TMI Blog2022 (6) TMI 1295X X X X Extracts X X X X X X X X Extracts X X X X ..... so to Section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. It is also pertinent to note that u/s 47(xiv) of the Act, any transfer of capital asset or intangible asset by a proprietorship concern to a company as a result of succession of the concern by a company is a recognized mode of transfer. Admittedly, the assessee had taken over proprietorship concerns and private company which are different entities and there were transfer of intangible asset by those two concerns to the assessee for a valuable consideration.Since the transaction is not covered under the above-mentioned clause of section 47, consequently fifth proviso of section 32 would also not be applicable in this case. Erroneous invocation of the explanation 3 to section 43(1) - The invoking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferee. Amendment by Finance Act 2021 clarifies the position on Goodwill depreciation - The Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an Assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. Amendments were made in section 55 of the Act, in relation to the meaning of 'cost of acquisition' etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to April 1, 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. The intention of the legislature is that depreciation on goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t along with IPR and knowhow and sales documentation etc. b) The Ld CIT (A) failed to appreciate that the takeover of business of the Proprietary concerns were in pursuance of an existing negotiation with an unrelated foreign investor wherein the foreign investor had already valued the business of the concerns at an amount much higher than what the Appellant took over the said businesses. 3) The action of the Ld. CIT(A) in invoking explanation 3 to section 43(1), thereby treating the transaction relating to goodwill as sham and colorable in the absence of a valuation report is untenable and unwarranted inasmuch as the valuation report taken immediately after the takeover more than justifies the amount paid by, the Appellant to the proprietary concerns. 2. The grounds of appeal relate to the common issue of action of the AO in making a disallowance ofs.2,15,02,864/-. The facts of the issue are that during assessment proceedings it was observed by the AO that the assessee had claimed depreciation @ 25% on intangible assets of Rs. 17,39,83,689/-. The assessee was asked by the AO to provide the details of intangible assets. In response to the same the assessee informed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o had substantial interest in M/s Sasya Gentech. In view of above the AO treated the transaction related to goodwill as sham and colorable device to claim higher depreciation by the assessee company. The AO invoked the provisions of Explanation 3 to Section 43(1) of the Act and restricted the value of intangible at Rs.19,60,780/-, as already recorded in the books of Indus Seeds as on 31.10.2014 the date immediately before the said concern was taken over by the assessee company. 3. During appellate proceedings the assessee has made detailed submissions. The assessee referred to the business transfer agreements (BTAs) with the two concerns purchased by it in slump sale. The BTAs define the words 'Intellectual Property Rights' and 'know-how'. The assessee submitted that the concerns taken over by it produced genetically qualified and developed seeds of high quality and the sale consideration paid by it to these concerns included value of intangibles like Intellectual Property Rights and know-how. The assessee submitted that the consideration paid by it over and above the net value of assets and liabilities taken over by it needed to be attributed to intangible asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant or otherwise. any person that is engaged or planning to become engaged in any business that competes with the business of the appellant. In addition to above the said concerns are also required to carry out certain activities and also give certain assurances (clause10.1), the relevant clausespertaining to same have already been reproduced supra. As per clause 8 of the agreement the vendor has made and given various warranties with the intention of inducing the purchaser to enter into the agreement and the vendor has indemnified the purchaser against all liabilities or loss arising directly or indirectly from breach of any warranty. As per clause 5.8, the vendor is required to use its best endeavours to obtain the consent of other parties to any contracts specified by the assessee to the assignment of those contracts to the assessee. As per clause 7, the vendor has agreed to ensure that all Divisional Personnel take employment of the assessee. As per clause 5.8, the vendor is required to assist the assessee with the necessary forms and contents to enable the utility service provided to the business, to be transferred to the assessee without any interruption of services. Thus, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial rights of similar nature as per the provisions of section 32(l) of the Act. Therefore, there is no quarrel on the issue that goodwill is eligible for depreciation. However, the said judgment would not override the other provisions of the Act, as in the case under consideration the value of goodwill itself is disputed by the AO. The assessee has called to justify the value of goodwill as adopted by it. As regards other decisions on the issue that differential price needs to be treated as goodwill, the said decisions are found to be rendered on different facts and above discussed facts were not before the appellate authorities. So the reliance of the assessee on such decisions is found to be misplaced e.g. in the case of Triune Energy Services (P) Ltd. Vs. Deputy Commissioner of Income Tax (2016) 65 taxmann.com 288 (Delhi), as relied upon by the assessee, the issue was not discussed on merits but the HC only held that no substantial question of law arose. 8. Against this, assessee is in appeal before us. The contention of the Ld. A.R. is that the assessee purchased the business of M/s. Indus Seeds and its various divisions (a proprietary concern of Mr. Praveen Noojibail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. A.R. relied on the submitted that in the present case, the businesses of M/s. Indus Seeds and M/s. Sasya Gentech Private limited have been transferred to the Assessee company by way of slump sale. Details of the net book value of the assets and liabilities taken over in the slump sale are as under: SI.No Particulars Proprietorship concern SasyaGentech Private Limited 1 Assets Taken Over 14,54,94,704 1,42,91,120 2 Liabilities Taken Over (12,41,03,462) (1,77,05,260) 3 Net Assets (3) = (1) - (2)2,13,91,242 (34,14,140) 4 Actual Consideration Paid (4) 18,60,00,000 40,00,000 5 Goodwill recognized in books as per AS - 10 (5) = (4) (3) 16,46,08,759 74,14,140 Applicability of AS - 10 11.1 The Assessee has recognized the above goodwill in its books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.6 In the present case, as per the Business Transfer Agreements, apart from the Tangible Assets and other assets which are transferred (as referred in the Para 2 of Transfer Assumption) includes a clause (d) of Para 2.2 which specifically states that any and all rights including, the goodwill and Intellectual Property Rights relating to all the Divisions and further the business is continued to be as going concern in the purchaser hands. It is further held in the above referred order that: From an accounting perspective, it is well established that 'goodwill' is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net 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. 