TaxTMI 
TaxTMI 
2023 (7) TMI 1462
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....ed DCIT be set aside. 2. Ground 2 - Depreciation on goodwill 2.1 On the facts and in the circumstances 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. ....
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.... Ground No. 3 - Depreciation on purchase of software 3.1 On the facts and circumstances of the case and in law, the Ld. DCIT has erred in not granting depreciation 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 dete....
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....o. 2701/Mum/2014 allowed the appeal of the assessee partly and restored the issue of taxability of goodwill to the file of the Assessing Officer. The Assessing Officer following the due procedure of law passed this impugned 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 val....
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....passed denying the claim. 4.5 On appeal, the ITAT vide order dated 28 June 2019 was pleased to remand the matter to the AO for adjudicating the issue of depreciation on goodwill on merits. 4.6 In the second round, the AO passed a draft assessment order dated 31 March 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 a....
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....lant's claim vide directions dated 13^th December 2022. The Ld. DRP held that the present was a case of succession and therefore the AO was justified in invoking sixth proviso to section 32 of the Act. The Ld. DRP also stated that valuation reports were unrealistic since they were primarily based on the projection of revenues 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, ....
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....ndertaking over and above an agreed threshold amount between the date of contract and the date of actual acquisition. c. Page 143 of the paper book (para 3.2): The parties acknowledge and agree that the transaction will constitute an outright slump sale of the entire Acquired Business as an inseparable whole as a going concern for a lump sum consideration. d. Page 149-150 of the paper book (para 5.3.3): The consideration 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)....
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....ted from paying tax on transfer of the assets and, therefore, the transferee does not get a higher cost of assets acquired but the cost in its hands continues to be what was the cost in the transferor's hands. Non-applicability of Explanation 7 to section 43() and Explanation 2 to section 43(6) of the Act 5.4 The ld counsel further submitted that the AO has held that value of goodwill in the books of GSK and CTPL is Nil and as per the provisions of Explanation 7 to section 43(1) of the Act, 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)(....
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....): (i) There was an amalgamation of three wholly owned subsidiaries with UB (ii) Goodwill existed in the books of one of the subsidiaries at Rs. 7.45 crores which was enhanced to Rs. 62.30 crores in the books of UB based on revaluation before amalgamation (iii) The AO in that case had doubted the deflated value of tangible assets and observed that in case replacement cost of building, plant and machinery and higher value of land was taken into account, there would not be any goodwill. Accordingly, resort 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 r....
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....ered that valuation of intangible assets viz. trademarks, technical know-how, copyrights, quality control know-how, software, commercial rights in the form of supply/ vendor/ manufacturing contracts etc. are lower, and in case a higher value is to be assigned to such intangible assets, the lowering of the value of goodwill would be offset by the higher allocation of the consideration paid by the assessee to the sellers and resultantly there would effectively not be denial of depreciation. Therefore, on this count also, there is no justification of denying depreciation. 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 ass....
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....e depreciation on the intangible assets. The AD is directed to grant the benefit of depreciation in terms of section 32(1)(i) upon the intangible assets acquired by the assessee. Thus, these grounds are allowed in favour of the assessee" (v) I & B Seeds (P.) Ltd. v. DCIT [20221 142 taxmann.com 274 (Bangalore - Trib.) In this case, the Hon'ble ITAT had allowed depreciation on goodwill which arose pursuant to slump sale. Further, with respect to the amendment in section 32(1) by Finance Act, 2021, the Hon'ble ITAT has held as under: 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.. ...13.15 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, ....
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....learned counsel has referred to various clauses of business transfer agreement (BTA) in respect of units acquired from GSK and CTPL respectively. On perusal of relevant clauses referred, we find that transaction in both the cases are of slump sale and not, amalgamation as stated by the Assessing Officer. 5.19 The learned Assessing Officer has further relied on the Explanation 7 to section 43(1) of the Act, to hold that assessee is not entitled for depreciation on the Goodwill recognised. For ready reference, the relevant explanation is reproduced as under: "Explanation 7.-Where, in a scheme of amalgamation, any capital asset 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 t....
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.... of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them." 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)....
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....TAT, which have been restored to the AO by order dated 24 August 2022 as above. 6.2 In so far as claim for depreciation for AY 2009-10 (subject matter of the present appeal) is concerned, DRP directed as under: ...We also note that the matter pertains to verification and admissibility of certain facts pertaining to AY 2007-08. Therefore, considering the above facts, we are unable to adjudicate this particular objection as it is to be decided by the assessing officer. We request the assessing officer to do the needful and pass an appropriate order in this regard. The ground of objection no. 2 is dismissed. 6.3 The ld counsel submitted that the AO however, has not followed the above directions 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....