Income Tax Act, 1961 – Sections 32, 43(1), 69, 92C, 92D, 143(3), 144B and 144C - The appellant, filed its income return for the AY 2020-21. The TPO made adjustments, including recharacterizing interest on Compulsory Convertible Debentures (CCDs) as equity, resulting in a TP adjustment of Rs.9,58,98,001. Additionally, the AO disallowed depreciation of Rs.15,98,76,563 on goodwill from a slump sale, referencing prior years' disallowances. The DRP upheld these actions. The appellant contested the final assessment before the Tribunal - Whether CCDs can be recharacterized as equity, justifying a TP adjustment of interest to NIL - Whether goodwill arising from a slump sale qualifies as an intangible asset eligible for depreciation under Section 32 – HELD - CCDs are debt instruments until converted into equity. The TPO exceeded jurisdiction by recharacterizing them as equity, ignoring the TP study and benchmarking analysis that justified the 11% coupon rate as being at ALP. Judicial precedents support the deductibility of interest on CCDs as revenue expenditure. The TPO’s failure to benchmark comparables invalidated the adjustment - Goodwill arising from a slump sale qualifies as an intangible asset under Section 32, as upheld by the Supreme Court in Smifs Securities. The Tribunal rejected the DRP's reliance on Explanations 3 and 7 to Section 43(1), noting they are inapplicable to slump sales. The amendment introduced by Finance Act 2021 denying depreciation on goodwill is prospective, applying from AY 2021-22 - The appeal was partly allowed. The TP adjustment on CCD interest was invalidated, and depreciation on goodwill for AY 2020-21 was directed to be allowed. The matter of CCD interest exceeding Section 94B limits was remanded to the AO for verification

 

2024-VIL-1760-ITAT-CHE

 

IN THE INCOME TAX APPELLATE TRIBUNAL

‘D’ BENCH CHENNAI

 

IT(TP)A No. 52/CHNY/2024

Assessment Year: 2020-21

 

Date of Hearing: 05.12.2024

Date of Pronouncement: 10.12.2024

 

STAHL INDIA PVT LTD

 

Vs

 

THE DEPUTY COMMISSIONER OF INCOME TAX

 

Appellant by: Shri Sriram Seshadri, CA

Respondent by: Shri A. Sasikumar, CIT

 

BEFORE

SHRI GEORGE GEORGE K, VICE PRESIDENT

SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER

 

ORDER

 

PER GEORGE GEORGE K, VICE PRESIDENT:

 

This appeal at the instance of the assessee is directed against the final assessment order dated 19.07.2024 passed under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2020-21.

 

2. Brief facts of the case are as follows:

 

The assessee is a private limited company incorporated on 29.01.1998. The assessee is primarily engaged in the business of manufacturing and distribution of specialty chemicals used in leather and fabric industry. For the assessment year 2020-21, the return of income was filed on 23.01.2021 declaring total income of Rs.17,18,84,540/-. The assessment was selected for complete scrutiny under CASS and notice u/s.143(2) of the Act was issued and duly served on the assessee on 29.06.2021. During the course of assessment proceedings, the case was referred to the TPO to determine the Arms Length Price (ALP) of international transactions undertaken by the assessee with its AE’s. The TPO vide his order dated 22.06.2023 passed u/s.92CA(3) of the Act proposed the following TP adjustment: -

 

 

3. Subsequent to the TPO’s order, the AO passed draft assessment order dated 28.09.2023 u/s.144C(1) of the Act incorporating the aforesaid TP adjustments proposed by the TPO. Apart from the TP adjustment proposed by the TPO, the AO has also made corporate tax disallowance of depreciation on goodwill amounting to Rs.15,98,76,563/-.

