Kovalam Resort Private Limited Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that balancing figure between the slump sale consideration and the value of identifiable tangible assets represents goodwill or commercial rights in the nature of an intangible asset, and depreciation thereon is allowable under section 32(1)(ii) of the Income Tax Act.
Facts- The assessee is a company engaged in the business of owning and operating a five-star hotel at Kovalam Beach, Thiruvananthapuram, known as “Kovalam Leela Raviz Hotel”. The assessee acquired the hotel undertaking of M/s Hotel Leela Venture Ltd. on a going concern basis by way of slump sale under a Scheme of Arrangement sanctioned by the Hon’ble Bombay High Court under sections 391 to 394 of the Companies Act, 1956, vide order dated 24.02.2012, with the appointed date as 01.09.2011, for a lump sum consideration of Rs. 500 crores. The assessee also took over liabilities amounting to Rs. 2 crores.
During assessment proceedings, AO held that depreciation under the Income-tax Act is intended to account for wear and tear and obsolescence and, therefore, the value of a depreciable asset necessarily declines over time. In the present case, the written down value of the building in the books of M/s Hotel Leela Venture Ltd. on the date of transfer was Rs. 31.25 crores, whereas the assessee had adopted values of Rs. 217.95 crores and Rs. 159.72 crores based on valuation reports. AO held that such revaluation of depreciable assets was contrary to the basic principle of depreciation and would result in allowance of double depreciation on the same asset, since the cost of construction and subsequent capital expenditure had already suffered depreciation in the hands of the transferor. AO adopted the written down value of depreciable assets in the books of M/s Hotel Leela Venture Ltd. as on the date of transfer, amounting to Rs. 60,92,34,250/-, as the actual cost of such assets in the hands of the assessee u/s. 43(1) of the Act. The balance amount of the slump sale consideration, amounting to Rs. 439,07,65,750/-, was treated as attributable to land. Thus, AO reduced the actual cost of buildings from Rs. 217,95,82,895/- as claimed by the assessee to Rs. 31,25,79,075/- and restricted depreciation on buildings to Rs. 3,12,57,907/-. On this basis, depreciation was recomputed at Rs. 6,80,23,443/- as against the depreciation of Rs. 25,86,15,073/- claimed by the assessee, resulting in a disallowance of Rs. 19,05,91,629/-.
