I bought a business on slump sale. Can I depreciate the assets at the price I paid?
No. A slump sale of an undertaking as a going concern is a succession to business otherwise than on death within s.170, so the proviso to s.32(1) applies and depreciation on the assets taken over is computed on the transferor's written down value, not on the buyer's allocation of the purchase price.
Decided by the ITAT (ITAT Mumbai — Shri Shamim Yahya (Accountant Member) and Shri C.N. Prasad (Judicial Member)) on 2020-06-15, reported as [2021] 124 taxmann.com 432 (Mumbai - Trib.) — IT Appeal Nos. 6919 (Mum) of 2018 and 306 (Mum) of 2019 (AY 2014-15). It bears on section 170, section 32(1), section 2(42C), section 50B of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
This is the ruling the department cites to strip out the depreciation step-up that makes an asset-value allocation attractive in a business transfer agreement, and it is in the library because the buyer needs to know it is coming. It rejects the argument that buying a business is not a 'succession', and it holds that s.2(42C) and s.50B say nothing about depreciation in the transferee's hands. The one taxpayer-friendly limb — treating the excess of consideration over written down value as depreciable goodwill — has been removed by statute from AY 2021-22.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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Archroma India Pvt. Ltd. acquired an undertaking from Clariant Chemicals (India) Pvt. Ltd. under a business transfer agreement on a slump sale basis dated 28 September 2013 for Rs. 209.15 crore. The buyer allocated fair market values to the acquired assets across the various blocks, added those values to its existing written down value and claimed depreciation on that enhanced base. The Assessing Officer held that the transaction was a succession to business within section 170, so that the proviso to section 32(1) restricted the aggregate depreciation to what the predecessor would have obtained, and disallowed Rs. 17.12 crore. The assessee argued that a purchase of a business is not a 'succession'.
The assessee's appeal and its cross objection were dismissed and the Revenue's appeal partly allowed. The Bench held that a purchase of an undertaking under a business transfer agreement on a slump sale basis is a succession within section 170, so that the fifth proviso to section 32(1) applies and depreciation on the assets taken over is computed on the transferor's written down value. It held in the alternative that, on the principle of noscitur a sociis, an asset transferred under a slump sale falls within the sweep of the fifth proviso even without invoking section 170(1). It also held that the balancing figure between the slump sale consideration and the written down value of the assets taken over qualifies as goodwill and is eligible for depreciation as such. The assessee's separate grounds on the acquisition cost of motor vehicles and furniture and fixtures failed, the Commissioner (Appeals)'s direction to adopt the seller's written down value for those two blocks standing.
At para 16 the Bench read the definition of slump sale in section 2(42C) as making it a species of transfer by way of sale, and at para 16.1 held that section 50B deals only with the charge on the profit arising from a slump sale and says nothing about depreciation on the assets acquired, so depreciation is governed by the general provisions of section 32. At paras 17 and 18 it set out the fifth proviso to section 32(1) and found that the transfers listed in section 47(xiii), (xiiib) and (xiv) did not cover the case, leaving section 170. At para 19 it read section 170 as dealing with transfer of assets pursuant to succession to a business otherwise than on death, and at para 20 held that because the assessee had acquired the assets under a business transfer agreement it had succeeded to the business and section 170 applied. At para 22 it rejected the argument that succession excludes a purchase of a business, on the Supreme Court's decision in CIT v. K.H. Chambers, and held that an obiter observation of the Delhi Tribunal in Saipem Triune Engineering could not settle the point the other way. At paras 23 to 24.1 it set out a second and independent route: applying noscitur a sociis, and there being no exclusion of slump sale anywhere in the Act from the scope of section 32, an asset transferred under a slump sale falls within the fifth proviso in the company of succession, amalgamation and demerger, 'even without invoking the provision of section 170(1)'. At para 25 it held the officer's computation under that proviso correct. At para 26, on the treatment of the difference between the written down value of the assets taken over and the slump sale price, it followed the Delhi High Court in Triune Energy Services (P.) Ltd. v. Dy. CIT, and recorded that the Supreme Court had confirmed the Delhi High Court's view that an excess paid over tangible assets for business and commercial rights under a slump sale is goodwill; the direction to treat the balancing figure as goodwill was therefore correct.
Hence it has succeeded the transferee company. The provisions of section 170 are clearly applicable on the facts of the present case.