 

4. Aggrieved by the draft assessment order, assessee filed objections before the DRP on 27.10.2023. DRP vide its directions dated 18.06.2024 disposed off the objections of the assessee. Pursuant to the DRP directions, the TPO gave effect to the same vide his order dated 15.07.2024, wherein relief was granted to the tune of Rs.56,71,137/- as regards the upward adjustment on account of margin adjustments. On receipt of the TPO’s order giving effect to the DRP’s direction, the AO passed the impugned final assessment order dated 19.07.2024. The computation of income in the final assessment order are as under:-

 

 

5. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal raising six grounds and various sub-grounds. The ld.AR during the course of hearing limited his submission to Grounds 4 & 5 and its various sub-grounds. Therefore, Grounds 1, 2, 3 and 6 are dismissed. The surviving grounds namely Grounds 4 & 5 and its various sub-grounds read as follows: -

 

4. TP adjustment towards interest on Compulsory Convertible Debenture (“CCDs”)

 

4.1 The lower authorities has erred in disregarding the conditions provided under Section 92C(3) of the Act and rejecting the transfer pricing documentation maintained by the Appellant in good faith, as required under Section 92D of the Act.

 

4.2 The lower authorities have erred in making a transfer pricing adjustment of INR 9,58,98,001 with respect to interest on CCDs.

 

4.3. The lower authorities erred in re-characterizing the CCDs issued by the Appellant as equity and in arbitrarily determining the ALP as NIL, without undertaking any benchmarking and comparability analysis.

 

4.4. The lower authorities erred in not appreciating the facts and evidences provided by the Appellant, wherein, even independent entities disclosed CCDs as debt instruments in financial statements.

 

5. Disallowance of depreciation on goodwill on slump sale

 

5.1. On the facts and circumstances of the case and in law, the lower authorities erred in disallowing depreciation of INR 15.98,76,563 claimed by the Appellant under section 32 of the Act, on goodwill arising on account of slump sale.

 

5.2. The lower authorities erred in disallowing the claim of depreciation on goodwill for the impugned AY merely based on disallowance made in the assessment order for AY 2018-19. Further the lower authorities failed to appreciate that the characterization of goodwill as an intangible asset under section 32 of the Act was not challenged in the assessment order for AY 2018-19.

 

5.3. On the facts and circumstances of the case and in law, the lower authorities erred in concluding that depreciation on goodwill is not allowable as under the provisions of the Act.

 

6. We shall adjudicate the two issues raised in the above grounds as under:-

 

TP adjustment towards interest on Compulsory Convertible Debentures (“CCDs”) [Ground Nos.4.1 to 4.4]:-

 

7. Brief facts in relation to above issue are as follows:-

 

7.1 The assessee company on 25.04.2014, issued 76,88,412 CCDs of Rs.190 to its AE, Stahl Netherlands BV ("Stahl Netherlands") for Rs.146 crores. The CCDs are convertible into 76,88,412 equity shares of Rs.10 each and would be converted into equity shares on 30.04.2024 or at any earlier time at the discretion of debenture holder. The coupon rate for the CCD was fixed at 11.00% payable per annum. During the impugned AY, the assessee has accrued interest on CCDs amounting to Rs.9,58,98,001/-.

 

7.2 The TPO treated the CCDs as equity thereby treating the ALP of interest on CCDs as ‘NIL’ and arrived at a TP adjustment of Rs.9,58,98,001/-. The DRP upheld the TPO’s order.

 

7.3 Aggrieved by the TPO’s/DRP’s orders, the assessee raised this issue before the Tribunal. The ld.AR submitted that the TPO has exceeded his jurisdiction in re-characterizing CCD’s as equity. It is submitted that it is judicially well settled proposition that CCD’s constitute debt and interest payable thereon is deductible expenditure till the same is converted into equity. In this context, the ld.AR relied on various judicial pronouncements. The reliance placed by the TPO and DRP on the judgment of the Hon’ble Apex Court in the case of Narendra Kumar Maheshwari reported in AIR 1989 (SC) 2138 and the RBI, FDI policy and FEMA regulations were distinguished by the ld.AR.

