Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “A” Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Shri C.N. Prasad (JM)
Per Shamim Yahya (AM) :- These are appeals by the assessee and Revenue and Cross objection by the assessee arising out of the order of learned CIT appeals dated 21.8.2018 and pertain to assessment year 2014-15.
The grounds of appeal raised in the assessee's appeal read as under :-
2 M/s. Archroma India Pvt. Ltd.
Ground No. 1 - Incorrect ignorance of acquisition cost of (i) Motor Vehicle and (ii) Furniture and Fixture acquired under Slump Purchase as per Valuation Report
1.1 On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) ['CIT(A)'] erred in concluding that the Appellant could not explain the basis for valuing the Motor Vehicle and Furniture and Fixture acquired under slump purchase and ignoring the valuation report obtained in the matter and which direction are kindly prayed to be reversed.
Ground No. 2 - Actual cost of (i) Motor Vehicle and (ii) Furniture and Fixture acquired under Slump Purchase directed to be adopted at Written Down Value ('WDV') of the Seller instead of their fair value of acquisition by the Appellant (Purchaser) as per Valuation Report
2.1 On the facts and circumstances of the case and in law, the CIT(A) erred in directing the AO to adopt the acquisition cost of Motor Vehicle and Furniture and Fixture as per corresponding WDV of the Seller instead of their fair value as per the Valuation Report thereby resulting in reduction of tax depreciation claimed and which directions are completely erroneous, unwarranted and prayed to be reversed.
The grounds of appeal raised in revenues appeal read as under :-
“1. Whether on the facts and circumstances of the case, the Ld.CIT(A) was justified in holding that the provisions of section 170 are not applicable in the present case ?
Whether on the facts and circumstances of the case, the Ld.CIT(A) was justified in holding that the assessee is eligible for depreciation on the fair market value of assets received pursuant to the succession ignoring the 5th proviso to section 32(l)of the Income Tax Act, 1961 ?
Whether on the facts and circumstances of the case, the Ld.CIT(A) was Justified in directing to consider the difference of the balancing figure other than the fair market value of the asset to be considered as goodwill for eligibility of depreciation thereon ignoring the fact that the assessee had claimed the same to be in the nature of Customer Distribution Network which was held to be ineligible for depreciation in the assessment order ?
The appellant prays that the order of the Ld. CIT(A) on the grounds be set aside and that of the Assessing Officer be restored.”
The grounds raised in the assessee’s Cross objection reads as under :-
“1. Disallowance of depreciation of Rs.13,54,40,305 on Customer Distribution Network ('CDN') acquired by the Assessee from the Seller under the Business Transfer Agreement
3 M/s. Archroma India Pvt. Ltd.
1.1. On the facts and circumstances of the case and in law, the Assessee ought to be allowed depreciation of Rs.13,54,40,305 on Customer Distribution Network acquired by it from the Seller-Clariant Chemicals (India) Limited, a third party, in case it is held to be not forming part of goodwill. The Respondent craves leave to add, amend, delete, rectify, substitute and modify any of the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing the appeal.”
Brief facts of the case are as under
During the relevant previous year the appellant entered into an Agreement for Transfer of a Business (BTA) on 28.09.2013 with Clariant Chemicals (India) Pvt. Ltd for purchase of an undertaking under slump sale scheme for consideration of Rs. 209,15,00,000/-. As a result, as per the BTA, the assessee acquired various assets, goodwill etc. from the transferor company. The assets so acquired were shown as addition in the block of assets of the company. Consequent to the acquisition of the business, the assessee got aggregate of the fair value of the assets belonging to each block ascertained. Such aggregate of fair value of assets belonging to each block was taken as the cost of acquisition of those assets and was accordingly added to the W.D.V. of that block of assets. The AO held that the purchases amounted to succession and that the provisions of section 170(1) of the Act were applicable. In the course of the assessment proceedings, the AO called upon the appellant to show-cause why the fifth proviso to section 32(1) of the Act should not be applied in its case. In response the assessee submitted that it is not a case of succession within the meaning of section 170(1) of the Act. The AR of the assessee, therefore, contended that the fifth proviso to section 32(1) does not come into play. The AO rejected the assessee’s contention and applied the fifth proviso to section 32(1) of the Act. This resulted in disallowance of Rs. 17,12,88,410/-.
