TaxTMI 
TaxTMI 
2022 (6) TMI 1295
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....abilities taken over but was also towards various clauses in the Business Transfer Agreements (BTA) such as non-compete and non solicitation, transfer of distribution network, customer database, material contracts, value of ongoing Research & Development along with IPR and knowhow and sales documentation etc. b) The Ld CIT(A) failed to appreciate that the takeover of business of the Proprietary concerns were in pursuance of an existing negotiation with an unrelated foreign investor wherein the foreign investor had already valued the business of the concerns at an amount much higher than what the Appellant took over the said businesses. 3) The action of the Ld. CIT(A) in invoking explanation 3 to section 43(1), thereby treating the transaction relating to goodwill as sham and colorable in the absence of a valuation report is untenable and unwarranted inasmuch as the valuation report taken immediately after the takeover more than justifies the amount paid by, the Appellant to the proprietary concerns. 2. The grounds of appeal relate to the common issue of action of the AO in making a disallowance ofs.2,15,02,864/-. The facts of the issue are that during assessmen....
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....f M/s Indus Seeds as on 31.10.2014 was a mere Rs.19,60,780/-. No valuation certificate was provided by the appellant to show how the value of the goodwill was determined. The AO noted that MD of the assessee company was proprietor of M/s Indus Seed and also had substantial interest in M/s Sasya Gentech. In view of above the AO treated the transaction related to goodwill as sham and colorable device to claim higher depreciation by the assessee company. The AO invoked the provisions of Explanation 3 to Section 43(1) of the Act and restricted the value of intangible at Rs.19,60,780/-, as already recorded in the books of Indus Seeds as on 31.10.2014 the date immediately before the said concern was taken over by the assessee company. 3. During appellate proceedings the assessee has made detailed submissions. The assessee referred to the business transfer agreements (BTAs) with the two concerns purchased by it in slump sale. The BTAs define the words 'Intellectual Property Rights' and 'know-how'. The assessee submitted that the concerns taken over by it produced genetically qualified and developed seeds of high quality and the sale consideration paid by it to these con....
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....ee. The said sellers are also prevented for a period of five years to own an interest in, manage, operate, join, control, lend money or render financial or other assistance participate in or be connected with, as a partner, stockholder, co-venturer. consultant or otherwise. any person that is engaged or planning to become engaged in any business that competes with the business of the appellant. In addition to above the said concerns are also required to carry out certain activities and also give certain assurances (clause10.1), the relevant clausespertaining to same have already been reproduced supra. As per clause 8 of the agreement the vendor has made and given various warranties with the intention of inducing the purchaser to enter into the agreement and the vendor has indemnified the purchaser against all liabilities or loss arising directly or indirectly from breach of any warranty. As per clause 5.8, the vendor is required to use its best endeavours to obtain the consent of other parties to any contracts specified by the assessee to the assignment of those contracts to the assessee. As per clause 7, the vendor has agreed to ensure that all Divisional Personnel take employment....
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..... As regards the decision of Hon'ble Supreme Court in the case of Smifs Securities Ltd.(supra), the said ruling of the Hon'ble Supreme Court is only on the point whether the goodwill falls in the category of intangible assets or any other business or commercial rights of similar nature as per the provisions of section 32(l) of the Act. Therefore, there is no quarrel on the issue that goodwill is eligible for depreciation. However, the said judgment would not override the other provisions of the Act, as in the case under consideration the value of goodwill itself is disputed by the AO. The assessee has called to justify the value of goodwill as adopted by it. As regards other decisions on the issue that differential price needs to be treated as goodwill, the said decisions are found to be rendered on different facts and above discussed facts were not before the appellate authorities. So the reliance of the assessee on such decisions is found to be misplaced e.g. in the case of Triune Energy Services (P) Ltd. Vs. Deputy Commissioner of Income Tax (2016) 65 taxmann.com 288 (Delhi), as relied upon by the assessee, the issue was not discussed on merits but the HC only held that no s....
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....es of M/s. Indus Seeds and M/s. Sasya Gentech Private limited have been transferred to the Assessee company by way of slump sale. Details of the net book value of the assets and liabilities taken over in the slump sale are as under: SI.No Particulars Proprietorship concern SasyaGentech Private Limited 1 Assets Taken Over 14,54,94,704 1,42,91,120 2 Liabilities Taken Over (12,41,03,462) (1,77,05,260) 3 Net Assets (3) = (1) - (2)2,13,91,242 (34,14,140) 4 Actual Consideration Paid (4) 18,60,00,000 40,00,000 5 Goodwill recognized in books as per AS - 10 (5) = (4) - (3) 16,46,08,759 74,14,140 Applicability of AS - 10 11.1 The Assessee has recognized the above goodwill in its books of account as per the provision of Accounting Standard 10 issued by the Ministry of Corporate Affairs. The relevant extract of which reads as under: "16.1 Goodwill, in general, is recorded in the books only when some consideration in money or money's worth has been paid for it. Whenever a business id acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net a....
