ANSHUL SPECIALTY MOLECULES PVT LTD,MUMBAI vs. DCIT, CIRCLE 1(1)(1), MUMBAI

After considering the replies filed by the assessee, the Assessing Officer held that the goodwill was created as a consequence of the Business Transfer Agreement and did not pre- exist in the books of either the transferor or the assessee. The Business Transfer Agreement did not specify any separate consideration for goodwill. The Assessing Officer also noted that no independent valuation report for goodwill was furnished and the conveyance deeds reflected acquisition only of land and building.

Relying upon the decision of the Bangalore Bench of the ITAT in United Breweries Ltd. vs. CIT (ITA Nos. 722, 801 & 1065/Bang/2014 dated 30.09.2016) and invoking the 5th proviso to section 32(1) of the Act, the Assessing Officer held that depreciation on such goodwill was not allowable.

Accordingly, the Assessing Officer disallowed the depreciation of Rs. 1,22,44,409/-, added the same to the income of the assessee, and completed the assessment under section 143(3) read with section 144B of the Act at a total income of Rs. 20,82,99,380/-. Penalty proceedings under section 270A were also initiated.

The learned CIT(A), however, did not accept the contentions of the assessee. The CIT(A) held that the goodwill of Rs. 9,79,55,271/- was newly created as a result of the slump sale and did not exist in the books of the transferor.The CIT(A) also observed that the Business Transfer Agreement did not specify any agreed value for goodwill, nor was there a valuation report. Relying on the decision of Co-ordinate Bench in case of United Breweries Ltd. vs. CIT the CIT(A) held that once the restriction under the proviso to section 32(1) applies, valuation of goodwill becomes irrelevant. Thus, the learned CIT(A) confirmed the disallowance of depreciation on goodwill and dismissed related ground of the appeal.

During the course of hearing before us, the learned Authorised Representative of the assessee reiterated the submissions made before the lower authorities. He invited our attention to the statement titled “Calculation of Goodwill on Acquisition” placed in the paper book (page no. 5), prepared for Accounting Year 2019–20, wherein the manner of computation of goodwill arising on acquisition of the manufacturing unit on slump sale basis has been set out. It was submitted that the assessee acquired the manufacturing unit for a lump sum consideration of Rs. 21,00,00,000/-. Against the said

The learned Authorised Representative further drew our attention to Annexure–5 titled “Licenses and Approvals”, forming part of the Business Transfer documentation, which enumerates various statutory approvals, consents, licences and permissions transferred along with the business as a going concern. These include, inter alia, environmental clearances, pollution control consents, factory licence, GMP certificate, narcotic licence, methanol licence, boiler licence, SSI registration and other regulatory approvals necessary for carrying on the manufacturing activity. It was submitted that these licences, approvals and regulatory permissions, though not separately valued in the Business Transfer Agreement, constitute valuable commercial and business rights enabling the assessee to carry on the acquired business without interruption. According to the learned Authorised Representative, such commercial rights and advantages, including intangibles such as trademarks and

The learned Authorised Representative thus contended that the goodwill so recognised represents not merely an accounting residual but embodies commercial rights, business advantages, licences, approvals and other intangibles acquired as part of the slump sale of a going concern. He submitted that depreciation claimed on such goodwill was therefore in accordance with law and the provisions of section 32(1)(ii) of the Act.

The learned Authorised Representative further placed reliance on the judgment of the Hon‟ble Supreme Court in the case of CIT vs. Smifs Securities Ltd., wherein the Hon‟ble Supreme Court has held that goodwill is an intangible asset falling within the expression “any other business or commercial rights of similar nature” under section 32(1)(ii) of the Act and is therefore eligible for depreciation. It was submitted that the goodwill arising in the present case on acquisition of a going concern for a lump-sum consideration squarely falls within the ratio laid down by the Hon‟ble Supreme Court, and accordingly, the depreciation claimed thereon is legally permissible.

The learned Authorised Representative also placed reliance on the judgment of the Hon‟ble Bombay High Court in

Per contra, the learned Departmental Representative relied upon the orders of the Assessing Officer and the learned CIT(A), NFAC. The learned Departmental Representative submitted that the lower authorities have correctly appreciated the facts and law and have rightly held that the goodwill claimed by the assessee was not acquired for a specific consideration, but was created as a consequence of the slump sale transaction.

We have carefully considered the rival submissions, perused the orders of the lower authorities, examined the material placed on record, including the computation of goodwill on acquisition and the annexures evidencing licences and approvals, and duly considered the judicial precedents relied upon by both the parties.

It is an undisputed fact that the assessee acquired a manufacturing unit as a going concern on slump sale basis for a lump sum consideration of Rs. 21,00,00,000/-. The assessee allocated the consideration towards identifiable tangible assets based on fair market value and book values, and the residual

The goodwill so recognised is therefore not a self-serving book entry, but represents the excess consideration paid for acquisition of business and commercial rights embedded in a running business, including licences, approvals, regulatory permissions and business advantages.

The issue whether goodwill constitutes an intangible asset eligible for depreciation is no longer res integra. The Hon‟ble Supreme Court in CIT v. Smifs Securities Ltd.(supra) has categorically held that goodwill falls within the ambit of “any other business or commercial rights of similar nature” under Explanation 3(b) to section 32(1). The Hon‟ble Supreme Court has held as under: “A reading the words „any other business or commercial rights of similar nature‟ in clause (b) of Explanation 3 indicates that goodwill would fall under the expression „any other business or commercial rights of a similar nature‟. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).”(para 4) The Hon‟ble Supreme Court further observed: “5. In the circumstances, we are of the view that „Goodwill‟ is an asset under Explanation 3(b) to Section 32(1) of the Act.”

The Revenue has placed reliance on the decision of the Bangalore Bench of the Tribunal in United Breweries Ltd. On careful examination, we find that the said decision is clearly distinguishable on facts and in law. In United Breweries Ltd., the goodwill arose pursuant to amalgamation of a wholly owned subsidiary, and the Co-ordinate Bench therein applied the fifth proviso to section 32(1), which restricts the aggregate depreciation allowable to the amalgamating and amalgamated company to what would have been allowable had the amalgamation not taken place. The Co-ordinate Bench specifically held that “the said judgment [Smifs Securities Ltd.] would not override the provisions of 5th proviso to Section 32(1) of the Act which restricts the claim in the

In the present case, however, the acquisition is not by way of amalgamation, demerger or succession covered under section 170, but is a slump sale between unrelated parties. The fifth proviso to section 32(1) is therefore not attracted. Consequently, the very foundation on which United Breweries Ltd. was decided does not exist in the present case.

Further, even in United Breweries Ltd., the Tribunal unequivocally accepted the principle that goodwill is eligible for depreciation under section 32(1)(ii), subject only to statutory restriction under the proviso.

In view of the settled legal position laid down by the Hon‟ble Supreme Court in Smifs Securities Ltd., as reaffirmed by the Hon‟ble jurisdictional High Court in Grindwell Norton Ltd., and having regard to the fact that the present case involves acquisition of a going concern by slump sale, we hold that the goodwill arising on such acquisition constitutes an intangible asset eligible for depreciation under section 32(1)(ii).

The disallowance of depreciation of Rs. 1,22,44,409/- claimed on goodwill is deleted. The Assessing Officer is directed to allow depreciation on goodwill in accordance with law while giving effect to this order. The grounds raised by the assessee are allowed accordingly. In the result, the appeal filed by the assessee is allowed.