AI Drafter 
TaxTMI 
TaxTMI 
2019 (11) TMI 1139
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....ively passed by learned Assessing Officer (hereinafter called "the AO") u/s.143(3) r.w.s.92CA(3) , 143(3) and 143(3) r.w.s. 92CA respectively of the Income-tax Act, 1961 (hereinafter called "the Act") for ay's: 2010-11 to 2012-13 respectively . As common issue is involved in all these three appeals, hence these three appeals for ay's : 2010-11 to 2012-13 were heard together and disposed of by this common order. First we shall take up appeal filed by Revenue for ay: 2010-11. 2. The grounds of appeal raised by Revenue in memo of appeal filed with the Income-Tax Appellate Tribunal, Chennai (hereinafter called "the Tribunal") for ay: 2010-11 read as under:- 1. The order of the Ld. CIT(A) is contrary to law, facts and circumstances of the case. 2.1. The CIT(A) erred in allowing the depreciation to the assessee relying on the decision of the Hon'ble Supreme Court in the case of M/s. Smifs Securities Ltd. and the ITAT's decision in the case of R.G. Keswani and failed to appreciate that following the principle of ejusdem generis, the goodwill accounted as balancing factor or non-compete fee is not a depreciable asset in nature of any other business or commer....
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....ellectual property right that can outweigh non-compete clause as supporting clause. 2.8 The CIT(A) ought to have appreciated that the relied upon decision in the case of M/s. Rentokil India Private Limited (ITA No.2660/Mds/2016) has not been accepted by the Department and further appeal is pending before the Hon'ble High Court of Madras. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. CIT(A) be set aside and that of the AO restored." 3. The only issue raised by Revenue in these appeals is with regard to allowability of depreciation on goodwill generated on acquisition of businesses of two entities namely GTS Exports Private Limited and Arc Trend Systems Private Limited by assessee, by learned CIT(A) . The assessee is engaged in manufacturing and wholesale trading of automatic door operators , door controls and accessories. The AO noted during the course of assessment proceedings that assessee has claimed depreciation on goodwill purported to be generated on acquisition of two businesses namely GTS Exports Private Limited and Arc Trend Systems Private Limited which in the opinion of the AO can....
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....ation on goodwill Schedule 18.3 to the Financial Statements of the Company for the year ended 31 March 2010, relating to "Acquisition of business of Certified Business Partners" (enclosed as Attachment 1) reflect the following assets and liabilities taken over by the Company pursuant to the BTAs executed with ATS and GTS: Particulars Amount in INR Millions Inventory 22.06 Sundry debtors 53.08 Loan and advances 5.05 Fixed assets 0.75 Current Liabilities (41.68) Goodwill 174.55 Total 213.81 The net assets of INR 39.26 were taken over at book value and goodwill amounting to INR 174.55 million was created as a result of the said acquisition. In this regard, it is submitted that the Company has inadvertently not claimed the depreciation on goodwill amounting to INR 38,183,955 (refer Attachment 2 for the computation of depreciation under the Act. 2.1 Our Submission 2.1.1. Eligibility to claim depreciation It is submitted that schedule 4B of the Financial Statement of the Company reflects depreciation on goodwill as per the Companies Act, 1956 (refer Attachment 1). However, the same was i....
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....are business movable assets) :- 12060792 Investments :- 22533123 Current Assets & Loans and Advances:- Cash in hand :- 2892892 Bank of India :- 20850 Bank of India :- 18630 Closing Stock :- 1436840 Cheque in hand :- 1003855 Sundry Debtors :-17609818 Loans & Advances :- 606994 Unsecured Loans :- 22761452 Sundry Creditors :- 18516984 Advances..... :- 1419137 The AO observed that assessee has allocated lesser value out of business consideration towards tangible assets and had claimed balance amount to be towards goodwill on acquisition of businesses. The AO observed that if proportionate allocations in value are done towards tangible assets based on book value, then there will not be any allocation remaining towards goodwill . The AO rejected contention of the assessee that consideration paid over and the above towards net worth of tangible asset is towards goodwill. The AO observed that since it is a case of slump sale, the book values were incorporated and fair market value of each of the asset was not considered by the assessee. The AO observed that if assessee had considered fair market value of each of the....