In arriving at the aforesaid disallowance of depreciation the assessing officer called for information from the transferor-company of the WDV of assets
4 M/s. Archroma India Pvt. Ltd.
transferred in its books. From the said information of the assessing officer noted the following :-
Sr. Block of Asset Rate of WDV as on 31.3.2013 No. Depreciation % of block of asset Transferred 1. Furniture & Fixture 10% 55,60,753 2. Office Equipment 15% Nil 3. Computers (including 60% 55,81,962 computer software) 4. Plant & Machinery 15% 12,91,94,553 5. Building 10% 2,27,31,868 6. Motor Vehicles 15% 2,36,74,351 7. Distribution network 25% Nil TOTAL 18,67,43,487
The assessing officer noted that since there was no asset in the name of office equipment and distribution network, assessing officer held that the assessee- company will not get any depreciation thereon. Thereafter the assessing officer computed proportionate depreciation allowable in the hands of the assessee on the basis of the value and rates obtaining in the case of the transferor company, as per the 5th proviso to section 32(1) of the Act.
Against the above order assessee appealed before the learned CIT(appeals). The assessee raised following grounds of appeal before the learned CIT(appeals) :-
“Ground No.1 : Purchase of one of the business of the Third Party Seller by the Appellant under slump sale arrangement treated as succession of the seller by the appellant under section 170 of the Act notwithstanding that the seller continues to exist and carries on its other business.
Ground No.2 : Erroneous disallowance of depreciation of Rs. 13,54,40,305/- on Customer Distribution Network (CDN) acquired by the appellant from the seller-chariant under the BTA (this ground is without prejudice to ground No. 1 above).
Ground No.3 : Cost of acquisition of goodwill not revised upwards for granting tax depreciation (this ground is without prejudice to ground No. 2).”
5 M/s. Archroma India Pvt. Ltd.
As regards ground No. 1, learned CIT(appeals) agreed with the assessee that assessee's case was not of succession. For this he referred to the submission of the assessee before the ITAT Delhi in the case of Saipem Triune Engineering Pvt. Ltd. Vs. DCIT (ITA No. 5239/Del/2012 dt. 25.7.2014) as under : "Provisions of section 170 not applicable. In order to attract section 170, there is to be, in our respectful submission succession of the "person" carrying on the business and not of the "business" itself. Thus, in order for "succession" to take place, identity of the person shall be subsumed by that of the successor, without disturbing the continuity and integrity of the business; that is, the successor should cease to exist as legal entity in the eyes of law."
Learned CIT(A) termed the same as decision of the ITAT. However he further observed that the cost of the assets belonging to each of the blocks are to be treated taken as the FMV. He however found that the value of the following assets as per the valuation report was less than the corresponding closing WDV in the books of the transferor at the time of transfer: (i) motor vehicle and (ii) furniture and fixture
He noted that the basis for valueing these assets below the WDV could not be explained by the appellant. Therefore, he directed the AO to take the value of WDV of (i) motor vehicles & (ii) furniture & fixtures as per corresponding the WDV in books of the seller at the time of sale. He held that the value of goodwill, which is the balancing figure, .will be reduced accordingly.
As regards ground No. 2 he held as under :- In the assessment order the AO treated the cost of Customer Distribution Network as nil. While deciding ground of appeal number 1, I have held that provisions of section 170 is not attracted in this case. Therefore, the difference between the cost of acquisition of the business and the cost of individual assets (tangible and intangible) excluding goodwill will be treated as cost of goodwill. I also find that the rate of depreciation admissible in respect of Goodwill and the cost of Customer Distribution Capital are same. This ground of appeal is purely Academic in nature and its outcome has no bearing on the tax liability of the appellant. For statistical purpose, ground of appeal no. 2 is treated as dismissed.
6 M/s. Archroma India Pvt. Ltd.
As regards ground No. 3 he observed as under:-
“While deciding ground of appeal number one, I have held that instant case is not a case of succession within the meaning of section 170. I find that in case of motor vehicle and furniture and fixture, the fair market value adopted by the appellant's lower than the closing WDV as per the books of accounts of the transferor. In the course of the appellate proceedings the AR of the appellant could not justify the value adopted by the appellant in respect of furniture and fixture and motor vehicle. I, therefore, direct the AO to take the cost of furniture and fixture and motor vehicle as the closing WDV in the books of the transferor. The AO will reduce the WDV the same amount by which the value of furniture picture and motor vehicle is enhanced. Therefore, the ground of appeal no. 3 is treated as partly allowed.
