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2015 (11) TMI 1218 - DELHI HIGH COURT

2015 (11) TMI 1218 - DELHI HIGH COURT - TMI - Valuation of Goodwill - Matter remitted to AO - question whether the valuation of goodwill is appropriate - calculation of the intangible and deprecation thereon - Held that:- The issue whether depreciation is allowable on goodwill is no longer res integra. In Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT), the Supreme Court had answered the question “Whether goodwill is an asset within the meaning of section 32 of the Income-tax Act, 1961, .....

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attributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts. Thus we are inclined to accept the contention advanced on behalf of the Assessee that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill

In the facts of the present case, the ITAT has rejected the view that the slump sale agreement was a .....

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of goodwill and the balance sheet drawn up on 22nd September, 2006 specifically recorded goodwill at ₹ 40,58,75,529.40/-. 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. The question framed is an .....

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ITAT ) in ITA No. 5239/Del/2012. The said appeal was preferred by the Assessee against an order dated 17th August, 2012 passed by the Commissioner of Income Tax (Appeals) [hereafter CIT(A) ] rejecting the Assessee s appeal against the assessment order dated 29th December, 2009 pertaining to Assessment Year (AY) 2007-08. Whereas the ITA No. 40/2015 has been filed by the Assessee, ITA 189/2015 has been filed by the Revenue. 2. The Assessee s appeal, ITA 40/2015, was admitted on 19th January, 2015 .....

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he valuation of goodwill of ₹ 40.58 crore is appropriate. According to the Assessee, the value of ₹ 40.58 crore has been arrived at by reducing the value of fixed assets of ₹ 2.56 crores and net current assets of ₹ 2.71 crores - aggregating ₹ 5.27 crores as reflected in the balance sheet as on 22nd September, 2006 - from the slump sale consideration of ₹ 45.85 crores. The said consideration had been paid pursuant to an agreement dated 22nd September, 2006 whic .....

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ce 50% are held by one Mr Binoy Jacob. The Assessee is a Design Engineering and Consultancy Company servicing industries engaged in Oil and Gas production and processing (offshore and onshore), Petroleum Refining, Petroleum Storage and Transportation, Chemicals and Petrochemicals. 4.2 Mr Binoy Jacob was also, at the material time, one of the principal shareholders/promoters of the company Triune Projects Pvt. Ltd. (hereafter TPPL ) and held 76.42% of the issued and subscribed share capital of TP .....

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pecified as 22nd September, 2006 (unless otherwise agreed between TPPL and the Assessee). It is relevant to note that that TPPL also agreed to provide the balance sheet as on closing date and it was agreed that the same would be treated as a part of the Agreement and as an annexure thereto. 4.4 The Assessee took over the assets, liabilities and the business of TPPL with effect from the closing date, i.e., 22nd September, 2006. The balance sheet drawn up by the Assessee as on 22nd September, 2006 .....

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this was in the nature of succession, which was covered under Section 170 of the Act. The AO reasoned that in terms of the fifth proviso to Section 32 of the Act, the claim of the Assessee for depreciation was restricted to the opening Written Down Value of assets at the beginning of the Previous Year, in the hands of TPPL. Thus, the AO did not admit the Assessee s claim for depreciation on goodwill, which was value at the slump sale consideration less the value of net tangible assets. The AO fu .....

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ees of ₹ 1.86 crores. In view of his findings, the AO disallowed the Assessee s depreciation claim of ₹ 10,14,68,882/- and added the same to the taxable income of the Assessee. 4.7 Aggrieved by the decision of the AO, the Assessee preferred an appeal before CIT(A). The CIT(A) observed that Mr Binoy Jacob was a principal promoter of TPPL and also held 50% shares in the Assessee Company. He also observed that while Mr Binoy Jacob had acquired 50% shares of the Assessee at ₹ 10 pe .....

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vice entered into only for the purposes of obtaining an undue tax advantage. The CIT(A) also did not accept the valuation report whereby the value of goodwill had been bifurcated into different components. The CIT(A) rejected the Assessee s claim that it had acquired any knowhow from TPPL and in any event found that the valuation of ₹ 26.20 was exaggerated. Similarly, the CIT(A) did not accept the valuation of business at hand of ₹ 12.50 crores as well as payment for noncompete at &# .....

