I&B Seeds Private Limited Vs ACIT ( ITAT Bangalore)
Introduction: The ITAT Bangalore issued a significant order in the case of I&B Seeds Pvt Ltd vs ACIT, directing re-adjudication on the claimed depreciation for goodwill arising from a slump sale. The order addresses various grounds of appeal, challenging the disallowance of depreciation on goodwill.
Detailed Analysis: The appellant, I&B Seeds Pvt Ltd, appealed against NFAC orders for the assessment years 2017-18, 2018-19 & 2020-21. The core issue revolves around the disallowance of depreciation on goodwill arising from the acquisition of Mr. Praveen Noojibail’s proprietary concern and Sasya Gentech Pvt Ltd through a slump sale.
The appellant argued that the claimed goodwill is an intangible asset eligible for depreciation under section 32(1) of the Act. They cited the Hon’ble SC’s precedent in Smifs Securities Ltd. and various other decisions supporting the eligibility of goodwill for depreciation.
The Tribunal referred to its earlier decision in the appellant’s case for the assessment year 2015-16, where it allowed depreciation on goodwill. It emphasized that goodwill arising from a slump sale is akin to any other commercial or business right, eligible for depreciation.
The order also discussed the applicability of the sixth proviso to Section 32(1) and clarified that it doesn’t apply when goodwill is recognized only by the successor company after a slump purchase.
The ITAT highlighted the Finance Act, 2021 amendments, clarifying that depreciation on goodwill is allowable before April 1, 2021. It rejected the erroneous application of Explanation 3 to Section 43(1) by the AO, emphasizing the legitimacy of claiming depreciation on goodwill.
However, the Tribunal acknowledged a stay by the Supreme Court in a similar case, leading to the remittance of the issue back to the AO for fresh consideration based on the final outcome of the Padmini Products Pvt Ltd case.
Conclusion: The ITAT Bangalore’s order in I&B Seeds Pvt Ltd vs ACIT brings attention to the ongoing debate on the depreciation of goodwill arising from slump sales. The decision emphasizes the eligibility of such goodwill for depreciation under section 32(1) and considers the Finance Act, 2021 amendments. However, the stay by the Supreme Court in a related case prompts a remittance for further consideration, indicating the evolving nature of the legal landscape.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
All these appeals by assessee are directed against different orders passed by NFAC for the assessment years 2017-18, 2018-19 & 2020-21 dated 28.8.2023, 11.9.2023 & 11.9.2023 respectively. Since the issues in these appeals are common in nature, these are clubbed together, heard together and disposed of by this common order for the sake of convenience. The assessee has raised following grounds of appeal:
I. “The order of the Ld. CIT (A) is opposed to the law, facts and circumstances of the case.
II. The order is passed against the principle of natural justice and thus, liable to be quashed.
III. The learned CIT(A) has erred in considering the word goodwill not included under the provisions of section 32(1) of the Act as an asset eligible for depreciation.
IV. The learned CIT(A) ought to have contemplated that the goodwill is in the nature of any other commercial or business right under the category of an intangible asset that is eligible for depreciation under section 32 of the Act.
V. The learned CIT(A) ought to have appreciated the fact that the matter is duly covered by the judgment of the Hon’ble Bengaluru ITAT in the Appellant’s own case for the assessment year 2015-2016 in ITA No. 3415/Bang/2018.
VI. The learned CIT(A) erred in considering the fact that the judgment of the Hon’ble Bengaluru ITAT has referred to the amendments specified in the Finance Act, 2021 will take effect from April 01, 2021, and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs.
VII. The learned CIT(A) has erred in understanding the facts that when the disallowance of depreciation on Goodwill is deleted by the Hon’ble ITAT for the Initial assessment year of acquisition i.e. 2015-16, a similar disallowance cannot be made for the subsequent assessment years.
VII. The learned ClT(A) has erred in making the disallowance under Section14A read with Rule 8D.
VIII. The learned CIT(A) has made a grave error in not appreciating the fact that the appellant has not incurred any expenses to earn the dividend income.
XIX. The learned CIT(A) failed to consider that the calculation of expenses related to exempt income cannot be on a notional basis as it would result in the imposition of an artificial method of computation.
X. The learned CIT(A) erred in considering the fact that the assessee has adequate own funds and the investment is undertaken with their own funds and no amount of borrowed funds has been utilized for the purpose of such investments.
XI. The learned CIT(A) erred in assuming that there may be expenses expended for earning such exempt income despite the fact that no fresh investments were made during the year under review.
