M/S SANYO BPL PVT LTD,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX,, BANGALORE

Per INTURI RAMA RAO, AM :

This is an appeal filed by the assessee directed against the

order of the Commissioner of Income-tax (Appeals)-III,[CIT(A)],

Bangalore, dated 11/08/2014 for the assessment year 2006-07.

duly incorporated under the provisions of the Companies Act,

1956. It is engaged in the business of manufacturing and trading

of colour television and accessories. Return of income for the

assessment year 2006-07 was filed on 28/11/2006 declaring total

loss of Rs.50,93,13,937/-. After processing the return of income

u/s 143(1) of the Income-tax Act,1961 [‘the Act’ for short], the

ITA No.1395/Bang/2014 Page 2 of 25 case was selected for scrutiny assessment by issuing necessary

statutory notice u/s 143(2) of the Act. Finally, the assessment

was completed u/s 143(3) of the Act vide order dated 29/12/2009

at a loss of Rs.35,86,32,378/-. While doing so, the Assessing

Officer (AO) has disallowed the claim for depreciation on the

value of intangible asset known as “distribution network” of

Rs.5,53,72,500/- and depreciation on other fixed assets was

disallowed Rs.9,53,09,059/- invoking the provision of Explanation

3 to Section 43(1) of the Act.

company was formed as a joint venture of M/s.Sanyo Electric

Company Ltd., Japan and M/s.BPL Sanyo Ltd., on 50:50 basis.

The assessee-company acquired business of manufacture and

trading of colour television from M/s.BPL Ltd., on a slump

purchase basis in terms of business transfer agreement dated

14/12/2005 for a consideration of Rs.360 crores. This purchase

consideration was accounted in the books of assessee-company

as per values assigned by M/s.Chowdhary & Associates, an

independent registered Valuer, among various assets including

the distribution network on the basis of market value. As per

depreciation schedule, the total value of intangible assets was

Rs.188,34,00,000/- and addition of Rs.268,53,00,000/- is shown.

The break-up of intangible assets includes the value of

distribution network of Rs.44,29,80,000/-. On this, the assessee-

ITA No.1395/Bang/2014 Page 3 of 25 company had claimed depreciation at 25%. The AO has rejected

the contention of the assessee observing as follows:

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distribution network of Rs.44,29,80,000/- and disallowed the

claim for depreciation of Rs.5,53,72,500/-.

In respect of depreciation, the AO also disallowed

depreciation on the assets acquired from BPL Ltd., valued by the

assessee-company at Rs.810.94 millions. The AO was of the

opinion that the assets were valued at higher side in the books of

account in order to claim depreciation. Invoking provisions of

Explanation 3 to section 43(1) of the Act, the AO had allowed

depreciation on the value as increased by 25% of the closing

WDV in the books of BPL Ltd., i.e., seller. The reasoning given for

not accepting the values as accounted for in the books of account

is given in para.8 of the assessment order which is as under:

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Accordingly depreciation of Rs.9,53,09,059/- was disallowed.

vide paras.8.1 to 9 of his order has confirmed the disallowance of

depreciation and distribution network vide paras.10 and 10.1

upheld restricting depreciation allowance on the value of closing

WDV of the transferor company as increased by 25%.

ITA No.1395/Bang/2014 Page 14 of 25 6. Being aggrieved, the assessee-company is in present appeal

raising the following grounds of appeal:

adjudication.

ITA No.1395/Bang/2014 Page 15 of 25 8. Ground Nos.2 and 3 challenge the disallowance of claim for

depreciation on distribution network. The AO has denied the

claim for depreciation on two counts: (1) valuation of distribution

network is on very high side and (2) there was no transfer of any

distribution network of M/s.BPL Ltd. The AO was of the view that

even if depreciation is to be allowed it can be allowed only to the

extent of 50% i.e. percentage of shares held by M/s.Sanyo

Electric Company Ltd., The fact that valuation of land was shown

at lesser value than value fixed as per guidance value under

stamp valuation Act led AO to believe that the value apportioned

to various assets is not fair market value but done with intention

of claiming higher depreciation i.e. ulterior motive of tax evasion.

Therefore, the AO disallowed the claim.

is no transfer of distribution network. He further held that it does

not fall within the definition of any other business or commercial

rights.

record. This issue can also considered from another angle. Even

assuming that there is no intangible assets as distribution

network as claimed by the assessee, excess of consideration paid

over assets taken over constitutes goodwill as per judicial

precedents in the light of the decision of the Hon’ble Delhi High

ITA No.1395/Bang/2014 Page 16 of 25 Court in the case of Triune Energy Services (P) Ltd. In ITA Nos.40

& 189 of 2015. Intangible assets qualifying for depreciation in

terms of the law laid down by the Hon’ble Supreme Court in the

case of CIT vs. Snifs Securities Ltd.(348 ITR 302). Thus the law

is fairly settled to the extent that excess of consideration paid

over assets taken over assets constitutes goodwill and the same

is eligible for depreciation. But the matter does not end there.

