TaxTMI 
TaxTMI 
2023 (7) TMI 1462
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....tances of the case and in law, the learned DCIT and the Hon'ble DR have erred in disallowing the Appellant's claim for depreciation of Rs. 21,28,26,691 on goodwill arising on acquisition of business from Glaxo Smithkline Pharmaceuticals Limited ('GSK) and Chemito Technologies Private Limited ('CTPL'). It is prayed that the learned DCIT be directed to allow depreciation of Rs. 21,28,26,691 on goodwill acquired by the Appellant as part of the business acquisition from GSK and CTPL. 2.2 On the facts and circumstances of the case and in law, the learned DCIT and Hon'ble DR erred in relying on Explanation 7 to section 43(1) of the Income-tax Act, 1961 (IT Act) and holding that the value of goodwill in the books of the Appellant should be nil without appreciating that the said Explanation 7 is applicable only in case of transfer of capital asset under a scheme of amalgamation, whereas in the instant case, there is no amalgamation, but the Appellant had acquired goodwill on slump sale as part of business acquisition from GSK and CTPL. It is prayed that learned DCIT be directed to hold that the above referred provision has no applicability to the Appellant&....
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....tion on purchase of software based on the directions of DRP for AY 2007-08. 3.2 It is prayed that the Ld. DCIT be directed to grant depreciation amounting to Rs. 1,04,938/- purchase of software. 4. Ground 4 - Deletion of erroneous demand of Rs. 80,79,043 4.1 On the facts and circumstances of the case and in law, the learned DCIT (irit final assessment order) has erred in determining a demand of Rs. 80,79,043 as payable by the Appellant (in its final assessment order) as a difference between refund of Rs. 4,48,30,280 issued to the Appellant and refund of Rs. 3,67,51,237 determined as payable to the Appellant. 4.2 The learned DCIT has failed to consider that the Appellant has received interest of Rs. 80,79,043 under Section 244A of the IT Act on the refund of Rs. 3,67,51,237 and accordingly, has received a total refund of Rs. 4,48,30,280 (Rs. 3,67,51,237 plus Rs. 80,79,043) including interest under section 244A of the IT Act and the erroneous demand of Rs. 80,79,043 determined is on account of non-grant of interest under section 244A of the IT Act in the computation sheet of the final assessment order. 4.3 It is prayed that the learned DCIT be directed to conside....
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....final assessment order, against which assessee is on appeal before the ITAT in second round. 3. The ground No. 1 of the appeal, being general in nature, we are not required to adjudicate upon specifically and therefore same is dismissed as infructuous. Ground 2: Depreciation on Goodwill - Rs. 21,28,26,691 4. The facts qua the ground No. 2 of the appeal are that the assessee acquired two units and recognised goodwill in those transactions. Firstly, during the previous year relevant to the Assessment Year ("AY") 2008-09, the assessee acquired by way of a slump sale on a going concern basis the Qualigens Fine Chemicals Division from Glaxo Smith Kline Pharmaceuticals Limited ("GSK")( i.e. an independent third-party seller) for a consideration of Rs. 234.20 crores vide a Business Transfer Agreement ("BTA") dated 26 July 2007 (pages 1-100 of the paper book). The consideration paid was allocated over various tangible and intangible assets based on a valuation report dated 31 December 2008 issued by M/s Bansi S. Mehta and Co., Chartered Accountants (pages 101-137 of the paper book) and balance amount was treated as Goodwill of business. 4.1 Secondly, during the previous year re....
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....ch 2022 under section 143(3) read with section 254 of the Income-tax Act, 1961 ("the Act") denying the claim for depreciation on goodwill. The AO accepted in view of the decision of the Hon'ble Supreme Court in Smifs Securities' case (supra) that Goodwill was a depreciable asset. However, he held that the decision in Smifs Securities' case was confined to the issue as to whether Goodwill was a depreciable asset and the other issues such as valuation thereof were required to be gone into. He heavily relied upon the decision of the ITAT in the case of United Breweries Ltd. (2016) 76 taxmann.com 103 (Bangalore - Trib.) and also distinguished the other decisions relied upon by the assessee. 4.7 In the final analysis at page 17, in para 12, the AO observed as under: "12. To sum up, the claim for depreciation on goodwill recorded in the books of the assessee arising out of slump purchase into the assessee company cannot be allowed for the following reasons: 1. The assessee has not followed the proper system of accounting as mandated by the Accounting Standard-14. As the amalgamation was of the nature of 'purchase', the assessee was required to adjust the differe....