 

7.4 The ld.DR supported the orders of the AO and the DRP.

 

7.5 We have heard rival submissions and perused the material on record. The TPO exceeded his jurisdiction in recharacterizing CCDs as equity, in line with thin capitalization, which cannot be applied in the present case. It has been a judicially well settled proposition that CCDs constitute debt and interest payable thereon is a deductible expenditure till the time the same are converted into equity. The Hon’ble Rajasthan High Court in the case of Secure Meters Ltd reported in 321 ITR 611 (Raj), held that the debentures when issued is a loan, and therefore, whether it is convertible, or non-convertible, does not militate against the nature of the debenture, being loan. The relevant finding of the Hon’ble High Court read as follows: -

 

“8. Thus it was held, that the expenditure incurred in procuring the loan was revenue expenditure within Section 10(2)(xv) of the old Income Tax Act, which corresponds to Section 37 of the present Act. By going through the said judgment it further transpires, that the Hon'ble Supreme Court also proceeded to examine the aspect of purpose of raising loan, and its immediate or subsequent utilisation for different purpose, and examined, that even if a loan is raised for purchasing raw material, and after raising the loan the company finds it un-necessary to bye raw material and spends the amount on capital asset, still it cannot be said to be capital expenditure, as it was held, that purpose for which the new loan was required was irrelevant to the question as to whether the expenditure for obtaining loan was revenue or capital expenditure. We are told, that relying on this judgment, many of the High Courts of the country have consistently taken the view, that the expenditure incurred in issuing any debentures, and raising loan on debentures, is admissible, obviously because the debenture is also a loan.

 

9. At this stage it was contended by the learned counsel for the Revenue, that a distinction should be drawn between the convertible, and non convertible debentures, inasmuch as if the debenture is converted into shares, then it partakes the character of capital, and in that event, the expenditure would not be revenue expenditure, and would be capital expenditure. Learned counsel for the assessee informs, that though it has not come on record so far, but as a matter of fact the debentures issued were of convertible nature. Then, the learned counsel for the assessee argued, relying upon the judgment of Calcutta High Court, in C.I.T. Vs. East India Hotels, reported in 252 ITR-860, that the expenditure incurred, even in raising loan by convertible debenture would also be admissible as revenue expenditure. The Calcutta High Court had adopted the reasoning, that conversion of debentures results into repayment of loan, and issuance of shares. This is one aspect of the matter. In our view, the other more important aspect of the matter is, that the Hon'ble Supreme Court in India Cement's case has clearly excluded this aspect from consideration, by holding, that it is irrelevant to consider the object, with which the loan was obtained. Admittedly the debentures when issued is a loan, and therefore, whether it is convertible, or non convertible, does not militate against the nature of the debenture, being loan, and therefore, the expenditure incurred would be admissible as revenue expenditure.

 

10. Thus, we do not find any error in the finding of the learned Tribunal on this aspect also. Consequently, question no. 2 also as framed, is required to be, and is, answered against the Revenue, and in favour of the assessee.”

 

7.6 The Bangalore Bench of the ITAT in the case of CAE Flight Training (India) Pvt. Ltd., reported in 2019 (8) TMI 554 has held that CCDs are to be considered as Debt only till they are converted as equity. Further, we place reliance on the following judicial pronouncement, which have upheld the same view:-

 

i) Bangalore Bench of the Tribunal in the case of Embassy One Developers Pvt. Ltd., 2020 (12) TMI 110

 

ii) Mumbai Bench of the Tribunal in the case of Indorama Ventures Oxides Ankleshwar (P.) Ltd., TS-471-ITAT-2024

 

iii) Bangalore Bench of the Tribunal in the case of Wework India Management (P.) Ltd., reported in 150 taxmann.com 432.

 

7.7 The reliance by the Ld. DRP on the judgment of the Hon’ble Supreme Court in the case of Narendra Kumar Maheshwari, supra is misplaced. The Hon’ble Supreme Court judgment was in the context of Companies Act, 1956 and Securities (Contract and Regulation) Act, 1956 and the issue was whether Controller of Capital issues has the power to allot inter alia CCD. Further, the reliance placed by the DRP on the RBI FDI policy and FEMA regulations is misplaced. Since in the case of fully convertible debentures, there is no future repayment obligation, the same was considered as equity for the purpose of FDI policy. This definition of convertible debentures given by RBI is in the context of FDI policy to exercise control on future repayment obligations in convertible foreign currency. Such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during pre-conversion period or regarding payment of dividend on such convertible debentures during reconversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion. This was also upheld by the Bangalore Bench of the Tribunal in the case of CAE Flight Training (India) Pvt. Ltd., (supra).

