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July 13, 2022

Goodwill acquired through a slump sale agreement is eligible for depreciation

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Goodwill acquired through a slump sale agreement is eligible for depreciation

Facts and Issue of the case

The facts of the case are the assessee is a company and filed its return of income on 17.10.2016 declaring ‘Nil’ income and current year loss of Rs. 1,08,85,581/-. During the course of assessment proceedings, the AO noted that the assessee company acquired Hyderabad business of Beams Hospitals Pvt Ltd as a going concern and on a slump sale basis by paying a purchase consideration of Rs. 7,94,00,000/-. The purchase consideration is stated to be towards certain tangible assets and also goodwill. While the value of the fixed assets is taken at Rs. 3,31,23,000/-, the difference amount of Rs. 3,96,87,209/-(after deducting the value of the fixed assets and the value of security deposits from the sale consideration) is treated as Goodwill and depreciation thereon is claimed at @25%. He, therefore asked the assessee to submit the valuation report for the assets acquired by way of slump sale, if any made. Although, the assessee filed the details regarding the fixed tangible assets, which are taken at the depreciated values in the books of the transferor company, however, he noted that there is no submission of the valuation report of the intangible assets, i.e Goodwill. He, therefore asked the assessee to explain as to why depreciation on goodwill should not be disallowed, since the assessee could not prove the actual cost of sale.

The assessee explained the circumstances in which the slump sale was carried out and why goodwill had to be paid. However, since the assessee has not given any valuation report for the valuation of the goodwill, the AO rejected the contention of the assessee. He noted that as per provision of section 32 r.w.s. 43(6)(a) depreciation is allowable on the actual cost of the asset acquired during the previous year. He referred to the provision of section 43(1), which defines actual cost. However since the assessee could not substantiate to his satisfaction regarding the valuation of such goodwill, the AO distinguished the decision cited before him in the case of Triune Energy Services Pvt Ltd. (Delhi High Court) and rejected the claim of depreciation on goodwill and made the addition of Rs. 99,21,802/- to the total income of the assessee.

Aggrieved with such order of the ld.CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds:-

1. The ld.CIT(A) is erred in facts and law while passing the order.

2. The ld.CIT(A) has not given proper conclusion why Depreciation on Goodwill is not allowable

3. The ld.DR.CIT(A) has not observed the facts the consideration paid over the above the tangible assets is for the goodwill and is accounted in the books of accounts of the purchaser.

4. The ld.CIT(A) has not observed the fact that goodwill is not internally generated, it is acquired during the course of purchase of the ongoing hospital and hence depreciation is allowable as per Section 32(1)(ii)

The Ld. Counsel for the assessee strongly challenged the order of the ld.CIT(A) in sustaining the disallowances made by the AO on account of depreciation on goodwill. He submitted that the assessee company acquired the Hyderabad business of Beams Hospitals Private Limited as a going concern and on a slump sale basis by paying a consideration of Rs. 7.94 crores. Referring to the copy of agreement dated 30.03.2015 between Beams Hospital Private Limited and Avis Hospitals India Limited, he submitted that as per the agreement, the purchase consideration is Rs. 7.94 crores. He submitted that in the return of income filed and as per schedule of depreciation, the value of fixed assets has been taken at Rs. 3,31,23,000/- and the difference amount of Rs. 3,96,87,209/- after deducting the value of security deposits etc. was treated as Goodwill on which depreciation @25% was claimed. He submitted that the value of fixed assets and other assets were taken at WDV of transferor company which was not disputed by the AO in the assessment order. Referring to various decisions filed in the paper book, he submitted that when a person acquires a business on a going concern basis by paying more than the fair market value of the net tangible asset, the difference in the purchase consideration and the net value of assets and liabilities is attributable to the commercial benefit that is acquired by the purchaser, which is nothing but goodwill and depreciation is allowable on it. He submitted that the intangible assets, i.e business claims, business information, business records, contracts, employees and know-how etc are all assets in absence of which the transferee would have had to commence business from scratch and go through the gestation period. However, by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. Thus, the specified intangible assets acquired under slump sale agreement are in the nature of ‘business or commercial rights of similar nature’. So far as the allegation of ld.CIT(A) that valuation report of the goodwill was not given, he submitted that the valuation report is not required since once the value of the fixed assets were determined, the remaining portion is only goodwill. He submitted that in the instant case, the goodwill has arisen out of the acquisition and not internally generated by the Appellant Company. Therefore, the decision of the ld.CIT(A) is not justified.

