ARUN EXCELLO URBAN INFRASTRUCTURE PVT. LTD.,CHENNAI vs. DCIT, CHENNAI

Per G.MANJUNATHA, AM: These two appeals filed by the assessee are directed

against separate, but identical orders of the learned

Commissioner of Income Tax (Appeals)-1, Chennai, both even

dated 28.02.2020 & 05.08.2020 and pertain to assessment

years 2014-15 & 2016-17. Since, facts are identical and issues

are common, for the sake of convenience, these appeals were

heard together and are being disposed off, by this

consolidated order.

appeal for both assessment years, therefore, for the sake of

2 ITA Nos.537 & 731/Chny/2020 brevity, grounds of appeal filed for assessment year 2014-15

are reproduced as under:-

“1. The order of the Learned Commissioner of Income Tax (Appeals) is contrary to the law, facts and circumstances of the case. 2. The Learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 6,80,75,000/- u/s 32 of the Act (Tax Effect: Rs. 2,20,86,933/-). 3. The Learned Commissioner of Income Tax (Appeals) erred in confirming the levy of interest u/s 234A of the Act in consequence to the above disallowance. 4. The Learned Commissioner of Income Tax (Appeals) erred in confirming the levy of interest u/s 234B of the Act in consequence to the above disallowance”

No.537/Chny/2020 are that the assessee is engaged in the

business of industrial civil and mechanical constructions. The

assessee has filed its return of income for assessment year

2014-15 on 29.11.2014 admitting total loss of Rs.2,71,24,844/-

The case was taken up for scrutiny and during the course of

assessment proceedings, the Assessing Officer noticed that

the assessee has claimed depreciation on goodwill

u/s.32(1)(ii) of the Income Tax Act, 1961, as applicable to

intangible assets. Therefore, the Assessing Officer called upon

the assessee to file necessary evidences including generation

3 ITA Nos.537 & 731/Chny/2020 of goodwill in the business of the assessee. In response, the

assessee submitted that M/s. Arun Excello Foundations Private

Ltd., a part of M/s. Arun Excello group was incorporated in the

year 1998 and was engaged in business of construction of

residential apartments. During financial year relevant to

assessment year 2013-14, M/s. Arun Excello Foundations

Private Ltd. had amalgamated with assessee company through

a scheme of merger approved by Hon’ble High Court of

Madras vide its order dated 13.09.2013. As per scheme of

Amalgamation, the assessee company had paid a sum of

Rs.27,23,00,000/- over and above value of assets and

liabilities of M/s. Arun Excello Foundations Private Ltd. and

same has been treated as goodwill in its books of account. It

was further submitted that in pursuant to scheme of

amalgamation, assets and liabilities of M/s. Arun Excello

Foundations Private Ltd. were acquired as a going concern

with brand name and trademark by paying consideration in

excess of value of assets and thus, excess amount paid for

acquiring of trade mark and brand name has been treated as

goodwill. Therefore, he submitted that excess amount paid by

the assessee is nothing but, business or commercial rights of

4 ITA Nos.537 & 731/Chny/2020 similar nature referred in Explanation 3 to section 32(1)(ii) of

the Act, which is entitled for depreciation of 25% on total value

of goodwill recognized in books of account. To support its

argument, the assessee has filed valuation report for

determining value of goodwill and brand value, from

independent auditor and has also taken support from decision

of the Hon'ble Supreme Court in the case of CIT vs. Smifs

Securities Ltd. (2012) 348 ITR 302 (SC).

explanation furnished by the assessee and according to him,

consideration paid over and above value of assets & liabilities is

simple goodwill, but not intangible being any business or

commercial rights of similar nature in the nature of intangible

assets as defined u/s.32(1)(ii) of the Act, and thus, the

assessee cannot claim depreciation as applicable to intangible

assets. The Assessing Officer has discussed issue in light of

the decision of Hon’ble Supreme Court in the case of CIT vs.