Valuation of goodwill is also the bone of contention between the

assessee and the revenue. Depreciation is admissible on the

actual cost as the actual cost is required to be determined. The

term ‘actual cost’ has been defined u/s 43(1) which reads as

under:

“43. In sections 28 to 41 and in this section, unless the context otherwise requires— (1)"actual cost" means the actual cost37 of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority: ”

The Legislature has prefixed the word ‘actual’ to the word ‘cost’ in

section 43(1) which suggests that the intention of the Legislature

was to curb the malpractices and tendencies to inflate capital

costs for obtaining higher depreciation while not burdening the

other with any material tax liability and to exclude collusive,

inflated and fictitious cost. In this connection, observation made

by the Hon’ble Delhi High Court in the case of CIT vs. Dalmia

(125 ITR 510) are apt. The provisions of section 43(1) are

considered by their Lordships as under:

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Thus, the assessing authority has ample power to determine the

‘actual cost’ of the asset which is eligible for depreciation as the

circumstances of the case would justify. In the present case, the

very fact that the seller of the business had 50% interest in the

company i.e. assessee-company by virtue of holding 50% shares,

and the assessee-company had failed to controvert the misgivings

of the AO as to the inflation of the actual cost of the asset. These

circumstances would certainly justify the AO to infer that fictitious

price has been put on the asset in order to avail higher

depreciation under the IT Act, perhaps with some other ulterior

motive which the AO had chosen not to probe. In any event,

right to use distribution network does not result in creation of any

intangible asset as either the transferor company or the assessee-

ITA No.1395/Bang/2014 Page 19 of 25 company had paid any money to the distributors for giving them

distributorship of dealing in the products of the assessee-

company. Therefore, we hold that the AO is justified in denying

depreciation claim on the intangible asset of distribution network

on the inflated value of the asset. It is very ingenious attempt by

the assessee-company to claim higher depreciation and avoid

payment of tax in the hands of the transferor of the business by

claiming to be slump sale transaction. Thus it is nothing but a

colourful device adopted with the intention of tax avoidance and

the principles enunciated by the Hon’ble Apex Court in the case of

McDowell& Co. Ltd v. CTO (1984) (154 ITR 148) are squarely

applicable. Thus, the grounds of appeal are dismissed.

invoking Explanation 3 to section 43(1) of the Income-tax Act,

1961 [hereinafter referred to as 'the Act' for short].

depreciation was made on the basis of valuation done by an

independent valuer among various assets. He submitted that the

AO has disallowed depreciation on fixed assets alleging over-

valuation of fixed assets in order to claim depreciation. The AO

had come to opinion that the assets are over-valued without any

basis and evidence. In respect of disallowance of depreciation on

distribution network learned counsel for assessee submitted that

ITA No.1395/Bang/2014 Page 20 of 25 even assuming that distribution network has not resulted any

intangible asset, excess price paid for acquisition of the business

should be treated as goodwill which is eligible for depreciation in

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

(340 ITR 302). Learned counsel for assessee further submitted

that excess consideration paid for assets taken over is nothing

but depreciation in terms of law laid down by the Hon‘ble Delhi

High Court in the case of Truine Energy Services Pvt. Ltd. in ITA

Nos.40 & 189/15. The sum and substance of the argument of

learned counsel for assessee is that even assuming that no

intangible assets are acquired on account of acquisition of

erstwhile BTV Manufacturing of BRI Ltd., The excess of

consideration should be treated as a goodwill which is eligible for

depreciation in terms of law laid down by the Hon’ble Supreme

Court in the case of CIT vs. Snifs Securities Ltd.(340 ITR 302).

On the other hand, learned CIT(DR) placed reliance on the

orders of the lower authorities.

record. In the present appeal, the issue involved is whether the

AO was justified in invoking Explanation 3 to section 43(1) for the

purpose of determining the actual cost to allow depreciation

thereon on distribution network which constitutes intangible

assets which is eligible for depreciation. Whether the claim of

ITA No.1395/Bang/2014 Page 21 of 25 depreciation on enhanced value of asset is admissible.

Undisputed facts are that the assessee-company acquired

manufacturing of colour television from BPL Ltd., on a slump sale

basis for a consideration of Rs.360 crores. M/s.BPL Ltd., has 50%

share holding in the assessee-company. Thus, M/s.BPL Ltd., has

got a substantial interest in the assessee-company by virtue of

holding shares for more than 20%. There is no dispute that the

business of manufacturing and trading of colour TV was acquired

from M/s.BPL Ltd., on a slump sale basis which means the

consideration paid by the purchaser i.e the assessee-company to

M/s.BPL Ltd., is not apportioned asset-wise by the seller i.e.

