Income Tax Appellate Tribunal – Bangalore
M/S. Middleby Celforts … vs Deputy Commissioner Of Income … on 20 December, 2021 IN THE INCOME TAX APPELLATE TRIBUNAL
“A” BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENTAND
SHRICHANDA POOJARI, ACCOUNTANT MEMBER
ITA Nos.953 to 955/Bang/2019
Assessment Years : 2014-15 to 2016-17
M/s. Middleby Celfrost Innovations Pvt. Ltd., Vs. DCIT,
3rd Floor, Onyx Centre, No.5, Circle – 4(1)(2),
Musuem Road, Bengaluru.
Bengaluru – 560 001.
PAN : AAICM 8445 J
Assessee by : Shri. T. Suryanarayana, Advocate
Revenue by : Shri. Sankar Ganesh K, JCIT(DR)(ITAT), Bengaluru
Date of hearing : 14.12.2021
Date of Pronouncement : 20.12.2021
ORDER
Per N. V. Vasudevan, Vice President
These are appeals by the assessee against 3 orders of CIT(A)-4, Bengaluru,
dated 15.02.2019 relating to Assessment Years2014-15, 2015-16 and dated
18.03.2019 relating to Assessment Year 2016-17.
2. We shall first deal with the appeal for Assessment Year 2014-15. The
issue that arises for consideration in the above appeal pertains to the
disallowance of Rs. 1,60,32,084/- on account of depreciation claimed on
goodwill amount arrived at after the fair value adjustment made to debtors and
inventory in the book of accounts. In the alternative, the Assessee is claiming
ITA Nos.953 to 955/Bang/2019
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for a deduction with respect to inventory and debtors adjustment from the
business profits.
3. During the financial year 2013-14, the assessee acquired the assets and
liabilities of the refrigeration business of Celfrost Innovations Private Limited
(`Seller’ or `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. As per
section 2(42C) of Income -tax Act 1961, ‘slump sale’ means the transfer of one or
more undertakings as a result of the sale for a lump sum consideration without
values being assigned to the individual assets and liabilities in such sales. In
CIT v. Smifs Securities Ltd. – (2012) 24 taxmann.com 222 (SC), the Hon’ble
Supreme Court held that Explanation 3 to s. 32 states that the expression “asset”
shall mean an intangible asset, being know-how, patents, copyrights, trademarks,
licences, franchises or any other business or commercial rights of similar nature.
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). Consequently, “Goodwill” is an asset under
Explanation 3(b) to s. 32(1) & eligible for depreciation. The difference between
the cost of an asset and the amount paid in the process of amalgamation
constituted “goodwill”. There is no dispute that the above principle will also apply
to a slump sale where business is acquired as a going concern and payment over and
above book value of net tangible assets can be allocated by assessee towards
ITA Nos.953 to 955/Bang/2019
Page 3 of 22
acquisition of bundle of business and commercial rights, compendiously termed as
‘goodwill’ and depreciation claimed on the same. We may also clarify that 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. The sale consideration paid would be
a lump sum consideration without values being assigned to individual assets.
4. 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, which was valued at Rs.
38,05,00,766/-. In terms of the said report, the goodwill so arrived at was
subject to adjustments in the value of certain current assets (i.e. sundry
debtors and inventory), C Form Liability and subsequent adjustments to the
purchase consideration.
5. The assessee carried out the adjustments to the values of Sundry
debtors and Inventory taken over from Celfrost at the year end, during
closing of the books. The book value of Sundry Debtors was reduced by Rs.
4,21,37,570/- and the book value of Inventories was reduced by Rs.
8,61,19,099i-, totaling to Rs. 12,82,56,669/-, on account of which, the
goodwill arrived at stood increased to the extent of Rs. 12,82,56,669/-.
Apart from the above, adjustments were also made for C Form liability (Rs.
1,50,00,000/-) and to the purchase consideration (Rs. 33,00,000/-).
ITA Nos.953 to 955/Bang/2019
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Consequently, the revised Goodwill valued and recorded in the books by
the assessee was at Rs. 52,70,57,435/-.
