|CORAM:||Anil Chaturvedi (AM), Sushma Chowla (JM)|
|CATCH WORDS:||Depreciation, slump sale|
|COUNSEL:||Percy Pardiwala, Vasanti Patel|
|DATE:||December 12, 2017 (Date of pronouncement)|
|DATE:||December 30, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 32/ 43(6): The slump price paid to acquire a business has to be bifurcated between tangible and intangible assets for purposes of allowing depreciation. If the allocation is done in a systematic manner by an independent valuer and there is no fallacy, the AO is bound by the allocation. If an asset forms part of the block of assets and depreciation is allowed, it loses its identity and depreciation cannot be denied in a later year|
(i) After going through the terms of BTA, Novation Agreement, the Toll Agreement, we find no merit in the stand of Revenue in this regard. The learned Departmental Representative for the Revenue also was of the view that no part of slump price is to be attributed to the know-how, patents and trademarks, since the same has not been acquired by the assessee. Even if we accept the said stand of learned Departmental Representative for the Revenue, ultimately after the slump price has been attributed first to the value of tangible assets, then the balance is to be attributed to intangible assets and once the same is done and whether it is under the umbrella of know-how, trademarks, patents or goodwill, it makes no difference since all these are covered under the umbrella of intangible assets, which are eligible for claim of depreciation under section 32(1)(ii) of the Act. The goodwill is also an intangible asset eligible for said depreciation as held by the Hon’ble Supreme Court in CIT Vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC). In view thereof, we find no merit in the stand of learned Departmental Representative for the Revenue and the same is rejected.
(ii) The next issue is whether slump price can be bifurcated between value of tangible and intangible assets. The Hon’ble Punjab & Haryana High Court in Shreyans Industries Ltd. Vs. JCIT (2005) 277 ITR 443 (P&H) has laid down the proposition that in case slump payments have been received for all the rights transferred including the assets transferred, then consideration has to be allocated amongst the said assets.
(iii) Similar proposition has been laid down by the Pune Bench of Tribunal in Drilbits International (P) Ltd. Vs. DCIT (2011) 142 TTJ 0086 (Pune-Trib).
(iv) The Hon‟ble High Court of Delhi in DE Nora India Ltd. Vs. CIT (2015) 370 ITR 391 (Del) on similar facts as in the case of assessee, where the assets and liabilities and obligations were taken from as going concern with no value specified in the agreement for the assets i.e. tangible and intangible assets after considering reliance placed on the judgment of the Hon’ble Supreme Court in Challapalli Sugars Ltd. Vs. CIT (1975) 98 ITR 167 (SC)
(v) The Hon’ble High Court thus, held that in the case of slump sale wherein both the parties had relied on Surveyor’s report in determining the consideration paid in lump sum, then depreciation was to be allowed on cost of fixed assets as per Surveyor’s report.
(vi) Further, the Hon’ble High Court of Delhi in Triune Energy Services (P.) Ltd. Vs. DCIT (supra) while considering the case of slump sale referred to the AS-10 and upheld the bifurcation of value of slump price over cost of tangibles and intangibles.
(vii) The Hon’ble High Court in CIT Vs. Pepsico India Holdings P. Ltd. (2011) 334 ITR 404 (Del) had held that the valuation undertaken by an independent Valuer was in respect of slump price, was well accepted method and hence, we find no merit in the order of CIT(A) in rejecting the same.
