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2017 (7) TMI 416 - AT - Income TaxDisallowing depreciation on one of the intangible asset “Distribution Network” - slump-sale proof - Held that:- In the present case, the very fact that the seller of the business had 50% interest in the company i.e. assessee-company by virtue of holding 50% shares, and the assessee-company had failed to controvert the misgivings of the AO as to the inflation of the actual cost of the asset. These circumstances would certainly justify the AO to infer that fictitious price has been put on the asset in order to avail higher depreciation under the IT Act, perhaps with some other ulterior motive which the AO had chosen not to probe. In any event, right to use distribution network does not result in creation of any intangible asset as either the transferor company or the assesse company had paid any money to the distributors for giving them distributorship of dealing in the products of the assesseecompany. Thus AO is justified in denying depreciation claim on the intangible asset of distribution network on the inflated value of the asset. It is very ingenious attempt by the assessee-company to claim higher depreciation and avoid payment of tax in the hands of the transferor of the business by claiming to be slump sale transaction. See McDowell& Co. Ltd v. CTO (1985 (4) TMI 64 - SUPREME Court) - Decided against assessee. Addition made invoking Explanation 3 to section 43(1) - Held that:- In this case, it is undisputed fact that M/s.BPL Ltd., from whom the assessee company had acquired the assets had used the asset and claimed depreciation. Thus this condition is satisfied. (2) The main purpose of transfer of such assets directly or indirectly to the assessee-company was for reduction of liability to income-tax. In the present case, transaction of acquisition business as a going concern is between two related parties and the seller had a substantial interest by holding 50% share. The assets were already depreciated in the hands of the seller i.e. M/s.BPL Ltd., higher values were assigned by the assessee-company in order to avoid tax liability. Thus, ingredients which are necessary for invoking Explanation 3 to section 43(1) are satisfied and the AO is justified in his action in restricting the allowance of depreciation on WDV at higher than 25% of the closing stock. The findings given by us in respect of depreciation on distribution network vide para 10 equally holds good even in respect of valuation of depreciable assets. - Decided against assessee.
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