TMI Blog2017 (7) TMI 416X X X X Extracts X X X X X X X X Extracts X X X X ..... genious 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chedule, the total value of intangible assets was ₹ 188,34,00,000/- and addition of ₹ 268,53,00,000/- is shown. The break-up of intangible assets includes the value of distribution network of ₹ 44,29,80,000/-. On this, the assesse company had claimed depreciation at 25%. The AO has rejected the contention of the assessee observing as follows: 7.2 The above contention of the assessee company was examined further. As per 'Accountants Report' on valuation for slump sale, paragraph 6.3 reads as under BPL had been in the manufacture inter alia of colour television (CTV) for long time and owns contractual rights in respect of an extensive distribution network comprising of C F Agent, Dealers, Distributors, galleries, CSD, Institutions, Service Franchise Networks and others. Many of these customers have done business with the BPL for a number years of uninterrupted service. By virtue of slump sale of CTV business to JV-Co, JV-cO has acquired the customers of CTV business and has therefore, been above to avoid the cost of having to develop its own market know how and build such a customer base. One approach to value the customer base would be to qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'not exclusive dealers of CTV's'. Further more, these dealers and distributors are not brand, specific only to BPL , but the dealers sell CTV's of other brands and competitors also. - The basis of valuation of distribution network is 'saving of future costs if marketed individually' and is based on estimation. - The BPL Ltd continues to be part of the assessee company being 50% share holder. In other words, by virtue of BPL being the share holder in the assessee company, in reality, there is no actual transfer of distributor network. The network of dealers and distributors will continue without much difference. In other words, it is akin to absorption of employees of CTV division of BPL to the assessee company. Nothing changes on the around but only on paper. 7.4 From the above, it is obvious that the valuation of the distribution network is on the higher side and has been done to claim depreciation. It is very important to note that what is transferred in only CTV division and BPL continues to do the other division on its own. The distribution network they are referring to is not CTV specific. The dealers/distributors are not dealers and distributo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of land in prime area like 'Noida'. Similarly, the land at Bangalore, Sy.no.s 23/1.23/2.24,25/2, 26/2 at Avalahalli, Old Madras Road measures 11 acres and valued at ₹ 5.3 crores as per revaluation which is totally absurd. It appears that, the total valuation was intended to be kept at the certain level and internal jugglery was made and was introduced in the name of 'distribution network'. For these reasons, I am of the opinion that the assessee has and its valuer has inflated the value of so called 'distribution network' to be included as part of the 'intangible assets' to claim higher rate of depreciation @ 25%. This opinion is further strengthened by the fact that the assets transferred stands at ₹ 81 crores whereas the intangibles are valued at ₹ 282 crores. Hence, the action of the assesee in considering and valuing the distribution network is totally unacceptable and liable to be rejected. 7.5 Having said that, whether the 'distribution network' can be considered intangible asset is examined. The assessee in doing so has drawn reference to Circular No.772 dated 23-12-1998 and has filed a submission before me and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -1998 makes it clear that the circular is not about 'intangible asset' but regarding the procedure of block assessment. Thus the assessee by reference to a circular which is not on the issue at hand is trying to mislead the undersigned and any reference to this circular is unacceptable. The Income Tax Act, refers to the intangible asset as Intangible assets, being know-how, patents, copyrights, trade mark, licenses or franchises or any other business or commercial rights of similar nature, acquired on or after the 1st day of April, 1998. From the above it can be ascertained that the 'distribution network' is covered in know how, patent, copy right, trade mark. The franchises have already been excluded in the accountant report itself. The only item thus left for discussion is 'business or commercial rights'. What is a business or commercial right is not defined. But from the discussion in paragraphs 7.2 to 7.4 it is clear that no distribution net work is actually transferred on the ground. For these reasons, no claim of depreciation on 'distribution network' is allowable. 7.7 Having said that, I propose to disallow the sum so claimed. A perus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken over on re valued costs'. 