 

7.8. The assessee company in order to justify the arm's length price of the interest due on CCD’s had selected in its TP study Comparable Uncontrolled Price method as the most appropriate method and performed a detailed benchmarking analysis arriving at a list of 57 comparable issuance of CCD’s. Based on such analysis, the assessee arrived at an arm's length range of 10.00% to 12.65% and concluded that the coupon rate of 11% was at ALP. The TPO ignored the benchmarking analysis undertaken by the assessee company without giving any cogent reasons, held that the ALP is NIL. The TPO did not conduct any search in accordance with TP regulations under the Act and Rule. The Hon’ble Bombay High Court in the case of India Debt Management (P.) Ltd reported in 417 ITR 103 (BOM) had held that where TPO made addition to assessee's ALP in respect of interest paid to AE on CCD, in view of fact that interest rate of comparables was ranging between 11% to 12%, 11.30% interest paid by assessee to its AE was very much within arm's length rate. Accordingly, the Hon’ble High Court deleted the impugned addition. In the instant case, the coupon rate of 11% paid by the assessee was well within the arm’s length range based on the benchmarking conducted by the assessee and hence the same is at ALP. Therefore, the action of the TPO / DRP in treating that CCDs as in the nature of equity is not permissible since CCDs remain as debt until they are converted.

 

7.9 Before concluding this issue, it is to be mentioned that the Bench had asked the ld.AR regarding the applicability of section 94B of the Act. The ld.AR by referring to the audit report at page 49 of the paper-book submitted that no disallowance is called for u/s.94B of the Act (since interest payment on CCD’s did not exceed 30% of EBITDA). However, this aspect needs to be examined if need be, by the AO. It is ordered accordingly. In the result, the Grounds 4.1 to 4.4 are allowed.

 

Disallowance of depreciation on goodwill on slump sale [Ground Nos. 5.1 to 5.3]:-

 

8. Brief facts in relation to above issue are as follows:-

 

8.1 The assessee had entered into a Business Transfer Agreement (“BTA”) on 20.09.2017 pertaining to assessment year 2018-19 to acquire the marketing and sales division of leather chemical business of BASF India Limited (“BASF India”) by way of a slump sale. The Purchase Price Allocation (“PPA”) report obtained by the assessee company assisted in the allocation of the above consideration to facilitate the accounting of identifiable assets and liabilities of the undertaking taken over. The consideration paid for acquisition of the division from BASF India was Rs.171,21,51,830/- and the excess consideration over the net assets taken over was recognized as goodwill amounting to Rs.115,22,91,027/-. The assessee company also paid certain retrenchment costs of Rs.2,45,46,664/- in respect of few employees of BASF unit that it did not take into its employment, pursuant to the slump sale. Since this cost was also discharged by the assessee company as a part of slump sale, the same was added to the goodwill, which was accordingly determined to be Rs.117,68,37,691/-. The AO for assessment year 2018-19, based on the PPA held that consideration of Rs.113,69,00,000/- represents excess consideration which was treated as unexplained investment under section 69 of the Act. The AO also disallowed the depreciation claimed on the said excess consideration amounting to Rs.28,42,25,000/-. The assessee company challenged the assessment order for AY 2018-19 by way of Writ Petition (“WP”) before the Hon’ble Madras High Court. The WP for AY 2018-19 was disposed off by the Hon’ble Madras High Court on 21.06.2024, wherein the Hon’ble High Court rejected the invocation of section 69 and thereafter remitted the case back to the AO to pass a fresh assessment order within three months.

