery (SRK) for which separate set of accounts were being maintained. The proprietor also had a personal account wherein his personal assets were also recorded. The consolidated accounts
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of all the 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.
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.
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 apply this clause, 75% of the shareholdings of the purchaser company shall be held by shareholder of the seller company. In other words, 25% of the amalgamating company continued to remain shareholder of amalgamated company as per section
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46(vi)(a) of the IT Act. In the present case, seller company have two directors namely Praveen N Noojibail (5000 shares i.e. 50%) and Meer Noojibail (5000 shares i.e. 50%). Reference page No.44 of Paper book – I and each one holding 50% of shares. On completion of the transaction, only husband is having 69.91% shares in new company, which is evident from page no.76 of paper book – I and 30.02% of shareholdings were remained with shareholder of the amalgamated company. Being so, provisions of section 47(vi)/47(vi)(a) of the Act is not applicable in case of transaction with M/s. Sasya Gentech PVt. Ltd.
On the issue of value of goodwill paid
11.14 He submitted that the takeover of the business of the said entities was in the pursuance of an existing negotiation with a foreign unrelated investor wherein the investor had already carried out his own due diligence and had made a concrete offer for a 30% stake in the business. The proprietor in order to consummate the deal had merely taken the same valuation at the time of corporatizing the business and as such the take-over did not call for any separate valuation. The goodwill amount includes several intangibles from its Business Transfer Agreements (BTA) such as non-compete clauses, transfer of distribution network, material contracts, value of ongoing research and development along with Intellectual Property Rights, Know-How, Sales Documentation etc. for both Indus Seeds and Sasya Gentech Pvt. Ltd.
11.15. Subsequent to the takeover, the foreign investor had invested the promised amount by having shares allotted for which, a valuation was undertaken. This valuation which was done
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immediately after the takeover also shows that the value of the erstwhile proprietary business would have been higher.
On the other hand, Ld. D.R. relied on the order of the CIT(A) and submitted that assessee’s case is directly hit by explanation 3 to section 43(1) of the Act. As such, he submitted that order of the lower authorities to be confirmed.
12.1. According to him in view of the above explanation, the assessee’s claim cannot be allowed. Further, it is submitted that it is a related party transaction. 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 depreciation on the same. The
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A.O. invoked the provisions of explanation 3 to section 43(1) of the Act and observed that assessee is not entitled for depreciation on intangible assets as he doubted the net consideration paid by the assessee to those two concerns on the reason that these are related party transactions. According to the A.O., assessee has not provided any material for justification of such a huge amount of goodwill to both M/s. Indus Seeds & M/s. Sasya Gentech Pvt. Ltd. According to the A.O., M/s. Sasya Gentech Pvt. Ltd. has negative net-worth of Rs.34,14,150/- at the time of take over of the asset & liability of that company. However, the goodwill was valued at Rs.74,14,150/- in the case of M/s. Sasya Gentech Pvt. Ltd. In the case of M/s. Indus Seeds net-worth at Rs.2,13,91,242/-. The payment of goodwill was Rs.16,46,08,759/-. The value of brand name and intangible assets recorded in the books of M/s. Indus Seeds as on 31.10.2014 was Rs.19,60,780/-. But no value of goodwill was there in M/s. Sasya Gentech Pvt. Ltd. No valuation certificate of goodwill has been furnished before the lower authorities. 13.1 In our opinion, the relevant provisions applicable to the facts of the case are section 32(1), 43(1), 47(xiv)/47(vi) & 47(via) of the Act, which we discussed elsewhere in this order.
13.2 After having noticed the above statutory provisions, we find the relevance of that provision to the present facts of the case. The business purchased by assessee were in the similar field since many years. They are establishing the respective business and having a trade name as brand name in respective field. The valuation has been determined by the assessee in accordance with the business transfer agreements and following the applicable accounting standard of Institute of Chartered Accounts of India i.e. AS-10. It is also mentioned by AO that valuation of intangible
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assets recorded in the books of M/s. Indus Seeds as on 31.3.2014 was Rs.19,60,780/-. In case of M/s. Sasya Gentech Pvt. Ltd., it was Nil. However, it has been valued by assessee at Rs.17,39,83,689/- and said amount has been paid by assessee.
13.3 Section 32(1) of the Act provides for depreciation in respect of trade mark owned wholly or partly by the assessee. In the present case, assessee has taken over the business of M/s. Indus Seeds and M/s. Sasya Gentech Pvt. Ltd. as a growing concern.
13.4 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 proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the
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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.
13.6 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 at Rs.17,39,83,689/-.
