I&B Seeds Private Limited Vs DCIT (ITAT Bangalore)
Goodwill Arising on Slump Sale Eligible for Depreciation; Explanation 3 to Section 43(1) Inapplicable: ITAT Bangalore
The assessee appealed against the disallowance of depreciation of ₹2,15,02,864 claimed on goodwill arising from the slump sale acquisition of the businesses of a proprietary concern and a private company. The Assessing Officer treated the goodwill transaction as a sham and a colourable device, invoked Explanation 3 to Section 43(1) of the Income-tax Act, and restricted the value of intangible assets, primarily on the grounds that no valuation report was furnished and the transactions were between related parties. The CIT(A) upheld the disallowance, observing that the excess consideration covered several rights under the Business Transfer Agreements, including non-compete and non-solicitation covenants, transfer of distribution network, personnel, contracts, intellectual property rights, know-how and sales documentation, and that the assessee had failed to establish that the entire differential amount represented goodwill. Before the Tribunal, the assessee contended that the goodwill represented the excess of purchase consideration over the net assets acquired in accordance with Accounting Standard AS-10, formed part of the business transfer agreements, and arose from acquisition of businesses as going concerns. The Tribunal held that goodwill arising on a slump sale constitutes an intangible asset eligible for depreciation under Section 32(1), that Explanation 3 to Section 43(1) was wrongly invoked since the goodwill did not exist in the books of the transferors and arose only upon the transfer of business, and that Sections 47(xiv), 47(vi) and the fifth and sixth provisos to Section 32(1) were not applicable on the facts. The Tribunal also noted that the department had accepted the capital gains arising from the same transaction in the hands of the seller and that the Assessing Officer had not established that the main purpose of the transfer was reduction of tax liability by claiming enhanced depreciation. Accordingly, the Tribunal allowed the assessee’s appeal.