 

8.2 Considering the disallowance made by the AO for AY 2018-19, similar disallowance of Rs.15,98,76,563/- being depreciation claim pertaining to the amount disallowed under section 69 of the Act in AY 2018-19 was upheld for the impugned assessment year by the AO. The DRP dealt in detail the objections raised by the assessee with respect to disallowance of goodwill and held that depreciation is not allowable on merits by application of Explanation 3 and Explanation 7 to section 43(1) and sixth proviso to section 32 of the Act.

 

8.3 Aggrieved with the AO/DRP’s orders, the assessee has raised this issue before the Tribunal. The ld.AR submitted goodwill arising on slump sale is eligible for depreciation and the issue is no longer res-integra. It was submitted various judicial pronouncements have been consistently holding the view that goodwill falls under the category of “any other business or commercial rights of similar nature” u/s.32(1)(ii) of the Act. In this context, the ld.AR relied on various judicial pronouncements. Further, the ld.AR submitted that the DRP’s reliance on Explanation 3 and Explanation 7 to section 43(1) of the Act and sixth proviso to section 32 of the Act is misplaced. It was submitted by the ld.AR that sixth proviso to section 32(1) of the Act applies only to assets existing before demerger and not to assets recognized by transferee company. In this context, the ld.AR relied on the order of Ahmedabad Bench of the Tribunal in the case of Urmin Marketing Pvt. Ltd., reported in 122 taxmann.com 40. As regards the invocation of Explanation 3 to section 43(1) of the Act, the ld.AR submitted that said Explanation is not relevant for the impugned assessment year. It was submitted that it is of relevance only for the year in which the asset is recorded and not in subsequent assessment years. The ld.AR submitted that the AO has not invoked Explanation 3 in the year of slump sale i.e, assessment year 2018-19 or in the impugned assessment year, hence the discussion by the DRP about Explanation 3 is only academic. Furthermore, it was submitted that goodwill did not preexist in the books of accounts of BASF India and hence the provisions of Explanation 3 to section 43(1) of the Act will not apply. In this regard, the ld.AR relied on the Ahmedabad Bench order of the Tribunal in the case of Urmin Marketing (supra) and the Bangalore Bench order of the Tribunal in the case of I & B Seeds (P) Ltd., reported in 142 taxmann.com 274.

 

8.4 As regards the invocation of Explanation 7 to section 43(1) of the Act by the DRP, the ld.AR submitted that said Explanation is relevant only in cases of amalgamation and not in a case of slump sale as in this case. Further, it was submitted in the present case, goodwill came into existence for the first time pursuant to slump sale. Thus, in absence of asset already recorded in the hands of the predecessor company, the provisions of Explanation 7 to section 43(1) of the Act will have no application. Lastly, it was contended by the ld.AR that the amendment by Finance Act, 2021 is only prospective in nature and applies for and from assessment year 2021-22 onwards and not the relevant assessment year namely 2020-21.

 

8.5 The ld. DR relied on the findings of the AO and the DRP.

 

8.6 We have heard rival submissions and perused the materials on record. As per section 32 of the Act, depreciation would be available in respect of the assets owned, wholly or partly, by the assessee company and used for the purposes of the business or profession. Explanation 3 to section 32(1) of the Act, defines intangible assets to include know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. The issue regarding whether goodwill constitutes a business or commercial right of similar nature is no longer res integra. The Hon’ble Apex Court in the case of Smifs Securities reported in 348 ITR 302, had held that goodwill constitutes an intangible asset as envisaged under section 32 of the Act. The relevant finding of the Hon’ble Apex Court reads as follows:-

 

"Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature. A reading the words ‘any other business or commercial rights of similar nature' in clause (b)of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b)"

 

8.7 The Hon’ble Jurisdictional High Court in the case of Mobis India Ltd., reported in 421 ITR 463 (Mad), had held though in the context of challenging the notice issued u/s.148 had approved the original assessment order wherein the AO had allowed depreciation on goodwill acquired under business acquisition under BTA by observing as under:-

 

“23. Thus, the assessing officer while completing the assessment under Section 143(3) of the Act took into consideration both the aforementioned decisions as considered what would be “business or commercial rights of similar nature”. The assessing officer was fully justified in holding that the vendor and dealer network rights and the goodwill acquired by the petitioner pursuant to the Business Transfer Agreement dated 26.04.2007, would qualify for depreciation under Section 32 of the Act.”

