Full Depreciation on Goodwill Acquired in Slump Sale Held Allowable.

ORDER

Krinwant Sahay, Accountant Member.- Appeal in this case has been filed by the Revenue against the order dated 2.1.2023 passed by the Ld. CIT(A) National Faceless Appeal Centre (NFAC), Delhi.

2. The revised grounds of appeal are as under:

3. Brief facts of the case, as discussed by the Ld. CIT(A) in his order. are as under: –

3. Although the Revenue has taken three grounds of appeal but the only issue i.e., involved in all these three grounds are against the CIT(A)’s order in allowing ‘depreciation on goodwill’ @ 100% of the prescribed rates instead of 50% as prescribed in second proviso to section 32(1) of the Income Tax Act, 1961 (in short ‘the Act’).

4. During proceedings before us, the Ld. DR placed reliance on the depreciation schedule relevant for the year under consideration to point out that the auditor of the Assessee had given a qualifying remark regarding the claim of ‘depreciation on goodwill’ @ 100%of the prescribed rates. Apart from this, the ld. DR relied heavily on the findings given by the Assessing Officer in the assessment order. The ld. DR also argued that in the fitness of things the depreciation should have been given @ 50% instead of 100%.

5. Per contra, the Ld. Counsel of the Assessee filed a written submission and argued on the line of the written submissions. His submissions are reproduced as under:

“SUBMISSIONS

2. Section 170(1) deals with succession to business by any person otherwise than by way of death as opposed to transfer of assets and liabilities of a business. It will be appreciated, that section 170(1) provides that a person carrying on business and profession has been succeeded therein by another person; that is, to say, that the person carrying on the business or profession has itself been succeeded by the successor. Further, sub-section (2) and (2A) to section 170 provide that where the predecessor cannot be found, the successor can be assessed to tax in place of the predecessor.

3. It would thus be appreciated that succession in terms of section 170 of the Act covers cases where the predecessor entity is subsumed in the successor entity; i.e., the predecessor loses its identity and ceases to exist on succession.

4. To illustrate, the following cases fall within the meaning of succession as provided for in section 170 of the Act inasmuch as all such cases, the predecessor entity ceases to exist on succession:

5. In all the aforesaid cases, it will be appreciated that the predecessor, on such succession, ceases to exist in the eyes and the successor becomes assessable on behalf of the predecessor.

6. In the case of slump sale, however, the seller/ transferor entity remains in existence and does not get subsumed in the purchaser/ transferee; the seller continues to operate as a legal entity separate from the purchaser, only an undertaking of the seller entity is transferred to, for a consideration, to the purchaser entity. Emphasis, in this regard, is also placed on the definition of slump sale in section 2(42C) of the Act which provides that “slump sale means transfer of one or more undertaking as a result of sale for lumpsum consideration without values being assigned to individual assets and liabilities in such sale”. It will thus be appreciated that slump sale talks about purchase of an undertaking of any assessee and not the assessee itself.

7. In the stated facts as well, the assessed had acquired only the OTC division of Novartis and not the entire business; Novartis, it will be appreciated, is still in existence and is carrying on business in India. The assessee, it is submitted, was never assessable on behalf of Novartis. It will thus be appreciated that mere acquisition of OTC business of Novartis by way of slump sale has, in no way, resulted in nonexistence of Novartis to qualify as succession in terms of section 170 of the Act.

8. The Hon’ble Apex Court in the case of CIT v. K.H. Chambers: [1965] 55 ITR 674 held that the transfer of sole proprietor business by father to his son would qualify as succession under the erstwhile section 25(4) of the Income Tax Act, 1922 since the business was subjected to tax under the provision of the Income Tax Act 1918. The provisions of section 25(4) of the Income Tax Act, 1922 were invoked by the assessee to claim refund of the taxes paid by the father under the Income Tax Act 1918 since, in terms of section 25(4), the taxes were to be paid by the successor in the case of succession. The aforesaid judgement, it is submitted, has no applicability inasmuch as it was not dealing with a case of a company having a separate legal entity transferring its business undertaken to another entity for a lumpsum consideration and no taxes were payable by the purchaser assessee.