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....rchaser hands. It is further held in the above referred order that: "From an accounting perspective, it is well established that 'goodwill' is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net tangible assets, that is, assets less liabilities. The difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts." 11.7 In view of the above, it was held by the Hon'ble Court that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill. On the issue of invoking the provision Explanation 3 to Sec 43(1) 11.8. He drew our attention on the said provisions of the Act. The relevant portion of Sec 43(1) is extracted below: "Explanation 3.-Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his busine....
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....ferred to the succeeding company, which means the assets which were left in the sole proprietorship. It is also brought on record by assessee that erstwhile proprietary concern M/s. Indus Seeds had three divisions namely Indus Seeds (Main), Seed & Plant Science & Sri Krishna Nursery (SRK) for which separate set of accounts were being maintained. The proprietor also had a personal account wherein his personal assets were also recorded. The consolidated accounts of all the four sets were subject to audit u/s 44AB and the balance sheet s at 31.3.2014 contained all the four. On 31.10.2014 when the business transfer took place only the assets and liabilities of the three business divisions were taken over and the personal assets and liabilities remained with the proprietor. The Chartered Accountants certificate regarding the assets and liabilities taken over were based on these figures as extracted from the books on 31.10.2014. This is evident from the page no.271 of assessee paper book. 2. The above clause requires that the sole proprietor should not receive any consideration or benefit other than by way of allotment of shares in the company, where in the present case, the con....
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....after the takeover also shows that the value of the erstwhile proprietary business would have been higher. 12. On the other hand, Ld. D.R. relied on the order of the CIT(A) and submitted that assessee's case is directly hit by explanation 3 to section 43(1) of the Act. As such, he submitted that order of the lower authorities to be confirmed. 12.1. According to him in view of the above explanation, the assessee's claim cannot be allowed. Further, it is submitted that it is a related party transaction. Hence, the claim of the assessee cannot be allowed. Findings:- 13. We have considered the rival submissions and perused the record. The issue before us with regard to the valuation of goodwill and granting depreciation on the same. In the assessment year under consideration, the assessee claimed depreciation on 25% of intangible assets i.e. goodwill at Rs.17,39,83,689/- in the return of income worked out at Rs.2,15,02,864/- on the reason that assessee company has paid for goodwill of Rs.16,46,08,759/- to M/s. Indus Seeds, sole property concern of Managing Director of the assessee company and Rs.74,14,150/- to M/s. Sasya Gentech Pvt. Ltd., the company in which the Managing ....
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....tangible assets recorded in the books of M/s. Indus Seeds as on 31.3.2014 was Rs.19,60,780/-. In case of M/s. Sasya Gentech Pvt. Ltd., it was Nil. However, it has been valued by assessee at Rs.17,39,83,689/- and said amount has been paid by assessee. 13.3 Section 32(1) of the Act provides for depreciation in respect of trade mark owned wholly or partly by the assessee. In the present case, assessee has taken over the business of M/s. Indus Seeds and M/s. Sasya Gentech Pvt. Ltd. as a growing concern. 13.4 It is noteworthy to mention herein that 5th Proviso to section 32(1) of the Act restrict the total depreciation, which can be claimed in case of succession, etc. to the depreciation which would have been allowable and there has been no succession. The 5th Proviso to section 32(1) was inserted by Finance Act, 1996 to restrict the claim of aggregate deduction, which is evident from the memorandum of Finance Bill, 1996, which reads as under:- In cases of succession in business and amalgamation of companies, the predecessor of the business and successor the amalgamating company and amalgamated company as the case may be, are entitled to depreciation allowance on same assets....
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.... invocation of the explanation 3 to section 43(1) of the Act 13.9. In our opinion, the invoking of this Explanation 3 to section 43 of the Act by the AO in the present case is totally misplaced and not justified. The said explanation does not restrict the claim of depreciation on goodwill arising pursuant to a slump sale. It is applicable if the impugned goodwill has been appeared in the books of accounts of transferee and this goodwill never appeared in the books of seller. In our humble opinion, the explanation 3 to section 43 will be applicable only in cases where the assets were at any time used by any other person for the purpose of his business or profession, but in the present case, the asset in question, "goodwill which is arising due to the transfer of business, which is explained in earlier para and assets were not used by any other person", therefore, it cannot be said that the said explanation is applicable to the present facts of the case. Goodwill arising on slump sale - eligible for depreciation 13.10. In this case, the AO did not principally contend against the position of the Appellant, that the goodwill recorded by it is an intangible asset eligible for d....
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....nce Bill, 1996, which introduced the sixth proviso (erstwhile fifth proviso) to section 32(1) of the Act. Thus, a commonality of assets should exist between predecessor and the successor goodwill arising pursuant to acquisition belongs only to successor company. 13.12. Further, the Ahmedabad Bench of the Tribunal, in the case of Urmin Marketing Pvt. Ltd., 122 taxmann.com 40 rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger, on the basis of purchase consideration paid (which is determined based on a valuation report), and no goodwill from the books of the transferor is recorded by the transferee. Amendment by Finance Act 2021 clarifies the position on Goodwill depreciation 13.13. The Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an Assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. 13.14. Further, amendments we....