Smifs Securities Ltd.(supra) and observed that in the case

before the Hon'ble Supreme Court, there was merger of two

separate entities for acquiring brand value along with business

on-going concern basis, whereas in the present case, it was an

5 ITA Nos.537 & 731/Chny/2020 amalgamation between two group companies under same

brand name and thus, claim of the assessee that it has paid

excess consideration for acquiring brand name appears to be

incorrect. The Assessing Officer has also discussed the issue

in light of decision of the Hon'ble Supreme Court in the case of

M/s.Mc Dowell & Company Ltd. Vs. CTO 154 ITR 148(SC) and

held that the assessee has adopted colourable device to ensure

that taxable income of the company is reduced and thus,

concepts of tax evasion and tax avoidance, difference in tax

planning, colourable device within framework law cannot be

allowed to part of tax planning. Therefore, he opined that

depreciation claimed on purported goodwill being excess

consideration paid for acquisition of asset of another company

cannot be treated as intangible asset which is entitled for

depreciation and hence, disallowed depreciation claimed on

goodwill and added back to total income.

preferred an appeal before learned CIT(A). Before the learned

CIT(A), the assessee has reiterated its submissions made

before the Assessing Officer in light of decision of the Hon'ble

6 ITA Nos.537 & 731/Chny/2020 Supreme Court in the case of CIT vs. Smifs Securities Ltd.

(supra) and also certain other judicial precedents and argued

that the assessee is entitled for depreciation on goodwill which

is in the nature of any other commercial or business rights as

defined u/s.32(1) of the Act, as intangible and thus, the

Assessing Officer has erred in disallowing depreciation claimed

on goodwill. The learned CIT(A), after considering relevant

submissions of the assessee and also has taken note of various

facts rejected arguments taken by the assessee and sustained

additions made by the Assessing Officer towards disallowance

of depreciation claimed on goodwill by holding that transferor

and transferee companies are same group companies and are

in same business and thus, by amalgamation the assesssee

company does not acquire any business or commercial rights

by paying consideration over and above asset value of the

transferor company. The learned CIT(A) discussed the issue in

light of decision of ITAT., Panaji Bench in the case of M/s.

Borkar Packaging (P.) Ltd Vs ACIT (2010) 131 TTJ 99 and held

that there was no business or commercial rights involved in

paying amount and goodwill was a balancing amount in the

scheme of amalgamation after fair value arrived at for merger of

7 ITA Nos.537 & 731/Chny/2020

the companies and hence, same cannot be considered as

intangible asset of any or other business or commercial rights to

claim depreciation u/s.32(1)(ii) of the Income Tax Act, 1961.

The relevant findings of the learned CIT(A) are as under:-

“7.1 Assessee claimed depreciation of Rs 6,80,75,000/- on intangible asset he Trade Mark of M/s Arun Excello. Assessing Officer observed that the Brand Value arose because of the merger between M/s. Arun Excello Infrastructure Ltd and M/s. Arun Excello Foundations Ltd which are sister concerns of the same group and there was no fresh brand addition or value to the assessee and concluded that the above transaction is a colourable device to reduce the taxable income of the assessee. Hence the Assessing Officer disallowed the depreciation claimed on Trade Mark.

7.2 In the grounds of appeal the appellant contested that the Assessing Officer erred in disallowing the amount of Rs.6,80,75,000/- under section 32 of the Income Tax Act, 1961.

7.3 As seen from the order of the Hon’ble High Court of Madras with respect to the amalgamation, (I) M/s. Arun Excello Foundations Private Ltd, the Transferor Company is engaged in the business of builders, contractors, construction, civil/electrical engineers, infrastructure development, promotion and development of land and property (ii) Arun Excello Urban Infrastructure Private Ltd, the Transferee Company is engaged in the business of builders, contractors, construction, civil/electrical engineers, infrastructure development, promotion and development of land and property and (iii) The directors of the Transferor and Transferee Companies decided to amalgamate the Transferor Company and Transferee Company in order to ensure better management of the Transferee Company as a single unit. Thus the Transferor and Transferee Companies are (1) same group companies (ii) are in the same business and (iii) no business or commercial rights are involved in paying the amount.

8 ITA Nos.537 & 731/Chny/2020 7.4 In [2010] 131 TTJ 99 (PANAJI) Borkar Packaging (P.) Ltd vs Assistant Commissioner of Income-tax, Hon’ble ITAT Panaji Bench held - Since the business did not require any licence, the amount paid could not be considered as amount towards licence. Further, since all of them were in the same business and all of them were group companies having only different units at different places, the amount paid did not involve any business or commercial rights. There were no business or commercial rights involved in paying the amount and the goodwill was a balancing amount in the scheme of amalgamation after the fair value arrived at for merger of the companies. In the present case the goodwill simliciter was valued at Rs.3,05,91,000 and there were no business or commercial rights involved in that goodwill accounted by the assessee. In view of this, while agreeing with the principle that goodwill simpliciter was not eligible for depreciation, one could not hold that the amount accounted for by the assessee could be bifurcated into goodwill simpliciter at Rs. 50 lakhs and the balance for other commercial rights. Hence, the assessee’s claim of deprecation on goodwill could not be allowed on the facts of the case.