13.7 It is to be noted that clause (xiv) to section 47 does not apply to the facts of the present case on the following reasons:
All the assets and liabilities of the proprietary concern were not transferred to the succeeding company which is otherwise a requirement under the above clause. Only the assets forming part of undertaking were transferred to the succeeding company, which means the assets which were left in the sole proprietorship. This is evident from the page no.271 of assessee paper book.
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.
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Besides, the seller has offered the above transaction for capital gains and paid the taxes accordingly.
13.8 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. Erroneous invocation of the explanation 3 to section 43(1) of the Act
13.9. In our opinion, the invoking of this Explanation 3 to section 43 of the Act by the AO in the present case is totally misplaced and not justified. The said explanation does not restrict the claim of depreciation on goodwill arising pursuant to a slump sale. It is applicable if the impugned goodwill has been appeared in the books of accounts of transferee and this goodwill never appeared in the books of seller. In our humble opinion, the explanation 3 to section 43 will be applicable 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:-
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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 case, it is the valuation that is challenged and not the eligibility of depreciation on goodwill.” The position of law held by the Hon'ble SC constitutes the law of the land and is binding on all the lower authorities, in terms of Article 141 of the Constitution of India.
ii. In this regard, we place further reliance on the decision of the Hon'ble Karnataka High in the case of Manipal Universal Learning P. Ltd., 255 ITR 26, the facts and circumstances of which are similar to the present case, wherein the Hon'ble HC allowed the claim of depreciation on goodwill arising on acquisition of business under slump sale model, reiterating the decision of the Hon'ble SC in the case of Smifs Securities (Supra).
iii. Further, we place reliance on the following decisions, wherein it was principally held that goodwill is an intangible asset eligible for depreciation under section 32 of the Act in the context of business transfer through slump sale:
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Areva T & D India Ltd. 345 ITR 21 Truine Energy Services (P) Ltd. 65 taxmann.com 238 Toyo Engineering India India Limited TS-811-HC-2012 Volvo India Pvt. Ltd. TS-391-ITAT-2019 Dorma India Pvt. Ltd. TS-735-ITAT-2019
13.11. The sixth proviso to Section 32(1) of the Act also not applicable. It is applicable, only in case of assets already existing in the books of predecessor company on which predecessor company was claiming depreciation before slump purchase, and it is not applicable on assets recognized only by successor company pursuant to such slump purchase. The legislative intent behind the introduction of the said proviso was to curb the practice of claiming' depreciation on the 'same assets' by both the predecessor company and the successor company. This evident from the memorandum explaining the provisions of Finance Bill, 1996, which introduced the sixth proviso (erstwhile fifth proviso) to section 32(1) of the Act. Thus, a commonality of assets should exist between predecessor and the successor goodwill arising pursuant to acquisition belongs only to successor company.
13.12. Further, the Ahmedabad Bench of the Tribunal, in the case of Urmin Marketing Pvt. Ltd., 122 taxmann.com 40 rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger, on the basis of purchase consideration paid (which is determined based on a valuation report), and no goodwill from the books of the transferor is recorded by the transferee.
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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 for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be rejected.
13.16 Further, it is also brought to our notice that the department accepted offer of capital gain by the individual assessee who has sold the goodwill i.e. in the case of Praveen Narayan
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Noojibail for the assessment year 2015-16, which is evident from the statement of income filed before us. Which is kept on record in assessee’s paper book at page no.65 and also accepted by the AO for the assessment year 2015-16 vide assessment order u/s 143(3) of the Act dated 31.12.2017, which is kept on record in assessee’s paper book at page no.89. Once the department accepted the capital gain offered by individual assessee in the respective hand, the same transaction cannot be doubted in the hands of purchaser. On this count also, we find force in the argument of Ld. A.R. that AO not established that the main purpose of transfer of such asset was reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish aforesaid fact, it has to be established that apart from claiming additional depreciation on enhanced cost, there is other main purpose for acquiring the asset i.e. goodwill in question. The AO in the instant case wrongly invoked the explanation 3 to section 43 of the Act. Our above decision is also supported by the order of the Tribunal relied by the Ld. A.R. in the case of M/s. Dorma India Pvt. Ltd., Chennai in ITA Nos.1664 to 1666/Chny/2019 dated 20.11.2019. Further, we also place reliance on the judgement of Hon’ble Karnataka High Court in the case of Padmini Products (P) Ltd. Vs. Deputy Commissioner of Income-tax in ITA No.154 of 2014 dated 5.10.2020, wherein similar circumstances Hon’ble High Court has allowed the claim of the assessee. 14. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 15th June, 2022 Sd/- Sd/- (George George K.) (Chandra Poojari) Judicial Member Accountant Member
Bangalore, Dated 15th June, 2022. VG/SPS
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Copy to:
The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.