ITAT: Purchaser Eligible To Claim Reduction On Excess Amount Paid Above Net Asset Value Of Seller’s Business

ITAT: Purchaser Eligible To Claim Reduction On Excess Amount Paid Above Net Asset Value Of Seller’s Business

Refers to the decision of the Supreme Court in a previous ruling

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that once the Income Tax Department accepts the capital gain offered by the seller upon transfer of its business, it cannot be doubted in the purchaser’s possession.

The tribunal noted that the assessing officer (AO) did not establish that the purpose of the transfer of assets was a reduction of liability to tax by claiming extra depreciation on enhanced cost. Therefore, it allowed the claim by the assessee company upon acquisition of business from another entity.

It cited the decision of the Supreme Court in the CIT vs. SIMS Securities [348 ITR 302] case, wherein the bench of Prakash Chandra Yadav (Judicial Member) and Chandra Poojari (Accountant Member) reiterated that “the excess amount paid over and above the net asset value would be treated as goodwill.”

The case

The assessee company trades in parts and spares used in machine tools and other support services. It filed the Income Tax Return (ITR) declaring an income of Rs.18,58,390.

During the assessment, the AO made an addition of Rs.1,20,46,911, which was the disallowance of depreciation on goodwill. It was done, as there was no valuation report on the date of transfer of the business. The AO also referred to the business transfer agreement and held that there was no mention of any goodwill in the agreement.

The ITAT observed that the assessee took over the business of DICEIPL vide the transfer agreement, since the latter was rendering services akin to the assessee's business. The purchase consideration was determined based on the valuation report on the discounted cash flow method (DCF). The excess amount above the net asset value of the business was paid for goodwill.

The bench noted that the AO erroneously presumed that the share-holding pattern of the assessee and the seller was the same. Thus, it disregarded the contention of the AO stating no intangible asset was transferred to the assessee by the seller, as the excess amount offered by the recipient as short-term capital gain was accepted by the revenue department.

The ITAT held that the goodwill was commercial or business right under the category of intangible assets. Thus, it allowed the appeal, ruling that the IT authorities erred in disallowing the depreciation claim of the assessee.