Income Tax Act, 1961 is quite clear on the tax implications in the hand of purchaser and seller in case of amalgamation or demerger, but when it is a division purchase or slump purchase, there are no specific provisions in the Act in relation to purchaser. Section 50B of the Act clearly specifies tax implication in the hands of seller, but similar provisions are not enacted in the Act for purchaser. This always leads to confusion on how value of assets needs to be considered in books of purchaser in the case of division purchase.
Below is the brief discussion on value of assets which needs to be considered in books of purchaser in event of division purchase (purchaser in case of slump sale)
1. Value of tangible assets taken over and depreciation on it.
Value of tangible fixed assets as per Income Tax Act, 1961
In the absence of any specific provisions for computation of WDV of assets acquired upon slump sale in the books of the transferee, a view could be taken that apportionment of slump consideration on the basis of fair values of various assets is possible.
It is to be noted in case of tangible assets depreciation is allowable u/s 32(1)(i) on “actual cost” means the actual cost of the assets to the assessee (sec 43(1)).
Since there is no specific provision on value to be considered in case of division purchase, assets can be considered on the actual cost born by the assesee. Since a lump sum consideration is paid and value is not assigned to each asset, the cost can be apportioned to the various assets on fair value basis.
Value of tangible fixed assets as per ICDS
As per the, ICDS V relating to tangible fixed assets it is clearly mentioned, “where several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis”. Fair basis is not defined in ICDS.
Therefore, it can be concluded, that cost of such assets in the books of purchaser can be identified by allocation of purchase price on fair value or from taking valuation report from independent valuers. and depreciation on tangible goods can be claimed as per the normal provisions of the Act.
Note: In case of amalgamation, depreciation as per section 32 is available to successor on WDV of assets as per Income Tax Act. As per explanation 6 to section 43(6), WDV shall be considered after reducing the deemed depreciation under the Act. The same shall not be applicable in case of slump sale or if division is purchased.
2. Depreciation on intangible assets.
Value of intangible fixed assets as per Income Tax Act, 1961
As per section 32(1)(ii) depreciation can be claimed on know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998 owned, wholly or partly, by the assessee and used for the purposes of the business or profession. Hence, the intangible assets acquired in event of division purchase can be considered on fair value basis.
Goodwill can also be generated in the event of purchase of division as per the accounting standards. The Income Tax Act, specifically doesn’t allow depreciation on acquisition of goodwill but as per the judgement passed by Supreme Court in case of Smifs Securities Limited it was held that goodwill is an asset within the meaning of
section 32(1)(ii) of the Act and same is covered under expression “business or commercial rights of similar nature”. Questions can be aroused that in case of Smifs Securities Limited depreciation of goodwill was allowed only in the event of amalgamation, so depreciation on goodwill will be allowed in this scenario or not. It may be noted that question rose before the Apex court was “Whether goodwill is an asset within the meaning of section 32 of the Act, and whether depreciation on “goodwill” is allowable under the said section?” Answer to this question was affirmative and therefore it can be clearly stated that depreciation on any kind of goodwill shall be allowable and not only which is generated by amalgamation.
Currently there is no ICDS on intangible fixed assets.
Therefore depreciation can be claimed on acquired intangible assets and goodwill as per the provision of Income Tax Act at 25%.
Hope this publication will assist you in your professional endeavors.