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2024 (2) TMI 1553 - AT - Income TaxDepreciation on goodwill - fictitious capital gains - transaction undertaken with a group entity and the execution of the Business Transfer Agreement (BTA) and Share Transfer Agreement (STA) within a short time that too ten days before the close of the financial year renders them colourable device only for the creation of goodwill and to avoid payment of taxes - HELD THAT - It remains an undisputed fact that the seller company is assessed to tax and the capital gains offered by it are accepted without any adjustment. Assessee placed reliance on the decision of Triune Projects Private Limited 2016 (12) TMI 408 - DELHI HIGH COURT and I B Seeds Pvt. Limited 2022 (6) TMI 1295 - ITAT BANGALORE for the principle that once the department accepted the capital gains in the hands of the seller the said transaction cannot be doubted in the hands of the purchaser. These decisions bind us. Viewing from any angle the circumstances cited by the authorities to hold that the BTA is a colourable device created only to reduce the tax does not hold water. We therefore while disagreeing with the authorities return a finding that it is legitimate for the assessee to go for acquisition of IT services division of Allegis India and there is no material to make it a colourable device in the shape of any undue advantage derived by the assessee. We accordingly direct the learned Assessing Officer to allow the depreciation on goodwill. Depreciation on other tangible assets disallowed on the ground that such assets were not put to use by the assessee during the year under consideration - When once we accept the BTA it goes without saying that the assessee acquired the IT services division of Allegis India on a going concern basis. Submission made on behalf of the assessee that in the hands of the seller depreciation in respect of such assets was allowed and in accordance with the provisions under the 6th proviso to section 32(1) of the Act is a verifiable fact. If such assets are considered for depreciation in accordance with law in the hands of the seller the question of putting such assets to use by the assessee does not arise and only requirement is compliance with the 6th proviso to section 32(1) of the Act. 6th proviso to section 32(1) of the Act reads that in any previous year the aggregate deduction in respect of depreciation of the tangible assets allowable to the predecessor and successor in case of succession shall not exceed the deduction calculated at the prescribed rates as if the succession had not taken place and such deduction shall be apportioned between the predecessor and successor in the ratio of the number of days for which the assets were used by them. No record is available before us throwing light on the proportion of the depreciation claimed by the seller but the assessee is entitled to claim such depreciation only in proportion to the number of days for which the asset held by it. We therefore deem it just and proper to cause verification of this fact and to allow such depreciation. We set aside the issue relating to the depreciation on the other tangible assets to the file of AO to verify and allow depreciation as directed above. Ground No. 2 is allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Appellate Tribunal (AT) are:
2. ISSUE-WISE DETAILED ANALYSIS Depreciation on Goodwill and Alleged Colourable Device Relevant legal framework and precedents: Section 32 of the Act permits depreciation on tangible and intangible assets, including goodwill, subject to conditions. The Finance Act, 2021, introduced amendments effective 01/04/2021 disallowing depreciation on goodwill; however, the assessment year in question (2017-18) predates this amendment. The Tribunal relied on precedents including the Hon'ble High Court of Delhi decision in Triune Projects Private Limited and the Bangalore Tribunal decision in I&B Seeds Pvt. Limited, which establish that acceptance of capital gains by the transferor precludes doubting the genuineness of the transaction in the hands of the purchaser. Court's interpretation and reasoning: The AO and CIT(A) doubted the genuineness of the BTA, characterizing it as a colourable device primarily to create goodwill and claim depreciation, noting the timing of the transaction shortly before the financial year-end and the lack of market data supporting the goodwill valuation. They also observed that employees' consent was received post-transfer, and the capital gains tax paid by the seller was marginal compared to the depreciation claimed. The Tribunal rejected these observations, emphasizing that the business acquisition was part of a global reorganization within the Allegis Group aimed at operational rationalization and efficiency, a common corporate practice. The Tribunal highlighted the significant post-acquisition business growth: an 87% increase in revenue and 39% increase in profit before tax, which contradicted the CIT(A)'s assertion of no fruitful outcome. The Tribunal also noted the capital gains tax paid by the seller (Rs. 67,41,196/-) exceeded the tax impact of depreciation claimed (Rs. 55,76,696/-), undermining the argument that the transaction was merely a tax avoidance device. Key evidence and findings: The audited financial statements of the seller, management-certified valuation of goodwill, and the profit and loss statements showing substantial revenue and profit growth post-acquisition were critical. The acceptance of capital gains by the tax authorities in the seller's hands was also a decisive factor. Application of law to facts: The Tribunal applied the principles from judicial precedents to conclude that acceptance of capital gains in the hands of the seller validates the transaction's genuineness in the purchaser's hands. The Tribunal also noted that the Finance Act, 2021 amendment disallowing depreciation on goodwill was not applicable to the assessment year under consideration. Treatment of competing arguments: The Tribunal acknowledged the AO and CIT(A)'s concerns but found them unsubstantiated by evidence. The assessee's arguments regarding legitimate business purpose, commercial rationale, and post-acquisition performance were accepted over the suspicion of tax avoidance. Conclusions: The Tribunal held that the depreciation claim on goodwill is legitimate and directed the AO to allow it. Depreciation on Other Tangible Assets and Usage Requirement Relevant legal framework and precedents: Section 32(1) of the Act allows depreciation on tangible assets, with the 6th proviso stipulating that in case of succession, the aggregate depreciation claimed by predecessor and successor shall not exceed the prescribed rates as if succession had not occurred, apportioned in proportion to days of usage. The law does not require actual usage or usage for a minimum number of days for claiming depreciation; rather, the asset must be "ready to use." Court's interpretation and reasoning: The AO and CIT(A) disallowed depreciation on tangible assets on the ground that assets were not put to use during the year. The Tribunal disagreed, holding that acquisition on a going concern basis implies assets were ready for use. The Tribunal further noted that depreciation was allowed to the seller in respect of these assets, and therefore, the assessee's claim cannot be negated on the basis of non-usage. Key evidence and findings: The BTA executed on 27/03/2017 with closing at 31/03/2017 11:59 p.m., audited financials, and prior acceptance of depreciation in the hands of the seller. Application of law to facts: The Tribunal emphasized compliance with the 6th proviso, requiring apportionment of depreciation between predecessor and successor based on days of usage. Since no record was available to determine the exact apportionment, the matter was remanded to the AO for verification and appropriate allowance. Treatment of competing arguments: The Tribunal acknowledged the AO's reliance on timing and usage but prioritized the statutory provision and the going concern nature of the transfer. The assessee's contention that usage is not a prerequisite for claiming depreciation under the block of assets concept was accepted. Conclusions: The Tribunal set aside the disallowance of depreciation on tangible assets and remanded the issue for verification and allowance in accordance with the 6th proviso to section 32(1). Interest on Refund under Section 244A Relevant legal framework: Section 244A of the Act provides for payment of interest on refunds due to the assessee. Court's interpretation and reasoning: The Tribunal directed the AO to verify and grant interest on refund as per the statutory provisions. Conclusions: The Tribunal allowed the claim for interest on refund. 3. SIGNIFICANT HOLDINGS "Viewing from any angle, the circumstances cited by the authorities to hold that the BTA is a colourable device created only to reduce the tax, does not hold water." "It is legitimate for the assessee to go for acquisition of IT services division of Allegis India and there is no material to make it a colourable device in the shape of any undue advantage derived by the assessee." "When once we accept the BTA, it goes without saying that the assessee acquired the IT services division of Allegis India on a going concern basis." "The assessee is entitled to claim such depreciation only in proportion to the number of days for which the asset held by it." Core principles established include:
Final determinations:
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