7.5 In the present case also the Transferor and Transferee Companies are (i) same group companies (ii) are in the same business and (iii) no business or commercial rights are involved In paying the amount. Hence, respectfully following above stated decision of the Hon’ble ITAT Panaji Bench, disallowance of depreciation claimed on trademark is upheld.”

learned CIT(A) has erred in confirming disallowance of

depreciation u/s.32 of the Income Tax Act, 1961, without

appreciating fact that the assessee had acquired a brand name

called ‘Arun Excello’, which was owned by M/s. Arun Excello

Foundations Pvt.Ltd., which is evident from fact that brand

name was registered in the name of transferor company. The

9 ITA Nos.537 & 731/Chny/2020 learned AR further submitted that the assessee has

substantiated payment of consideration for acquiring brand

name and goodwill by filing valuation report of brand ‘Arun

Excello’ from independent valuer and as per said valuation,

brand value as on 31.03.2013 as per discounted cash flow

method was at Rs.27,23,00,000/- and as per cost approach, it

was at Rs.192.3 millions. The AR further referring to scheme of

amalgamation as part of order of Hon’ble Madras High Court

submitted that as per clause ‘C’ (iii), it was clearly stated that

transferor company is the registered holder of trade mark of

‘Arun Excello’ brand and scheme enable transferee company to

represent value of the trademark and brand at the fair market

value in its books of account on the basis of valuation to be

certified by independent valuer. Since, amalgamation was

approved by the Hon’ble Madras High Court and payment for

acquisition of brand name and goodwill is part of scheme of

amalgamation, there is no reason for the Assessing Officer to

doubt generation of goodwill on account of acquisition of assets

& liabilities of company in light of decision of the Hon'ble

Supreme Court in the case of Mc Dowell & Company Ltd. Vs.

CTO (supra) to argue that assessee has adopted colourable

10 ITA Nos.537 & 731/Chny/2020 device for reducing tax liability. The learned AR relied upon

various judicial precedents, including decision of the Hon'ble

Supreme Court in the case of CIT vs. Smifs Securities Ltd.

(supra), and submitted that it is very well established legal

position that goodwill falls under expression “any other business

or commercial rights of similar nature” and thus, the assessee

is entitled for depreciation. The learned CIT(A) without

appreciating facts has simply confirmed additions made by the

Assessing Officer and his order should be set aside.

order of the learned CIT(A) submitted that the Assessing Officer

has rightly distinguished case laws cited by the assessee in the

case of CIT vs. Smifs Securities Ltd. (supra) by bringing out

factual differences when compared to assessee’s case, as per

which in the case before the Hon'ble Supreme Court, there was

amalgamation between two separate entities for acquisition of

assets and brand name, whereas in the present case

amalgamation was between two group companies under same

name and brand and therefore, question of acquiring brand

value does not arise. The learned DR further submitted that

11 ITA Nos.537 & 731/Chny/2020 although the assessee claims to have registered trademark and

brand name in the name of transferor company, but ownership

of said brand is in doubtful. Further, the Assessing Officer has

brought out clear facts in light of decision of the Hon'ble

Supreme Court in the case of Mc Dowell & Company Ltd. Vs.

CTO (supra) and categorically held that it is a case of tax

avoidance mechanism adopted by the assessee and thus, the

learned CIT(A), after apprising relevant facts has rightly upheld

additions made by the Assessing Officer and his order should

be upheld.

available on record and gone through orders of the authorities

below. The facts borne out from records clearly indicate that

there was amalgamation between appellant company and M/s.