9. Even otherwise, the erstwhile section 25(4) of the Income Tax Act, 1922 read as under:

10. On a perusal of the aforesaid, it will be appreciated that the aforesaid provisions have no pari-materia with the provision of section 170 of the Act. Be that as it may, it will further be appreciated that in term of the aforesaid section 25(4), in a case of succession, tax is not payable by the first mentioned person (predecessor). In the present case, the tax on gains arising on slump sale has, it is submitted, been paid by the seller and not by the assessee; the assessee, it is reiterated, is in no capacity assessable on behalf of the seller. Thus the aforesaid decision, it is respectfully submitted, has no applicability to the present case.

11. The DR has, during the course of hearing, placed reliance on the decision of the Mumbai Bench of the Tribunal in the case of ITO v. Archroma India (P) Ltd:  to hold that slump sale is covered within the meaning of succession defined in section 170 of the Act. In reaching the aforesaid conclusion, the Tribunal; it is respectfully submitted, has erred in not appreciating that the predecessor entity, even after transfer of one of the many undertakings being run by it, was duly in existence and was carrying on business; thus the predecessor was not succeeded. Moreover, in reaching the aforesaid conclusion, the Tribunal placed reliance on the decision of the apex Court in the case of KH Chambers, which, as elaborated supra, is not applicable.

12. It is thus, with utmost respect, submitted that the aforesaid decision rendered by the Mumbai Tribunal, based on incorrect appreciation of facts and the position of law, cannot be followed. Re (2): Even otherwise, sixth proviso to section 32(1) of the Act not applicable

13. Even otherwise, it is submitted that the sixth proviso to section 32(1) is a restrictive provision providing that aggregate depreciation allowable to the predecessor and successor in case of succession referred to in section 47(xiii)/(xiiib)/(xiv) or section 170 of the Act or in case of amalgamation and demerger, would be apportioned in the ratio of number of days for which the assets were being used by the respective entities and would not exceed the amount allowable at the prescribed rate, as if the succession or amalgamation or demerger had not taken place.

14. The aforesaid proviso, it will be appreciated, seeks to plug a loophole whereby the two personentities could claim more than 100% depreciation in the aggregate qua the same asset(s) / block of assets, in the year in which the asset is transferred from one person to another (otherwise other than by way of sale).

15. In the facts of the present case, the seller entity is, in our submission, not entitled to depreciation at all on the assets transferred by way of slump sale inasmuch as in terms of provisions of sub-item (C) of item (i) of section 43(6)(c) of the Act, the assets transferred under slump sale stand reduced from the relevant block of asset of the seller before charging depreciation on the same. It is on this reduced value of the block of asset that the depreciation at applicable rate is then computed at the year end.

16. As regard depreciation on goodwill, it is respectfully submitted that the said goodwill, being a self-generated asset, was never recorded in the books of the transferor for claim of depreciation; the same arose only as a result of excess consideration paid by the assessee for acquisition of the OTC undertaking; the predecessor could not have, by any stretch of imagination, claimed depreciation of such goodwill [refer I&B Seeds Pvt Ltd v. DCIT:  (Bang Trib.) – Para 13. 1 1; pg. 34 of CLPB]. Accordingly, the transferee (assessee) is entitled to 100% depreciation on intangibles recognized for the first time in the books of the transferee at the value allocated thereto out of the slump consideration.

17. Reliance is placed on the following decisions wherein it is held that where the predecessor did not claim depreciation on assets transferred during the year, the provisions of sixth proviso to section 32(1) of the Act cannot be applied to restrict the claim of depreciation in the hands of the transferee/ acquirer entity:

18. In view of the aforesaid, since the predecessor, viz. Novartis in the present case, has not claimed depreciation on both tangible and intangible assets forming part of the OTC business transferred to the assessee by way of slump sale, the provisions of sixth proviso to section 32(1) of the Act are not attracted.

Re. (c): Assets- put to use for more than 180 days

19. In terms of clauses 6 and 8 of the Slump Sale Agreement dated 20.03.2015 with Novartis for acquiring its OTC Business on a going concern basis; certain conditions needed to be satisfied for completion of the slump sale. The conditions provided in Clause 6 stood duly satisfied on or before 30.09.2015 inasmuch as:

20. In view of the aforesaid, since the conditions mentioned in Clause 6 stood satisfied as on 30.09.2015, in consequence thereof and in accordance with Clause 8 of the Slump Sale Agreement, all the assets, liabilities, contracts, agreements stood transferred to the assessee on 01.10.2015 and accordingly, the assets acquired under slump sale, including goodwill, were put to use on even date by the assessee. The aforesaid fact has also been certified by the Tax Auditor in the Tax Audit Report issued in Form 3CA in Clause 3(6) and 3(7) read with Clause 18 of Form 3CD

21. In that view of the matter, since the assets were, during the year under consideration, used for a period of more than 180 days (from 01.10.2015 to 31.03.2016 =183 days), depreciation at 100% of the prescribed rate was allowable to the assessee.