8.4 During the course of assessment proceedings, the same was questioned and the assessee vide letter dated 15-12-2009 submitted that the assets were purchased by an independent entity Sanyo BPL P Ltd., from BPL Ltd.,. Even if the assets are purchased at a value higher than that of the WDV computed as per IT Act, 1961 of the selling company, the same would be considered as capital gains in accordance with provisions of S.50 in case of depreciable assets and such income would have been offered by the entity selling the asset(BPL Ltd.). Vide this letter the assessee has further argued that, the fact that the BPL Ltd., has 50% share in Sanyo BPL P Ltd., has no relevance in context of transfer of assets. Since Sanyo BPL P Ltd., is a separate legal entity, the purchase cost of assets for the purpose of depreciation would be the amount agreed to and paid by Sanyo BPL P Ltd., to BPL Ltd.,. The assessee further added that, no where in the Income Tax Act does it specify that assets purchased from a related party should be taken at the WDV computed as per IT Act, 1961 of the transferor company. Thus, the assessee is contending that if the assets are pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for the sake of clarity, the following facts are enumerated The assessee company is engaged in the business of manufacture and trade of colour television and accessories. Vide agreement dated 14-12-2005 between BPL ltd and M/s Sanyo Electric Co, Japan, the colour TV business of the BPL Ltd was transferred on slump sale basis to the newly formed 50:50 joint venture of M/s BPL Ltd and M/s Sanyo Electric Co, Japan namely M/s Sanyo BPL Pvt Ltd., i.e., the assessee company. As per schedule of fixed assets the assessee has shown the value of fixed assets at ₹ 81.19 cr including assets held for sale. Out of the above, the land is shown at ₹ 6.22 crores and other fixed assets at ₹ 73.83 crores and assets are revalued. As per the closing WDV of M/s BPL Ltd., the value of such fixed assets excluding land is ₹ 15.75 crores. The assessee has submitted that, it need not adopt the closing WDV of the transferor because it is neither a subsidiary nor the transaction between two companies can be termed as merger, de merger, amalgamation etc., However, a perusal of the closing WDV of the transferor and the value adopted by the assessee company shows that the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,856 Fire fighting equip 1,62,557 16,79,233 15,16,676 Office equipments 3,95,998 15,06,952 11,10,954 Computers 9,50,588 76,17,438 66,66,850 Furniture/fixtures 1,58,33,733 1,77,85,358 19,51,625 Total 15,74,64,490 73,83,71,104 58,09,06,614 8.8 It is not clear, how the value of depreciable items such as plant machinery, dies, tools and moulds, electrical installations, air-conditioning, fire fighting equipments, computers; furniture and fixtures can be increased from ₹ 15.75 crores to ₹ 73.83 crores. Even if we consider, the cost of installation of any second hand machinery and time lag for that purpose and rate of cannot be more than 25% of the closing WDV of the----------(sic). 8.9 To deal with this type of situation, wherein the assets are transferred between the related parties an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k . 3. The CIT(A) has erred on the facts and law in not considering that for the intangible asset namely Distribution Network , the Appellant has paid sales consideration and the same was valued as per the valuation report prepared by the independent registered valuer (s) and was reflected under the category of intangible assets by the Appellant. 4. The CIT(A) has erred on the facts and law in not considering that the intangible asset namely Distribution Network is duly covered under the provisions of section 32(1) (ii) of the Income Tax Act,1961. 5. The CIT(A) has erred on the facts and law in confirming the disallowance of ₹ 9,53,09,059/-made by the AO while not allowing the depreciation claimed by the Appellant on the revalued value of the fixed assets. 6. The CIT(A) has erred on the facts and law in not considering that the Appellant has not overvalued the value of the fixed assets as the value of the fixed assets was determined on the basis of on the valuation report obtained from an Independent Registered Valuer. 7. The CIT(A) has erred on the facts and law in not considering that that the Appellant has not overvalued the value of the fixed assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. This issue can also considered from another angle. Even assuming that there is no intangible assets as distribution network as claimed by the assessee, excess of consideration paid over assets taken over constitutes goodwill as per judicial precedents in the light of the decision of the Hon ble Delhi High Court in the case of Triune Energy Services (P) Ltd. In ITA Nos.40 189 of 2015. Intangible assets qualifying for depreciation in terms of the law laid down by the Hon ble Supreme Court in the case of CIT vs. Snifs Securities Ltd. (348 ITR 302). Thus the law is fairly settled to the extent that excess of consideration paid over assets taken over assets constitutes goodwill and the same is eligible for depreciation. But the matter does not end there. Valuation of goodwill is also the bone of contention between