ITAT Upholds Depreciation Adjustment on Assets and Goodwill

The ITAT upheld the direction to adopt the acquisition cost of Motor Vehicle and Furniture and Fixture at the Written Down Value (WDV) of the Seller, reducing tax depreciation claimed. Section 170 provisions were deemed inapplicable, and the balancing figure between slump sale value and WDV was treated as goodwill for depreciation. The ITAT confirmed that excess paid over tangible assets under slump sale qualifies as goodwill. Disallowance of depreciation on Customer Distribution Network was considered academic due to the same depreciation rate for Goodwill and CDN. The Revenue's appeal was partly allowed, and the assessee's appeal and cross-objection were dismissed.

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Issues Involved:
1. Incorrect ignorance of acquisition cost of Motor Vehicle and Furniture and Fixture acquired under Slump Purchase.
2. Actual cost of Motor Vehicle and Furniture and Fixture acquired under Slump Purchase directed to be adopted at Written Down Value (WDV) of the Seller.
3. Applicability of provisions of section 170 in the case.
4. Eligibility for depreciation on the fair market value of assets received pursuant to succession.
5. Consideration of the difference of the balancing figure as goodwill for eligibility of depreciation.
6. Disallowance of depreciation on Customer Distribution Network (CDN) acquired under the Business Transfer Agreement.

Detailed Analysis:

1. Incorrect Ignorance of Acquisition Cost:
The assessee argued that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in concluding that the appellant could not explain the basis for valuing the Motor Vehicle and Furniture and Fixture acquired under slump purchase and ignored the valuation report obtained in the matter. The CIT(A) directed the Assessing Officer (AO) to adopt the acquisition cost as per the Written Down Value (WDV) of the Seller instead of their fair value as per the Valuation Report.

2. Actual Cost Directed to be Adopted at WDV:
The CIT(A) directed the AO to adopt the acquisition cost of Motor Vehicle and Furniture and Fixture as per the corresponding WDV of the Seller instead of their fair value as per the Valuation Report. This resulted in a reduction of tax depreciation claimed by the assessee. The AO computed proportionate depreciation allowable in the hands of the assessee based on the value and rates in the transferor company’s books, as per the 5th proviso to section 32(1) of the Act.

3. Applicability of Provisions of Section 170:
The CIT(A) held that the provisions of section 170 are not applicable in the present case. The CIT(A) agreed with the assessee that the case was not of succession. The CIT(A) referred to the submission of the assessee before the ITAT Delhi in the case of Saipem Triune Engineering Pvt. Ltd. Vs. DCIT, stating that section 170 applies to the succession of the "person" carrying on the business, not the "business" itself. The ITAT concluded that the provisions of section 170 were not attracted in this case.

4. Eligibility for Depreciation on Fair Market Value:
The CIT(A) directed that the difference between the cost of acquisition of the business and the cost of individual assets (excluding goodwill) should be treated as the cost of goodwill. The rate of depreciation admissible for Goodwill and Customer Distribution Network (CDN) was found to be the same. The AO was directed to consider the balancing figure as goodwill for eligibility of depreciation.

5. Consideration of Balancing Figure as Goodwill:
The ITAT upheld the CIT(A)’s direction to treat the balancing figure between the value of slump sale and the WDV of assets taken over as goodwill, eligible for depreciation. This was supported by the Hon’ble Supreme Court decision in the case of Arevat T&D India Ltd., confirming that excess paid over tangible assets under slump sale can be categorized as goodwill.

6. Disallowance of Depreciation on CDN:
The AO treated the cost of Customer Distribution Network (CDN) as nil. The CIT(A) held that the provisions of section 170 were not attracted, and the difference between the cost of acquisition and the cost of individual assets should be treated as goodwill. The ITAT noted that the rate of depreciation for Goodwill and CDN was the same, making this ground purely academic.

Conclusion:
The ITAT concluded that the invocation of the 5th proviso to section 32 was correct for computing depreciation on the WDV of assets taken over from the transferor company. The balancing figure between the value of the slump sale and the WDV of assets taken over qualifies as goodwill, eligible for depreciation. Accordingly, the assessee’s appeal and the cross-objection were dismissed, and the Revenue’s appeal was partly allowed.

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