22. The DR had, during the course of hearing, placed reliance on the depreciation schedule relevant for the year under consideration to allege that the auditor of the assessee has given a qualifying remark regarding the claim of depreciation on goodwill at 100% of the prescribed rate. It is, with all emphasis at command, respectfully submitted that the aforesaid note relied upon by the DR is merely a disclosure made by the auditor; the same, in no way, constitutes a qualifying remark made by the auditor as has been alleged by the DR. Had that been the case, the auditor, it is submitted, would not have specified the date when assets were put to use as ‘01.10.2015’ in his report issued under section 44 AB of the Act, as appearing on page 51 of the PB.

23. Without prejudice to the contention that there is no qualifying remark made by the auditor, it is, even otherwise, a settled law that view of the auditor is not determinative/ binding as the same only represents the auditor’s view which may or may not be the correct position in law [refer PCIT v. IL & FS Energy Development Company Ltd. : 399ITR 483 (Del); PCIT v. Escorts Ltd  (Del).].

24. In view of the aforesaid, since the assets have been put to use for more than 180 days in the year under consideration, and more particularly, since the predecessor has not claimed depreciation on such assets, the assessee is entitled to claim of depreciation at 100% of the prescribed rate on both tangible and intangible assets acquired as part of the slump sale.

6. We have considered the findings given by the Assessing Officer in the assessment order and by the ld. CIT(A) in the appellant order. We have also considered the written submissions filed by the ld. Counsel for the Assessee. We have taken into consideration the arguments made during the proceedings before us, both by the Revenue and the Counsel of the Assessee. We find that the Ld. CIT(A) has given a detailed findings in his appellate order starting from pages 4 to 28 of the order dated 2.1.2023. The decision of the CIT. CIT(A) is reproduced as under: –

“6.3 The facts are clear and are that the assessee purchased. certain assets and liabilities from NHPL through agreement dated 20/03/2015. This agreement is at pages 67 to 122 of the PB and is titled as “Asset Sale and purchase agreement “. As per this agreement, certain assets and certain liabilities of NHPL have been purchased for a consideration. However, this is not a slump sale agreement as the OTC Development related assets and liabilities of R and D division of NHPL have not been taken over as a going concern. The agreement is clearly only regarding purchase of certain assets along with liabilities of a particular division of NHPL. The assets taken over are listed in Part A of Schedule 1 (Transferring Assets & Liabilities), while the liabilities taken over are in Part B of that Schedule. The assets taken over are contracts as per Schedule 4 (60 contracts), Plant & Equipment as per Schedule 5, real estate as per Schedule 6, employees and accounts receivable. The liabilities taken over are the accounts payable. It is therefore amply clear that this agreement is not a slump sale agreement as no business has been taken over as a going concern. The assessee paid Rs 24,84,62,000 towards this agreement and also paid Rs 80.14 lakhs as VAT and Rs 197.85 lakhs towards Service Tax on this transaction. The total consideration paid by the assessee for acquisition of these assets therefore is Rs 2762.61 lakhs. The assessee has valued the Assets taken over at Rs 1995.12 lakhs, and has claimed the difference of Rs 767.49 lakhs as goodwill generated in his hands as a result of this purchase. In the P&L A/c, this amount was written off as “Write off of intangibles in books “, and in the computation of income, this amount was added back to the income. During assessment proceedings, the assessee has claimed this to be goodwill and made a claim of depreciation before the AO, on the same reasoning as that for goodwill resulting from Slump Sale with Novartis India Ltd. The AO has rejected this claim for the same reasons as in Grounds above, i.e. that this claim was not made through a revised return, the provisions of the 6th proviso to sec 32(1) will apply to this transaction also, holding this to be a succession u/s 170. Crucially, while advancing such reasons, the AO has held this asset purchase agreement to be a Slump Sale agreement. The AO in para 7.2 has held that as the assessee has paid a lumpsum consideration, it indicates that the assessee has acquired a division from NHPL as a going concern. He then applied the same reasoning as for the slump sale agreement with Novartis India to deny the claim of depreciation on goodwill.

