DCIT CIRCLE-7(1), DELHI V. SONEPAR INDIA PVT. LTD. , DELHI

ITA 1256/DEL/2022

AI Insights

The case revolves around the dispute concerning the depreciation on goodwill amounting to Rs. 5,63,75,000 claimed by Sonepar India Pvt. Ltd. after acquiring distribution and marketing rights from M/s Elcon System Pvt. Ltd. The Assessing Officer (A.O.) initially disallowed the depreciation, citing precedents from other Tribunal decisions. However, the CIT(A) reversed this decision, referencing judgments from the Supreme Court and other High Courts which supported the assessee's position. The Revenue's appeal to the Tribunal contested the CIT(A)'s decision, but the Tribunal upheld the CIT(A)'s ruling, dismissing the Revenue's appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 22954 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2016-2017
• Other Referred Cases: Commissioner of Income Tax Vs. Smifs Securities Ltd., Commissioner of Income Tax Vs. M/s Bharti Teletech Ltd., Triune Energy Services Pvt. Ltd. Vs. DCIT, CIT Vs. Hindustan Coca Cola Beverages Pvt. Ltd., CIT vs. Dalmia Cement (B) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANAS PIYUSH; ASHAD SAIFI
• Assessee Lawyers: ROCKTIM SAIKIA
• Keywords: Condonation of delay; Depreciation; Fair market value; Valuation report