6. In the assessment order passed, the Ld. AO accepted that the
difference between the purchase consideration and the net value of the assets
was goodwill entitled for Depreciation under Section 32 of the Act. However,
the AO was of the view that to the extent of Rs. 12,82,56,669/- which had
arisen on account of adjustments to debtors and inventory, the same was not
in terms of the valuation report and that therefore, no deprecation ought to
be allowed on the same. He held that such adjustments were not required as
per clause 4.24 and 4.25 under the BTA which stated that the debtors and the
inventories were at their realizable values; and Depreciation claimed on the
enhanced goodwill amounted to a double benefit as the assessee would
claimed deductions at the time of write off of debtors and inventories. 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 Ld. AO. Accordingly, the depreciation allowance on
the enhanced goodwill was also disallowed thereby resulting in reducing the
loss declared by the assessee from Rs. 5,66,14,356/- to Rs. 2,59,19,772/-.
The AO was of the view that by revaluing its debtors and inventory, the
assessee was indirectly trying to claim depreciation on non-depreciable
assets and also that it would amount to a double deduction. While doing so,
the AO erroneously considered the entire depreciation claimed by the
assessee on intangible assets (trademark plus goodwill). The assessee had,
in parallel, filed a rectification application under Section 154 of the Act
against the erroneous disallowance of the depreciation on trademark. The
AO rectified the error and restricted the disallowance of depreciation only
on the adjustments made to Goodwill.
ITA Nos.953 to 955/Bang/2019
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7. On appeal to the Commissioner of Income-tax (Appeals) [“CIT(A)], the CIT(A)
passed an order upholding the order of the AO by: –
Not accepting the fair value adjustment made to goodwill with
respect to debtors and inventory in the books of account by the
Assessee, thereby disallowing the depreciation impact of the same.
Not accepting the audited financial statements where the fair value
adjustments made in connection with the goodwill were accepted by the
auditors.
Not considering the alternate claim made by the assessee in its submission
with respect to inventories.
The CIT(A) however accepted that the assessee had demonstrated that they have
not claimed any double deduction with respect to debtors and inventory in the
subsequent years till FY 2017-18. Aggrieved by the Order of the Ld. CIT(A), the
assessee has filed the present appeal before the Tribunal.
8. The issues that arise for consideration in this appeal are, whether,:
a) The CIT(A) erred in not accepting the fair value adjustment made to
goodwill on account of adjustments to debtors and inventory in the book
of accounts of the assessee despite the same being accepted by the
auditors. (Ground Nos. 1 to 3); and
b) Without prejudice and in the alternate, the assessee is entitled be allowed
a deduction with respect to inventory adjustment from the business
profits. (Ground No. 4)
c) Without prejudice and in the alternate, the assessee is entitled be allowed a
deduction with respect to debtors from the business profits. (Ground No. 5)
9. The learned counsel for the assessee submitted that at the end of the
financial year, while closing its books, inter alia, the assessee made the
following fair value adjustments to its debtors and inventory taken over from
Celfrost:
ITA Nos.953 to 955/Bang/2019
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Amount in Rs. Adjustment Original Adjustmen Fair value finally Impact on
made Book value t (Rs.) considered goodwill
towards at the time
of slump
Debtors sale
18,27,35,030 (4,21,37,57 14,05,97,460 Increase in
account 0) value of
Inventory 25,89,30,370 (8,61,19,09 17,28,11,271 Increase in
9) value of
goodwill
As a result of the above adjustment, the goodwill which was increased by Rs.
12,82,56,669/- i.e. the total of the above adjustments and the assessee claimed
depreciation on the enhanced goodwill thereof. The adjustments were
primarily in the nature of provision for doubtful debts and adjustments for
slow-moving, obsolete and short inventory.
10. Submissions with regard to revaluation of Debtors: The learned
counsel for the Assessee submitted that subsequent to the slump sale, the
management identified that certain debtors taken over from Celfrost were
not stated at their realizable value at the time of their transfer owing to
ageing, legal disputes, default in timely payments, past disputes,
reconciliation and other inherent issues and a provision on this account was
therefore recorded at Rs. 4,21,37,570/-. The analysis of the debtors was done
on a scientific basis for each of such debtor individually. This exercise was
possible only upon the taking over of the debtors. Further, since the
adjustment pertained to the debtors taken over, it is fair and logical that the
goodwill is adjusted for the said amount since no adjustments to the
Purchase Consideration was possible. The independent valuer at the time of
the PPA report, expressly recognised the said fact and noted it suitably in
Para 11.2.1 and 11.2.5 of the PPA report, which stated as follows:
“11.2.1 As per the management book value of working capital is
considered as fair value”
ITA Nos.953 to 955/Bang/2019
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11.2.5 The implied goodwill balance represented above may not
necessarily be equal to the total amount of goodwill implied by
the transaction as it may exclude certain closing accounting
adjustments to be made by the Management.”