Arun Excello Foundations Private Ltd., by a scheme of

amalgamation approved by Hon’ble Madras High Court vide its

order dated 13.09.2013. As per scheme document before the

Hon’ble High Court, clause 3(c) refers to trademark ‘Arun

Excello’ registered in the name of transferor company and

further recognition of trademark, brand value in fair market

12 ITA Nos.537 & 731/Chny/2020 value in the books of account of the transferee company on the

basis of valuation to be certified by independent valuer. It was

also an admitted fact that the assessee has paid a sum of

Rs.27,23,00,000/- over and above assets & liabilities of

transferor company as per scheme of amalgamation. The

assessee has recognized difference between consideration

paid for acquiring assets & liabilities of transferor company and

fair value of assets as goodwill in books of account and claimed

depreciation as per Part B of Appendix 1 of Rule 5 of the

Income Tax Rules, 1962, as applicable to intangible assets as

defined u/s.32(1)(ii) of the Income Tax Act, 1961.

assessee towards claim of depreciation on goodwill as

intangible u/s.32(1)(ii) of the Act, one has to see whether

goodwill is in the nature of intangible asset being any other

business or commercial rights of similar nature or not. The

Hon’ble Supreme Court has considered an identical issue in

light of acquisition of goodwill and after considering Explanation

3 to section 32(1) of the Act, held that a reading of words “any

other business or commercial rights of similar nature” in clause

(b) of Explanation 3 indicates that goodwill would fall under

13 ITA Nos.537 & 731/Chny/2020 expression “any other business or commercial rights of similar

nature”. Therefore, the Hon’ble Court has held that goodwill is

an asset under Explanation 3(b) to section 32(1) of the Act,

and thus, entitled for depreciation as applicable to intangible

asset. The Hon’ble Madras High Court in the case of Mobis

India Ltd. Vs. DCIT (2018) 90 taxmann.com 389, took a similar

view and held that goodwill acquired by the petitioner pursuant

to business transfer agreement would qualify for depreciation

u/s.32 of the Income Tax Act, 1961. The Hon’ble Delhi High

Court in the case of CIT Vs Hindustan Coca Cola Beverages

P.Ltd., 331 ITR 192 had also taken a similar view. The co-

ordinate Bench of the Tribunal in the case of Hinduja

Foundation vs. ACIT (2017) 83 taxmann.com 52 had

considered an identical issue and after considering relevant

facts and also by following the decision of the Hon’ble

Supreme Court in the case of CIT vs. Smifs Securities Ltd.

(supra) held that any other business or commercial rights of

similar nature under clause (b) of Explanation 3 indicates that

goodwill will fall under expression ‘any other business or

commercial rights of similar nature’.

14 ITA Nos.537 & 731/Chny/2020 10. In this factual and legal background, if you examine facts

of present case, we find that the assessee had acquired brand

name ‘Arun Excello’ from M/s. Arun Excello Foundations Pvt

Ltd., pursuant to scheme of merger approved by the Hon’ble

High Court of Madras. The assessee had paid consideration

for acquisition of assets of transferor company over and above

assets & liabilities as per which a sum of Rs.27,23,00,000/-

has been paid in excess of assets of transferor company. The

assessee has assigned excess consideration paid in pursuant

to scheme of merger to goodwill after assigning fair market

value to all assets & liabilities as on date of merger. Further,

the assessee has substantiated value of brand name ‘Arun

Excello’ by filing registered trademark documents in the name

of M/s. Arun Excello Foundations Pvt.Ltd. The assessee had

also filed valuation report from independent valuer, as per

which value of brand ‘Arun Excello’ is in excess of consideration

paid by the assessee for acquisition of goodwill. Therefore,

from the above, it is very clear that excess consideration paid

for acquisition of brand ‘Arun Excello’ of transferor company in

a scheme of merger is nothing but a goodwill, which represents

brand value of ‘Arun Excello’ and thus, we are of the considered

15 ITA Nos.537 & 731/Chny/2020 view that same is in the nature of any other business or

commercial rights of similar nature as intangible, as defined

u/s.32(1)(ii) of the Income Tax Act, 1961, which is entitled for

depreciation as applicable to intangible assets.

The assessee has relied upon decision of the ITAT., Chennai

Bench in the case of ACIT vs. M/s. Dorma India Pvt.Ltd. (2019)

57 CCH 0420. We have gone through decision cited by the

learned AR for the assessee and find that co-ordinate Bench

has considered an identical issue of acquisition of goodwill in

pursuant to scheme of amalgamation and after considering

relevant facts and also by following decision of the Hon'ble

Supreme Court in the case of CIT vs. Smifs Securities Ltd.