Judgement Text

" 1 ITA No. 1256/Del/2022 DCIT Vs. Sonepar India Pvt. Ltd. IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘G’: NEW DELHI BEFORE BEFORE SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER AND SHRI AVDHESH KUMAR MISHRA, ACCOUNTANT MEMBER ITA No. 1256/Del/2022, (A.Y.2016-17) DCIT Circle-7(1) Room No. 404, C. R. Building, I. P. Estate, New Delhi Vs Sonepar India Pvt. Ltd. 507, Bhikaji Cama Place, New Delhi PAN No: AACCE2411Q (Appellant) (Respondent) Appellant by CA Manas Piyush and CA Ashad Saifi Respondent by Sh. Rocktim Saikia, Sr. DR Date of Hearing 10/01/2025 Date of Pronouncement 22/01/2025 ORDER PER YOGESH KUMAR U.S., JM : This appeal is filed by the Revenue against the order of Ld. Commissioner of Income-Tax (appeals)-3, New Delhi [Ld. CIT(A)”, for short], dated 10/08/2020 for the Assessment Year 2016-17. 2. The grounds of appeal are as under: - “1. That on the facts and in the circumstances of the case and law, the Ld.CIT(A) has erred in deleting the disallowance made by AO on account of depreciation of Goodwill of Rs. 5,63,75,000/- which is not allowable as per provision of income tax act. 2 ITA No. 1256/Del/2022 DCIT Vs. Sonepar India Pvt. Ltd. 2 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made by the AO on account of depreciation of Goodwill despite the Assessee failed to produce the evidence of acquisition and its ownership.” 3. There is a delay of 536 days in filing the present Appeal by the Revenue. The Department of Revenue filed an application for condoning the delay on the ground that the Appeal could not be filed on time due to Colvid-19 situations and relying on the Judgment of Hon'ble Supreme Court in Suo-moto Writ Petition (Civil) No. 03 of 2020 dated 08/03/2021, sought for condoning the delay. The Assessee has also field objection/reply contending that even after excluding the Covid-19 period relaxation, there is still delay of 60 days in filing the present Appeal, therefore, sought for dismissal of the Application. 4. Heard on the issue of limitation. For the reason assigned in the application for condonation of delay filed by the Revenue, considering the days of delay and by applying liberal approach as well as by following the direction of the Hon'ble Supreme Court in Writ Petition (Civil) No. 03 of 2020 dated 08/03/2021,the delay of 536 days in filing the present Appeal is hereby condoned. 3 ITA No. 1256/Del/2022 DCIT Vs. Sonepar India Pvt. Ltd. 5. Brief facts of the case are that, the A.O. disallowed an amount of Rs. 5,63,75,000/- on account of depreciation on good-will, by placing reliance on the orders of Tribunal of Panji Bench in the case of Chowgule & Company Pvt. Ltd. and the order of Bangalore Tribunal in the case of United Breweries Ltd. Aggrieved by the assessment order dated 27/12/2018, the Assessee preferred an Appeal before the Ld. CIT(A). The Ld. CIT(A) by placing reliance on the Judgment of Hon'ble Supreme Court in the case of Commissioner of Income Tax Vs. Smifs Securities Ltd. 348 ITR 302 (SC),Commissioner of Income Tax Vs. M/s Bharti Teletech Ltd. reported in (2015) 60 Taxmann.com 166 (Delhi High Court) and Triune Energy Services Pvt. Ltd. Vs. DCIT reported in (2016) 65 Taxmann.com 288 (Delhi High Court) allowed the appeal of the Assessee. Aggrieved by the order of the Ld. CIT(A) dated 10/08/2020, the Department of Revenue preferred the present Appeal on the grounds mentioned above. 6. The Ld. Departmental Representative vehemently submitted that the Ld. CIT(A) erred in deleting the disallowance made by the A.O on account of depreciation of good-will of Rs. 5,63,75,000/-, which is not eligible as per the provision of Income Tax. The Ld. Departmental Representative relying on the findings and the conclusion of the Assessment Order sought for reversing the order of the Ld. CIT(A). 4 ITA No. 1256/Del/2022 DCIT Vs. Sonepar India Pvt. Ltd. 7. Per contra, the Assessee's Representative submitted that the order of Panji and Bangalore Bench of the Tribunal relied by the A.O. are not applicable to the case of the Assessee as the Assessee has purchased the business of another entity and further submitted that the case of the Assessee is not of the amalgamation and by relying on plethora of Judgments submitted that the Grounds of appeal of the Revenue are devoid of merit, therefore, sought for dismissal of the Appeals. 8. We have heard both the parties and perused the material available on record. The Assessee entered into purchase agreement with M/s Elcon System Pvt. ltd. on 30/09/2015, wherein the Assessee acquired distribution ship and marketing rights of products of M/s Rockwell Automation Ltd. for North India. The Assessee made payment of Rs. 27,71,53,558/- towards acquisition of the said distributionship and marketing rights. The Assessee acquired net assets of Rs. 5,16,53,558/- and the payment of Rs. 22,55,00,000/- has been claimed to have been made by the Assessee over and above the value of net assets acquired was recognized as good-will in the books of accounts of the Assessee and the Assessee claimed depreciation over the same under the provisions of the Income Tax Act, 1961 (‘Act’ for short). The Ld. A.O. denied the depreciation and disallowed Rs. 5,63,75,000/- which was claimed as depreciation on good-will by the Assessee. 