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....ble Madras High Court in the case of Pentasoft Technologies Ltd., v. DCIT reported in (2014) 41 taxmann.com 120(Mad.) had held that depreciation is to be allowed on payment of non-compete fee in a composite agreement for acquisition of businesses. The AO observed that this decision of Hon'ble Madras High Court has not reached finality as Revenue has filed an SLP with Hon'ble Supreme Court. It was also observed by AO that assessee has admitted that there is no non-compete fee and assessee is claiming excess amount paid over and above net assets acquired towards goodwill. The AO also observed that it is the assessee who has himself admitted that there is no non-compete fee. The AO observed that assessee's reliance upon decision of Hon'ble Supreme Court in the case of CIT v. Smifs Securities Ltd., reported in (2012) 348 ITR 302 (SC) is not correct because facts of the assessee's case are distinguishable with facts in the case of Smifs Securities Ltd.(supra) and ratio of decision in the case of Smifs Securities Limited(supra) is not applicable in the case of the assessee. The AO observed that Hon'ble Supreme Court held in the case of Smifs Securities Limited(supra) , as under: ....
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....The calculations pertaining to the purchase consideration were also furnished. It was stated that it was bifurcated between the assets and liabilities of the distribution business of ATS and GTS. lt was also stated that the appellant had taken over the key employees as well as employees engaged in installation from ATS and GTS. The company had also taken over various assets such as business information, intellectual property, information relating to clients, and so forth. These benefits in the nature of bundled rights acquired by the company in the form of business or commercial rights were to be taken into consideration for the purpose of determining the purchase consideration. The appellant stated that the net assets of Rs. 39.26 million were taken over at book value and the excess consideration amounting to Rs. 174.55 million was, in fact, in the nature of business or commercial rights acquired by the, appellant as a result of the acquisition. The appellant, while discussing the issue of depreciation on goodwill, referred to the provisions of section 32 of the Act. It was pointed out that the explanation 3 to section 32(1) defines intangible asset being know how, patent....
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....re allocated to the assets and liabilities was not sound because only the distribution business of ATS and GTS were taken over on a going concern bases. The appellant also furnished replies regarding the AO's findings that the excess purchase cost was in the nature of non-compete fee. The appellant cited the ratio of the Madras High Court in the case of Penta Soft Technologies Ltd. vs. DCIT (41 taxmann.com 120) where it was held that depreciation can be claimed on non-compete fee in a composite agreement. The appellant submitted that Depreciation; on goodwill for A.Y. 2010-11 amounting to Rs. 38,183,955/- and the depreciation for A.Y. 2011-12 amounting to Rs. 28,637,966/- were claimed during the course of the assessment proceedings and not by filing revised return. In this context, the appellant referred to Explanation 5 to section 32 of the Act: "For the removal of doubts, it is hereby declared that the provisions of this subsection shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income." Furthermore, the appellant referred to the decision of Chennai Tribunal in this case of Shri Balaji Sago ....
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.... of the view that the assessee is entitled to the depreciation on the intangible asset viz., goodwill/customer list as claimed by him. Our view is also on account the fact that Sec.92B in respect of international transactions under the Explanation thereto has provided that the expression intangible property would include under clause-(f) "customer related intangible assets such as customer list, customer contacts, ........................................", thus, the legislature in its wisdom in respect of the international transactions, provided for the expression intangible property to include intangible assets such as customer list in Sec. 92B then an interpretation difference from the same cannot be taken that under the same applicable act and that too to the detriment of local business and citizens. In these circumstances, we are of the view that the assesses is entitled to the claim of depreciation on the intangible assets, being the goodwill/customer list, as claimed by the assessee. In the result, Ground Nos.2 to 2.5 of the asessee's appeal stand allowed. Taking into account these touchstones provided by the jurisdictional Tribunal, I hereby accept the submissio....