[Emphasis Supplied]
The above remarks were applicable for both debtors and inventory
adjustment. Accordingly, the Assessee created a provision of the doubtful debts,
to monitor its effort on the recoverability for debtors. It was submitted that the
fair value adjustment made by the Assessee with respect to debtors and
inventory was also found reasonable to the auditors as per para 28 of the
audited financial statements. The fact that no adverse qualifications were noted
in the audit report for the year ended 31 March 2014, goes to show that the
adjustment represented true and fair value of the asset taken over which is the
basis of drawing up the financial statements under the Companies Act, 2013.
11. The learned counsel submitted that the reference by the AO to clause
4.25 of the BTA which contains a disclosure by the seller as to the largest ten
suppliers / customer as on June 2013 and the fact that the supplier / customer
as mentioned in that schedule are in healthy relationship with the seller and
his conclusion based on the same that debtors require no adjustment is not
sustainable and overlooks the fact that actual position would be reflected only
when the debtors is taken over and the realisation is undertaken by the assessee
independently.
12. It was submitted that even as on March 2018, i.e. even after four years
of acquisition of business, the assessee has realised only around 20% debtors
during subsequent years. It was submitted that had the assessee not claimed
adjustment in goodwill and claimed the debts which could not be recovered
from the debtors as bad debts in the year of write off, the assessee would have
ITA Nos.953 to 955/Bang/2019
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claimed more deduction than what the assessee had claimed in the form of
depreciation on enhanced value of goodwill. Given the fact that the assessee
has not earned any profit since inception and has accrued losses upto 31
March 2018, that as on 31 March 2018, the assessee has claimed a total
deduction of Rs. 3,04,71,553/- towards depreciation as compared to Rs.
3,35,23,187/- had the said amount not been adjusted to goodwill but towards
profits/ losses of the assessee. As such, the assessee has actually under-
claimed Rs. 30,51,634/- as on 31 March 2018 due to making the fair value
adjustment to goodwill, instead of adjusting through P&L accounts. Further,
it is also submitted that majority of the debtors have either being written off
or recovered and the balance amount as on 31 March 2018 is not very
substantial which may either be recovered or written off in near future. It
was submitted that the assessee has not claimed any deduction for writing off
bad debts in the year of actual write off. Rather, any recovery from such
debtors, has been offered for tax by the assessee in the respective year. In
view of the above, it was submitted that by adopting the adjustment of debtors
through Goodwill, the assessee is only postponing the claim/ deduction of
expense in the books of accounts and no undue benefit is taken. Further, it
was submitted that the adjustment made to the value of goodwill is not
prejudicial to the interest of the revenue and the assessee does not gain from
tax perspective in any manner whatsoever.
13. Submissions related to adjustm ents made to Inventories :
Subsequent to the slump sale, the management identified that certain
inventories taken over from Celfrost were not stated at their realizable value at
the time of their transfer owing to a number of factors for example market
acceptance, obsolescence, discontinued products, usage of products, ageing,
physical condition – defective, refurbished, rusting, brand, etc. Post-
acquisition, upon evaluation of the inventory, the assessee ascertained that
ITA Nos.953 to 955/Bang/2019
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there were many adjustments which had to be made to the value for inventory
to represent their true realisable value and accordingly, the inventories were
written down by Rs. 8,61,19,099/. The analysis of the inventories was done on
a scientific basis for each factor. This exercise was possible only upon the
taking over of the inventories. Further, since the adjustment pertained to the
inventories taken over, it is fair and logical that the goodwill is adjusted for the
said amount since no adjustments to the Purchase Consideration was possible.
14. The learned counsel for the assessee submitted that the assessee has
bucketed the inventory into various items to ascertain the stock value adjustment.