6.4 It appears that the AO has not appreciated the facts correctly and has not paid attention to the Asset sale and purchase agreement dated 20/03/2015. This is clearly not a slump sale agreement at all, as no undertaking or business has been acquired as a going concern. Very clearly, only certain assets and liabilities related to the OTC R&D division have been taken over. The AO has ignored the fact that the entire R&D Division has not been taken over, but only certain assets and liabilities have been taken over for a consideration. The description of such assets and liabilities is in para 6.3 above. On these facts, it is evident that this transaction cannot be categorized as a slump sale agreement. In fact, the assessee is also not claiming this to be a slump sale agreement. I therefore do not agree with the AO that this transaction is like a slump sale agreement. The other reasons cited by the AO are that the claim was not made by the assessee through a revised return and therefore cannot be entertained. This argument of the AO has also been addressed by me in para 5 above, wherein I have pointed out decisions of the Hon’ble Supreme Court and the jurisdictional Chandigarh ITAT wherein it has been held that such claims made outside of a revised return can be considered by appellate authorities. I therefore reject this reason cited by the AO and admit this claim of the Assessee to be considered on merits.

6.5 On merits, it is the claim of the assessee that he has paid consideration over and above the FMV of assets acquired and that difference should be classified as goodwill as done in the Slump Sale transaction with Novartis. The AO, on the other hand has classified this transaction as slump sale and then applied 6th proviso to sec 32(1). I am not in agreement with neither the AO nor the assessee on this issue. I have already discussed in detail in para 4 above as to why the transaction of purchase through slump sale, between two unrelated principals, for a negotiated price, cannot be considered as amalgamation, demerger or “succession ” either u/s 170 or u/ 47(xiii), (xiiia) or (xiv). The same reasoning applies to this transaction also, which is a plain and simple asset purchase agreement. I do not see how can this be called an amalgamation, demerger or “succession “, so as to come under the mischief of the 6th proviso to sec 32(1). For the same reasons as discussed in paras 4. 7 to 4.9, I am of the view that the 6th proviso to sec 32(1) cannot be applied to this transaction. I am therefore not in agreement with any of the reasons cited by the AO for denial of depreciation on this so-called goodwill.

6.6 It now remains to examine the case of the assessee, which is that the excess consideration is goodwill. Having held that this transaction is a plain asset purchase agreement, and not a slump sale, and further that no undertaking of NHPL has been acquired by the assessee as a going concern, there is no question of any goodwill being generated on such acquisition. It could be seen that various courts have held that excess consideration over FMV is towards goodwill of the undertaking purchased, on the very important premise that the undertakings so purchased are as a going concern, which means that the whole of the business has been purchased including the goodwill. In the instant agreement, no particular undertaking has been purchased as a going concern, but only certain assets and liabilities of a particular division of NHPL have been purchased. It is therefore evident that the goodwill pertaining to the R&D Division has not flown to the assessee at all. That goodwill would have flown only if the entire R&D Division was acquired by the assessee, which is admittedly not the case. On these facts therefore, I am of the view that there is no goodwill generated in this transaction and the claim of the assessee is to be rejected even though on for different reasons than those mentioned by the AO. Based on this discussion, I am of the considered view that there is no goodwill attached to the purchase of certain assets of the R& D Division of NHPL, neither is there any goodwill generated through this plain vanilla asset purchase agreement. I therefore uphold the rejection of the claim towards depreciation on the excess consideration paid over the FMV claimed to be goodwill.”

7. In our considered view two important aspects or facts which are relevant for the point of view of claiming deduction @ 100% had been brought on record by the Counsel of the Assessee are – (i) finally that the assets purchased on 30.11.2015 were put to use by the appellant w.e.f 01.10.2015. Thus, from 01.10.2015 to 31.3.2016, the total number of days for the use of such assets come to 183 which is more than 180 days as required by law for claiming depreciation @ 100% and (ii) that the company which sold such assets on 30.9.2015 did not claim any depreciation on them. Keeping in view these two important facts and various case laws brought on record by the Revenue as well as by the appellant, we find no reason to interfere with the findings given by the Ld. CIT(A) on this issue. Accordingly, Revenue’s appeal on this issue is dismissed.

8. In the result, Revenue’s appeal is dismissed.