2010 (11) TMI 526 - AT - Income Tax

Tribunal upholds CIT(A) decision, dismisses Revenue appeal on arm's length acquisition valuation.

Dy. CIT Versus Lafarge India Ltd.

The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal. It was found that the acquisition was at arm's length, the valuation by the ... Disallowane of depreciation - Assessee was the highest bidder at Rs. 550 crores accordingly claimed depreciation on the value of assets at Rs. 481.39 crores - The A.O. was of the view that the assessee had paid more amount than the book value and the difference amount was to be considered as goodwill - Section 43(1) is clear that the actual cost to be considered for the purpose of section 32 should be the actual cost paid by the assessee - Since the deal between the TISCO and the assessee company was at arms length price and since the parties are not related and there is no evidence that the transaction is a collusive one or done with an intention to reduce the tax liability and also further that there is no clause for payment of goodwill by the assessee in the Business Transfer Agreement – Appeal is dismissed Issues Involved:1. Entitlement to claim of depreciation with reference to the cost of acquisition of two industrial units purchased from TISCO.2. Treatment of the difference in the cost of acquisition and book value as Goodwill.3. Consistency in the treatment of similar transactions in different assessment years.Detailed Analysis:Issue 1: Entitlement to Claim of DepreciationThe Revenue contended that the CIT(A) erred in allowing the assessee to claim depreciation based on the acquisition cost of two industrial units from TISCO. The A.O. disallowed Rs. 16.93 crores out of the total depreciation claimed, arguing that the excess amount paid over the book value should be treated as Goodwill. The assessee, a subsidiary of M/s. Lafarge India Holding Pvt. Ltd., purchased the units for Rs. 550 crores through an open bid. The fair market value of the fixed assets was determined at Rs. 481.39 crores by M/s. K.S. Aiyar & Co., with the remaining Rs. 68.61 crores attributed to net current assets. The CIT(A) held that the transaction was at arm's length and the valuation by an expert agency could not be disregarded unless proven manipulative. The CIT(A) directed the A.O. to allow depreciation based on the cost of acquisition shown by the assessee.Issue 2: Treatment of Difference as GoodwillThe A.O. treated the difference between the acquisition cost and the book value as Goodwill, disallowing depreciation on this amount. The assessee argued that the transaction was not collusive and was based on an open bid, with no provision for Goodwill in the agreement. The CIT(A) found no evidence of collusion or tacit understanding to inflate asset values. The CIT(A) emphasized that the transaction was at arm's length and the valuation was done by a competent valuer. The CIT(A) rejected the A.O.'s reliance on Explanation 3 to Section 43(1), which applies when assets are transferred to reduce tax liability through enhanced depreciation claims. The CIT(A) concluded that the A.O. failed to prove any manipulative intent and directed that depreciation be allowed based on the actual cost to the assessee.Issue 3: Consistency in Treatment of Similar TransactionsThe Revenue pointed out that in the subsequent assessment year, the assessee treated the difference between the acquisition cost and book value as Goodwill for a unit purchased from M/s. Raymonds Ltd. The CIT(A) noted that the circumstances and the nature of the transactions were different. In the case of TISCO, the entire consideration was apportioned between fixed assets and net current assets, with no Goodwill involved. The CIT(A) held that the A.O. did not provide valid reasons for rejecting the valuation report and the method adopted by the registered valuer. The CIT(A) concluded that the assessee's treatment of the acquisition cost was appropriate and consistent with the principles of fair market valuation.Conclusion:The Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's appeal. It was determined that the acquisition was at arm's length, the valuation by the registered valuer was valid, and there was no basis to treat the excess payment as Goodwill. The Tribunal emphasized that the actual cost to the assessee should be considered for depreciation purposes, as per Section 43(1) of the Income Tax Act. The appeal of the Revenue was dismissed, and the order pronounced in the open Court on 24th November, 2010.