(supra), held that excess amount paid by the assessee over

and above book value of tangible assets acquired under the

scheme of amalgamation is definitely towards intangible assets

acquired by the assessee in the form of brand value and

goodwill, which is in the nature of any other business or

commercial rights of similar nature and eligible for depreciation

16 ITA Nos.537 & 731/Chny/2020

as applicable to intangible assets. The relevant findings of the

Tribunal are as under:-

“5. We have considered rival contentions and perused the material on record including cited case laws. We have observed that the assessee is engaged in the business of manufacturing and wholesale trading of automatic door operators, door controls and accessories. The background of the case before us is with respect to claim of the assessee towards depreciation on goodwill generated on acquisition of businesses of two entities namely M/s Arc Trend Systems Private Limited (hereinafter called “Arc”) and GTS Exports Private Limited(hereinafter called “GTS”). The assessee has filed before the authorities below as well before us, slump sale agreements entered into by it for acquiring businesses of these two entities. The interpretation and analysis of these two slum sale agreements is very vital for resolving controversy between rival parties. Before proceeding further let us carefully and closely analyze these two agreements, wherein critical gist for our purposes is as under:-

(a) The first agreement is dated 21.11.2008 termed as Slump Sale Agreement which was entered into between assessee and GTS Exports Private Limited. The agreement stipulates that GTS is engaged inter-alia in the business of trading of Dorma Products, including door controls, automatic doors, glass fittings, accessories and providing installation services which business of GTS has been in existence for a period of more than three years. The assessee intends to acquire business of GTS which concerns with trading of Dorma products 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 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

ITA Nos.537 & 731/Chny/2020

Intellectual Property, Business Contracts including rights thereunder, Business information and all of the assets which are used in the Business, to be sold and transferred to the assessee in accordance with the slump sale agreement. Business Contracts are defined as meaning contracts, agreements and undertakings pertaining to the Business, which shall also be taken over by assessee under the aforesaid slump sale agreement. The agreement also stipulates that all pending customer orders shall also stand transferred to the assessee. As per slump sale agreement, Business Goodwill is defined as meaning all the goodwill of GTS in relation to business transferred including customer relations and exclusive right of the assessee to carry on its activities under the name of business and represents itself as carrying on business of GTS, which shall also get transferred to assessee pursuant to aforesaid slump sale agreement dated 21.11.2008, which is also included within the agreed consolidated lumpsum consideration of 7.60 crores and no separate amount is payable towards goodwill, business contracts, customer orders etc. The agreement also stipulates that business intellectual properties, business information and business movable assets, as defined in agreement shall also stand transferred in favour of assessee under the aforesaid agreement within the aforesaid consolidated lumpsum consideration of 7.60 crores. All the defined employees including key employees, installation employees and other employees of GTS will severe their relations with GTS and then join employment of the assessee on fresh terms and conditions so as to enable assessee to carry on business activities of the acquired business under slump sale agreement on a going concern basis uninterruptedly. The assessee under the agreement is entitled to continue to carry on the business of trading of Dorma Products and related installation services so acquired in its own name and for its own sole benefit, which was hereinbefore conducted by GTS. There is also a non compete clause in the agreement which stipulates that GTS and its key employees shall not directly or indirectly compete for a period of five years with assessee with respect to products produced by assessee or in the process of developing anywhere in the world by the assessee. No separate consideration is stipulated in slump sale agreement to be paid separated for this non compete clause in slump sale agreement and rather a consolidated lumpsum consideration of’ 7.60 crores also includes consideration for non compete agreement by GTS and its key employees for a period of five

ITA Nos.537 & 731/Chny/2020

years. The aforesaid agreement also contains details of business movable assets which are acquired by assessee under this slump sale agreement which mainly consist of personal computers, printers, fax machines, laptops, shelves, 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 of Dorma Products and related installation services which is stated to be operated by Arc for period of more than three year. Thus, the business of investment of funds carried on by Arc is not acquired by assessee. Perusal of the terms and conditions of the agreement made it undisputedly clear that the assessee intends to acquire business of Arc and not the company Arc Trend Systems Private Limited per-se. The total composite lump sum consideration stated for acquisition for the business of Arc as stated in Slump Sale Agreement is 13,72,15,000/- for the business of Arc being acquired by assessee as stipulated in slump sale agreement dated 29.11.2008. The Business Assets as defined in the agreement to be acquired by assessee from Arc are Net current assets, Business Movable Assets, Business Goodwill, Business Intellectual Property, Business Contracts including rights thereunder, Business information and all of the assets used in the Business, to be sold and transferred to the assessee in accordance with aforesaid slump sale agreement. Business Contracts are defined as meaning contracts, agreements and undertakings pertaining to the

