TaxTMI 
TaxTMI 
2025 (2) TMI 1848
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....015-2016. 1. The CIT(A) erred in upholding disallowance of Depreciation on Goodwill, without considering the facts and circumstances of the case 2. The CIT(A) has erred in accepting the contention of AO that the transfer is not a valid slump sale even though the AO has not given any cogent reason for the same and has never controverted that the transaction in question is the transfer of an Undertaking as a Going Concern with the physical assets, manpower and live assignments/deeds in relation to the same being transferred to the buyer. 3. The CIT(A) has erred in treating the transfer as a demerger without appreciating the fact the transfer was not undertaken in pursuance to a Scheme of Arrangement under the Companies Act and the buyer Company did not issue shares as a consideration of the said transfer, both of which are the necessary conditions of section 2(19AA) of the Income Tax Act in order to be qualified as demerger 4 The CIT(A) has erred in treating the transfer as mechanism used to reduce profit without appreciating the fact that Goodwill did not arise out of mere book entries, as the consideration for business transfer was exchanged in C....
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.... 2(19AA) of the Act, the buyer becomes a successor of the business and hence the transaction cannot be treated as a slump sale. The Ld. AO observed that the transfer of PES business is covered by the provision of Section 170 of the Act which deals with succession and the sump sales is not regarded as a transfer for the purpose of capital gains and no capital gains is chargeable to tax in the hands of the seller. So, it was held that the 5th Proviso to section 32(1) of the Act would be applied and restrict the claim of depreciation on same set of assets which it received owing to succession. The assessee reiterates that the acquisition of the PES business unit of the seller as a going concern under a slump sale arrangement. The assessee objected that the Ld. AO has re-characterised this transaction without bringing on record any cogent reason to do so. The assessee submitted that the same transaction has been offered to tax by LTIL wherein capital gains of Rs. 377.50 Cr. was declared in their return of income. Pursuant to acquisition of PES business, the goodwill has been determined at Rs. 389.09 Cr. which represents the difference between purchase consideration and value of net ass....
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....r and the same was accounted in accordance with accounting standards followed by the assessee. The Ld. AR relied on the decision of Hon'ble Delhi High Court in the case of Triune Energy Services (P.) Ltd. v. DCIT (2016) 65 taxmann.com 288 wherein under similar circumstances, depreciation on goodwill from slump sale was allowed under Section 32 of the Act. 7. The Ld. AR further stated that the slump sale cannot be treated as succession. The Ld. AO held that the transfer of PES business is covered by the provisions of section 170 of the Act which deals with succession to business otherwise than on death. The Ld. AO considered that a slump sale is not regarded as a transfer for the purpose of capital gains and hence no capital gains is chargeable to tax in the hands of the seller. Accordingly, it was held that the 5th proviso to sec. 32(1) of the Act would apply as it would restrict the claim of the assessee on claiming excessive depreciation on same set of assets which it received owing to succession. He argued that the Ld. AO has erred in invoking Section 170 of the Act (forming part of Chapter XV) which deals with succession to business or profession. These provisions are not ap....
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....at slump sale and demerger are different. The Ld. AO has referred to the definition of demerger u/s. 2(19AA) and held that transaction fulfills all conditions laid down u/s. 2(19AA) of the Act. But the transaction is not regarded as transfer u/s 47 of the Act in the hands of the seller, LTIL. Since the transaction is not a transfer, any payment made in lieu of such transfer cannot be regarded as a genuine business transaction incurred wholly and exclusively for the purpose of business. The Ld. AO observed that the transaction is a colorable device adopted by the assessee to drain the ex-chequer by claiming fictitious goodwill to the extent of Rs. 398.48 Cr. and claiming depreciation thereon of Rs. 85.41 Cr. which is not admissible. The Ld. AR stated that once the transaction is held to be a slump sale, the question of it being treated as a demerger does not arise. A transaction to be treated as a demerger u/s. 2(19AA), all conditions laid down therein need to be fulfilled. He stated that the following key conditions which have not been fulfilled in assessee's case which are as follows: - i. Transaction is not pursuant to a scheme of arrangement u/s. 391-394 of the Compa....