Against the order assessee and revenue in cross appeal before us and assessee has also filed Cross objection.
We have heard both the Counsel and perused the records. Ld.Counsel of the assessee submitted that this is not a case in which provisions of section 170 are attracted. He submitted that succession doesn't encompass purchase of business. He submitted that there are separate provisions for taxation of slump sale of business and therefore it is not in the nature of succession. In this regard he referred to the provisions of section 2(42)C and provisions of section 5OB. He further submitted that Customer Distribution Network (CDN) is an eligible intangible assets or the same can be recharacterised as goodwill for the purpose of applying tax depreciation under section 32(1)(ii) of the income tax act.
Learned counsel further submitted that even if WDV of the transferor is adopted the balancing figure of goodwill adopted by the assessee on which tax depreciation has been allowed by the assessing officer will increase from Rs. 61,34,59,000/- to Rs. 1,30,69,08,315/- increased by the value of CDN of Rs. 54,12,20,000/-. Learned counsel further relied upon several case laws in support of his proposition
7 M/s. Archroma India Pvt. Ltd.
Per contra learned Departmental Representative relied upon the orders of the authorities below. In support thereof learned DR also relied upon several case laws.
Upon careful consideration we note that in the present case assessee has acquired the assets under a slump sale. The income tax act under section 2(42)(C) defines slump sale as under: “slump sale means the transfer of one or more undertakings as a result of the sale for a lump-sum consideration without value being assigned to the individual assets and liabilities in such sales.”
From the above it is clear that slump sale is a specie of transfer by way of sale. The provision of section 50B reads as under :-
50B. (1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place :
Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.
(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288, indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section. [ Explanation 1.—For the purposes of this section, "net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account :
8 M/s. Archroma India Pvt. Ltd.
Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth. Explanation 2.—For computing the net worth, the aggregate value of total assets shall be- (a ) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (c) of item (i) of sub-clause (c) of clause (6) of section 43 [(b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD , nil; and (c) in the case of other assets, the book value of such assets.]
A reading of the above makes it clear that the above section deals with the mode of charging to tax, the profit or the gain arising out of the slump sale. It nowhere deals with the issue of depreciation on the assets acquired under slump sale. When there is no mention whatsoever about the issue of depreciation on assets acquired under slump sale under section 5OB the natural, corollary is that the depreciation on assets acquired under slump sale is to be governed by the general provisions given in the income tax act for the depreciation on assets. In this regard we may refer to the 5th proviso to section 32(1). The said proviso is as under :- Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.
A reading of the above makes it clear that the above proviso deals with the depreciation on transfer of assets in case of succession referred in 47(xiii),
9 M/s. Archroma India Pvt. Ltd.
47(viib) and 47(xiv) or section 170(1) or to the amalgamating company or to the demerged company.
Section 47(xiii) deals with the case of transfer of a capital asset by a firm. Section 47(xiiib) deals with transfer of capital asset by a private company or unlisted company, limited liability partnership on transfer's which are result of conversion of the company into a limited liability partnership. Section 47(xiv) deals with succession of sale proprietorship. Hence the present case is not coming under the ambit of transfer under section 47 as mentioned in the said proviso.
Section 170 of the income tax act is as under :- (1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession :- (a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession; (b) the successor shall be assessed in respect of the income of the previous year after the date of succession.
A reading of the above shows that this section deals with transfer of assets pursuant to succession to business by any person otherwise than death.
In the present case we find that assessee had acquired the said assets under slump sale. There is a business transfer agreement and by way of this agreement the assessee has purchased an undertaking under slump sale. In our considered opinion the facts in the present case clearly show that the assessee company has acquired the assets under a business transfer agreement. Hence it has succeeded the transferee company. The provisions of section 170 are clearly applicable on the facts of the present case.
The submission of the learned counsel of the assessee that there are separate provisions for dealing with slump sale is not sustainable with regard
10 M/s. Archroma India Pvt. Ltd.
to the depreciation on assets obtained under slump sale. As we have already noted above the concerned sections that is section 2(42)c and section 50B referred by the learned counsel of the assessee do not deal with the issue of depreciation on assets acquired under slump sale. As submitted by learned Counsel of the assessee the Assessing Officer has accepted the value of goodwill attributed by the assessee as a balancing figure in the value of sump sale and value attributed to specific asset taken over.