11.7 In view of the above, it was held by the Hon'ble Court that the consideration paid by the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any form or manner, other than by way of allotment of shares in the company; 11.11 Ld. A.R. submitted that above clause does not apply to the facts of thepresent case on the following reasons: 1. All the assets and liabilities of the proprietary concern were not transferred to the succeeding company which is otherwise a requirement under the above clause. Only the assets forming part of undertaking were transferred to the succeeding company, which means the assets which were left in the sole proprietorship. It is also brought on record by assessee that erstwhile proprietary concern M/s. Indus Seeds had three divisions namely Indus Seeds (Main), Seed Plant Science Sri Krishna Nursery (SRK) for which separate set of accounts were being maintained. The proprietor also had a personal account wherein his personal assets were also recorded. The consolidated accounts of all the four sets were subject to audit u/s 44AB and the balance sheet s at 31.3.2014 contained all the four. On 31.10.2014 when the business transfer took place only the assets and liabilities of the three business divisions were taken over and the personal assets and liabilities remained with the proprietor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of distribution network, material contracts, value of ongoing research and development along with Intellectual Property Rights, Know-How, Sales Documentation etc. for both Indus Seeds and Sasya Gentech Pvt. Ltd. 11.15. Subsequent to the takeover, the foreign investor had invested the promised amount by having shares allotted for which, a valuation was undertaken. This valuation which was done immediately after the takeover also shows that the value of the erstwhile proprietary business would have been higher. 12. On the other hand, Ld. D.R. relied on the order of the CIT(A) and submitted that assessee s case is directly hit by explanation 3 to section 43(1) of the Act. As such, he submitted that order of the lower authorities to be confirmed. 12.1. According to him in view of the above explanation, the assessee s claim cannot be allowed. Further, it is submitted that it is a related party transaction. Hence, the claim of the assessee cannot be allowed. Findings:- 13. We have considered the rival submissions and perused the record. The issue before us with regard to the valuation of goodwill and granting depreciation on the same. In the assessment year under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased by assessee were in the similar field since many years. They are establishing the respective business and having a trade name as brand name in respective field. The valuation has been determined by the assessee in accordance with the business transfer agreements and following the applicable accounting standard of Institute of Chartered Accounts of India i.e. AS-10. It is also mentioned by AO that valuation of intangible assets recorded in the books of M/s. Indus Seeds as on 31.3.2014 was Rs.19,60,780/-. In case of M/s. Sasya Gentech Pvt. Ltd., it was Nil. However, it has been valued by assessee at Rs.17,39,83,689/- and said amount has been paid by assessee. 13.3 Section 32(1) of the Act provides for depreciation in respect of trade mark owned wholly or partly by the assessee. In the present case, assessee has taken over the business of M/s. Indus Seeds and M/s. Sasya Gentech Pvt. Ltd. as a growing concern. 13.4 It is noteworthy to mention herein that 5th Proviso to section 32(1) of the Act restrict the total depreciation, which can be claimed in case of succession, etc. to the depreciation which would have been allowable and there has been no succession. The 5th Proviso to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the company, where in the present case, the consideration is paid through banking channels. 3. Besides, the seller has offered the above transaction for capital gains and paid the taxes accordingly. 13.8 Since the transaction is not covered under the above-mentioned clause of section 47, consequently fifth proviso of section 32 would also not be applicable in this case. Erroneous invocation of the explanation 3 to section 43(1) of the Act 13.9. In our opinion, the invoking of this Explanation 3 to section 43 of the Act by the AO in the present case is totally misplaced and not justified. The said explanation does not restrict the claim of depreciation on goodwill arising pursuant to a slump sale. It is applicable if the impugned goodwill has been appeared in the books of accounts of transferee and this goodwill never appeared in the books of seller. In our humble opinion, the explanation 3 to section 43 will be applicable only in cases where the assets were at any time used by any other person for the purpose of his business or profession, but in the present case, the asset in question, goodwill which is arising due to the transfer of business, which is expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in the books of predecessor company on which predecessor company was claiming depreciation before slump purchase, and it is not applicable on assets recognized only by successor company pursuant to such slump purchase. The legislative intent behind the introduction of the said proviso was to curb the practice of claiming' depreciation on the 'same assets' by both the predecessor company and the successor company. This evident from the memorandum explaining the provisions of Finance Bill, 1996, which introduced the sixth proviso (erstwhile fifth proviso) to section 32(1) of the Act. Thus, a commonality of assets should exist between predecessor and the successor goodwill arising pursuant to acquisition belongs only to successor company. 13.12. Further, the Ahmedabad Bench of the Tribunal, in the case of Urmin Marketing Pvt. Ltd., 122 taxmann.com 40 rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger, on the basis of purchase consideration paid (which is determined based on a valuation report), and no goodwill from the books of the transferor is recorded by the transferee. A ..... 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