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.... which finds place in Explanation 3(b). 5. In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act." 11. During the argument, the Ld.AR narrated the fact that the previous year relevant to assessment year 2014-15 the assessee had accounted for goodwill arising on acquisition of the Indian PES business of LTIL of Rs. 379,69,67,332/-. In its computation of income filed for the AY 2014-15, out of total depreciation of Rs, 51,07,25,862, depreciation of Rs. 47,46,20,917 was claimed in respect of the said goodwill. In the course of assessment proceedings for the AY 2014-15, notice dated 18.10.2016 was issued by the Ld. AO under section 142(1) of the Act, wherein, the assessee was inter-alia asked to explain introduction/addition of intangible assets during the year. The assessee responded to the same by its letter dated 15.12.2016, wherein, in paragraph 20 it explained that it had acquired PES business unit from L&T Infotech Limited. The excess of consideration paid over the net value of assets represented goodwill. 12. Pursuant thereto, an assessment order dated 20.12.2016 has been passed under sectio....
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....pellant as it is not a slump sale but a mechanism where appellant claimed depreciation to reduces his profit. It is further noted that the so called acquisition of assets happened in the previous year to the relevant financial year, but the appellant has not claimed depreciation in that year, which is not understandable. Now the A.Ο. disallowed the entire depreciation on the said acquisition of asset, so there is no question of opening depreciation in this block. However the A.O. is directed to allow depreciation on the other assets in this block which are not part of this transaction. The order of the A.O. is confirmed with subject to above observations." 14. We heard the rival submissions and considered the documents available in the record. The issue was agitated, whether the transaction of the assessee with the PES is a slump sale or the revenue has treated it as a demerger. The present is alleged to be a case of succession of business and, hence, the present sixth proviso to section 32(1) of the Act shall be applicable. In such a scenario, since goodwill did not appear as an asset in the hands of the LTIL, no depreciation can be allowed it respect of the same in the....
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....by virtue of the demerger are not satisfied. LTIL has offered the capital gains arising on the said transfer of PES business unit for tax purpose which has been assessed as such in the assessment order passed on them. They have offered the income to tax by applying the provisions of section 50B dealing with computation of capital gains in the case of slump sale. Therefore, neither the transaction is in the nature of demerger nor have the parties treated it to be so. 14.2. We note that the Ld. AO referred to Explanation 3 section 43(1) of the Act, alleging the main purpose of transfer as the reduction of liability to income tax by claiming depreciation on the enhanced cost. He has failed to appreciate that the main purpose of transfer was that LTIL wanted to focus on its core business of providing Information Technology services to financial services sector and the manufacturing sector. Further, rendering of such services to telecom sector was required to consolidated as the PES in relation thereto we provided by LTIL while the integrated engineering service were provided by Larsen & Toubro Ltd. Therefore, the said transaction of slump sale was driven by principles of business an....
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.... 925/Mum/2021, date of pronouncement 02/05/2024. Whether the Tribunal has relied on the order of the Hon'ble Supreme Court in the case of Smifs Securities Ltd (supra) where the goodwill is eligible for depreciation, since it is in nature of an intangible asset. Since the claim of the assessee is supported by said decision rendered by the Hon'ble Apex Court, so the eligibility of depreciation is duly accepted under section 32 of the Act. Considering the transactions related to slump sale or demerger, it has already discussed that the said agreement was duly submitted before the Bench and it is in the nature of slump sale, so section 45 related to demerger is not applicable. We set aside the observation of the Ld. CIT(A). We uphold the contention of treating the transaction as 'slump sale and consequently delete the denial of depreciation of Rs. 85.41 Cr. on goodwill made by the Ld. AO. Accordingly, the grounds of the assessee are allowed. 15. Additional Grounds: The assessee filed the additional ground with the submission. The issues are first time agitated before the Bench. The Ld. AR argued and prayed for remanding the matter to the file of the Ld. AO. The submission ....