The distinction between the case of the assessee and succession envisaged u/s. 170 as submitted by learned Counsel of the assessee also fails on the touchstone of Hon'ble Supreme Court decision in the case of CIT Vs. K.H. Chambers [1965] 55 ITR 674 . In this view of the matter other decisions referred by learned Counsel of the assessee cannot take precedence. Moreover, an obiter decta in the case of Tribunal decision in Saipem Triune Engineering Pvt. Ltd. (supra) cannot be said to be a conclusive law that slump sale does not come under the realm of section 170.
We can consider the present issue from another angle for the invocation of the 5th proviso to section 32(1) to the case of Slump Sale.
As evident from the reading of the 5th proviso to section 32(1) the said proviso deals with the deprecation on transfer of assets in case of succession amalgamation and demerger. As per the principle of construction enshrined in the dictum Noscitur a sociis, meaning of an unclear word may be known from the accompanying words. Under this doctrine the meaning of questionable or doubtful words or phrases in a statute may be ascertained by reference to the meaning of other words or phrases associated with it. In Maxwell interpretation of the statues this doctrine is explained that the meaning of that expression is stated as that when two or more words which are susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. The words take colour from each other and are quantified
11 M/s. Archroma India Pvt. Ltd.
by the meaning of each other, more general is restricted to a sense analogous to that looks of the less general.
Examining on the anvil of the above rule of construction we find that the said section deals with depreciation on transfer of assets in case of succession amalgamation and demerger, and there is no exclusion anywhere in the income tax act regarding issue of depreciation on slump sale from the ambit of depreciation taxation under section 32. Hence, in our considered opinion, on the principle of the Noscitur a sociis, the asset transferred under slump sale would fall under the sweep of this section, i.e., 5th proviso to Section 32(1), despite the word slump sale not used therein specifically. As the accompanying word suffice for the inclusion thereof on this principle by the amalgamation , succession and demerger in there cognate sense. Accordingly the depreciation on assets transferred under slump sale has to be considered from the prescription of this proviso, even without invoking the provision of section 170(1).
From the above discussion it is evident that 5th proviso to section 32 is evidently applicable for the computation of depreciation on assets which have been taken over from the transferor company. Hence the computation of depreciation on assets which have been taken over has to be in accordance with the said proviso. Hence the computation of depreciation on these assets transferred in terms of the said proviso by the assessing officer is correct.
Now we deal with the issue of value of treatment of difference between the WDV of assets taken over and the slump sale amount. Honourable Supreme Court in the case of Arevat T&D India Ltd. (supra) has confirmed the order of honourable Delhi High Court. The Hon’ble High Court held that excess amount paid over and above the tangible assets for acquisition of various business and commercial rights under slump sale can be categorised under the head goodwill. This view also supported by Hon'ble Delhi High Court decision in the case of Triune Energy Services Pvt. Ltd. Vs. DCIT (65
12 M/s. Archroma India Pvt. Ltd.
taxmann.com 288). The Tribunal in that case has set aside the issue of valuation of goodwill to the file of the Assessing Officer. The Hon'ble High Court held that the same being a balancing figure the value of goodwill was to be allowed. Hence the direction to treat the balance amount of WDV of assets taken over and slump sale as goodwill is correct and in accordance with the above case law. Accordingly, in the background of the aforesaid, we conclude as under: No. 1 the invocation of 5th proviso to section 32 is correct to the extent of computation of depreciation on the WDV of assets taken over from the transferor company No. 2 the balancing figure between the value of slump sale and the value of WDV of assets taken over shall qualify as goodwill, and eligible for consequent depreciation.
Accordingly, the assessee’s appeal and the cross objection are dismissed and the Revenue’s appeal is partly allowed.
Before partying we note that this appeal was heard in 22.1.20.The pronouncement is delayed due to lockdown in view of Covid 19 pandemic. The pronouncement is as per rule 34(5) of appellate tribunal rules and Honourable Bombay High Court decision vide order dated 15.4.2020 extending the time bound periods specified by hon’ble High Court by removing the period under lockdown. This aspect is also dealt with in detail in ITAT Mumbai order in case of DCIT vs JSW Steel vide order dt 15.5.2020. Order has been pronounced in the Court on 15.6.2020 as per rule 34(4)by placing the pronouncement list on notice board.
Sd/- Sd/- (C. N. PRASAD) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 15.06.2020
13 M/s. Archroma India Pvt. Ltd.
Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) PS ITAT, Mumbai