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....evenues for subsequent 5 years, which were provided by management, without sharing any transparent, discernible and acceptable methodology based on authenticated market size / market share of the businesses acquired market research / studies, other relevant factors, etc. The AO passed the final assessment order dated 31st January 2023 under section 143(3) read with 144C(13) read with section 254 of the Act denying the claim of depreciation on goodwill. 5. Before us the ld. Counsel of the assessee submitted that AO himself has accepted the Goodwill as a depreciable asset under section 32(1)(ii) of the Act. Even otherwise, this issue is concluded by the decision of the Hon'ble Supreme Court in Smifs Securities Ltd. 348 IT 302 (SC). The submission of assessee before us are summarised as under: Transactions in question are in the nature of slump sale, not amalgamation The acquisition of the business undertakings by the Appellant from GSK and CTPL were by way of a slump sale. A review of the respective BTAs clearly show that the business undertakings were taken over as a whole for a lump sum consideration. For instance, a reference may be made to the following: a. Page 4 of....
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....eration to be paid by wire transfer. e. Page 181 of the paper book: Statement of assets and liabilities f. Page 186 of the paper book: Schedule of fixed assets, which shows there was no goodwill in CTPL. g. g. Page 191 of the paper book: List of assets (no goodwill) h. Pages 208-222: List of material contracts i. Page 223: List of distributors 5.1. The assessee further submitted that the above is only an illustrative list of the relevant clauses of the two BTAs, which show that: (i) The undertakings were acquired by the assesee from GSK and CTPL by way of a slump sale and on a going concern basis (ii) The consideration for such acquisition was paid by wire transfer (i.e., in monetary terms) and not by issuance of shares (iii) There was no goodwill in seller's books and no claim of depreciation by the sellers on goodwill (iv) Lumpsum consideration paid by the assessee for acquiring the undertakings was allocated over various assets and liabilities and recognised in the books of the Appellant at their respective fair values based on valuation report as per the requirement of Accounting Standard 10. (v) Accordingly, the transactions in question were ....
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.... the value of Goodwill in the books of the assessee should also have been Nil. Further, it is stated that WDV of the block of assets of intangible assets in the books of the assessee should have been recorded as Nil value against the goodwill as per the provisions of Explanation 2 to section 43(6) of the Act. 5.5 It is submitted by the assessee that Explanation 7 to section 43(1) and Explanation 2 to section 43(6) of the Act are applicable to transactions in the scheme of an amalgamation and, therefore, not applicable in the case of the assessee, since transactions of the assessee are in the nature of slump sale. Non-applicability of fifth proviso (now sixth proviso) to section 32(1)(ii) of the Act 5.6 The ld counsel further submitted that the AO in the assessment order has stated that without prejudice, the depreciation allowable to the assessee on Goodwill post-purchase should have been at the same rate as allowable to seller prior to amalgamation as per the fifth proviso (now sixth proviso) to section 32(1)(ii) of the Act and accordingly, the depreciation allowable to the assessee on Goodwill should have been zero. 5.7 Regarding above , it was submitted that the said provis....
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....rt was taken to Explanation 3 to section 43(1) of the Act. It is submitted that Explanation 3 to section 43(1) can have no application in the present case since goodwill did not exist in the books of GSK or CTPL and, hence, there was no question of them using the assets before acquisition of the undertakings by the Appellant. Moreover, there is no finding by the AO that the transfer was done for the purposes of claiming enhanced depreciation. 5.11 But in the case of assessee, however: (i) The divisions were acquired by way of a slump sale as a going concern from GSK and CTPL, which are unrelated entities whereas in United Breweries parties were related. (ii) The sellers continue to exist after their respective businesses were sold to the Appellant (iii) Goodwill did not exist in the books of the sellers. The goodwill was determined based on the purchase price allocation made by an independent valuer by assigning fair values to the assets in accordance with the relevant accounting standard. Excess consideration paid to the sellers over the net assets acquired was considered as goodwill (iv) The valuation of other assets except for goodwill was not challenged by the Ld. AO ....