Observation by the court

Referring to the decision of Hon’ble Supreme Court in the case of CIT vs Smifs Securities Ltd. 348 ITR 302, he submitted that the Hon’ble Supreme Court has held that Goodwill is an asset under Explanation 3(b) to section 32(1) and, thus, it is eligible for depreciation. He submitted that in this case, during relevant assessment year, one ‘Y’ Ltd. amalgamated with assessee- company. According to assessee, excess consideration paid by it over value of net assets acquired of ‘Y’ ltd amounted to goodwill on which depreciation was to be allowed. The Authorities below recorded a finding that assets and liabilities of ‘Y’ Ltd. were transferred to assessee for a consideration, the difference between cost of an asset and amount paid constituted goodwill and that assessee company in process of amalgamation had acquired a capital right in form of goodwill because of which market worth of assessee company stood increased- Accordingly, assessee’s claim was allowed since revenue could not rebut the factual findings recorded by authorities below, the order passed by them was upheld.

Referring to the decision of Hon’ble Supreme Court in the case of PCIT vs.Zydus Wellness Ltd. [2020] 113 taxmann.com 154(SC)/269 Taxman 57, he submitted that the Hon’ble Supreme Court in the said decision has dismissed the SLP filed by the revenue against the order of the Hon’ble High Court, wherein the Hon’ble High court upheld the decision of the Tribunal allowing assessee’s claim for depreciation on goodwill.

Referring to the decision of Hon’ble Delhi High court in the case of Triune Energy Services(P.) Ltd. vs. DCIT[2016] 65 taxmann.com 288, he submitted that the Hon’ble High Court in the said decision has held that where assessee purchased business as going concern, consideration paid in excess of value of tangible assets was classifiable as goodwill eligible for depreciation and, therefore, further exercise to value goodwill was not warranted. In that case, assessee purchased business of another company as going concern-It claimed depreciation on goodwill being excess of amount paid over net value of assets. Assessing Officer rejected claim for depreciation-Tribunal held that depreciation must be allowed on goodwill but remanded matter back to determine valuation of goodwill since in view of AS-10 consideration paid in excess of value of tangible assets was rightly classified as goodwill, therefore, the Hon’ble High court held that further exercise to value goodwill was not warranted.

Referring to the decision of Hon’ble Delhi High Court in the case of Areva T & D India Ltd. vs. DCIT [2012] 20 taxmann.com 29, he submitted that the Hon’ble High Court in the said decision has held that specified intangible assets, viz., business claims, business information, business records, contracts, employees and know-how acquired by assessee under slump sale agreement are in nature of business or commercial rights of similar nature specified in section 32(1)(ii) and are accordingly eligible for depreciation under that section.

He accordingly submitted that the order of the ld.CIT(A) being not in accordance with law should be set aside and the grounds raised by the assessee should be allowed. The ld.DR on the other hand heavily relied on the order of the ld.CIT(A). Referring to the decision of the Co-ordinate bench of the Tribunal in the case of Signode India Ltd. vs. DCIT vide ITA No.954/Hyd/2019 order dated 24.02.2021, he submitted that identical issue has been decided by the Tribunal, where depreciation on goodwill was disallowed and the appeal filed by the assessee has been dismissed. He accordingly submitted that the grounds raised by the assessee should be dismissed.

