TMI Blog2021 (11) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... the net asset value for acquiring a business concern shall constitute goodwill. Applicability of proviso to sec.32 (1) - It is not the case of the revenue that this transaction is between two related parties. Hence this purchase would not fall under the categories of succession, amalgamation and demerger. We have noticed that the tax authorities have observed that the spirit of the above said provisions should be applied to the present case. We are unable to agree. It is well settled proposition of law that the Income tax provisions should be construed strictly. Hence the scope of the above said proviso cannot be extended to the transaction of purchases between two unrelated parties. Eligibility of the assessee to claim depreciation on Goodwill cannot be decided unless the above said factual aspects are clarified. We have held, following the decision rendered in Truine Energy Services Pvt. Ltd. [ 2015 (11) TMI 1218 - DELHI HIGH COURT] , that the excess amount paid over and above the net asset value on acquiring a business concern shall constitute goodwill. However, the said legal principle can be applied only if the facts relating to the case are clear. We have noticed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid u/s 201(1A) of the Income-tax Act,1961 ['the Act' for short]. c) Disallowance of interest on bank overdraft u/s 40(a)(ia) of the Act. 2. The assessee is a Private Limited company incorporated on 23.12.2013. It is a subsidiary of TUV Rheinland (India) Pvt. Ltd.. The ultimate parent company is TUV SUD Group, Germany. This group is providing technical services worldwide.The assessee company is engaged in the business of providing Vocational training to the students in the fields of fire safety, lift technology, fiber optics, etc. 3. The first issue relates to disallowance of depreciation claimed on goodwill. The A.O. noticed that the assessee has claimed depreciation on goodwill. The depreciation was claimed on the amount of ₹ 25.38 crores @ full rate, since it was used for more than 180 days and on ₹ 5.18 crores @ 50% of eligible amount of depreciation, since it was used for less than 180 days.The total amount of depreciation claimed onGood will was ₹ 6,99,31,440/-. In this regard, the AO noticed that the assessee had acquired a vocational training institute giving training to the students from a person named Shri M.V. Thomas, who was running t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eller, then it cannot have a place in depreciation chart of buyer also. Accordingly, the A.O. held that the claim of depreciation of the assessee on goodwill cannot be allowed. 6. Without prejudice to the above, the A.O. also held that the assessee has not done any valuation for goodwill. In any case, there is huge variation between the value of asset and the consideration paid by the assessee. Accordingly, the A.O. took the view that the assessee has adopted a colourable device to reduce tax liability by claiming higher amount of depreciation and for the purpose, it has paid higher amount for purchasing assets on slump sale. The A.O. also took support of the decision rendered by Mumbai Bench of ITAT in the case of Deputy Commissioner of Income-tax Vs. Toyo Engineering India Ltd. (2013) 33 Taxmann.com 560, wherein it was held that no depreciation will be allowed on goodwill in a case where from purchase of goodwill was not proved by the assessee. Accordingly, the A.O. disallowed depreciation claimed by the assessee on goodwill. 7. The Ld. CIT(A) noticed that the assessee company was formed only on 23.12.2013 while the agreement had been entered by the holding company on 4.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are. 10. The Ld CIT(A) also affirmed the view of the A.O. that the spirit of 5th Proviso (now it is 6th proviso) to section 32(1) of the Act would apply to case of slump sale, like that of assessee. Accordingly, the Ld. CIT(A) upheld the disallowance of depreciation claimed on goodwill. 11. The Ld. A.R. submitted that it is a settled principle that the consideration paid in excess of value tangible assets while acquiring a going concern on slump sale basis is to be classified as goodwill. This is in consonance with Accounting Standard-10 issued by Institute of Chartered Accountants of India. The Ld. A.R. submitted that this principle was appreciated by Hon ble Delhi High Court in the case of Truine Energy Services Pvt. Ltd. Vs. Deputy Commissioner of Income-tax (2016) 65 Taxmann.com 288. The Ld. A.R. submitted that the A.O. had placed reliance on the decision rendered by Mumbai Bench of Tribunal in the case of Toyo Engineering India Pvt. Ltd. (supra). She submitted that the above said decision is distinguishable on facts. She submitted that the above said decision rendered by Mumbai Tribunal was distinguished by Chennai Bench of Tribunal in the case of ACIT Vs. M/s. Dorma Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , since the NIFE ACADEMY did not possess any goodwill asset. The Ld. D.R. further submitted that the agreement was entered in 2013 by the holding company. Even if it is assumed that the assessee had acquired right from its holding company, yet there is no explanation from the assessee as to why it did not claim any depreciation in assessment years 2014-15 and 2015-16 and further, why depreciation has been claimed during the year under consideration. Accordingly, the Ld. D.R. submitted that the Ld. CIT(A) was justified in rejecting the claim of depreciation in view of the above said deficiencies. 