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....5.15 Reliance is placed on the following decisions, wherein it has been categorically held that depreciation is allowable on goodwill in a slump sale, after taking into account all relevant provisions of the Act, including fifth proviso (now sixth proviso) to section 32 of the Act. (i) Triune Energy Services (P.) Ltd. v. DCIT [2016] 65 taxmann.com 288 (Delhi) In this decision, the Hon'ble Delhi High Court while dealing with depreciation on goodwill arising on account of slump sale has held in favour of the assessee stating as under: "As indicated hereinbefore Goodwill includes a host of intangible assets, which a person acquires, on acquiring a business as a going concern and valuing the same at the excess consideration paid over and above the value of net tangible assets is an acceptable accounting practice. Thus, a further exercise to value the goodwill is not warranted." (ii) Triune Energy Services (P.) Ltd. v. DCIT [2018] 96 taxmann.com 580 (Delhi -Trib.) The Hon'ble Delhi Tribunal in this case placed reliance on the decision of Hon ble High Court in case of the same assessee and directed the Id. A to delete the disallowance on account of depreciation on intangib....
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....mendments 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.. ...13.15 Therefore, the intention of the legislature is that depreciation on goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be rejected. 5.16 The ld counsel further submitted that since assessment for AY 2008-09 was not picked up for scrutiny, it did not have an occasion to claim depreciation on goodwill in AY 2008-09 in respect of goodwill arising out of slump purchase of undertaking from GSK. Therefore, certain claims were raised before the Hon'ble ITAT in the appeal for AY 2009-10. The Hon'ble ITAT by its order....
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....sset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. Explanation 7A.-Where, in a demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is an Indian company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business : Provided that such actual cost shall not exceed the written down value of such capital asset in the hands of the demerged company." 5.20 On perusal of the above Explanation, we find that same is in relation to transactions of amalgamation and not related to slump sale transactions, which is the case of the assessee. 5.21 The learned Assessing Officer has further relied on Explanation-2 to section 43(6) of the Act, which reads as und....
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....em." 5.24 On plain reading of the above proviso, it is clear that same is in relation to allocation of the depreciation on the asset between predecessor and successor entities, whereas in the instant case goodwill was not in existence as intangible asset in the case of predecessor companies from whom the assessee has acquired corresponding units under slump sale. Therefore, the said provision is also not applicable of the facts of the instant case. 5.25 The ratio is in the case of United Breweries (supra) is also not applicable over the facts of case as in the said case there was amalgamation of the three wholly owned subsidiaries whereas in the instant case there is a acquisition of units of third parties by way of slump sale. 5.26 The learned DR before us submitted that allocation of values to the fixed asset acquired has been on lower side for creating goodwill as intangible asset. But in our opinion, if the quantum of goodwill is reduced, the valuation of the fixed asset will increase, which are also eligible for depreciation and thus in the exercise of reallocation of values among the goodwill and other fixed asset ,will be a revenue neutral exercise. 5.27 In view of the ....
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....irections in the final assessment order and not given any relief. 6.4 The computation of depreciation at the rate of 60% on the opening written down value for the year under consideration is as under: Particulars Amount (Rs.) Software expenses disallowed as per the assessment order of 2007-08 10,93,104 Less: Depreciation allowed in assessment order of AY 2007-08 6,55,862 Written down value as on 1 April 2007 4,37,242 Less: Depreciation @ 60% for AY 2008-09 (FY 200708) 2,62,345 Written down value as on 1 April 2008 1,74,897 Depreciation @ 60% for the current year AY 2009-10 (FY 2008-09) 1,04,938 6.5 The ld counsel submitted that considering the above submission, the AO may be directed to grant consequential depreciation of Rs. 1,04,938 on purchase of software. 6.6 We have heard rival submission on the issue in dispute. The only request made in this ground is for allowing depreciation in respect of expenditure on computer software, which was claimed as revenue expenditure in earlier by the assessee but rejected by the ld CIT(A) and held as capital expenditure. Since the said decision has been claimed as finally accepted by the assessee, the assessee deserve depreci....