The same has been summarized below:
Category Reason for the
Difference provision
Difference in the quantity of stock reported as
between stock taken overfrom Celfrost and physical
taken over and stock available with the Assessee.The said
difference was identified by the
physical stock Assessee item-wise and was adjusted towards
opening stock of inventory for the purpose of
accounting in the books.
Defective items Since the defective goods would have to be sold in
the market as such, the Assessee depreciated the
said stock by 50%.
Goods more than 1 Goods that were not selling in the market due to
year old and not sold various reasons like obsolescence, market
acceptance, customer usage etc., were identified
and considered as non-moving goods and thus
Goods more than 1- 100% Goodsofthat
thewere
cost/book value.as slow moving goods
considered
year-old but still whose realizable value could be impacted in the
selling sluggishly near future were identified separately. Since the
said goods were selling at
a very low pace, their value was considered to be
impacted due to ageing, obsolescence, market
acceptance, customer demand etc.in the
longrun. Accordingly, a write down of 50% was
made in this respect.
ITA Nos.953 to 955/Bang/2019
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Discontinued product The Assessee sold certain products internationally,
which were in competition with some of the
existing products ofCelfrost, which sold its
business to the Assessee. Post-acquisition, the
Assessee
Spares related to the The sparesdidrelated
not intend
to thetoabove
deal inequipment’s
productssince
was
above equipment’s/ also identified and provided by the management on
stock a reasonable basis
It was submitted that the assessee has evaluated the stock in detail and has made
the fair value adjustment on a scientific basis to ascertain the true and fair value
of the stock. It was submitted that the AO has ignored the observations and
comments made by the valuer and statutory auditors and disregarded the value
of inventory in the assessment order. It was pointed out that the fair value
adjustment made in the books of accounts and adjusted to inventory do not
have an impact on the P/L account as the same is adjusted to the opening
stock of the assessee and therefore, correspondingly, the closing stock also
contains the effect of the adjustment and no impact is created in the P/L
account for the year.
15. SUBMISSIONS ON ALTERNATE GROUNDS IN GROUND NOS. 4
AND 5:
The Assessee is entitled be allowed a deduction with respect to
inventory adjustment from the business profits. (Ground No. 4)
Alternatively, and without prejudice to the above submissions, the learned
counsel submitted that had it not adjusted stock to goodwill but written off to
the P/L account, the same would be treated as an allowable expenditure as per
Accounting Standard 2 – Valuation of Inventories (`AS-2′) and section 145(2)
of the Act. Under the circumstances, the entire amount of Rs. 8,61,19,099/-
ITA Nos.953 to 955/Bang/2019
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would be debited to the P/L account and the losses would have increased
substantially to that extent. The impact of the same is tabulated below:
Amount in Rs.
Goodwill Adjustment P/L adjustment
Financial Amount Claim of Amount adjusted
Year adjusted to depreciation to P/L account
goodwill on the same (Rs.)
(Rs.) in FY 2013-
FY 2013- 8,61,19,099/- 1,07,64,887/- 8,61,19,099/-
14
The Ld. CIT(A) has not adjudicated on the above alternate claim made by the
assessee in the submission during the course of the appeal proceedings. Further, the
Ld. CIT(A)while upholding the Order of the AO has held that the fair value
adjustment made to the value of goodwill was an afterthought of the assessee
as in case of slump sale, write off of bad and doubtful debts and inventories
cannot be made by the new purchaser without making any efforts towards
them. Since the contention of the assessee as well as the alternate claim was
not accepted by the Ld. CIT(A), while filing the above appeal before this
Hon’ble Tribunal, it was felt necessary to add an alternate Ground of Appeal
for the said adjustment with respect to inventory. Accordingly, ground nos. 4
and 5 are raised. It was submitted that in case of inventories, the assessee is
required to conduct an exercise of valuing its stock on the basis of AS-2
prescribed on the basis of the market value. Further, the mercantile system of
accounting is followed by the assessee and as mentioned above, as per the said
system of accounting, inventory revaluation is allowed as deduction under the
Act and as mentioned by the Ld. CIT(A) no specific efforts are required for the
said claim to be allowed to the assessee. The learned counsel placed reliance
on the decision given by the Hon’ble Karnataka High Court in the case of CIT
vs. IBM India Ltd. [2015] 55 Taxmann 515 (Karnataka)wherein it was held
that where an assessee does not reduce the value of obsolete items from value
ITA Nos.953 to 955/Bang/2019
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of inventory and instead create provision for obsolescence, such accounting
treatment is in compliance with AS-2 and said provision is an allowable
deduction from business profits. Thus, even if the assessee had recorded its
stock at gross values and made a provision for obsolescence to arrive at the
value as per AS-2, the assesse had a right to deduction of the said provision
from its business profits. It was submitted that the assessee has debited the
said adjustment amount to goodwill account instead of P/L account and has
reduced the same from the value of inventory disclosed in the balance sheet,
thereby giving effect of an actual write off instead of a provision. As such,
relying on the principles laid in the above jurisprudence, the assessee is
entitled to the deduction of the said adjustment from its business profits. It
was further submitted that since the assessee has not debited its P/L account
while accounting for the said inventory adjustment since the same was debited
to the goodwill account, if the goodwill adjustment pertaining to inventory is
disallowed then the assessee will suffer a loss as it will perpetually lose its right
claim a deduction to which it is legally entitled to. Hence, the alternate claim
made by the assessee is genuine and should be allowed. The learned counsel
relied on the decision of Hon’ble Supreme Court in the case of Kedarnath Jute
Mfg. Co. Ltd. vs. CIT [1971] 82 ITR 363 (SC) wherein it was held that an
assessee who follows the mercantile system of accounting will be entitled for
deduction of an expense which has accrued during the year from the profits and
gains of the business if it is allowed under law irrespective of the fact that the
assesse has not made a provision in its book of accounts for such expenditure.
Thus it was submitted that the amount of provision for diminution in the value
of inventory can be claimed as an allowable deduction from business profits even
in case the said provision was not debited to P&L account for that year. In view
of the above, it was submitted that the assessee should be allowed the alternate claim
of deduction of inventory adjustment from its profits if the said adjustment made to
goodwill is not accepted.
ITA Nos.953 to 955/Bang/2019
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16. With regard to alternate submission on Grd.No.5, we shall first reproduce
Grd.No.5, which reads as follows:
The Assessee is entitled to be allowed a deduction as regards
debtor’s adjustment from business profits. (Ground No. 5)
Regarding Grd.No.5, the learned counsel for the assessee submitted that the
assessee had debited the amount of provision of debtors to goodwill account and
claimed depreciation thereon. However, this entire adjustment to goodwill was
disregarded by the AO thereby disallowing the depreciation claim on the said
amount in the P/L account. The CIT(A) upheld the Order of the AO in this
regard and held that the fair value adjustment made to the value of goodwill
was an afterthought of the assessee as in case of slump sale, write off of bad
and doubtful debts and inventories cannot be made by the new purchaser
without making any efforts towards them. Since the contention of the assessee
was not accepted by the Ld. CIT(A), while filing the said appeal before the
Hon’ble ITAT, it was felt necessary to add an alternate Ground of Appeal for
the said provision adjustment with respect to debtors. In this regard, it was
submitted that since 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. However, if the goodwill adjustment
is dismissed and depreciation claim is disallowed by the Tribunal, then the
assessee will suffer a loss as it will perpetually lose its right claim a deduction
ITA Nos.953 to 955/Bang/2019
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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. He placed
relied on decision of Hon’ble Apex Court in the case of CIT vs. T. Veerabhadra
Rao [1985] 22 Taxman 45 (SC) 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.
17. Further, it was submitted that as on 31 March 2018, even after four years
of acquisition of the business of Celfrost, the assessee has realized only
around 20% of the debtors after making all efforts for recovery of the same.
Hence, it was submitted that the assessee carried out efforts to recover the
debtors taken over and in case the same was not possible, the said provision
was written off. In view of the above, it is submitted that in case the goodwill
adjustment is dismissed and consequent depreciation claim is disallowed, the
assessee be allowed deduction of the write off of actual bad debts on the
basis of the principles laid down in the case of Veerabhadra Rao(supra).