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....r along with tangible assets, thus excess paid was towards goodwill. It was entire business of distribution of assesee's products by these two entities which was taken over by assessee and lumpsum consideration was paid. Our attention was drawn to slump sale agreements which are placed in file. The employees along with business contracts were also taken over by assessee along with distribution businesses of these companies. It was submitted that these two companies as such were not taken over by assessee. The learned counsel for the assessee drew our attention to ground number 2.8 filed by Revenue wherein it is stated that tribunal decision in the case of Rentokil India Private Limited in ITA no. 2660/Mds/2016 , dated 15.11.2017 for ay: 2011-12 is not accepted by Revenue and appeal is filed with Hon'ble Madras High Court. It was submitted that merely because an appeal filed by Revenue is pending before Hon'ble Madras High Court could not be a reason to deny benefit to the assessee of the decision of co-ordinate benches of ITAT in the case of Rentokil (supra) allowing depreciation on goodwill. The learned counsel for the assessee also relied upon decision of Chennai-tribunal in the ....
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....gist for our purposes is as under : (a) The first agreement is dated 21.11.2008 termed as Slump Sale Agreement which was entered into between assessee and GTS Exports Private Limited. The agreement stipulates that GTS is engaged inter-alia in the business of trading of Dorma Products, including door controls, automatic doors, glass fittings, accessories and providing installation services which business of GTS has been in existence for a period of more than three years. The assessee intends to acquire business of GTS which concerns with trading of Dorma products and related installation services. Perusal of the terms and conditions of the agreement undisputedly made it clear that the assessee intends to acquire business of GTS and not the company GTS Exports Private Limited per-se. The total composite consideration stated for acquisition for the business of GTS as stated in Slump Sale Agreement is Rs. 7.60 crores lumpsum consolidated for business of GTS related to trading of Dorma products and related installation services being acquired by assessee as stipulated in slump sale agreement dated 21.11.2008. The Business Assets as defined in the agreement to be acquired by ass....
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....re in the world by the assessee. No separate consideration is stipulated in slump sale agreement to be paid separated for this non compete clause in slump sale agreement and rather a consolidated lumpsum consideration of Rs. 7.60 crores also includes consideration for non compete agreement by GTS and its key employees for a period of five years. The aforesaid agreement also contains details of business movable assets which are acquired by assessee under this slump sale agreement which mainly consist of personal computers, printers, fax machines , laptops, shelves , tables and chairs located at its GK-II and Anand Parbat office at New Delhi which shall stand transferred to assessee under this slump sale agreement . There is also transfer of inventories, account receivables , loans and advances outstanding in the books of accounts of GTS on effective date to the assessee under the aforesaid slump sale agreement but there is no land and building which is transferred to the assessee under the said agreement. The amounts received by GTS from its debtors of trading in Dorma Products and related installation services businesses directly post effective date shall have to be accounted for b....
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....08 within agreed lumpsum composite consideration of Rs. 13.72 crores and . The agreement also stipulates that business intellectual properties, business information and business movable assets, as defined in agreement shall also stand transferred in favour of assessee under aforesaid agreement within aforesaid lumpsum composite consideration of Rs. 13.72 crores. All the defined employees including key employees , installation employees and other employees of Arc will severe their relations with Arc and then join employment of the assessee so as to enable assessee to carry on business activities of the business so acquired under slump sale agreement uninterruptedly on going concern basis. The assessee under the agreement is entitled to carry on the business so acquired in its own name and for its own sole benefit. There is also a non compete clause in the agreement which stipulates that Arc and its key employees shall not directly or indirectly compete for a period of five years with assessee and the products produced by it or in the process of developing anywhere in the world. No separate consideration is specified for non compete agreement entered into by assesse....