XII. The Appellant craves leave to add, alter, substitute, and delete any or all the grounds of appeal urged above.
XIII. For the above and other grounds to be urged during the hearing of the appeal, the Appellant prays that the appeal be allowed in the grant of a refund.
Total tax effect Rs.94,62,182/-“
2. Ground Nos.I to VII are with regard to disallowance of depreciation on goodwill. Facts of the issue are that the assessee is a Private Limited company engaged in the business of R & D, production and marketing of hybrid seeds. During the AY 20 15-16, the assessee had purchased proprietary concern of Mr. Praveen Noojibail and M/s. Sasya Gentech Private Limited by slump sale and claimed depreciation on the Goodwill which was the amount paid by the assessee to the transferors over and above the value of net asset is taken over. This issue for AY 20 15-16 is now before this Tribunal. For the AY 2017-18, the ld. AO took a similar stand by denying the claim of depreciation on the goodwill by holding that no documentary evidences were made available before him in support of this claim. Accordingly, he disallowed an amount of Rs.2,82,68,464/-.
3. In assessment year 2018-19, the disallowance on this count was Rs.2,12,01,349/-. For assessment year 2020-21, the disallowance was Rs. 1,19,25,759/-. Against this, assessee went in appeal before NFAC who has confirmed the addition made by ld. AO in all these assessment years. Against this assessee is in appeal before us.
4. We have heard the rival submissions and perused the materials available on record. Admittedly, similar issue came for consideration before this Tribunal in assessee’s own case in ITA 3415/Bang/2018 for the assessment year 2015-16 dated 15.6.2022 wherein held as under:
“13. We have considered the rival submissions and perused the record. The issue before us with regard to the valuation of goodwill and granting depreciation on the same. In the assessment year under consideration, the assessee claimed depreciation on 25% of intangible assets i.e. goodwill at Rs.17,39,83,689!- in the return of income worked out at Rs.2, 15,02,864!- on the reason that assessee company has paid for goodwill of Rs.16,46,08,759!- to M!s. Indus Seeds, sole property concern of Managing Director of the assessee company and Rs. 74,14,150!- to M!s. Sasya Gentech Pvt. Ltd., the company in which the Managing director of assessee company is the substantial shareholder and Director. The assessee has taken over the business!assets and liabilities of M!s. Indus Seeds and also M!s. Sasya Gentech Pvt. Ltd. by a slump sale arrangement. The value of intangible asset was the difference between the book value of assets and liabilities taken over and the sale consideration paid to both the concerns. In other words, the difference between net-worth over the sale consideration is considered as goodwill and claimed depreciation on the same. The A. O. invoked the provisions of explanation 3 to section 43(1) of the Act and observed that assessee is not entitled for depreciation on intangible assets as he doubted the net consideration paid by the assessee to those two concerns on the reason that these are related party transactions. According to the A. O., assessee has not provided any material for justification of such a huge amount of goodwill to both M!s. Indus Seeds & M!s. Sasya Gentech Pvt. Ltd. According to the A.O., M!s. Sasya Gentech Pvt. Ltd. has negative net-worth of Rs.34,14,150!- at the time of take over of the asset & liability of that company. However, the goodwill was valued at Rs. 74,14,150!- in the case of M!s. Sasya Gentech Pvt. Ltd. In the case of M!s. Indus Seeds net-worth at Rs.2,13,91,242!-. The payment of goodwill was Rs. 16,46,08,759!-. The value of brand name and intangible assets recorded in the books of M!s. Indus Seeds as on 31.10.2014 was Rs.19,60,780/-. But no value of goodwill was there in M/s. Sasya Gentech Pvt. Ltd. No valuation certificate of goodwill has been furnished before the lower authorities. 13.1 In our opinion, the relevant provisions applicable to the facts of the case are section 32(1), 43(1), 47(xiv)/47(vi) & 47(via) of the Act, which we discussed elsewhere in this order.
13.2 After having noticed the above statutory provisions, we find the relevance of that provision to the present facts of the case. The business purchased by assessee were in the similar field since many years. They are establishing the respective business and having a trade name as brand name in respective field. The valuation has been determined by the assessee in accordance with the business transfer agreements and following the applicable accounting standard of Institute of Chartered Accounts of India i.e. AS-10. It is also mentioned by AO that valuation of intangible assets recorded in the books of M/s. Indus Seeds as on 31.3.2014 was Rs. 19,60,780/-. In case of M/s. Sasya Gentech Pvt. Ltd., it was Nil. However, it has been valued by assessee at Rs.17,39,83,689/- and said amount has been paid by assessee.