(viii) The CIT(A) while denying the claim of assessee had placed reliance on the ratio laid down by the Hon’ble Supreme Court in Saharanpur Electric Co. Ltd. Vs. CIT reported in 194 ITR 294 (SC), wherein the proposition was laid down in case of seller of business and it was held that there was no merit in allocating slump price over the value of assets. First of all, the said ratio is in respect of assessment year prior to amendment and in the case of seller of business. Further, AS-10 of Accounting Principles also provide for the working of value of tangible and intangible assets and once the same is so allocated, the assessee is entitled to the claim of depreciation on such assets. The total consideration exchanged between the parties was Rs.153.18 crores. The assessee has allocated sum of Rs.27.49 crores to the value of assets including plant & machinery which has been taken over by the assessee. Further, the assessee had allocated sum of Rs.125.68 crores to the value of know-how, patents and trademarks, and goodwill. The said exercise was carried out in a systematic manner by the Valuer and in the absence of findings of any fallacy in the said distribution, there is no merit in rejecting the values adopted by the assessee. So, sum of Rs.153.18 crores in the first instance is to be allocated to cost of tangible assets, further to the value of trademarks, patents and know-how and the balance to the goodwill. The assessee had undertaken the allocation in assessment year 2003-04, which has been accepted in the hands of assessee. Further, it may be pointed out herein itself that the assessee has been allowed depreciation on the value of know-how, patents and trademarks by the Assessing Officer, which has not been disturbed in the preceding year. However, the depreciation claimed on goodwill was not allowed to the assessee, which was allowed by the Tribunal in turn, following the ratio laid down by the Hon’ble Supreme Court in CIT Vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC).
(ix) The learned Departmental Representative for the Revenue placed heavy reliance on the ratio laid down by the Delhi Bench of Tribunal in Osram India (P) Ltd. Vs. DCIT (2012) 20 taxmann.com 271 (Delhi), wherein the issue decided was on depreciation on goodwill. The Tribunal held that the said depreciation would not be allowed unless and until it is shown that the value of such goodwill is in fact value of intangible assets such as know-how, patents, copyrights, trademarks or any other business or commercial rights of similar nature being intangible assets. However, the said proposition now stands reversed by the Hon’ble Supreme Court in CIT Vs. Smifs Securities Ltd. (supra). The second aspect of the said decision was that wherein it has been held that the view taken by the Assessing Officer i.e. allowing depreciation on the whole amount of goodwill without any bifurcation if it was in accordance with law could not be disturbed, but if the same mistake had been committed by the Assessing Officer, which is not in accordance with law, then the said mistake cannot be perpetuated on the basis of rule of consistency. We have already decided the issue at length vis-à-vis claim of assessee on the value of tangible assets and intangible assets and in the absence of any mistake being pointed out by the Department in the bifurcation of amounts, then the said proposition cannot be allowed. In any case, the basis for bifurcation is the valuation report of an independent Valuer and the same cannot be tinkered.
(x) The next aspect of the issue is that where the assessee had already bifurcated slump price over the cost of tangible assets, value of know-how, trademarks, patents and balance to the goodwill in the preceding year i.e. assessment year 2003-04 and depreciation having been allowed to the assessee in the preceding year, consequent to which the said assets were part of block of assets and during the year under consideration, depreciation is claimed on the WDV of the said assets as on the start of financial year, then can the authorities disturb the same?.
(xi) We find no merit in the stand of Revenue since after insertion by the Taxation Law (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 01.04.1988, the concept of „block of assets‟ had been brought on Statute. The said section very clearly provides that aggregate of WDV of all assets falling within the „block of assets‟ at the beginning of previous year and adjusted, could be increased by the cost of any asset acquired during the previous year and could be reduced by the money payable in respect of any asset, which is falling under „block of assets‟, which has been sold or discarded, and on the balance, the assessee is entitled to claim depreciation. In view of the amendment to the Act and in view of the concept of „block of assets‟ what has to be seen is the aggregate WDV of assets which are falling within the same block at the beginning of previous year, that is the first step. Thereafter, in case any new asset is acquired, then the value of such asset is to be included; and in case any such asset from the “block of assets” is sold, then the value of same is to be excluded. However, none of the authorities can tinker with the WDV of the assets for any reason whatsoever. Once the asset has entered into „block of assets‟ and thereafter, depreciation has been allowed and in the succeeding year, the WDV of such asset is to be accepted as sacrosanct and depreciation has to be allowed on the same. Such is the proposition laid down by the Hon‟ble Bombay High Court in Director of Income Tax (IT) Vs. HSBC Asset Management (I) (P.) Ltd. (supra) and CIT Vs. G.R. Shipping Ltd. in Income Tax Appeal No.598 of 2009, vide judgment dated 28.07.2009