DN SOLUTIONS (INDIA) PRIVATE LIMITED,BANGALORE vs. THE INCOME TAX OFFICER, WARD 2(1)(3), BANGALORE

The assessee, M/s DN Solution India Private Limited formerly known as Doosan Machine Tools India Private Limited is a company incorporated on July 05, 2016 and is engaged in the business of trading in parts and spares used in machine tools and other business support service activities.

The assessee fled its return of income for year under consideration on 29/11/2017 declaring an income of Rs.18,58,390/-. The case of the assessee was selected for scrutiny after issuing

Page 2 of 8 statutory notices. During the course of assessment proceedings, the AO made 4 additions mentioned as under:-

So far as the addition of Rs.1,20,46,911/- i.e disallowance of depreciation on goodwill the AO took a view that assessee is not entitled for depreciation on goodwill because there was no valuation report on the date of transfer of the business. The AO also referred to the business transfer agreement dated 29/07/2016 and held that there is no mention of any good will in that agreement. The Ld AO has also alleged that M/s M/s Doosan Infraacore Construction Equipment India Private Limited (DICEIPL) and the assessee are related parties.

The second disallowance made by the AO is the disallowance on account of provisions for warranty. This amount has been disallowed by the AO on the ground that the transactions were between the related parties and hence provisions of 40A(2)(b) are applicable in this case.

The third disallowance has been made under the head shared service cost for this the AO observed that the assessee failed to prove the necessity of this high spending on professional and consultancy services in trading business. The AO wsa of the view that for the allowance of any expenditure oen has to see whether services were actually needed for the business.

Aggrieved with the order of the AO, the assessee filed appeal before the CIT(A), however remain unsuccessful.

Now the assessee has come up before us and has raised total 5 grounds of appeal, which are further divided into sub grounds.

The ld. DR contended that there were no tangible or intangible assets with the assessee and hence the claim of the assessee i.e depreciation on goodwill is not allowable.

After considering the rival submissions, perusing the material on record and case law cited by the Bar, it is observed that the AO has basically gone by the presumption that the share holding pattern of the assessee company and of the seller company DICEIPL is same. It observed that this observation of the AO is factually incorrect as evident from the share holding pattern, submitted by assessee and the same is extracted herein below for the sake of reference:

Perusal of the above chart would show that both the parties are not related parties and hence the AO has erred in making adverse comments.

The next observation of the AO that there was no intangible asset transferred to the assessee by the seller company is also not correct because law in this regard has already been settled by the Hon’ble Supreme Court in the case of CIT Vs. SIMS securities reported in 348 ITR 302, wherein the Hon’ble Supreme Court has held that excess amount paid over and above to the net asset value would be treated as goodwill. Hon’ble Supreme Court in this case has further held that goodwill is in the nature of any other commercial or business right under the category of intangible assets.

Once the department accepted the capital, gain offered by individual assessee in the respective hand, the same transaction cannot be doubted in the hands of purchaser. On this count also, we find force in the argument of Ld, A.R. that AO not established that the main purpose of transfer of such asset was reduction of liability to income tax by claiming extra depreciation on enhanced cost. In order to establish aforesaid fact, it has to be established that apart from claiming additional depreciation on enhanced cost, there is other main purpose for acquiring the asset i.e. goodwill in question. The AO in the instant case wrongly invoked the explanation 3 to section 43 of the Act. Our above decision is also supported by the order of the Tribunal relied by the Ld. A.R. in the case of ACTT v. Dorma India (P.) Ltd., Chennai in [IT Appeal Nos.1664 to 1666 (Chny) of 2019 dated 20-11-2019]. Further, we also place reliance on the judgment of Hon'ble Karnataka High Court in the case of Padinini Products (P) Ltd v. Dy. CIT [2020] 121 taxmann.com 237/[202 I] 277 Taxman 22, wherein similar circumstances Hon'ble High Court has allowed the claim of the assessee.”

So far as ground and 3 and 4 are concerned, we restore the issue to the file of the AO for examining afresh in the light of the additional evidences filed before us under Rule 29 of the ITAT Rules,

In view of the above ground No.2 of the assessee is allowed and ground Nos. 3 and 4 are allowed for statistical purposes and ground No.5 is dismissed as not pressed.

In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in court on 24th day of June, 2024