13.3 Section 32(1) of the Act provides for depreciation in respect of trade mark owned wholly or partly by the assessee. In the present case, assessee has taken over the business of M/s. Indus Seeds and M/s. Sasya Gentech Pvt. Ltd. as a growing concern.
13.4 It is noteworthy to mention herein that 5th Proviso to section 32(1) of the Act restrict the total depreciation, which can be claimed in case of succession, etc. to the depreciation which would have been allowable and there has been no succession. The 5th Proviso to section 32(1) was inserted by Finance Act, 1996 to restrict the claim of aggregate deduction, which is evident from the memorandum of Finance Bill, 1996, which reads as under:-
In cases of succession in business and amalgamation of companies, the predecessor of the business and successor the amalgamating company and amalgamated company as the case may be, are entitled to depreciation allowance on same assets which in aggregate exceeds depreciation allowance for Previous year at the prescribed dates. It is proposed to restrict the aggregate deduction in a year to the deduction computed at the prescribed rates and apportion the allowance in the ratio of number of days for which the assets were used by them.
13.5 Thus, it is evident that 5th proviso to Section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession.
13.6 It is also pertinent to note that u/s 47(xiv) of the Act, any transfer of capital asset or intangible asset by a proprietorship concern to a company as a result of succession of the concern by a company is a recognized mode of transfer. Admittedly, the assessee had taken over proprietorship concerns and private company which are different entities and there were transfer of intangible asset by those two concerns to the assessee for a valuable consideration at Rs.17,39,83,689/-
13.7 It is to be noted that clause (xiv) to section 47 does not apply to the facts of the present case on the following reasons:
1. All the assets and liabilities of the proprietary concern were not transferred to the succeeding company which is otherwise a requirement under the above clause. Only the assets forming part of undertaking were transferred to the succeeding company, which means the assets which were left in the sole proprietorship. This is evident from the page no.271 of assessee paper book.
2. The above clause requires that the sole proprietor should not receive any consideration or benefit other than by way of allotment of shares in the company, where in the present case, the consideration is paid through banking channels.
3. Besides, the seller has offered the above transaction for capital gains and paid the taxes accordingly.
13.8 Since the transaction is not covered under the above-mentioned clause of section 47, consequently fifth proviso of section 32 would also not be applicable in this case.
Erroneous invocation of the explanation 3 to section 43(1) of the Act
13.9. In our opinion, the invoking of this Explanation 3 to section 43 of the Act by the AO in the present case is totally misplaced and not justified. The said explanation does not restrict the claim of depreciation on goodwill arising pursuant to a slump sale. It is applicable if the impugned goodwill has been appeared in the books of accounts of transferee and this goodwill never appeared in the books of seller. In our humble opinion, the explanation 3 to section 43 will be applicable only in cases where the assets were at any time used by any other person for the purpose of his business or profession, but in the present case, the asset in question, “goodwill which is arising due to the transfer of business, which is explained in earlier para and assets were not used by any other person”, therefore, it cannot be said that the said explanation is applicable to the present facts of the case.
Goodwill arising on slump sale — eligible for depreciation
13.10. In this case, the AO did not principally contend against the position of the Appellant, that the goodwill recorded by it is an intangible asset eligible for depreciation under Section 32(1) of the Act. In our opinion, the claim of assessee is to be allowed on the following lines:-
i. The said goodwill is in the nature of any other commercial or business right under the category of an intangible asset that is eligible for depreciation under section 32 of the Act. The issue whether Goodwill arising on transfer is eligible for depreciation or not, is no longer Res-Integra, and has been settled by the Hon ‘ble SC in the case of Smifs Securities Ltd. (348 ITR 302), wherein held that “in the present case, it is the valuation that is challenged and not the eligibility of depreciation on goodwill.” The position of law held by the Hon’ble SC constitutes the law of the land and is binding on all the lower authorities, in terms of Article 141 of the Constitution of India.
ii. In this regard, we place further reliance on the decision of the Hon’ble Karnataka High in the case of Manipal Universal Learning Ltd., 255 ITR 26, the facts and circumstances of which are similar to the present case, wherein the Hon ‘ble HC allowed the claim of depreciation on goodwill arising on acquisition of business under slump sale model, reiterating the decision of the Hon ‘ble SC in the case of Smifs Securities (Supra).
iii. Further, we place reliance on the following decisions, wherein it was principally held that goodwill is an intangible asset eligible for depreciation under section 32 of the Act in the context of business transfer through slump sale:
