M/s. Middleby Celforts Innovations Private Limited, Bangalore V. Deputy Commissioner of Income Tax, Circle-4(1)(2), Bangalore

MA 58/BANG/2022

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 3050 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 13 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 29-08-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 25-08-2022
• Assessment Year: 2015-2016
• Appeal Filed On: 16-06-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MAHIMA GOUD
• Keywords: Depreciation; Additional evidence; Bad and doubtful debts; Valuation report
• Section: 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER MP Nos.58 and 59/Bang/2022 (in ITA Nos.954 and 955/Bang/2019) Assessment Years : 2015-16 and 2016-17 M/s. Middleby Celfrost Innovations Private Limited, 3 rd Floor, Onyx Centre, No.5, Museum Road, Bengaluru - 560 001. PAN : AAICM 8445 J Vs. DCIT, Circle - 4(1)(2), Bengaluru. APPELLANT RESPONDENT Appellant by:Ms. Mahima Goud, Advocate Respondent by :Shri. Sankar Ganesh K, JCIT(DR)(ITAT), Bengaluru Date of hearing:26.08.2022 Date of Pronouncement:30.08.2022 O R D E R Per N. V. Vasudevan, Vice President: These are Miscellaneous petitions (MPs) filed by the assessee u/s.254(2) of the Income Tax Act, 1961 (Act) pointing out certain apparent errors in the order of the Tribunal which needs to be rectified. 2. One of the issues that arose for consideration was as to whether the assessee would be entitled to depreciation on goodwill on the difference between the consideration received on slump sale and value consequent to revaluation of the assets under slump sale M.P.No.58 & 59/Bang/22 (in ITA Nos.954 and 955/Bang/2019) Page 2 of 8 on the basis of the valuation report obtained after conclusion of the slump sale. The Tribunal gave its decision on the issue as follows: “19. We have given a careful consideration to the rival submission. The facts on record show that during the financial year 2013-14, the assessee acquired the assets and liabilities of the refrigeration business of Celfrost as a going concern on a slump sale basis for a total consideration of Rs. 74,60,00,000/-through a Business Transfer Agreement (`BTA') dated 15 October 2013. Under the said BTA, the assessee acquired the business undertaking, including assets related to the undertaking including but not limited to, tangible fixed assets, goodwill, exclusive right to all data and lists of customers and suppliers, business intellectual property, brand/ trademark, business and domain names, utility models, business information etc. The difference between the cost of assets acquired under BTA and the sale consideration paid was a sum of Rs.38,05,00,766/-. He however accepted the two other adjustments to Goodwill on account of C - Form liability (Rs.1,50,00,000/-) and adjustment to purchase consideration (Rs. 33,00,000/-). Consequently, the final goodwill was determined to be Rs. 39,88,00,767/- by the AO. The AO did not agree to the claim of depreciation on enhanced value of goodwill claimed by the assessee on account of revision of book value of Sundry Debtors less by Rs. 4,21,37,570/- and the book value of Inventories less by Rs. 8,61,19,099/-, totalling to Rs. 12,82,56,669/-. 20. Admittedly, the slump sale concluded on 15.10.2013 as per the terms of the BTA. After conclusion of slump sale, the assessee obtained a valuation report dated 9.8.2014 from an independent valuer for the allocation of the purchase price towards various assets (hereinafter the 'Purchase Price Allocation report' or `PPA report') and accordingly recorded them in its books. As per the PPA, all assets were recorded at fair value and an allocation was made towards the brand value. The resultant excess purchase consideration paid was recognized towards goodwill. In terms of the said report, book value of Sundry Debtors was reduced by Rs. 4,21,37,570/- and the book value of Inventories was reduced by Rs. 8,61,19,099/- which resulted in consequent enhancement of the value of goodwill to the extent of Rs. 12,82,56,669/-. There is no provision in the Act as to how the purchaser in a slump sale has to record the value of assets/rights acquired in a slump sale, though the value of assets/rights would be available and agreed by the parties. As per the agreement between the parties the refrigeration business was acquired by the assessee on a slump sale basis for a particular sale consideration. The business M.P.No.58 & 59/Bang/22 (in ITA Nos.954 and 955/Bang/2019) Page 3 of 8 purchase agreement is dated 15.10.2013 and in terms of article 3.1, the transaction concluded on the date of signing the business agreement. The cost/consideration allocated to various assets have to be and have been recorded as bargained between the assessee and the vendor of the refrigeration business. It is only thereafter that the assessee undertook the exercise of valuation by an independent valuer and noticed that the debtor’s account and inventory had been valued higher at the time of slump sale. It is therefore clear in terms of the decision of the Hon’ble Supreme Court in the case of Smiffs Securities (supra), the assessee could claim as goodwill only the difference between the consideration paid at the time of slump sale and the net value of the assets that the assessee acquired by virtue of the slump sale. The assessee cannot seek to vary the quantum of goodwill based on an exercise carried out by it subsequent to the slump sale and by passing entries in the books of accounts towards the end of the financial year, even though there may be valid reasons for doing so, as in the present case. In such an event where the quantum of consideration attributable to various assets in a slump sale is sought to be varied from what was bargained between the parties to the slump sale, like in this case towards unrealizable debts/bad debts fall or slump in the value of inventory, the claim can be only by way of either a write off of debt as bad u/s.36(1)(vii) or diminution in the value of inventory by necessary entries in the books of account in the relevant account. The claim will be examined by the AO in accordance with the relevant provisions of the Act like Sec.36(1)(vii) of the Act for write off of debts as bad. It is only on satisfaction of conditions for allowing deduction as per the Act, the deduction will be allowed. Instead of doing so, if an adjustment is made to the quantum of goodwill, then such examination by the AO will not be possible. We are therefore in agreement with the DR on this aspect. We, therefore, are of the view that the Revenue authorities were justified in rejecting the claim of the assessee for depreciation on enhanced value of goodwill to the extent of Rs.12,82,56,669/-. We however do not agree with the submission of the learned DR that the deduction claimed is of a capital nature. In this regard we are of the view that both the items of sundry debtors and inventory are part of the business that was acquired by the assessee on slump sale, they will therefore retain the same character as they had with the vendor. The assessee only steps into the shoes of the Vendor in so far as the business that was transferred as a going concern is concerned and therefore the assessee would be entitled to claim bad debts as well as fall in value of inventory as deduction, subject to satisfaction of the conditions for such allowance laid down in the Act. The decision of the Hon’ble Supreme Court in the case of T.Veerabhadra Rao (supra) supports the plea of the assessee in this regard. M.P.No.58 & 59/Bang/22 (in ITA Nos.954 and 955/Bang/2019) Page 4 of 8 3. As an alternative ground in ground Nos.4 and 5, the assessee had prayed that if depreciation is not allowed on the enhanced value of the goodwill, then to the extent the assessee suffered loss on account of valuation of inventory and non-realization of the debtors which were taken on the slump sale, which were not allowed as deduction, the same should be taken into account as a deduction in the year in which the inventory value adjustment happened in the year in which the debtors become bad. This alternative ground was adjudicated by the Tribunal in paragraphs 21 and 22 as follows: “21. As far as the alternate submission made by the assessee with regard to allowing deduction with respect of inventory adjustment of Rs.8,61,19,099 as raised in Ground No.4 is concerned is concerned, we find that the assessee claimed deduction of a sum of Rs.1,07,64,887 in the form of depreciation on enhanced goodwill to the extent of Rs.8,61,19,099/-. To the extent of Rs.8,61,19,099/- the assessee has reduced from the value of inventory disclosed in the balance sheet, thereby the assessee has written off inventory. Ifdepreciation to the extent of Rs.1,07,64,887/- is denied on enhanced value of goodwill to the extent of Rs.8,61,19,099/-, the assessee pleads for allowing deduction of Rs.8,61,19,099/- as write off of inventory, with a plea that whatever is realized on sale of the written off inventory would be and is being offered to tax by the assessee. This plea raised by the assessee before the CIT(A) has not been examined by the CIT(A) and we are of the view that it requires verification of facts and hence the issue is remanded to the AO for consideration afresh in accordance with law after affording opportunity of being heard to the assessee. 22. With regard to the alternate plea of allowing deduction on account of debtors adjustment from business profits as raised in Grd.No.5 is concerned, the assessee has debited the entire provision related to debtors to goodwill account, the same was not debited to the P/L account. Accordingly, no amount in this respect has been claimed as a deduction in the tax computation/ Income tax return (`ITR') on this account. It was submitted that the assessee has disclosed the amount recovered from debtors in the subsequent years as income of the year in which such sum was recovered and offered the same to tax. Moreover, the assessee has not claimed any deduction in the P/L account or ITR during actually write off of bad debts made in the books of accounts at later point in time. If the goodwill adjustment is dismissed and depreciation claim is disallowed by the Tribunal, then the assessee will suffer a M.P.No.58 & 59/Bang/22 (in ITA Nos.954 and 955/Bang/2019) Page 5 of 8 loss as it will perpetually lose its right claim a deduction to which it is legally entitled to. Therefore, the assessee has pleaded in Grd.No.5 an alternate relief, notwithstanding its contention that the adjustment made to the value of goodwill is valid and should not be disallowed. The plea in this regard in principle is supported by the decision of the Hon'ble Apex Court in the case of CIT vs. T. Veerabhadra Rao (supra) wherein it was held that even if a debt is transferred from one owner to another the transferee should be entitled to the same treatment as in the hands of predecessor with respect to the debt transaction. The amount of bad debts written off in the books for subsequent AYs by the assessee and the recovery of amounts written off which was offered to tax by the assessee has been given in paragraph-17 of this order. To substantiate the figures so given, the assessee has filed an application for admission of the following documents as additional evidence. Sl. No. Particulars 1. Statement of debtors written off for AY 2015-16 2. Statement of debtors written off for AY 2016-17 3. Statement of debtors written off for AY 2017-18 4. Sample ledger extracts demonstrating write off for AY 2015-16. 5. Sample ledger extracts demonstrating write off for AY16-17. These documents are admitted as additional evidence as the same is necessary for effectively adjudicating the issue before the Tribunal. We also find that the additional evidence will explain the cascading effect of the claim of the assessee in the subsequent Assessment Years. Since the goodwill adjustment is dismissed and depreciation claim is disallowed, the assessee will suffer a loss as it will perpetually lose its right claim a deduction on account of bad debts written off to which it is legally entitled to. Therefore, we are of the view that the plea raised in the alternative in Grd.No.5 deserves to be accepted. The AO will examine the claim of the assessee in this regard and allow the deduction in accordance with law in the year of write off in the light of the additional evidence and also such other evidence that the AO may insist for allowing and examining the claim of the assessee. The appeal for the Assessment Year 2014- 15 is accordingly treated as partly allowed for statistical purposes. In the appeals for Assessment Years 2015-16 and 2016-17, the only claim is for allowing depreciation on enhanced value of goodwill, which we have already not accepted in the appeal for AY 2014-15. Hence, these appeals are dismissed.” M.P.No.58 & 59/Bang/22 (in ITA Nos.954 and 955/Bang/2019) Page 6 of 8 4. The issue came up for consideration in three Assessment Years viz., 2014-15, 2015-16 and 2016-7 for which a common order was passed. In Assessment Year 2014- 15, the directions on the alternative ground i.e., ground No.5 with regard to allowing deduction on account of bad debts was allowed by the Tribunal. In Assessment Years 2015-16 and 2016-17 also, similar alternative ground had been raised by the assessee praying for deduction on account of bad debts i.e., the debts which were taken over in slump sale. Inadvertently, the Tribunal, without noticing the alternative grounds, dismissed the appeals of the assessee for Assessment Years 2015-16 and 2016-17. This alternative ground raised in Assessment Years 2015-16 and 2016-17 is ground No.3 in both these appeals. The assessee, in this MP, has prayed for suitably amending the order of the Tribunal in tune with the decision taken in Assessment Year 2014-15 on ground No.5 and follow the said decision on ground No.3 raised appeals for Assessment Years 2015-16 and 2016-17. 5. The learned Counsel for the assessee reiterated the facts stated in the MP and submitted that the Tribunal order suffers from mistake apparent on the record and should be rectified as prayed for in the MA. Learned DR relied on the order of the Tribunal. 6. After carefully considering the rival submissions, we are of the view that there is mistake apparent on the face of the record in as much as ground No.3 in appeals for Assessment Years 2015-16 and 2016-17 were omitted to be adjudicated. In ground No.3 in both the Assessment Years, the assessee has prayed for relief in the alternative that the debtors to the extent that have become bad and which were part of the slump sale taken over by the assessee should be allowed as a deduction. The reasoning given by the Tribunal for allowing an identical ground No.5 in Assessment Year 2014-15 is equally M.P.No.58 & 59/Bang/22 (in ITA Nos.954 and 955/Bang/2019) Page 7 of 8 applicable to ground No.3 in Assessment Years 2015-16 and 2016-17. We, therefore, modify the Order of the Tribunal as follows: (a)The last two sentences of para 22 which reads as follows: In the appeals for Assessment Years 2015-16 and 2016-17, the only claim is for allowing depreciation on enhanced value of goodwill, which we have already not accepted in the appeal for AY 2014-15. Hence, these appeals are dismissed.” Will stand amended to read as follows: “In the appeals for Assessment Years 2015-16 and 2016-17, the assessee has claimed depreciation on enhanced value of goodwill and in the alternative has prayed in ground No.3 that if the depreciation on enhanced value of goodwill is not allowed, the debts which have become bad and which were part of the slump sale should be allowed as a deduction. For the reasons stated while deciding identical issues in Assessment Year 2014-15, we are of the view that depreciation on enhanced value of goodwill cannot be accepted. With regard to the alternative prayer made in ground 3 in these 2 Assessment Years, the decision rendered on ground No.5 for Assessment Year 2014-15 will apply and the AO is directed to examine the claim of the assessee as directed while deciding ground No.5 for Assessment Year 2014-15 above.” 7. The existing paragraph 23 of the Order of the Tribunal will be deleted and, in its place, the following para will be substituted: “In the result, all the appeals are treated as partly allowed for statistical purposes.” M.P.No.58 & 59/Bang/22 (in ITA Nos.954 and 955/Bang/2019) Page 8 of 8 8. In the result, the MP is allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (CHANDRA POOJARI) (N. V. VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT Bangalore, Dated : 30.08.2022. /NS/* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.