 

8.8 The Hon’ble Karnataka High Court on identical facts in the case of Manipal Universal Learning P. Ltd., reported in 359 ITR 369 (Kar) had allowed the claim of depreciation on goodwill arising on acquisition of business under slump sale model. We have also placed reliance on the following judicial pronouncements, wherein it was held that goodwill is an intangible asset eligible for depreciation u/s.32 of the Act in the context of slump sale.

 

i) Hon’ble Delhi High Court in the case of Areva T&D India Ltd., reported in 345 ITR 421.

 

ii) Hon’ble Delhi High Court in the case of Triune Energy Services (P.) Ltd., reported in 65 taxmann.com 288

 

iii) Chennai Bench of the Tribunal in the case of Dorma India Pvt. Ltd., reported in TS-735-ITAT-2019

 

iv) Delhi Bench of the Tribunal in the case of Cyber India Online Ltd., reported in 64 SOT 1

 

8.9 The DRP had relied upon the sixth proviso to Section 32(1) of the Act. The sixth proviso is applicable, only in case of assets already existing in the books of predecessor company and it is not applicable on assets recognized only by successor company. The legislative intent as per the memorandum of Finance Bill, 1996, was to curb the practice of claiming depreciation on the same assets by both the predecessor company and the successor company. The Ahmedabad bench of the Tribunal in the case of Urmin Marketing Pvt. Ltd.(supra), rejected invocation of the said proviso and held that the same is not applicable in a case where goodwill is recorded pursuant to a merger and no goodwill from the books of the transferor is recorded by the transferee. The DRP relied on the order of Bangalore Bench of the Tribunal in the case of United Breweries Ltd. reported in 76 taxmann.com 103, for invoking the said proviso. The facts in the present case are distinguishable from those in United Breweries (Supra), as the said decision was in the context of amalgamation and for the reasons as discussed below:

 

• UB acquired the shares of KBDL from its shareholders, at the value of Rs.180.52 Crores. In the immediately following previous year (year under appeal), KBDL merged with UB. Goodwill,was an asset pre-existing in the books of KBDL, which was valued at Rs.7.45 Crores, was recorded by UB at an enhanced value of Rs.62.30 Crores upon amalgamation. The enhanced value of goodwill in the books of account was said to be on account of revaluation of assets. In view of this, the depreciation thereon was restricted to actual cost of asset, having regard to Explanation 3 of section 43(1).

 

• Additionally, 6th proviso to section 32(1) of the Act was invoked. It was observed that the transferor KBDL had not claimed any depreciation on goodwill prior to the transfer and hence, applying said proviso, it was concluded that no depreciation shall be allowed in the hands of UB, since the transferor did not claim any depreciation thereon. It was therefore concluded that the amalgamated company cannot claim such depreciation that was never claimed by the amalgamating company.

 

• The above-mentioned basis formed the twin grounds on which the depreciation was denied to the UB. However, it is important to note that Tribunal has clarified at para 15 of the order that goodwill is a depreciable asset having regard to the Supreme Court judgment in Smifs Securities.

 

8.10 The said order of ITAT in the case of United Breweries (supra) was also distinguished and rejected in para 60 by the Delhi Bench of the Tribunal in the case of Aricent Technologies (Holdings) Ltd reported in 109 taxmann.com 47, while allowing depreciation on goodwill. The relevant finding of the Delhi Bench of the Tribunal reads as follows:-

 

