TaxTMI 
TaxTMI 
2014 (8) TMI 271
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....ar on slump sale basis. 2.1 That the CIT(A) failed to appreciate that intangible assets, viz. technical knowhow, brand name and non-compete rights acquired by the appellant during t4e year fell squarely within the description of 'other business or commercial rights of similar nature' in terms of Explanation 3(b) to section 32(1) of the Act and accordingly, the amount paid for acquisition thereof was eligible for depreciation under section 32 of the Act: 2.2. That the CIT(A) erred on facts and in law in holding that no know-how was transferred by the seller to the appellant as part of the slump sale. 2.3 That the CIT(A) erred on facts and in law in alleging that assignment of specific values to assets acquired by the appellant on slump sale of business, with reference to the valuation report issued by independent valuer, was a colorable device, not appreciating that the buyer is required to record the values of each of the assets separately in its books of account for statutory purposes. 2.4 That the CIT(A) erred on facts and in law in disregarding the valuation report issued by independent valuer, based on conjectures, without bringing on record, any material to....
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....T(A) erred on facts and in law in disallowing depreciation of Rs. 16,86,487 claimed by the appellant on fixed assets acquired by the appellant from the seller invoking the provisions of section 170 of the Act. 5. That the CIT(A) erred on facts and in law in enhancing the income of the appellant by disallowing depreciation to the tune of Rs. 51,47,730, by invoking the provisions of Explanation 3 to section 43(1) of the Act. 5.1. That the CIT(A) erred on facts in and in law in applying the provisions of Explanation 3 to section 43(1) of the Act without bringing any evidence on record to demonstrate that the main purpose of acquiring the business was to reduce income by claiming higher depreciation on enhanced value of assets. 6. That the CIT(A) erred on facts and in law in enhancing the income of the appellant by Rs. 55,79,200 on account of disallowance of lease rentals paid by the appellant to the lessor, by invoking the provisions of section 40A(2) of the Act. 6.1. Without prejudice, the CIT(A) erred on facts and in law in adopting an arbitrary amount of Rs. 6/- per sq.ft. as rent for assets taken on lease by the appellant, without bringing on record any evidence to sup....
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....d also that TPPL was having any registered patent/trademarks in respect of such designs and technical know how (iii) To substantiate the claim that TPPL was having exclusive technical know how for FPSO operations as claimed in valuation report. 8. AO was of the opinion that in this case assessee is succeeding business of TPPL in respect of design and engineering division. That assessee company has not only acquired the designs know how and other physical assets of the predecessor but also the ongoing business related to FPSO operation as well as manpower and other live assignments/lease/deeds. That assesee company has acquired these on going concern basis. That this is very much in nature of demerger or hiving of a particular unit into a new entity. AO was of the opinion that such succession are squarely covered under 170 of the I.T. Act. AO further observed that Section 170 and fifth proviso to the section 32 clearly restrict the claim of the assessee company for excessive depreciation which it is claiming on same set of assets in succession. Since as per section 2(42)(c) in the case of slump sale no particular value can be assigned to a particular asset forming part of an u....
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....e return of income is purposely undated. That proviso for the slump sale was used as colourful device by the assessee which also included the process of valuation in order to minimize the tax liability in the hands of TPPL and to maximize the claim of deprecation in the hands of assessee. The AO in this regard refereed to the decision of Hon'ble Apex cout in the case of Mcdowell and Co. Ltd. 12. The AO further doubted that veracity of the valuation report he mentioned that valuation report itself is full of deficiencies. The AO further rejected that assesee's value of technical know-how by applying a method of cash flows. He held that it was nothing but a sham exercise. The AO further observed that TPPL has simply handed over its liability of ongoing projects to the assesee company without which assessee company would not earn any profit and rather end up in paying heavy compensation / demerge. Hence the value of business in hand has to be computed at NIL. That since the valuation is done only to meet the figure of 40.58 crore to claim deprecation on it, therefore, it has been treated as enduring assets which cannot be allowed. 13. AO further observed that the residual value ....
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....(2) were two-fold - (i) payment of lump sum amount for acquisition of business by way of slump sale was not an 'expenditure' since no deduction has been claimed in computing the business income of the assessee; (ii) Section 40A(2) relates to expenditure of 'revenue' nature only and not to expenditure for acquisition of capital assets, which constitutes capital expenditure. 17. However, learned CIT(A) did not find these contentions good enough. He opined that the word 'expenditure' appearing in Section 40A(3) has not been defined in the Act. He referred to Hon'ble Apex Court's decision in the case of Attar Singh Gurmukh Singh Vs. ITO - [1991] 191 ITR 667 wherein Hon'ble Apex Court had held that the word 'expenditure' is a word of wide import. Section 40A(3) refers to the expenses incurred by the assessee in respect of which payment is made. That it means that all the outgoings are brought in the word 'expenditure' for the purpose of this Section. Learned CIT(A) observed that the word 'expenditure' has been used both in Section 40A(3) as well as Section 40A(2). Hence, he opined that the ratio of Attar Singh Gurmukh Singh's case cited above shall have application in the case of Sec....
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....amely, Sh. Binoy Jacob, who invested 50% in the same company around the same time, dividend income did not have to pay any premium at all. (iii) The entire share premium of Rs. 45.84 cr. paid by M/s Saipem has been transferred to TPPL, a company in which Sh. Binoy Jacob, holds 74% shares. Thus, Sh. Binoy benefited twice - once by not paying any premium on acquisition of shares in the appellant-company & secondly, by receiving huge amount of Rs. 45.85 cr. as sale consideration in the hands of TPPL, when its physical assets stood only at Rs. 2.58 cr. (iv) Sh. Binoy Jacob undertook "non-compete" obligations as per Article 11 of the 'Shareholders Agreement'. But he did not charge any consideration for undertaking such huge obligations. Obviously, he did not find it necessary since he was being suitably compensated by way of inflated consideration to TPPL. 4.43.1. Hence, the finding given by the A.O. that the whole scheme was a colourable device to obtain undue tax benefit, is upheld." 19. Thereafter, learned CIT(A) considered the issue of assessee's claim of depreciation. Learned CIT(A) noted that initially, the assessee had passed an entry in its books treating the impugne....
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.... TPPL. Learned CIT(A) further referred to the slump sale agreement in this regard and observed that a reading of definitions contained in the slump sale agreement shows that it is the business of TPPL which has got transferred and the information, data, specifications, records and material etc. mostly relate to the business of the seller. It has got nothing to do with any industrial information or technique likely to assist in the field of oil well. Learned CIT(A) held that even assuming but not admitting that know-how was available with TPPL, its valuation at Rs. 26.20 crores was exaggerated. He observed that the so-called know-how has been valued purely on future profitability which in any case was to be a unrealistic guess work. 22. Thereafter, learned CIT(A) considered the valuation for the business on hand at Rs. 11.50 crores. In this regard, learned CIT(A) observed that the only category of rights which could have got entitled the assessee to depreciation in this regard were business or commercial rights of similar nature. Learned CIT(A) observed that the categories of rights claimed to have been acquired under the slump sale agreement such as contracts, employees, goodwil....
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....ld to be colorable device adopted to evade due revenue to the Government. Learned CIT(A) further referred that in several cases, ITAT has held that depreciation is not allowable on goodwill. Accordingly, learned CIT(A) held that depreciation cannot be allowed even on the alternative claim of the assessee company that the amount of Rs. 40.58 crores may be treated as having been paid towards acquisition of goodwill. 26. Thereafter Ld. CIT(A) considered the applicability of provisions of section 170 of the Act. In this regard Ld. CIT(A) observed that if on appreciation of facts it is found to be a case of succession then the 5th provision to section 32(1) shall come into operation and no depreciation on intangible assets would be admissible by virtue of operation of the said provision and the allowable deprecation would be operated in the ratio of the number of days for which the assets were being used by the predecessor and successor company. Ld. CIT(A) referred to the provision of section 170 and section 32(1) 5th proviso. Ld. CIT(A) observed that a combined reading of both the provisions would show that in case of succession in business, depreciation would not be separately comp....
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....ecific context of succession of the firm by a company in order to describe "transactions not regarded as transfer". Therefore, the word "succession" appearing in the said section would not impinge on the meaning of the same word appearing in S. 170 and the 5th proviso to S.32. 28. On the basis of the above discussion, Ld. CIT(A) held that the A.O. has rightly invoked S. 170 and 5th proviso to S. 132 of the Act in the facts & circumstances of this case. That as a result, no depreciation would be allowed on any intangibles because no such intangible assets were appearing in the books of the predecessor company i.e. TPPL. Moreover, depreciation would be allowed in proportion to the number of days for which the tangible assets were in use by both the companies - the predecessor (TPPL) and the successor company (STEP). The assets were in use by TPPL till 25.9.2006 (178 days), they were transferred to STEP since 26.9.2006 (187 days). STEP, the assessee company, has claimed depreciation for the whole year, on the ground that the assets were in use for more than 180 days. That the AO has invoked 5th proviso to section 32, but has inadvertently missed out to restrict the depreciation pro....
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....lusion in this case cannot be denied because the promoter Shri Binoy Jacob is the shareholder having substantial interest in both the companies. Accordingly Ld. CIT(A) enhanced the income by working of depreciation allowable under the Act after taking WDV previously used as the actual cost in hands of the assessee company. 30. Thereafter Ld. CIT(A) considered the enhancement on account of rent for use of assets. Ld. CIT(A) observed that assessee company was duly set up and acquired on going business of Triune Projects Pvt. Ltd. That assessee company not only decided to acquire the ongoing business of TPPL it also decided to operate from the same office premises from which TPPL was earlier running its business. The premises are two in number and while one of the owner of the properties was a 100% owned subsidiary of TPPL the other party was an unrelated party. In this regard Ld. CIT(A) observed that the lease rent paid for the property acquired from the related party was Rs. 20.87 per sq. ft. and one from unrelated party was Rs. 22/- per sq. ft.. Thereafter Ld. CIT(A) refereed to lease agreement between TPPL and the assessee. He found that lease rental at Rs. 30/- per sq. ft. per....
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....) adopted Rs. 6/- per sq. ft. and held that allowable portion of lease rental works out to Rs. 13,94,800/- and disallowable portion works out to Rs. 55,79,200/-. 32. Against the above order assessee is in appeal before us. 33. We have heard both the counsels and perused the record. Ld. Counsel for the assessee has at the outset submitted that he shall not be pressing the ground No. 1 in the grounds of appeal. Hence ground No. 1 raised by the assessee before us is dismissed as not pressed. 34. The submissions of the Ld. Counsel of the assessee in this regard are as under :- "Re: Ground of Appeal No. 1 Not pressed. Re: Grounds of Appeal No. 2 to 2.8 and 3 to 3.2 * The appellant is held 50% by Saipem, Italy and 50% by one Mr. Binoy Jacob. The appellant had during the relevant assessment year 2007-08 vide agreement dated 22.09.2006, acquired the business of engineering and design services relating to the oil and gas industry, carried on by Triune Projects Pvt. Ltd. ('TPPL'), by way of slump sale. * The lumpsum consideration paid for the aforesaid business was Rs. 45.85 crores. A sum of Rs. 40.58 crores out of the purchase consideration was attributed to the followi....
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....atable to the various intangible assets (net of depreciation disallowed by the assessing officer) holding the slump sale to be a sham transaction and alternatively invoking the provisions of section 40A(2) of the Act. Re: Slump sale transaction not bogus * The CIT(A) has grossly erred in holding the aforesaid business transfer as 'colorable device' without appreciating the facts of the present case. It needs to be appreciated that TPPL was engaged in business of Design Engineering and Project Consultancy for various oil and gas projects including floating production, storage and off loading system (FPSO), for the past 10 years. The services include conceptual studies, feasibility studies, process design, detailed engineering, procurement services, construction supervision and commissioning services. TPPL was a certified ISO - 9001-2000 company and had at the time of sale of business, 350 skilled/technically qualified people on its rolls. * Several international players in the oil and gas sector including Saipem International BV, a Fortune 500 company, evinced interest in acquiring 50% stake in the design and engineering business carried on by TPPL. It was, therefore, decid....
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....ium on acquisition of shares in the appellant-company & secondly, by receiving huge amount of Rs. 45.85 crores as sale consideration in the hands of TPPL, when its physical assets stood only at Rs. 2.58 crores", in view of the fact that - a) TPPL sold the design and engineering business to the appellant company for lumpsum consideration of Rs. 45.85 crores. b) TPPL paid tax on capital gains on slump sale of the business calculated in terms of section 50B of the Act. c) Saipem International BV invested in 50% equity of the appellant company, infusing a sum of Rs. 45.85 crores including share premium of Rs. 45.84 crores. d) The funds infused by Saipem International BV in the appellant company were used to pay the slump consideration to TPPL for purchase of business. * In the aforesaid arrangement, the sale consideration has been paid by the appellant company to TPPL. It is not understood how the receipt of sale consideration by TPPL for slump sale of its design and engineering business benefitted Shri Binoy Jacob, who was only a shareholder in the company. [Refer decision of Supreme Court in case of Vodafone International Holding B.V. v. UOI: 341 ITR 1]. * Further, ....
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....nt of income to the extent of Rs. 30.44 crore by the CIT(A), applying provisions of Section 40A(2) of the Act is without any basis in law. * Merely because the amount of Rs. 40.58 crores (out of the lumpsum consideration) has been capitalized by the appellant towards intangible assets acquired by way of slump sale in the books of accounts and depreciation claimed thereon, would not trigger the mischief of section 40A(2) of the Act. Claim of depreciation on the capitalised value of assets does not enjoin the Revenue to add the value of assets (on which depreciation is claimed) in terms of section 40A(2) of the Act. * Further, the depreciation claimed cannot also be disallowed in terms of the said section; if depreciation claimed is, in the opinion of the AO excessive, being claimed on the basis of inflated value of assets, the AO in terms of Explanation 3 to section 43(1) of the Act is entitled in law to reduce the admissible depreciation. * Recently in the case of CIT v. Mark Auto Industries Ltd.: 40 taxmann.com 482, the Punjab and Haryana High Court held that there could be no disallowance under section 40(a)(ia) of the Act in respect of capitalised value of assets on the....
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....ness or undertaking transferred constituted a capital asset, distinct and separate from the assets comprised in the undertaking. * The intangible assets acquired by the appellant as part of slump sale of the design and engineering business of TPPL were in the form of technical knowhow, business information, business records, pending / ongoing contracts, customer and vendor data base, human capital in the form of skilled and trained manpower, non-compete obligations, etc. Such valuable assets / rights fall within the category of 'business or commercial rights of similar nature' specified in section 32(1)(ii) of the Act. [Re: Supreme Court decision in CIT v. Techno Shares and Stocks Ltd. v. CIT: 327 ITR 323 and Delhi High Court in Areva T & D India Ltd.: 345 ITR 421]. * Such intangible assets are entitled to depreciation in terms of section 32(1)(ii) of the Act as has been held in the following cases: CIT v. Hindustan Coca Cola Beverages P. Ltd.: 331 ITR 192 (Del) affirmed by Supreme Court in SLP No. 26151/2011. CIT v. Smifs Securities Ltd: 348 ITR 302 (SC) CIT vs. L.T. Overseas Pvt. Ltd. : ITA No. 50/2010 (Del.) B. Raveendran Pillai v. CIT: 332 ITR 531 (Ker.) Gu....
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....so to section 32(1) not applicable * Depreciation is allowable in terms of section 32(1) of the Act on the written down value ('WDV") of block of assets. * As per the provisions of section 43(6) of the Act, WDV in case of any block of assets is determined as WDV at the beginning of the relevant previous year as adjusted by the following: a. Such WDV is increased by the actual cost of assets falling within that block, acquired during the relevant year; b. Increased WDV [as adjusted in terms of (a) above] is reduced by consideration received on transfer of any asset falling within that block, to the extent of WDV of the block. * Where an asset(s) forming part of block of assets is sold, the sale price received therefor is credited against the WDV of that block of assets. In other words, in block concept no depreciation is admissible on assets in the year of sale thereof. * Item (C) of section 43(6)(c)(i) of the Act further provides that in case of slump sale, WDV of the block of assets shall be reduced by WDV of assets transferred by way of slump sale. Such WDV of assets transferred is determined by reducing the actual cost of assets so transferred as part of slump ....
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.... the two entities in the ratio of number of days of user. * It is important to note that in such situation(s) of transfer of asset (other than by way of sale), there is no consideration paid for such transfer, unlike in the case of slump sale. * In the case of slump sale of business, the seller entity is not entitled to depreciation, at all on the assets transferred by way of slump sale and, therefore, the fifth proviso to section 32(1) of the Act does not, at the threshold, apply. * The decision of the Supreme Court in the case of CIT vs. K.H. Chambers: 55 ITR 674 relied upon by the CIT(A) has been quoted out of context. The definition of "succession" propounded by the apex Court in the said decision, relying upon earlier judgements rendered in the context of interpretation of section 25(4) of the Income-Tax Act, 1918 has no applicability with respect to interpretation of fifth proviso to section 32(1) read with section 170 of the Act and more so in the context of block concept of depreciation. * That being so, since no depreciation is allowable to transferor, viz., TPPL the fifth proviso to section 32 cannot be applied to the appellant's case. Re: Ground of Appeal ....
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....independent party had invested in the joint venture at premium. Actual consideration has flowed from the purchaser to the seller and on the basis of useful life of the assets, depreciation was claimed on the written down value as per the books, calculated in accordance with provisions of the Companies Act, 1956; there was no intention whatsoever to claim depreciation on enhanced cost. * The case laws relied upon by the CIT(A) in Nagammal Cotton Mills P. Ltd. v. CIT: 258 ITR 390(Mad.); CIT v. Poulose & Mathew P. Ltd. : 236 ITR 416 (Ker.) and Escorts Ltd. v. UOI: 199 ITR 43 (SC) are not applicable, being clearly distinguishable on facts. Re: Ground of Appeal No. 6 to 6.2 (Disallowance of Lease Rentals): * The appellant company decided to operate from the same office premises from which TPPL was earlier running its business which were two in number. The appellant obtained on lease building No. H-4A in Mohan Cooperative Industrial Area (having air conditioning and power back up facility) from a related party viz., Amlo Engineering Ltd. which was 100% subsidiary of TPPL. * It may be pointed out that in slump sale transaction, the air conditioning unit and DG sets, which were....
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....are subscription agreement (SSA). -(iii) Saipem; Saipem Italy & Binoy Jacob-Share Holders Agreement (SHA). Saipem (assessee) formed on 15-07-2006 with shareholding of 9999(Jacob) & 1 (DVS Raizada who later transferred this too to Jacob). Later on 22-09-2006 Saipem Italy bought 10000 shares of Saipem of 10 each at a premium of 45840 per share as a result now shareholding was 10000 (Jacob) & 10000( Saipem Italy). Importantly while Saipem Italy got shares at premium while Jacob got at par of Rs. 10/-. Slump Sale Agreement/22-09-2006 (TPPL & Saipem) provided for -Purchase consideration of going business of TPPL to be at 45.85 crores. -TPPL agreed (clause 14) to not to compete with Saipem for unspecified period(unlike for Mr.Jacob). Share Holders Agreement (SHA-tripartite) dated 22-09-2006 provided for -Not issuing/transferring any share to any one else. -'Non-compete clause' for Jacob 3 yrs after expiry of SHA & at least for 4 years from signing of SHA. -Assets to be transferred and not to be transferred (page 17). Share subscription Agreement (SHA -tripartite) dated 22-09-2006 provided for -Assets to be transferred and these were (a) TPPL assets (ex....
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....of 27 lacs to Petro Vietnam, 25-lacs of Bharat Heavy, AC, Generator Set etc.) show that Assessee's treatment of transactions on Slump sale by creating new entity Saipem as discussed u/s 2(42C) itself is doubtful and apparently is aimed at evasion of tax at any costs. 5. It is prayed to keep in view that 'Tax is King's (here Revenue's) share in the income/profit of a business/taxpayer' to use for public cause. Naturally, the Revenue becomes a partner or shareholder in the profits or transactions of an assessee and accordingly looked from this angle it will be within the rights of Revenue to probe and question the financial arrangements so as to find that it does not cause undue prejudice to its interest. When we keep the above aspects in mind it will be clear that the arrangements were arrived at by Mr. Binoy Jacob and TPPL in a way whereby they were getting undue tax benefits thus causing serious prejudice to the interest/share of Revenue. Assessee also knew that on Goodwill no depreciation is allowable that is why it trifurcated it into Know How, Business on Hand and Non-Compete fee so that it is able to claim reduction of tax by claiming depreciation. GROUNDWISE-ISSUEWISE D....
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....on compete fee Rs. 1.88 crores Despite this being the case of Slump Sale bifurcation/attribution of it sizably to specific intangible as well as tangible assets baffled the AO and about this the CIT(A) observed as the following. (i) Know-how (valued at 26.20 Cr) though undoubtedly an intangible asset but the TPPL was never engaged in manufacturing hence Ist part of definition Expln 4 to 32(1) is not attracted. Likewise since TPPL was never engaged in R & D and only business is transferred & no know how is also transferred within the meaning of Explanation 4 to 32(1). Even otherwise allocation of 26.20 Cr to knowhow was found to be inflated as no basis is given. (ii) Business on Hand (valued at 12.50 Cr) which the Valuer initially nomenclatured as 'Business in hand' as on 22-09-06 but later changed to 'executing bsn in brand name TPPL'. Why the nomenclature was changed has not been explained by the appellant at any stage of the proceedings. (iii) 'Brand Name/Non-compete Rights' (valued at 1.88 Cr) about which the CIT(A) has held that this item is not covered by S.32(1)(ii)-intangible assets- not covered by 'know-how, patent, TM, Licence etc.' Further, the CIT(A) says the....
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....ellant which becomes apparent from allowance of depreciation on tangible assets taken over and taxation of profits post acquisition in the hands of the appellant only it is submitted that these are mere specious arguments. In fact the AO there had doubt whether it was really as Slump Sale? Further, these are factual aspects about which as such there cannot be doubt but while making such factual averments the appellant has not taken care to take note of the logical inference which the AO/CIT(A) were drawing. Never the AO/CIT held that entire transactons were bogus but instead they were doubting the arrangements arrived at to record the infusion of money by Saipem (in acquiring the business of the TPPL) whereby Mr. Jacob and Saipem were getting undue and unreasonable tax benefits by compromising the Revenue's interest. It is only in this manner that CIT(A) has called the multiple agreements a colourable device and not beyond. Never the Revenue has argued that money paid by Saipem or Saipem Italy was not paid or was of Mr. Jacob or was of TPPL's own money routed through this manner. Thus, arguments as made out now as well as made in assessment/appellate proceedings before CIT(A) ha....
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.... be taxed as its income is concerned it is pointed out the appellant has not appreciated the findings or the observations of the AO/CIT(A) in correct perspective. It may kindly be noted that never the AO/CIT held that entire transactions were bogus but instead they were doubting the arrangements arrived at to record the infusion of money by Saipem in acquiring the business of the TPPL whereby Mr. Jacob and Saipem were getting undue and unreasonable tax benefits by compromising the Revenue's interest. It is only in this manner that CIT(A) has called the multiple agreements a colourable device and not beyond. Never the Revenue has argued that money paid by Saipem or Saipem Italy was not paid or was of Mr. Jacob or was TPPL's own money routed through this manner. Thus, arguments of the appellant as made out now as well as made in assessment/appellate proceedings before CIT(A) have no merits. Proposition qua the applicability of provisions of Sec.40A(2)(b): To begin with, it is considered necessary to point out that neither in assessment proceedings nor in proceedings before the CIT(A) explanation was put forth by the appellant as to why Saipem Italy paid premium while Mr. Bin....
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....zance of this argument of the appellant even indirectly. 5. Depreciation on Goodwill: 5.1 The CIT(A) has dealt with this issue as an alternate claim ( on page 93 onwards) and held that depreciation on Goodwill was not allowable inter alia for the reasons that; -Goodwill is not mentioned in Intangible assets in Expln 3 to 32(1)(ii). -It is a case of contradictory claims as initially debited as Goodwill & later its cost reduced to zero. -Saipem lent name without charging for Goodwill & when Cost is zero there can be no depreciation. -Only 2.56 cr. assigned to tangible assets & hence sum of Rs. 40.58 Cr. for Goodwill hence Areva T &D 250 CTR 151 Delhi will not apply as there just 38% was assigned to Goodwill. -Various decisions of the Courts hold that depreciation is not allowable on Goodwill. 5.2.1 Over and above to what the CIT(A) had held in his order, it is submitted that the Supreme Court judgment in Smifs Securities Ltd 348 ITR 302 is not applicable because of distinction in facts. In that case unlike the case of Saipem there was no payment on a/c of Goodwill and only the excess over the value of assets was deemed to be towards the Goodwill and further th....
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....on the basis of number of days of user and no separate allowability is possible in both the hands. 6.2 The CIT(A) held that though the AO invoked 5th proviso but he missed out to restrict depreciation proportionately and accordingly directed the AO to do so as per which allowable depreciation would be 17.71 lacs as against 34.58 lacs which will result in enhancement by 16.86 lacs. 6.3 In this respect it is now submitted that (a) In regard to the applicability of section 170 the Tribunal would appreciate that the very title of the section 'Succession to business otherwise than on death' goes to show that it has applicability when there is succession of business. For the purpose of this succession what is important is the succession of business. (b) Further, the Bench would appreciate that Revenue's case is that multiple agreements entered into need to be holistically read out to find out the true intent and purpose and when it is done it would observed that these have been camouflaged so as to evade the taxes. Evasion & avoidance of the provisions would become apparent from the aspect that in so far as the Seller is concerned it had parted with all its assets in the sens....
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....(b) In regard to the argument of the assessee that CIT(A) has not brought on record any third party evidence to support excessive claim of depreciation, it is pointed that for such an obvious inference there was no need for any evidence to be brought on record. By adopting Companies Act valuation vis-à-vis the Income Tax Act WDV, the Assessee has been able to claim more depreciation about which there cannot be any dispute and hence, such an obvious inference/ fact does not need any further evidence to support. The Bench is prayed to appreciate that the valuation adopted by the assessee was causing serious prejudice to the interests of Revenue which itself was sufficient to invoke the relevant Explanation. 8. Lease Rentals (Ground No. 6): 8.1 The CIT(A) noticed that in the AY 8-9, the AO had disallowed u/s 40A(2)(b) the payments (excess over the reasonable estimate done) for the lease rent for use of AC, DG Set. During the pendency of the appellate proceedings the CIT (A) exercising plenary powers conferred on him, sought to verify whether the similar disallowance is called for even in the year under consideration. The CIT(A) noticed that payment by the assessee to TPPL....
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....bdul Kadar vs. CIT {22 ITR 241} where it was held that evidence to be considered can, apart from circumstantial evidences, be even probabilities judged by human course of conduct. Further attention is drawn to the judgment dated 07-11-2013 of the jurisdictional Delhi High Court in the case of DIT-1,International Taxation v. Alcatel Lucent USA INC where the High Court after discussing the Supreme Court judgment in Esthuri Aswathia v. CIT {66 ITR 478 } pointed out that the Tribunal may act upon probabilities and presumptions may supply gaps in the evidence which may not be supplied from independent sources. Accordingly, it is submitted that the estimate as worked out by the CIT(A) after drawing reasonable inferences may not be disturbed especially when it was virtually impossible for the Revenue to bring on record the independent comparable cases having the identical facts. Since, the matter is decided by the CIT(A) against by the appellant it is not understood why the appellant does not rebut the inferences drawn against by bringing, at its own, comparable cases especially when it is now its own burden. In the light of what is submitted above Hon'ble Bench is prayed to dismiss th....
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....g a very brief order is silent on important aspects. Even the principle of 'ejusdem generis' was also not argued which was not applicable because of the fact that Goodwill is specifically dealt with in the Act itself. Further reference was made of SC judgment in Arnit Das v. State of Bihar (2000) 5 SCC 488 & UP Synthetics & Chemicals (1991) 4 SCC 139. In these SC judgments it was held that "another exception to the rule of precedents is the rule of sub-silentio. A decision is passed subsilentio when the particular point of law involved in the decision is not perceived by the Court or not present to its mind or is not consciously determined by the Court and it does not form part of the ratio decidendi and is not binding." 6. It was submitted that earlier Intangible assets were not entitled for depreciation as such and when it was allowed 'Goodwill' was not included in section 32(1) which meant that legislature deliberately omitted it & in that context attention was invited to SC judgment in CA Abraham v. ITO Kottayam AIR 1961 609 "in construing provisions designed to prevent tax evasion, if the legislature used words of comprehensive import the courts cannot proceed on an assumpt....
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....the acquisition which had already taken place. 6.2 is contrary to para 2.5 and shows that is a camouflaged document. Page 119 : No details of Witness making it difficult to undertake verification & hence not fully reliable. Page 121: which shows that not all assets/liabilities are transferred which means probably the transaction was not as such a Slump Sale which in turn distinguishes facts of this case from that of SMIFS Securities. Page 135: MOU is incomplete does not contain vital details & hence not fully reliable. Page 141: Vital details necessary for verification missing. Page 143: Vital details necessary for verification missing. Decisions relied by the Appellant on issue of Depreciation: 1. RC Cooper v. Union of India {AIR 1970 SC 564} The words "aggregate value of components is not necessarily the value of the entirety of a unit or property acquired, especially when the property is a going concern with an organized business" as contained in para 116 of the judgment are not relevant to the present issue in hand because here we are dealing with the provisions of the Income Tax Act and not with the validity of acquisition as was under consideration ....
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....oodwill per se is not eligible for claim of depreciation (para 12) and also by RG Keswani 116 ITD Mum where it was held that Goodwill does not come under the expression of any other business or commercial rights of the nature similar to Know-how, patent, copy rights etc." 36. Rejoinder of AR "Arguments/Comments of the learned CIT-DR The learned CIT-DR has submitted written submissions/synopsis of the arguments made during the hearings and in response to appellant's written submissions filed before the Tribunal. In the said synopsis, broadly, the learned CIT-DR had raised the following averments/arguments: I. The Ld. CIT-DR argued that tax payable to a citizen/assessee represents the King's (here Revenue's) share in the income of a business and is the price of civilization. According to the Ld. CIT DR the Revenue is a partner or shareholder in the profits of the assessee and has right to probe into financial arrangements entered into by the assessee, to prevent undue prejudice to its interest. It was argued that documents have to be construed in accordance with well established principles and balance must be maintained. In support of the said proposition, the reliance wa....
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....cept by the authority of law." Therefore each tax levied or collected has to be backed by the Statute, passed either by the Parliament or State. It is respectfully submitted that income tax levied by Government without authority of law is unconstitutional. II. Amongst several international companies who had evinced interest, Saipem International BV was chosen as the joint venture partner for the joint venture company (the appellant). Saipem International B.V made the investment in the appellant at the enterprise valuation. The design and engineering business of TPPL was transferred as a going concern by way of slump sale to the appellant company for lumpsum consideration of Rs. 45.85 crores. The appellant carried on the said business acquired lock, stock and barrel, without any break / interruption. The said transaction was not sham/bogus in view of the following: g) Tangible assets and liabilities forming part of the design and engineering business of TPPL vested in the appellant company pursuant to slump sale; h) The appellant took over the intangible assets of TPPL in the form of technical knowhow, customer/vendor database, pending contracts, licenses, leases and permit....
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....in audited books of accounts. All these facts are clearly evident on perusal of various agreements and documents placed on record in the paper book. The assessee thus has discharged the onus cast on it to prove that the transaction was genuine and was not sham /collusive. Thereby, there is no room for making presumptions and drawing adverse inferences. The onus infact lies on the Revenue to prove as to how the transaction was sham when the Revenue itself accepted the factum of slump sale by: a) allowing depreciation on tangible assets; b) assessing appellant on profits from design and engineering business; c) accepting the fact that actual cash consideration was paid by appellant to TPPL. III. The submission regarding the transaction not being sham/colourable has already been made vide written synopsis (refer pages 2-4) which are not being repeated for sake of brevity. The argument made by CIT DR that appellant has been shifting stand by initially treating the amount of Rs. 40.58 crores as goodwill and later trifurcated the same in order to claim depreciation, is without appreciating the facts of the case and position in law. It needs to be appreciated that appellant ha....
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....ereon. V. The appellant has vide written synopsis (refer pages 5-7) already elaborated as to how the provisions of section 40A(2) have been wrongly invoked in the present case which are not repeated for the sake of brevity. VI. The decision of Supreme Court in case of Smiff Securities (supra) was squarely applicable to appellant' case and the distinction sought to be drawn by CIT DR on the ground that there has been change in stand of the appellant is in our respectful submission, clearly misplaced and without appreciating the facts of the case and the position in law." 37. We have carefully considered the submissions and perused the material on record. First we deal with to the Ld. CIT(A) enhancement income by Rs. 30,34,06,647/- on account of finding that there is no reasonableness of the purchase consideration of Rs. 45.68 crores. 38. We find that the assessee company Saipem Triune Engineering Private Ltd. (STEP) was incorporated during the year . 2006-07 wherein 50% of the holding was with Saipem and 50% is held by Mr. Binoy Jacob. Saipem Is a global EPCI Contractor in the business of Oil and Gas Services including upstream and downstream, offshore and Onshore constr....
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....the income of the assessee and tax computed therefrom. This is an absurd preposition it also does not have any support from the tax laws. The entire payment of Rs. 40.58 crore has been claimed by the assessee to be on account of acquisition of business. This expenditure has been treated by the assesssee in capital field and only depreciation thereon has been claimed. If for any reason the capital expenditure incurred by the assesee is treated as bogus the only consequences that will follow will be the disallowance of depreciation claimed on the assets so acquired by no stretch of imagination the entire payment made can be treated as the income of the assesee being the payer. Its taxability in the hands of the re4ceipient is all together different matter. 42. In this regard Ld. CIT(A)'s reference to section 40A(3) and 40A(2)(b) are totally out of context and unsustainable. All these sections fall in chapter 4 of the I.T., Act which deals with the computation of business income. These sections refers to expenses and payments not allowable in certain circumstances. Hence admittedly it follows that these payments / expenditure will not be deductible in computation of business income....
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....ative's submission that it has never been the arguments of the revenue that the money paid by Saipen Italy was not paid or was of Mr. Binoy Jacob or was of TPPL own money routed through this manner. In these circumstances we find that the conclusion by the authorities below that the whole scheme was a colourable device cannot be sustained and is liable to be set aside. Accordingly the same is set aside. 44. Now we consider the claim of the depreciation on the payment of Rs. 40.58 crore towards intangibles. It is noted that initially the assessee has booked the impugned amount of Rs. 40.58 crore as good will. Later on on the basis of valuation report the assessee bifurcated the good will into three different components and treated them as intangible assets. These were a) technical know how Rs. 26.18 crore b) valuation of business on hand Rs. 12.50 crore c) non compete fee Rs. 1.86 crore. We note that as admitted by the Ld. Counsel of the assessee this valuation report was obtained post slump sale agreement. The authorities below have emphasized that this valuation report is undated hence lacks credibility. We further find that Ld. CIT(A) has found that valuation report was prepar....
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....les should be treated as good will and depreciation allowed therein. We find that it is undisputed that the above sum of Rs. 40.58 crore is a difference between the acquisition cost paid by the assesee and the net tangible assets acquired. Now the first issue to be dealt is as to whether depreciation can be claimed on good-will. In this regard we note that section 32 of the I.T. Act which deals with depreciation does not envisage depreciation on good will. Section 32(2) does envisage depreciation on know how, patents , copyright , trademark, licences , franchises or any other business or commercial rights of similar nature the intangible assets acquired on or after the first day of April, 1998. Now we have to examine whether the amount paid by the assessee in this regard which is now being claimed as good will would be entitled to depreciation under the above provision of law. We find that Hon'ble apex court has considered this issue in the case of CIT vs. Smith Securities Ltd. reported in 348 ITR 302. In this regard we may refer Hon'ble Apex Court's observation and finding in placitum 8, 9 and 10 of the said order :- "8. The Assessing Officer held that goodwill was not an asset....
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....aterial has been brought on record before us which can aid into the computation of good will in this regard. Ld. Departmental Representative in this regard has submitted that the aforesaid sum of Rs. 40.58 crore towards good-will was arrived at between the assessee and the TPPL before the agreement in this regard. Ld Departmental Representative has pointed out that no material as to how this sum was computed has been brought on record. We also find that there are proper and generally accepted methods of valuation of good-will and in this case no method or procedure applied for valuation of good will has been brought on record. In these circumstances in our considered opinion interest of justice will be served if the matter is remitted to the file of the AO. Accordingly we remit this issue to the file of the AO. AO is directed to examine the veracity of valuation arrived at for good-will and shall thereafter allow deprecation as per law. 48. Now we deal with the applicability of provisions of section 170 and application of Explanation 3 of section 43(1). We find that the AO has found that section 170 is applicable. He has not given any finding of disallowance in this regard. Sect....