the assessee and the revenue. Depreciation is admissible on the actual cost as the actual cost is required to be determined. The term actual cost has been defined u/s 43(1) which reads as under: 43. In sections 28 to 41 and in this section, unless the context otherwise requires- ( 1) actual cost means the actual cost37 of the assets to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a particular asset is a question of fact which has to be determined on the evidence of the material produced before or available to the Income-tax authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by an assessee would be a piece of evidence and, prima facie, the statements or figures given therein would show how much the cost of the asset to the assessee is. But if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purpose, it is open to the Income-tax authorities to refuse to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual cost was. These observations in our view render the approach adopted by the Tribunal in the present case as unsustainable when it observed that collusion and inflation would not entitle the Income-tax authorities to substitute their own figure of actual cost. In the case of Guzdar Kajora Coal Mines Ltd. [1972] 85 ITR 599 (SC), the deed of conveyance executed in favour of the assessee pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven circumstances in the amount of purported actual cost. We are further of opinion that the Tribunal was not justified in restricting the operation of the actuality of cost to cases where part of that consideration was not paid or ploughed back or covered some other items. In these cases, the cost would be what is in fact paid. What was not paid or was returned would never be considered as cost. This will be independent of the provisions contained in the Income-tax Act. The provisions of this Act have not been introduced for this purpose. They have rather a special objective and is directed towards nullifying the malpractices, sometimes indulged in some quarters, of disproportionately inflating capital cost in order to earn high depreciation, and pass on in collusion substantial amounts to sister concerns or closely connected parties to whom those amounts may have little or negligible bearing on the incidence of tax. This is what appears to have happened in the present case. In our opinion, when the Legislature has prefixed the word actual to the word cost , it was to lay emphasis on the reality and genuineness thereof and exclude collusive, inflated, deflated or fictitious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid for acquisition of the business should be treated as goodwill which is eligible for depreciation in the light of decision of the Hon ble Supreme Court in the case of (340 ITR 302). Learned counsel for assessee further submitted that excess consideration paid for assets taken over is nothing but depreciation in terms of law laid down by the Hon ble Delhi High Court in the case of Truine Energy Services Pvt. Ltd . in ITA Nos.40 189/15. The sum and substance of the argument of learned counsel for assessee is that even assuming that no intangible assets are acquired on account of acquisition of erstwhile BTV Manufacturing of BRI Ltd., The excess of consideration should be treated as a goodwill which is eligible for depreciation in terms of law laid down by the Hon ble Supreme Court in the case of CIT vs. Snifs Securities Ltd. (340 ITR 302). On the other hand, learned CIT(DR) placed reliance on the orders of the lower authorities. 13. We heard rival submissions and perused material on record. In the present appeal, the issue involved is whether the AO was justified in invoking Explanation 3 to section 43(1) for the purpose of determining the actual cost to allow depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avoiding tax liability and therefore, invoked the provisions of Explanation 3 to section 43(1) of the Act. While doing so, the AO accepted that higher value of 25% over and above closing WDV in the hands of M/s.BPL Ltd. i.e. transferor. Permission as envisaged under provisions of Explanation 3 to section 43(1) from higher authorities was also obtained. The only objection of the assessee-company seems to be that except subjective opinion of Assessing Officer, there was no material referred by the AO indicating overvaluation of the assets of the assessee-company. Thus, it was contended that the AO should not have invoked the provisions of Explanation 3 to section 43(1) of the Act. 14. It is needless to mention that depreciation is admissible only on actual cost incurred by the assessee-company. When the assessee-company purchased as a going concern at a slump price, identification of the actual cost in respect of different assets poses certain problems. It is an accepted practice that consideration paid for acquisition of business allocation towards various assets based on report of expert. In the instant case, the assessee-company exactly did the same thing but the report of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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