ITA Nos.537 & 731/Chny/2020

Business which shall also stood transferred to assessee under the said agreement and no separate consideration is stipulated for acquiring business contracts. The agreement also stipulates that all pending customer orders shall also stand transferred to the assessee. As per agreement, Business Goodwill is defined as meaning all the goodwill of Arc in relation to business transferred including customer relations and exclusive right of the assessee to carry on its activities under the name of business and represents itself as carrying on business of Arc, which shall also get transferred to assessee pursuant to aforesaid slump sale agreement dated 29.11.2008 within agreed lumpsum composite consideration of 13.72 crores and. The agreement also stipulates that business intellectual properties, business information and business movable assets, as defined in agreement shall also stand transferred in favour of assessee under aforesaid agreement within aforesaid lumpsum composite consideration of 13.72 crores. All the defined employees including key employees, installation employees and other employees of Arc will severe their relations with Arc and then join employment of the assessee so as to enable assessee to carry on business 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 I 13.72 crores stipulated in slump sale agreement also, interalia includes payment of non-compete 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 advances outstanding in the books of accounts of Arc as 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.

ITA Nos.537 & 731/Chny/2020

The amounts received by Arc from its debtors of trading in Dorma Products and related installation services businesses directly post effective date shall have to be accounted for by Arc to the credit of assessee.

Thus, on a careful perusal of both these aforesaid slump sale agreements dated 21.11.2018 and 29.11.2018 respectively entered into by assessee with GTS and Arc respectively, it is clear that assessee has only acquired running businesses on going concern basis carried on by GTS and Arc of trading in Dorma Products and related installation services along with all business assets, customers, business contracts, business intangibles, key employees, installation employees and other employees as detailed in the slump sale agreements entered into by the assessee with GTS and Arc, dated 21.11.2008 and 29.11.2008 respectively. These two agreements are undoubtedly composite agreements for acquiring running business of these two entities namely GTS and Arc concerning trading in Dorma Products along with related installation services on a going concern basis with an intent to continue running of the aforesaid businesses by assessee in its own name for its own sole benefit. The tangible assets which are acquired under these two agreements are mainly computer hardware, printers, fax machines, and other office equipments/appliances, inventories, accounts receivables, loans and advances etc. which were existing in the books of accounts of GTS and Arc on effective date which were incorporated by assessee in its books of accounts at their book value. The details of business movable assets and liabilities acquired by assessee are part of these slump sale agreements. Representations and warranties are made by GTS/Arc to assessee that their books of accounts and records represent true and correct position and all material financial transactions are accurately recorded in such books of accounts and record, that there are no contingent or other liabilities which are not recorded in books of accounts etc and several other representations and warranties were made by GTS/Arc and consequences for wrong/false representations and warranties are also provided in these agreements.. Any realization of accounts receivable existing in the books of GTS and Arc on effective date of transfer directly by GTS and Arc subsequently is to be accounted by GTS and Arc to the credit of assessee. The key employees, employees working in the business of related installation services run by GTS and Arc shall resign from GTS

ITA Nos.537 & 731/Chny/2020

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 along with 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, accounts receivables, loans and advances etc. as well for acquiring intangibles associated with businesses such as business contracts, customers, customer orders, business information, non compete clause, takeover of employees, right to run the businesses on going concern basis etc for a consolidated lumpsum consideration payable under a composite contract viz, slump sale agreements. The perusal of these slump sale agreements clearly and undisputedly specify the intention of the assessee to acquire these businesses erstwhile run by GTS and Arc which is related to trading in Dorma Products and related installation services, on a going concern basis with an intent to run these businesses thereafter by assessee under its own name for its own sole benefit uninterruptedly on a going concern basis. Thus, acquisition of these businesses as going concern basis with an intention to run thereafter directly by assessee in its own name for its own sole benefit is also visible from taking over of key employees, installation employees and other employees on its employment directly with an intent to continue the business on going concern basis thereafter smoothly with the existing key employees, installation employees and other employees. Thus, the clauses as to non compete by key employees and by GTS/Arc for a period of five years with assessee is a supportive clause to support acquisition of relevant businesses by assessee and thereafter running of these acquired businesses of trading in Dorma products and related installation services by assessee directly in its own name and for its own sole benefit uninterruptedly on going concern basis. Thus, it is undoubtedly clear that the assessee did not acquire the companies namely GTS and Arc per-se but acquired

