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

order of the Commissioner of Income-tax (Appeals)-III,[CIT(A)], Bangalore, dated 11/08/2014 for the assessment year 2006-07.

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-

Page 3 of 25 company had claimed depreciation at 25%. The AO has rejected the contention of the assessee observing as follows:

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:

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

Page 14 of 25 6. Being aggrieved, the assessee-company is in present appeal raising the following grounds of appeal:

7. Ground No.1 is general in nature and does not require any adjudication.

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.

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:

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-

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.

11. Ground Nos.5 to 10 challenge the addition made by the AO invoking Explanation 3 to section 43(1) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short].

12. Learned counsel for assessee argued that the claim for 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 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 & 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.

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

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.

“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.”

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