14. In the rejoinder, the Ld. A.R. submitted that the agreement was entered by the holding company on behalf of the assessee company and the assessee company was formed to execute the above said agreement. She submitted that the assessee company only has paid the consideration for purchase of NIFE Academy and hence it is the assessee which has paid for goodwill . Accordingly, she submitted that the assessee company is eligible for depreciation on goodwill payment. 15. The Ld. A.R. further submitted that though the agreement was entered for purchase of NIFE Academy in 2013, the deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;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 this stage, it is also relevant to refer to Accounting Standard 10 as issued by the Institute of Chartered Accountants of India. The relevant extract of which reads as under:- 16.1 Goodwill, in general, is recorded in the books only when some consideration in money or money's worth has been paid for it. Whenever a business id acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net assets of the business taken over, the excess id termed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. A careful perusal of the above said proviso would show that the same is applicable to the cases of Succession , Amalgamation and Demerger , i.e, transactions between related parties. In the instant cases NIFE academy has been acquired through Business Transfer Agreement by the holding company of the assessee from Shri M V Thomas. It is not the case of the revenue that this transaction is between two related parties. Hence this purchase would not fall under the categories of succession, amalgamation and demerger. We have noticed that the tax authorities have observed that the spirit of the above said provisions should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e., the assessee has to show as to how the rights proposed to be acquired by the holding company were made over to it. ii. Then the assessee has to furnish the details of the date from which it has started operating NIFE Academy. iii. The date of making payment for acquiring NIFE Academy and the details of authority under which the payment was made. iv. If the assessee has proved its ownership of the NIFE Academy and if it has also started operating NIFE Academy from any of the earlier years, then the provisions of Explanation 5 to sec.32 shall apply. Accordingly, the depreciation shall be deemed to have been allowed in the earlier years. Accordingly, the depreciation is allowable in this year on WDV only. For this purpose, the actual payment is not relevant. These facts also require verification. 20. Accordingly, in our view, the eligibility of the assessee to claim depreciation on Goodwill cannot be decided unless the above said factual aspects are clarified. We have held, following the decision rendered by Hon ble Delhi High Court, that the excess amount paid over and above the net asset value on acquiring a business concern shall constitute goodwill. However, the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso been dealt with exclusively by the various benches of the ITAT , specifically in Velankani Information Systems Ltd. V DCIT [2018] 97 taxmann.com 599 (Bangalore Trib.)/[2018] 173 ITD 19 (Bangalore Trib.) wherein considering various decisions of the Tribunal had followed the decision of the Hon ble Madras High Court in CIT Vs. Chennai Properties Investment Ltd. (supra) as under :- 21. As far as delay in remittance of tax deducted at source u/s. 201(1A) of the Act is concerned, we find that the Hon ble Madras High Court has taken a view that i nterest paid u/s. 201(1A) is also in the nature of tax and notwithstanding the fact that it is not the tax liability of the assessee, the same cannot be allowed as a deduction. The following were the relevant observations of the Hon ble Madras High Court:- 14. As already noticed the p ayment of interest takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which rendered the assessee liable for payment of i nterest was in the nature of a direct tax and similar to the income-tax payable under the Income-tax Act. The interest paid under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Narayani Ispat (P.) Ltd. (supra), which was cited by the ld. counsel for the assessee, did not consider or did not have an occasion to consider the decision of the Hon ble Madras High Court in the case of Chennai Properties and Investment Ltd. (supra) . In these circumstances, we follow the decision of the Hon ble Madras High Court uphold the order of the CIT(A) insofar as it relates to disallowance of interest on delayed remittance of tax deducted at source u/s. 201(1A) of the Act. 8. In view of this, we do not find any merit in the appeal of the assessee and hold that interest payment on late payment of tax at source is not eligible business expenditure for deduction and it is not compensatory in nature. 24. Following the above said decision, we decide this issue against the assessee and accordingly uphold the decision rendered by Ld CIT(A) on this issue. 25. The last issue relates to the disallowance of interest payments u/s 40(a)(ia) of the Act for non-deduction of tax at source. The AO noticed that the assessee has not deducted tax at source from various payments, which included payment of interest on borrowings amounting to ₹ 65,66,637/-. The AO dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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