ITA Nos.537 & 731/Chny/2020

businesses of these two companies concerning trading of Dorma Products and related installation services business which were erstwhile run by GTS and Arc. The agreement is a composite agreement to acquire aforesaid businesses run by these two entities concerning trading of Dorma Products and related installation services for composite lump sum consideration. The perusal of agreement also clearly evidences that consideration paid by assessee does not include any payments towards acquisition of land and building but these are mainly for acquiring movable assets such as computers, laptop, printers, fax machines, air conditioners, refrigerators, business stocks, accounts receivables, loans and advances etc. along with intangible assets such as business contracts, customers, business information, right to continue business as going concern basis, non compete clauses etc. which stood acquired by the assessee under these agreements for aforesaid consolidated lump sum consideration. Thus, to this extent decision relied upon by Revenue in the case of Toyo Engineering India Limited (supra) is distinguishable as in the case of Toyo Engineering India Limited(supra), the acquisition consisted predominantly of land admeasuring 5559.90 square meters and a building thereon, on which Toyo House was situated and hence non allocation of fair market value of land and building on the date of transfer weighed heavily on tribunal in coming to conclusion that no payment for goodwill was made. The relevant part of decision of Mumbai-tribunal in the case of Toyo Engineering India Limited(supra) is reproduced hereunder:

“The consideration in the form of cancellation of investments, cannot be said to have been made for purchase of assets at book value, when the fair value of each asset and liability is much higher. As already stated, the primary asset of CGEL was land admeasuring 5559.90 sq.mtrs. and a building thereon, on which Toyo House is situated. The market value of this asset should have been considered. If the assessee had paid more than the fair market value of assets minus the fair market value of liabilities, then the company would have a case to claim that certain amounts were incurred for goodwill. In the absence of such an exercise, we are of the considered opinion that there is no goodwill in the nature of commercial rights purchase by the assessee. This is only a book entry and it is only another way of disclosing the intrinsic value of the fixed asset of the company.”

ITA Nos.537 & 731/Chny/2020

In the instant case before us, it is not the case of Revenue, that assessee had acquired some land and building in which case, the valuation of such land and building at book value in the books of acquirer will distort the books of accounts as the fair market value of land and building is significantly higher, as no such land and buildings are acquired by assessee under these two slump sale agreements. What is acquired in these two slump sale agreements by assessee is in the form of tangible assets by assessee which are mainly business movable assets such as computers, laptops, fax machines, printers, office equipments, IT accessories, account receivables, inventories, loans and advances etc and it cannot be said that incorporating these assets in books of accounts of the assessee at book value existing on the date of acquisition has led to distortion in presentation of books of accounts of the acquirer. There is no such allegation by Revenue that these tangible assets never existed or any attempt is made to defraud revenue by introducing non existent tangible assets or undervaluing these assets. The business assets related to these business activities of trading by these two entities GTS and Arc in Dorm Products and related installation services only were acquired by assessee and not all the assets existing in books of accounts of GTS/Arc and that is where the AC erred in computing the values of the assets acquired in the books of accounts of the assessee vis-a-vis assets existing in the books of accounts of GTS/Arc as the AC considered the entire assets of GTS/Arc existing in their books of accounts for incorporating in books of accounts of assessee which is not the correct thing to do as the assessee did not acquire these companies GTS/Arc nor acquire their entire assets/liabilities/businesses in toto but only acquired business related to trading in Dorma Products and related installation services business erstwhile carried on by these two entities. Thus, we donot agree with this contention of Revenue that merely because these tangible business movable assets were included by assessee in its books of accounts at the book value existing in the books of GTS/Arc on effective date will disentitle assessee from claiming depreciation on the excess consideration paid over and above book value of tangible assets acquired of GTS/Arc. The representations and warranties are made by GTS/Arc to the assessee vide these agreements that their books of accounts and records reflect true and correct state of affairs and for making false/wrong representation/warranties by the sellers, the