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e Assessee was not sustainable as the same was not claimed as an allowance or a deduction and, therefore, any addition under Section 40A was not sustainable. The ITAT further held that the conclusion of CIT(A) and the AO that the scheme of slump sale (i.e. the Agreement) was a colourable device was also unsustainable. Accordingly the ITAT set aside the said conclusion. 4.9 Insofar as the claim of depreciation is concerned, the ITAT held that no credible material had been brought out in the valua .....

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AT - following the decision of Supreme Court in CIT v. Smifs Securities Ltd.: 348 ITR 302 (SC) - upheld the Assessee s contention that depreciation could be claimed on goodwill; but, remanded the matter for the purposes of valuation of goodwill. 5. Mr Sabharwal, learned Senior Advocate appearing for the Assessee submitted at the outset, that the trifurcation of goodwill into separate components viz. technical know-how, brand name and non-compete , were done by the Assessee after the conclusion o .....

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that the scope of Section 32 had been widened by Finance Act (2) Act, 1988 and depreciation was now allowable on intangible assets acquired on or after 1st April, 1998. He further submitted that the consideration paid by the Assessee in excess of the value of tangible assets was attributable to the corporate name, the business set up, various licenses and commercial rights acquired by the Assessee as a part of the going concern of TPPL. Mr Sabharwal also referred to Accounting Standard 10 in su .....

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wards acquisition of goodwill. She contended that no consideration could be attributed to goodwill as the slump sale agreement was silent on this aspect. 8. Countering the aforesaid arguments, Mr Sabharwal referred to the Agreement, which expressly interprets goodwill for the purposes of the Agreement as includes the goodwill in relation to the name, associated to the business of the seller. He also referred to the balance sheet of the Assessee prepared as on 22nd September, 2006 which is based .....

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le under the said section in favour of the Assessee. 11. The Supreme Court had further held as under:- We quote hereinbelow Explanation 3 to section 32(1) of the Act: "Explanation 3.-For the purposes of this sub-section, the expressions 'assets' and 'block of assets' shall mean- (a) tangible assets, being buildings, machinery, plant or furniture ; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial .....

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e". The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 11. In the circumstances, we are of the view that "goodwill" is an asset under Explanation 3(b) to section 32(1) of the Act. 12. In the present case the Business Identification Schedule appended to the Agreement specified the business of TPPL, which was sold to the Assessee. Apart from the tangible assets the said Schedule also included the follow .....

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in 22nd September 2006. 4) TPPL Business Records and Know How: Know how, expertise, capabilities, references, track records related to clients and/or suppliers, agents, distributors, business and production plans, forecast, correspondence, orders, inquiries, proprietary information, patent, data, archives, design specification, manuals, research data, instructions, all past and present information and whatever can be directly or indirectly referred to the Business etc, including the books, recor .....

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22nd September, 2006. xxxx xxxx xxxx xxxx xxxx 9) Goodwill: Goodwill includes the goodwill in relation to the name associated to the Business. 13. Goodwill is an intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base etc. The expression goodwill subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. 14. In CIT .....

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n carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business. The Court had further explained that: A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. And yet, .....

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ation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. It comes silently into .....

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et tangible assets, that is, assets less liabilities. The difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts. The Financial Reporting Standard 10 issued by Accounting Standard Board which is applicable in United Kingdom and by Institute of Chartered Accountants of Ireland in r .....

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Reporting Standard 10 also provides for accounting of purchased goodwill as the difference between the cost of an acquired entity and the aggregate of the fair values of that entity s identifiable assets and liabilities. Positive goodwill arises when the acquisition cost exceeds the aggregate fair values of the identifiable assets and liabilities. Negative goodwill arises when the aggregate fair values of the identifiable assets and liabilities of the entity exceed the acquisition cost. 17. At t .....

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d as 'goodwill'. Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise. 18. It is also relevant to note that Smifs Securities Ltd. (supra) was a case where assets of company - YSN shares and Securities (P.) Ltd. were transferred to Smifs Securities Ltd. under a scheme of amalgamation. And, the excess consideration paid by the Assessee therein over the value of net assets of YSN Shares and Securities .....

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The Agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The Agreement itself indicates that slump sale included sale of goodwill and the balance sheet drawn up on 22nd September, 2006 specifically recorded goodwill at ₹ .....

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