Under the circumstances. the following claim will be made to the tax
computation of the assessee. Financial Nature of Actual Treatment in Treatment Pleaded
Year expense Debtors P/L in adjustment
Written off account ITR to ITR
2013-14 Actual bad – – currently
– –
debts
written off
Baddebts – – – –
recovered
Actual bad 1,00,465 Net provision Not Allow as tax
debts debited to offered deductible
written off P/L account to tax expenditure
ITA Nos.953 to 955/Bang/2019
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2014-15 Baddebts 29,55,065 No Offered Reverse the
recovered impact to tax as income
income declared
2015-16 Actual 2,14,89609 Net provision Not Allow as tax
bad debts debited to offer deductible
written off P/L account ed to expenditure
tax
Bad debts 23,43,353 No Offered Reverse
recovered impact to tax as the
income income
2016-17 Actual 66,34,695 Net Not Allow as tax
bad debts provision offer deductible
written off debited to ed to expenditure
P/Laccount tax
Bad debts – – –
recovered
2017-18 Actual – – – –
bad debts
written off
Bad debts – – – –
recovered
18. Per contra, the learned DR submitted that the predominant question
involved in this case regarding bad debt are, (i) Can recognition of sundry debts as
bad debt subsequent to purchase of business on slump sale basis be treated as
goodwill? (ii) Whether write off of debts which were acquired as assets subsequent
to slump sale purchase is revenue loss or capital loss? It was submitted that Assessee
acquired refrigeration business M/s. Celfrost Innovation Pvt. Ltd., through a
Business Transfer Agreement (BTA) for a total sale consideration of Rs.74.6
Crores on slump sale basis on 15.10.2013 i.e. in the mid of F.Y.2013-14
relevant to Asst. Year 2014-15. This value of Rs.74.6 Crores was arrived
based on the report of an independent valuer. However, the assessee claimed
that during finalization of audit for the F.Y.2014-15, it had reduced the value
ITA Nos.953 to 955/Bang/2019
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of inventory and debtors downwards. The assessee treated the difference between
the value arrived for the purpose of slump sale purchase and the value arrived for
the purpose of year-end audit as Goodwill. The assessee had claimed
depreciation on the same. Though the assessee claims it as revaluation it is fact
of identification of bad debts. The depreciation was disallowed by the Assessing
Officer. On an appeal, the CIT(A) confirmed the same. It has to be noted that the
Assessing Officer did not disallow depreciation on goodwill recognized
consequent to the business transfer agreement (slump sale). The Assessing
Officer disallowed depreciation claim on account of recognition of sundry
debtors and inventory as bad debt at the time of finalization of books of account
only. The Assessing Officer vide Para 4.6 and 4.7 of the assessment order for
AY 2014-15 has brought out very clearly that at the time of acquisition of
business sundry debtors were good enough. Hence, subsequent event which led
to downward valuation cannot be claimed as goodwill. It is a capital loss. Hence
disallowance was made by the Assessing Officer is right in law. Now the assessee
before the Tribunal, in its paper book dated 30/12/2019 has claimed that the debtors
were actually written off. The following are the amount of debtors written off:
Asst. Year Amount written off
(Rs.)
2015- 16 1,00,465
2016- 17 2,14,89,609
2017- 18 6,6,34,695
It was submitted that from the above, it is very clear that no debt was written off
during the Asst. Year 2014-15. Write off of Bad debts (acquired as asset from
another party) cannot be claimed as goodwill. If at all write off of bad debt is
claimable, it can be claimed only u/s.36 (1)(vii) subject to the conditions laid
down in Sec.36(2). However, it is being acquired assets it is capital in nature.
The assessee had not fulfilled conditions laid down under subsection 2 to Section
36. Hence the claim of the assessee that the recognition of bad debt as valuation
ITA Nos.953 to 955/Bang/2019
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is to be negated and should be treated as just identification of bad debt. As those
debts were capital in nature and write off of it is capital loss. Hence, no
deduction u/s 36(1)(vii) is to be allowed.
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
ITA Nos.953 to 955/Bang/2019
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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 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
ITA Nos.953 to 955/Bang/2019
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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.
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. If
ITA Nos.953 to 955/Bang/2019
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depreciation 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 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
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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.
SI. 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.
ITA Nos.953 to 955/Bang/2019
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23. In the result, appeal for the Assessment Year 2014-15 is treated as partly
allowed for statistical purposes. The appeals for Assessment Years 2015-16 and
2016-17 are dismissed.
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: 20.12.2021.
/NS/*
Copy to:
1. Assessees 2. Respondent
3. CIT 4. CIT(A)
5. DR 6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore.
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