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..... The details of business movable assets and liabilities acquired by assessee are part of these slump sale agreements. Representations and warranties are made by GTS/Arc to assessee that their books of accounts and records represent true and correct position and all material financial transactions are accurately recorded in such books of accounts and record , that there are no contingent or other liabilities which are not recorded in books of accounts etc and several other representations and warranties were made by GTS/Arc and consequences for wrong/false representations and warranties are also provided in these agreements. . Any realization of accounts receivable existing in the books of GTS and Arc on effective date of transfer directly by GTS and Arc subsequently is to be accounted by GTS and Arc to the credit of assessee. The key employees, employees working in the business of related installation services run by GTS and Arc shall resign from GTS and Arc , and join employment with assessee on terms and conditions freshly agreed by assessee with these personnel. The Agreement also stipulates Key employees of GTS/Arc as well the entities namely GTS/Arc shall not compete with ....
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....companies concerning trading of Dorma Products and related installation services business which were erstwhile run by GTS and Arc. The agreement is a composite agreement to acquire aforesaid businesses run by these two entities concerning trading of Dorma Products and related installation services for composite lumpsum consideration . The perusal of agreement also clearly evidences that consideration paid by assessee does not include any payments towards acquisition of land and building but these are mainly for acquiring movable assets such as computers, laptop, printers, fax machines, air conditioners, refrigerators, business stocks, accounts receivables , loans and advances etc. along with intangible assets such as business contracts, customers, business information, right to continue business as going concern basis , non compete clauses etc. which stood acquired by the assessee under these agreements for aforesaid consolidated lump sum consideration . Thus, to this extent decision relied upon by Revenue in the case of Toyo Engineering India Limited (supra) is distinguishable as in the case of Toyo Engineering India Limited(supra) , the acquisition consisted predominantly of land....
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....hese assets . The business assets related to these business activities of trading by these two entities GTS and Arc in Dorma Products and related installation services only were acquired by assessee and not all the assets existing in books of accounts of GTS/Arc and that is where the AO erred in computing the values of the assets acquired in the books of accounts of the assessee vis-à-vis assets existing in the books of accounts of GTS/Arc as the AO considered the entire assets of GTS/Arc existing in their books of accounts for incorporating in books of accounts of assessee which is not the correct thing to do as the assessee did not acquire these companies GTS/Arc nor acquire their entire assets /liabilities/businesses in toto but only acquired business related to trading in Dorma Products and related installation services business erstwhile carried on by these two entities. Thus, we donot agree with this contention of Revenue that merely because these tangible business movable assets were included by assessee in its books of accounts at the book value existing in the books of GTS/Arc on effective date will disentitle assessee from claiming depreciation on the excess consid....
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....n ITA No.2660/Mds/2016 for ay: 2011-12 vide orders dated 15.112017 has allowed depreciation on the intangible assets viz. goodwill/customer list . The co-ordinate Bench of this tribunal in Rentokil (supra) referred to Explanation to Section 92B of the 1961 Act to hold that intangible shall include customer list and depreciation shall be allowable u/s 32 of the 1961 Act . We have observed that co-ordinate Bench of this Tribunal in the case of M/s.Rentokil India Pvt. Ltd. v. DCIT in ITA Nos.444 & 445/Chny/2018 for ay's: 2010-11 & 2014-15 vide common order dated 26.07.2018 has followed its earlier decision in the case of M/s.Rentokil India Pvt. Ltd. v. DCIT in ITA No.2660/Mds/2016 for ay: 2011-12 and has granted relief to the assessee by allowing depreciation on goodwill. Thus, keeping in view of the aforesaid decisions, we hold that Ld.CIT(A) has rightly allowed depreciation claimed by the assessee by following the decision of the tribunal in the case of M/s.Rentokil India Pvt. Ltd. v. DCIT in ITA no. 2660/Mds/2016, vide order dated 15.11.2017 in allowing relief to the assessee. The decision of Hon'ble Supreme Court in the case of Smifs Securities Limited (supra) also support the ....