ACIT Vs Dorma India Pvt. Ltd. (ITAT Chennai)
The Revenue filed appeals for AYs 2010-11 to 2012-13 challenging the CIT(A)’s order allowing depreciation on goodwill arising from the assessee’s acquisition of the distribution businesses of GTS Exports Private Limited and Arc Trend Systems Private Limited through slump sale agreements. The Assessing Officer disallowed the claim, holding that the excess consideration represented either non-compete fee or merely book entries since tangible assets had been recorded at book value without determining their fair market value. The AO also held that the assessee had not claimed depreciation in its return of income and therefore could not raise the claim during assessment proceedings. The CIT(A) accepted the assessee’s contention that only the distribution businesses were acquired as going concerns together with bundled business and commercial rights including business goodwill, customer relationships, business contracts, business information, intellectual property and employees, and held that the excess consideration represented eligible intangible assets under Explanation 3 to Section 32(1). The Tribunal examined both slump sale agreements in detail and found that the assessee had acquired only the running distribution businesses and related installation services, together with tangible business assets, inventories, receivables, customer contracts, customer orders, business information, goodwill, intellectual property, employees and non-compete obligations under composite agreements, while neither company itself nor any land or building was acquired. It held that the AO had incorrectly proceeded on the assumption that the assessee had acquired the entire companies and all their assets and liabilities. The Tribunal distinguished the decision in Toyo Engineering India Ltd., observing that the present acquisitions did not involve land or buildings whose book values could materially distort the allocation of consideration. It further held that the book values of the acquired movable assets had not been rebutted by the Revenue and that the excess consideration was attributable to the acquired intangible assets, including business contracts, customer base, business information, goodwill, the right to continue the businesses as going concerns and the supporting non-compete clauses. Relying on the decisions in Smifs Securities Ltd., Pentasoft Technologies Ltd. and Rentokil India Pvt. Ltd., the Tribunal held that depreciation was allowable on goodwill and the acquired business and commercial rights. It also held that, in view of Explanation 5 to Section 32(1), depreciation is a statutory allowance and remained allowable even though it had not been claimed in the original or revised return, since the claim had been made during the assessment proceedings. Finding no error in the CIT(A)’s order, the Tribunal dismissed the Revenue’s appeals for all three assessment years.