“60. The DR further emphasized that if the 6th proviso to section 32 (i) is considered the depreciation under this provision is to be restricted to the amount considering that amalgamation has not taken place and since in the hands of the amalgamating companies the depreciation on goodwill would have been zero there cannot be deprecation in the hand of the amalgamated company. In support reliance was placed on the decision of the coordinate bench of the Tribunal Bangalore in ITA No.722, 801 and 1065/ Bang/ 2014. Once again the DR is not appreciating the facts of the case in hand in their true perspective. It has to be understood that there was no goodwill in the books of amalgamating companies and only after the scheme of amalgamation, when the amalgamating companies amalgamated, goodwill came into existence being the difference between the consideration paid by amalgamated company over and above the net asset value of the amalgamating companies. The reliance placed on the judgment of coordinate bench is misplaced in as much as in that case the value of the goodwill in the books of amalgamating company was only Rs.7.45 crores which has been shown by the assessee at Rs.62.30 crores and on this it was held by the appellate authority that the assessee has failed to justify the valuation of goodwill at Rs.62.30 crores. The facts of the case in hand clearly show the valuation of goodwill as per the valuation report and there is no quarrel in so far as the net asset value of the amalgamating companies is concerned. The same has the sanction of the Hon’ble High Court.”

 

8.11 The DRP had also stated that the assessee’s claim of depreciation is not in accordance with Explanation 3 to section 43(1) of the Act. The said explanation is not relevant for the Impugned AY. It would be of relevance only in respect of the year in which an asset is recorded and not for the subsequent years. In the present case, the AO has not invoked explanation 3 in the year of slump sale, i.e.,AY 2018-19, or in the Impugned assessment year. Hence, the entire discussion by the DRP about Explanation 3 is academic, as it requires ‘satisfaction’ of the AO, and approval of the Joint Commissioner for being invoked. Both these aspects being absent, the discussion by the DRP is entirely presumptuous and academic. Furthermore, in the instant case, goodwill did not pre-exist in the books of account of BASF India and hence the provisions of Explanation 3 to section 43(1) will not apply. In this regard, reliance is placed on the order of the Ahmedabad Bench of the Tribunal in the case of Urmin Marketing (supra), wherein it was held that explanation 3 to section 43 of the Act does not have any application as goodwill, was not shown in the books of the amalgamating company, and the said explanation comes into play only where an asset exists in the books of amalgamating company. Reliance is also placed on the decision of the Bangalore Bench of the Tribunal in the case of I & B Seeds (P.) Ltd. (supra), wherein the Tribunal held that AO could not invoke Explanation 3 to section 43(1) as the said Explanation does not restrict the claim of depreciation on goodwill arising pursuant to a slump sale.

 

8.12 Further, the DRP had also stated that the assessee’s claim of depreciation is not in accordance with Explanation 7 to section 43(1) of the Act. The said explanation 7, is relevant only in the cases of amalgamation and not in the instant case of slump sale. Even assuming that the said explanation is applicable in case of slump sale, the said Explanation 7, is of relevance only for the year in which an asset is recorded and not for the subsequent years. Hence, the same cannot be invoked for the Impugned AY. Further, in the present case, goodwill came into existence for the first time pursuant to slump sale. Thus, in absence of an asset already recorded in the hands of predecessor company, the provisions of Explanation 7 to section 43(1) of the Act will have no application. In this regard, we place reliance on the order of Ahmedabad Bench of the Tribunal in the case of Urmin Marketing (supra), wherein it observed that the assessee has not recorded any goodwill from the books of account of the amalgamating company and it was therefore held that the provisions of Explanation 7 to section 43(1) of the Act cannot be applied.

 

8.13 Before concluding it is to be mentioned that the Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from 01.04.2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent AYs. Further, amendments were made in section 55 of the Act, in relation to the meaning of ‘cost of acquisition’ etc. This amendment recognizes that depreciation on goodwill in relation to the years prior to 1.04.2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. Therefore, it is evident from the above, that the intention of the legislature, that depreciation on goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be avoided.

 

8.14 In light of aforesaid reasoning and judicial pronouncements cited supra, we hold that the depreciation on goodwill arising out of the slump sale is to be allowed under Section 32 of the Act for the concerned assessment year. It is ordered accordingly. Therefore, Grounds 5.1 to 5.3 are allowed.

 

9. In the result, the appeal filed by the assessee is partly-allowed.

 

Order pronounced in the open court on 10th December, 2024 at Chennai.

 

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