ITA Nos.537 & 731/Chny/2020

consequences are provided in these agreements. Thus, we do not 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 Revenue. The Revenue has also not done any exercise to valuing these tangible movable assets acquired by the assessee to rebut contention of the assessee that book value of these acquired tangible assets represent fair market value of these assets. Rather AC has proceeded on wrong notion that the assessee acquired companies namely GTS/Arc or acquired their entire assets and liabilities which is not correct. The assessee has discharged its primary onus and now it was for Revenue to have brought on record incriminating material to rebut the contentions of the assessee and in the absence of any cogent incriminating material on record, we reject this contention of the Revenue and hold that book value of these tangible movable assets acquired by assessee was indeed their fair market value. The excess paid by assessee over and above book value of tangible movable assets(net of liabilities) acquired is definitely towards intangibles assets acquired by assessee in the form of business contracts, customer orders, customers, business information, right to continue business as going concerns, non compete by GTS/Arc/key employees etc. Thus, consolidated payments made by assessee over and above net assets acquired by it under a composite contract in the present case before us, in our considered view is towards goodwill and non compete agreement by GTS/Arc and its key employees and in our considered view depreciation is allowable both on the aforesaid excess amount paid towards goodwill and non compete agreement,. Our aforesaid view is supported by decision of Honble Madras High Court decision in the case of Pentasoft Technologies Limited (supra). We have observed that co-ordinate Bench of Chennai- tribunal in the case of M/s. Rentokil India Private Limited v. DCIT in ITA No.2660/Mds/2016 for AY: 2011-12 vide orders dated 15.112017 has allowed depreciation on the intangible assets viz, goodwill/customer list. The co-ordinate Bench of this tribunal in Rentokil (supra) referred to Explanation to Section 92B of the 1961 Act to hold that intangible shall include customer list and depreciation shall be allowable u/s 32 of the 1961 Act. We have observed that co-ordinate Bench of this Tribunal in the case of M/s.Rentokil India Pvt. Ltd. v. DCIT in ITA Nos.444 & 445/Chny/2018 for AYs: 2010-11 & 2014-15 vide common order

25 ITA Nos.537 & 731/Chny/2020 dated 26.07.2018 has followed its earlier decision in the case of M/s.Rentokil India Pvt. Ltd. v. DCIT in ITA No.2660/Mds/2016 for AY: 2011-12 and has granted relief to the assessee by allowing depreciation on goodwill. Thus, keeping in view of the aforesaid decisions, we hold that Ld.CIT(A) has rightly allowed depreciation claimed by the assessee by following the decision of the tribunal in the case of M/s.Rentokil India Pvt. Ltd. v. DCIT in ITA no. 2660/Mds/2016, vide order dated 15.11.2017 in allowing relief to the assessee. The decision of Honble 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-S 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 revised return of income filed with Revenue, but has made claim during the course of assessment proceedings, the assessee will be entitled for depreciation u/s.32 of the 1961 Act. Thus, we decide this effective ground in favour of the assessee. In the result appeal filed by Revenue in ITA No. 1664/Chny/2019 for AY: 2010-11 stand dismissed. We order accordingly.”

circumstances of the case, we are of the considered view that

excess consideration paid by the assessee for acquisition of

assets & liabilities of transferor company over and above its fair

market value is definitely for acquiring intangible assets like

brand name and goodwill, which is in the nature of any other

business or commercial rights of similar nature as defined

26 ITA Nos.537 & 731/Chny/2020 u/s.32(1)(ii) of the Act and thus, entitled for depreciation as

applicable to intangible assets. The Assessing Officer and

learned CIT(A) without apprising facts has disallowed

depreciation on goodwill. Hence, we direct the Assessing

Officer to delete additions made towards disallowance of

depreciation claimed on goodwill.

allowed.

ITA No.731/Chny/2020 (A.Y.2016-17):

to facts & issues which we had considered in ITA No.

537/Chny/2020, for AY 2014-15. The reasons given by us in

preceding paragraphs shall equally apply to this appeal, as well.

Therefore, for similar reasons, we direct the Assessing Officer

to delete additions made towards disallowance of depreciation

claimed on goodwill.

27 ITA Nos.537 & 731/Chny/2020 15. As a result, both these appeals filed by the assessee are

allowed.

Order pronounced in the open court on 30th November, 2021

Sd/- Sd/- (महावीर �संह) (जी. मंजुनाथ) (Mahavir Singh) (G. Manjunatha ) उपा�य�/ Vice-President लेखा सद%य / Accountant Member चे'नई/Chennai, (दनांक/Dated 30th November, 2021 DS

आदेश क� ��त*ल+प अ,े+षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु-त (अपील)/CIT(A) 4. आयकर आयु-त/CIT 5. +वभागीय ��त�न1ध/DR 6. गाड� फाईल/GF.