M/s.BPL Ltd., But the purchaser i.e. the assessee-company

apportioned the value which could be reasonably attributed to

assets acquired through the scheme of slump sale based on an

independent expert valuer’s opinion. In the present case,

assessee-company valued fixed assets at Rs.81.19 crores out of

which value for land was shown at Rs.6.22 crores and other fixed

assets on which depreciation was claimed was valued at Rs.73.83

crores. As against this, closing WDV of these assets in the books

of M/s.BPL Ltd., transferor company was only Rs.15.75 crores.

Thus, difference between closing WDV in the hands of the seller

i.e. M/s.BPL Ltd., and the values of the fixed assets on which

depreciation was claimed by the assessee-company is Rs.58.8

crores. The contention of the assessee-company is that fixed

assets acquired on account of purchase of business are valued

ITA No.1395/Bang/2014 Page 22 of 25 based on the valuation made by independent valuer. Though the

AO accepted in principle, the method of apportionment of values

to the fixed assets based on the valuation of independent valuer,

but AO found fault in the method of valuation done by the valuer

as, according to him, the immovable property owned by the

assessee-company at Noida, the value was shown lesser than the

value as per the stamp duty. This made the AO to suspect that

the methodology adopted by the Valuer is not free from doubt

and therefore, the AO had not accepted the values assigned by

the assessee-company to the assets and felt that the assets were

overvalued in order to claim depreciation with the intention of

avoiding tax liability and therefore, invoked the provisions of

Explanation 3 to section 43(1) of the Act. While doing so, the AO

accepted that higher value of 25% over and above closing WDV in

the hands of M/s.BPL Ltd. i.e. transferor. Permission as

envisaged under provisions of Explanation 3 to section 43(1) from

higher authorities was also obtained. The only objection of the

assessee-company seems to be that except subjective opinion of

Assessing Officer, there was no material referred by the AO

indicating overvaluation of the assets of the assessee-company.

Thus, it was contended that the AO should not have invoked the

provisions of Explanation 3 to section 43(1) of the Act.

only on actual cost incurred by the assessee-company. When the

ITA No.1395/Bang/2014 Page 23 of 25 assessee-company purchased as a going concern at a slump

price, identification of the actual cost in respect of different assets

poses certain problems. It is an accepted practice that

consideration paid for acquisition of business allocation towards

various assets based on report of expert. In the instant case, the

assessee-company exactly did the same thing but the report of

the expert in this case i.e. M/s.Chowdharu & Associates was not

accepted by the AO on noticing that the valuer had assigned

lesser value to land property and more value in respect of other

assets which are eligible for depreciation. This prompted the AO

to ignore the valuer report and estimate the actual cost at 25%

higher than value of closing WDV in the books of M/s.BPL Ltd.

invoking the provisions of Explanation 3 to section 43(1) of the

Act. The said provisions read as under:

“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 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.”

section 43(1), it is clear that nowhere the provisions speaks of

market value being determined by the AO but speaks of actual

cost being determined by the AO with approval of the Joint

ITA No.1395/Bang/2014 Page 24 of 25 Commissioner in the specified circumstances. The pre-requisite

condition necessary for invoking of the said Explanation 3 to

section 43(1) are only - (1) that the asset at any time was used

by any other person for the purpose of business. In this case, it

is undisputed fact that M/s.BPL Ltd., from whom the assessee-

company had acquired the assets had used the asset and claimed

depreciation. Thus this condition is satisfied. (2) The main

purpose of transfer of such assets directly or indirectly to the

assessee-company was for reduction of liability to income-tax. In

the present case, transaction of acquisition business as a going

concern is between two related parties and the seller had a

substantial interest by holding 50% share. The assets were

already depreciated in the hands of the seller i.e. M/s.BPL Ltd.,

higher values were assigned by the assessee-company in order to

avoid tax liability. Thus, ingredients which are necessary for

invoking Explanation 3 to section 43(1) are satisfied and the AO is

justified in his action in restricting the allowance of depreciation

on WDV at higher than 25% of the closing stock. The findings

given by us in respect of depreciation on distribution network vide

para 10 equally holds good even in respect of valuation of

depreciable assets. Thus, grounds of appeal Nos.5 to 10 are

dismissed.

In the result, the appeal by the assessee is dismissed. Order pronounced in the open court on 4th November, 2016

Sd/- Sd/- (SUNIL KUMAR YADAV) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER

ITA No.1395/Bang/2014 Page 25 of 25 Place : Bangalore D a t e d : 04/11/2016

srinivasulu, sps

Copy to : 1 Appellant 2 Respondent 3 CIT(A) 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore