TaxTMI 
TaxTMI 
2014 (8) TMI 271
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....) 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 establish that the valuation report was not correc....
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....6,86,487 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 support the aforesaid basis. 6.2. That the CIT(A) erred in invoking the provi....
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....i) 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 undertaking and seller claimed benefit of slump sale therefore, the valuation assigned by the assessee to all the assets....
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....lso 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 of 1.8 crore assigned to non-compete fee was of no significance. AO opined that non-compete fee is not eligible for depreciation ....
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....eduction 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 Section 40A(2) as well. Learned CIT(A) further referred that even otherwise, the heading of Section 40A reads 'Expenses or payments not dedu....
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.... 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 impugned amount of Rs. 40.58 crores as goodwill. Later, on the basis of a valuation report obtained from his Chartered Accountant, the assessee bifurcated the g....
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....ement 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, goodwill did not satisfy the requirement of business or commercial right of similar nature as mentioned in Section 32(1)(ii). Learned CIT(A) concluded that the assess....
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....ot 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 computed under the Act for both the parties. Rather the full year's depreciation would be computed and the same would be apportioned according to the number of days such a....
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....d 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 proportionately. He is directed to do so. As a result, the depreciation to be allowed is worked out at Rs. 17,71,759/- as against Rs. 34,58,247/- computed at para 7.8 (page 1....
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....ced 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 month has been charged for providing these facilities. Clause 6 of the agreement provides that the assessee has to bear the repair and maintenance of the plants, DG sets, HT ....
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....e 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 following intangible assets acquired by the appellant as part of the aforesaid business transferred by TPPL: Particulars Value of asset (Rs.) Depreciation (Rs.) Technical know-how 26,20,15,529 6....
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....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, decided to hive off the design and engineering business carried on by TPPL into a separate legal entity (joint venture company), by way of slump sale, wherein the foreign partner could take up 50% equity. * Amongst several international co....
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....gn 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, Shri Jacob held 50% equity in the appellant company which was subscribed at par. The subscription to 50% of the equity of the appellant company by Saipem International BV at premium, resulted in injection of funds into the appellant company. It is not comprehended as to ho....
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....ssets 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 allegation by the Revenue that the assessee had defaulted in deducting tax at source on the amount incurred for acquisition of assets. The High Court further held that section 40(a)(ia) of the Act could apply only in respect of deduction claimed for revenue expenditure; the said sectio....
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....rmation, 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.) Guruji Entertainment Network Ltd. v. ACIT: 108 TTJ 180 (Del.) ACIT vs. M/s CLC Global Ltd: ITA No. 2288 (Del) 2008 SKS Micro Finance v. DCIT: 145 ITD 111 (Hyd.) Re: Ground of Appeal No. 4: * The CIT(A) has enhanced the assessment by disallowing depreciation allowed by the AO on the tangible assets to the extent ....
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....owing: 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 sale by the amount of depreciation allowable on the assets so transferred, as if such asset was the only asset(s) was the only asset(s) in the relevant block. * As noticed above, in terms of item (C) of section 43(6)(c)(i) of the Act, WDV of the assets transferred by way of slump sale is required to be reduced from the WDV of the relevant block....
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....ets 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 No. 5 to 5.1: * The CIT(A) has invoking provisions of Explanation 3 to section 43(1) of the Act, enhanced the assessment by disallowing depreciation allowed by the AO on tangible assets holding that depreciation would be admissible to the appellant only with reference to the WDV of the assets (in books of TPPL) forming part of the business purchased by the appel....
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....ost. * 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 mere utilities and represented non critical assets of the business were retained by TPPL. * Vide agreement dated 22.09.2006 between TPPL and the appellant, the lessor TPPL had leased out air conditioning and DG sets for providing air conditioning and power back up facility for both the office premises for which lease rental @ Rs. 30 per sq. ft per month was charged. Accordingly the appe....
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....). 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 (excluding AC, power supply infrastructure, Generator Set; Investments; Surplus cash in hand /Bank) (b) Working capital (c) TPPL contracts (d) TPPL business records & know how (e) TPPL employees (f) Assumed liabilities (g) Goodwill. FURTHER INFERENTIAL FACTS (a) On day of acquisition i.e. on 22-09-2006 Balance Sheet shows value of Goodwill at 40.58 cr. (b) Valuation Report (undated) splits Goodwill value of 40.58 Cr into (a) Know-how ....
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....reholder 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 DISCUSSION: 1. Exclusion of 18.07 lacs from Turnover: As submitted in the hearing as also by way of written Broad proposition filed on 27-02- 2014 this Ground is not pressed i.e. it is withdrawn by the appellant hence needs no comments. 2. Depreciation on Intangible assets: AO disallowed depn of 10.14 cr {@25%} on intangibles being Goodwill of 40.58 cr. trifurcated into Tech know how; Existing business in Brand name TPPL & Brand Name/Non compete fee. The CIT....
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....nsferred & 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 these rights were rights in personam and not in rem hence no depreciation is allowable. Shifting stand of the appellant ( initially allocating 40.58 towards Goodwill and later trifurcation of it and attributing nothing towards Goodwill) goes to show that the treatment given by the appellant was not bonafide. After careful perusal of the documents produced before him CIT(A) inter alia Held: -Deal was designed to benefit Mr. Binoy in the form of consideration being the huge premium of 45,840 p....
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....g. 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) have no merits. (b) Qua the proposition that it is not correct that Mr. Binoy Jacob enjoyed unfair tax advantage or that he got benefitted twice (once by not paying premium on shares in appellant company & second by receiving huge amount of 45.85 crores in the hands of Seller TPPL where the physical assets stood just at 2.58 crores) it is submitted that the appellant has not appreciated the matrices of the case in entirety. It is pointed out that if the multiple agreements entered into are examined conjointl....
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....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. Binoy Jacob who was also acquiring 50% in the company, did not pay any such premium. In fact Binoy Jacob who owned 74% shares in the TPPL was the largest beneficiary which meant that this payment was going to benefit Mr. Jacob clearly & hence 40A(2)(b) were clearly applicable. Payment of Rs. 40.58 Cr which is about 15 times of the value of physical assets goes to show that it had unreasonably arrived at. Precisely for the disproportionate rate vis-à-vis the physical value of assets the CIT(A) held that provisions of s....
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....ciation. -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 there was consistent stand in assigning the value whereas in the case in hand there is shifting in stand on assessee's part especially qua the assignment of the value to it. 5.2.2 Further, on the issue whether Goodwill is covered by the principle of 'ejusdim generis' and if at all it is so then how it is pointed out that the applicability of this principle was not at all argued there. It is just a case that their lordships invoked it at their own and further it is a case of 'ratio sub silentio' which itself is enough to weaken the precedential ....
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.... 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 sense that whatever is not subjected to Slump sale has been leased out leaving with it possession of virtually none of the assets. Thus, on pressing into the service the principle of 'pith and substance' it would become clear that practically ( if not in law) there was complete 'succession' of TPPL, the seller. (c) In regard to reliance of the appellant on section 47(xiii)(xiv) it is submitted that this section has no application at all here. It has applicability only in reference to section 45 i.e. qua the Capital Gains and not in reference to the issue of Deprecia....
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.... 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 of Rs. 69.74 lacs as rent for use- just- of AC, DG Set @ or Rs. 30/- per sft. was excessive considering the fact that for the office space in which the said facilities are installed was acquired by the assessee by paying rent @ Rs. 20 to 22 per sft. Bench would appreciate that it is a normal experience of life that the rental for the immovable space are always higher as compared to the payment for facilities obviously because of inherent cost/value involved which is in most of the cases higher. While holding the payment @ Rs. 30 as excessive the CIT(A) has been judicious enough i....
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....ependent 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 the appellant's appeal. Additional points over and & Revenue's written Submissions & reliance on order of CIT(A) order. 1. CIT v. Kharwar 72 ITR 603 SC - to explain that if the parties have chosen by a device the legal relation, it is open to the taxing authority to unravel the device and to determine the true character of the relationship. 2. Mac Dowell & Co. 154 ITR 152 SC -tax avoidance is 'the art of dodging tax without breaking the law'. This is a five judge judgment which has not been over-ruled or diluted nor it was possible to do so for the subsequent Benches of the SC having the s....
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....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 assumption that the words used in a restricted sense so as to defeat the avowed object of the legislature. It was also pointed out that 'Tax planning' is by an assessee qua his own affairs whereas in this case Mr. Binoy Jacob has arranged affairs of his group including that of his Group companies ( which were independent of the appellant) which brings the case of the appellant within the scope of tax evasion. Paper Book: To show that attempt of the appellant is based on change of opinion or after thought & based on unreliable & incomplete documentation which is enough to show that case laws relief by the appellant....
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....on 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 there. Thus, this decision is not in the context of the Income Tax Act and secondly this has absolutely no application in the facts and circumstances of the present case. 2. PNB Finance Ltd. v. CIT 307 ITR 75 SC At the outset it is pointed out that that was the case where provisions of section 45 were under consideration whereas it is not so in the present case. Clearly this decision is not applicable for the simple reason that the controversy involved in this case is entirely different from the controversy under consideration in the case in hand. 3. CIT v. Techno Shares & Stocks Ltd. v. CIT 327 ITR 323 SC This decision is firstly not on Goodwil....
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....he 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 was placed on following legal decisions: a) Delta International Ltd. v. Shyam Sunder Ganeriwala & Others: 4 SCC 545 (SC) b) DIT (Intl. Taxation) v. Alcatel Lucent USA Inc : 66 ITR 478 (Del.)(HC) The CIT-DR argued that it is not disputed that money has actually been exchanged but in what form is not clear. The onus lies on the assessee to show with documentary evidences as to in what form the consideration was received. II. It was argued that the appellant had an intention to evade tax and the transaction of slump sale was colourable device. According to the Ld. CIT DR, the appellant knew that no depreciation was allowable on goodwill. The appellant thus changed stand by trifurcating the exc....
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....ed 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 permits, etc in the name of TPPL; i) The employees of TPPL were transferred and taken over by the appellant company; j) Actual cash consideration of Rs. 45.85 crores was paid by the appellant company to TPPL; k) TPPL had duly accounted for transaction of slump sale in its audited books of account and paid tax on capital gains on slump sale of the business; In view of the aforesaid admitted / undisputed facts, the CIT DR clearly erred in holding that the slump sale agreement between TPPL, on the one hand, and the appellant, on the other, was sham / collusive. The decisions relied upon by the CIT DR were distinguishable on facts. In Delta International Ltd. v. Shyam Sunder Ganeriwala & Others relied upon by CIT DR, the ....
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....action 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 had paid a sum of Rs. 45.85 crores to acquire the ongoing design and engineering business of TPPL lock, stock and barrel. Out of the said sum, Rs. 40.58 crores represented the excess paid over the book value of tangible assets which was attributed to the intangible assets viz., technical know how, executing business sin brand name, non compete fee. Goodwill, it may be appreciated, is compendious name given to aforesaid intangible assets. There is no single generally accepted definition of 'goodwill' and it is made up of a whole lot of factors, each influencing the final make up of business. It is thus, respectfully submitted that there has been no change in stand of the appellant. IV. The valuation report has also been questioned by the CIT....
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.... 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 construction and drilling. 39. Triune Projects Private Ltd. (TPPL) Is an engineering and design services company. Vide agreement dated 22.09.2006 Mr. Binoy Jacob, the main promoter of TPPL had agreed to form a company Saipem Triune Engineering Private Ltd. (STEP). STEP acquired the design engineering business of TPPL for a consideration of Rs. 45.85crores in slump sale. 40. Mr. Binoy Jacob the main Director of TPPL had agreed to form a company being assessee company. The assesee company acquired the design engineering business of TPPL for a consideration of Rs. 45.85 crore in lumpsum. The consideration of Rs. 45.85 crore comprised of net asset of Rs. 5.27 crore and for technical know how and other intangible assets of TPPL worth Rs. 40.58 crore. The AO ha....
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....2. 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 of the assessee. When the amount paid has been claimed as capital expenditure then no disallowance can be made in this regard except for the depreciationo claimed on the said capital acquisition. Even if it is presumed that the entire payment was bogus and the assessee has gifted away the entire amount the same cannot be added as income in the hands of the assesee being the payer. Thus we hold that reference to these sections by the Ld. CIT(A) is uncalled for and not at all germane to the adjudication of the issue at hand. In these circumstances we hold that the enhancement of income by the Ld. CIT(A) amounting to Rs. 30,44,06,647/- is not at all sustainable and the same is liable to be set aside. Accordingly we delete the enhancement by the Ld. CIT(A). 43.....
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....se 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 prepared by a Chartered Accountant who was also appearing on behalf of the assessee in the appellate proceedings. We find that numerous defects have been reported in the said valuation report and the same was also pointed out by the Ld. Departmental Representative before us . We note that in para 2.1 the valuer has mentioned that in preparing the valuation report the valuer has relied upon and assumed without independent verification , the accuracy and completeness of all information provided by the company. The valuer has clearly pointed out that the information provided there has not been verified by the valuer. It has also been mentioned that the valuation contained herein is purely for discussion purposes, it has further been pointed out that analysis are not and d....
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....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 falling under Explanation 3 to section 32(1) of the Income Tax Act, 1961 ("the Act" for short) 9. We quote hereinabove Explanation 3 to section 32(1) of the Act : "Explanation 3 - For the purpose of this sub section, the expressions 'assets' and 'block of assets' shall mean - (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or an other business or commercial rights of similar nature." Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-bow, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature. A reading the words ' any other business or commercial r....
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.... 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. Section 170 deals with succession to business or profession otherwise than on death. The 5th proviso to section 32(1) deals with depreciation in case of succession etc. We find that findings of the Ld. CIT(A) and the AO also in this regard are interalia based upon the premise that the whole scheme is a sham transaction . We find that as dealt with hereinabove we have already held that the whole scheme in this case cannot be termed as sham transaction. Further more we note that while dealing with enhancement on account of disallowance of depreciation by invoking 5th proviso to section 32(1) Ld. CIT(A) has observed that there is no need to give separate opportunity for this enhancement. We further note that AO has not considered these aspects. In our considered opinion interest of justice w....