The court had considered the rival arguments made by both the sides, perused the orders of the AO and ld.CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case has acquired Hyderabad business of Beams Hospitals Private Limited as a going concern and on a slump sale basis by paying a consideration of Rs. 7.94 crores as per the slump sale agreement between AVIS Hospitals India Limited and Beams Hospitals Private Limited dated 30.03.2015 copy of which is placed in the paper book at page at 78 to 99. We find the assessee in the return of income filed has taken the value of fixed assets at Rs. 3,31,23,000/- as per the depreciation schedule and the difference amount of Rs. 3,96,87,209/- after deducting the value of security deposits etc. was treated as goodwill on which depreciation @ 25% has been claimed. We find the AO rejected the claim of depreciation on goodwill by relying the provision of section 32 r.w.s. 43(1) and 43(6). We find the ld.CIT(A) upheld the action of the AO, the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the ld.counsel for the assessee that when a purchaser acquires a business on a going concern basis by paying more than the fair market value of the net tangible asset, the difference in the purchase consideration and the net value of the assets and liabilities is attributable to the commercial benefit which is nothing but goodwill on which depreciation has to be allowed. It is also his argument that the intangible assets, i.e business claims, business information, business records, contracts, employees and know-how, are all assets in absence of which the transferee would have had to commence business from scratch and go through the gestation period. Therefore by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business and the specified intangible assets acquired under slump sale agreement are in the nature of “any other business or commercial rights of a similar nature” on which depreciation is allowable.

So far as the decision relied on by the ld.CIT-DR in the case of Signode India Ltd.(supra) is concerned, the same in our opinion is distinguishable and not applicable to the facts of the present case. In that case, the Tribunal while rejecting the claim of depreciation on goodwill has given certain observations, which are not present in the instant case. The Tribunal in the said case has reproduced the valuation made by an independent valuer, who have given their report based on the information provided by the client and have not independently verified or checked the accuracy or timeliness of the same as per para 7.4 of the order. Similarly, the Tribunal at para 7.13 of the order has observed that the basis for transfer price is in the individual knowledge of the transferor and transferee and both the parties are under the control of same management, which indicate that the claim of fictional goodwill is nothing but deriving undue benefit out of oneself at the cost of the revenue. Similarly, the Tribunal observed at para 7.14 of the order that the parent company appointed the valuer and not the assessee and there is unfair fixation of transfer price to benefit the transferor at the cost of the assessee, the matter being an affair between parent of the assessee and the assessee. the Tribunal had given a clear finding that clause 10.2 of the second valuation report clearly indicate that the purchase consideration is for acquisition of 100% equity. Therefore, the price is paid for 100% control of equity and more in the nature of premium for acquisition of 100% equity control and therefore, the balancing charge is not in the nature of goodwill. It has observed that allowing depreciation on fictional goodwill in such a case would be a case of one making profit/loss out of oneself.

In such circumstances, the Tribunal held that it was wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non- existent. The Tribunal further observed that the valuation report is faulty and in contradiction to the “Business Transfer Agreement” in working out a fictional goodwill and the mentioning the same at Rs. 792.79 crores by assigning the same to certain intangibles in arbitrary manner without any valuation which in that cannot be fixed as per the Business Transfer Agreement. Finally, the Tribunal observed that when there is no transfer of the asset as well as there is no valuation of the asset, there cannot be any claim of ownership or claim of depreciation.

However, in the case before us, these facts are missing and the transfer is not between same group concerns or related concerns. Therefore, the decision relied by the ld.CIT-DR is not applicable to the facts of the present case. In view of the above discussion and respectfully following the decisions cited(supra), we hold that the ld.CIT(A) is not justified in denying the claim of depreciation on goodwill claimed by the assessee. We, therefore set aside the order of the ld.CIT(A) and allow the claim of depreciation on goodwill for the impugned assessment year. The grounds raised by the assessee on this issue are accordingly allowed.

Conclusion

The appeal of the assessee is allowed by the court.

AVIS-Hospitals-India-Limited-Vs-ACIT-ITAT-Hyderabad

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