5 ITA No. 1256/Del/2022 DCIT Vs. Sonepar India Pvt. Ltd. 9. The Ld. A.O. while disallowing the depreciation on good-will relied on the orders of the Tribunal in the case of Chowgule & company Pvt. Ltd. (Panji Tribunal) (Supra) and United Breweries Ltd. (Bangalore Tribunal) (supra). However, the issue of good-will has been examined by the Hon’ble Delhi High Court in the case of CIT Vs. Hindustan Coca Cola Beverages Pvt. Ltd. (2011) 198 Taxmann.com 104 (Delhi),wherein The Hon'ble Delhi High Court held as under:- \"Goodwill of the company comprises of: (a) payment made to bottlers at the time of acquisition of their business, and (b) the difference between the consideration paid for business and the value of tangible assets determined by a reputed valuer. The specific payment for goodwill referred to in (a) above represents the consideration for the marketing and trading reputation, trading style and name, marketing and distribution territorial know how and information of the territory. The amount referred to in (b) above has been paid for certain contracts, rights, etc., owned by the seller. In the valuation report these contracts, rights, etc., have not been assigned any value. Therefore, the difference between the total consideration and the value of the tangible assets has been accounted for goodwill. Goodwill in the assessee's case is in substance similar to the tangible assets.\" 10. The Hon’ble Delhi High Court in the case of M/s Triune Energy Services Ltd. Vs. DCIT (2016) 65 Taxmann.com 288 (Delhi) held as under:- \"Goodwill is an intangible asset providing a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base, etc. The expression 'goodwill' subsumes within 6 ITA No. 1256/Del/2022 DCIT Vs. Sonepar India Pvt. Ltd. it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. [Para 13]\" From an accounting perspective, it is well established that 'goodwill' is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a going concern by paying more than the fair market value of the net tangible asset, that is, assets less liabilities. 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. Such goodwill is also commonly understood as the value of the whole undertaking less the sum total of its parts. The 'Financial Reporting Standard 10' issued by Accounting Standard Board which is applicable in United Kingdom and by the Institute of Chartered Accountants of Ireland in respect of its application in the Republic of Ireland, explains that the accounting requirements for goodwill reflect the view that goodwill arising on an acquisition is neither an asset like other assets nor an immediate loss in value. Rather, it forms the bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements. [Para 16] In view of Accounting Standard 10 as issued by the ICAI the assessee's contention was right that the consideration paid by the assessee in excess of value of tangible assets was rightly classified as goodwill. [Para 19]\". 11. Further the Hon’ble Delhi High Court in the case of Commissioner of Income Tax, Delhi - I Vs M/S Bharti Teletech Limited, [2015] 60 taxmann.com 166 (Delhi), held that \"though termed as goodwill, what was actually parted with by STL was a commercial right, i.e., exclusivity to the network which would not have been otherwise available but for the 7 ITA No. 1256/Del/2022 DCIT Vs. Sonepar India Pvt. Ltd. terms of the arrangement. So viewed, the conclusions arrived at by the Commissioner (Appeals) and the Tribunal cannot be faulted”. 12. In the present case, it is not the case of the Department that the good-will is generated, but admittedly the Assessee purchased the good- will from other Company. The good-will has been generated, in the instant case at the hands of the Assessee due to the sale transaction of the distribution ship and marketing rights from M/s Elcon System Pvt. Ltd. , the Assessee has recognized the good-will amounting to Rs. 22.50 crore in accordance with the generally accepted accounting principles in India. The nexus between the consideration paid by the Assessee and the acquisition of assets and rights have been substantiated by the Assessee during the assessment proceedings and the same has been accepted by the A.O. Once the nexus has been established by the Assessee, then the adequacy of the consideration cannot be challenged as held by the Hon’ble Delhi High Court in the case of CIT vs. Dalmia Cement (B) Ltd. (2002) 254 ITR 377. The Revenue cannot justify claim to put itself in the Arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is the reasonably expenditure having regard to the circumstances of the case. 8 ITA No. 1256/Del/2022 DCIT Vs. Sonepar India Pvt. Ltd. 13. Apart from the above, it is also undisputed fact that the claim of depreciation of good-will has been accepted and allowed by the Department to the Assessee for Assessment Year 2017-18, 2018-10, 2019-20 and 2020-21. Considering the above facts and circumstances, we find no error or infirmity in the order of the Ld. CIT(A) in deleting the disallowance made by the A.O. on account of depreciation on good-will of Rs. 5,63,75,000/-, accordingly, we dismiss the Grounds of Appeal of the Revenue. 14. In the result, Appeal of the Revenue is dismissed. Order pronounced in open Court on 22nd January, 2025 Sd/- Sd/- (AVDHESH KUMAR MISHRA) (YOGESH KUMAR U.S.) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 22/01/2025 R.N, Sr. PS Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI 9 ITA No. 1256/Del/2022 DCIT Vs. Sonepar India Pvt. Ltd. "