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Handle my notice → Ask a CA on WhatsAppNo. A slump sale of an undertaking as a going concern is a succession to business otherwise than on death within s.170, so the proviso to s.32(1) applies and depreciation on the assets taken over is computed on the transferor's written down value, not on the buyer's allocation of the purchase price. This was decided by the ITAT (ITAT Mumbai — Shri Shamim Yahya (Accountant Member) and Shri C.N. Prasad (Judicial Member)) and bears on section 170, section 32(1), section 2(42C), section 50B of the Income Tax Act 1961. It is reported as [2021] 124 taxmann.com 432 (Mumbai - Trib.) — IT Appeal Nos. 6919 (Mum) of 2018 and 306 (Mum) of 2019 (AY 2014-15). This is the ruling the department cites to strip out the depreciation step-up that makes an asset-value allocation attractive in a business transfer agreement, and it is in the library because the buyer needs to know it is coming. It rejects the argument that buying a business is not a 'succession', and it holds that s.2(42C) and s.50B say nothing about depreciation in the transferee's hands. The one taxpayer-friendly limb — treating the excess of consideration over written down value as depreciable goodwill — has been removed by statute from AY 2021-22. If it applies to you, the first step is this: Model the depreciation on the transferor's written down value before pricing the deal, not on the fair values allocated in the agreement.
Archroma India Pvt. Ltd. acquired an undertaking from Clariant Chemicals (India) Pvt. Ltd. under a business transfer agreement on a slump sale basis dated 28 September 2013 for Rs. 209.15 crore. The buyer allocated fair market values to the acquired assets across the various blocks, added those values to its existing written down value and claimed depreciation on that enhanced base. The Assessing Officer held that the transaction was a succession to business within section 170, so that the proviso to section 32(1) restricted the aggregate depreciation to what the predecessor would have obtained, and disallowed Rs. 17.12 crore. The assessee argued that a purchase of a business is not a 'succession'. The matter was decided on 2020-06-15 by the ITAT (ITAT Mumbai — Shri Shamim Yahya (Accountant Member) and Shri C.N. Prasad (Judicial Member)). On those facts the ITAT held as follows. The assessee's appeal and its cross objection were dismissed and the Revenue's appeal partly allowed. The Bench held that a purchase of an undertaking under a business transfer agreement on a slump sale basis is a succession within section 170, so that the fifth proviso to section 32(1) applies and depreciation on the assets taken over is computed on the transferor's written down value. It held in the alternative that, on the principle of noscitur a sociis, an asset transferred under a slump sale falls within the sweep of the fifth proviso even without invoking section 170(1). It also held that the balancing figure between the slump sale consideration and the written down value of the assets taken over qualifies as goodwill and is eligible for depreciation as such. The assessee's separate grounds on the acquisition cost of motor vehicles and furniture and fixtures failed, the Commissioner (Appeals)'s direction to adopt the seller's written down value for those two blocks standing.
At para 16 the Bench read the definition of slump sale in section 2(42C) as making it a species of transfer by way of sale, and at para 16.1 held that section 50B deals only with the charge on the profit arising from a slump sale and says nothing about depreciation on the assets acquired, so depreciation is governed by the general provisions of section 32. At paras 17 and 18 it set out the fifth proviso to section 32(1) and found that the transfers listed in section 47(xiii), (xiiib) and (xiv) did not cover the case, leaving section 170. At para 19 it read section 170 as dealing with transfer of assets pursuant to succession to a business otherwise than on death, and at para 20 held that because the assessee had acquired the assets under a business transfer agreement it had succeeded to the business and section 170 applied. At para 22 it rejected the argument that succession excludes a purchase of a business, on the Supreme Court's decision in CIT v. K.H. Chambers, and held that an obiter observation of the Delhi Tribunal in Saipem Triune Engineering could not settle the point the other way. At paras 23 to 24.1 it set out a second and independent route: applying noscitur a sociis, and there being no exclusion of slump sale anywhere in the Act from the scope of section 32, an asset transferred under a slump sale falls within the fifth proviso in the company of succession, amalgamation and demerger, 'even without invoking the provision of section 170(1)'. At para 25 it held the officer's computation under that proviso correct. At para 26, on the treatment of the difference between the written down value of the assets taken over and the slump sale price, it followed the Delhi High Court in Triune Energy Services (P.) Ltd. v. Dy. CIT, and recorded that the Supreme Court had confirmed the Delhi High Court's view that an excess paid over tangible assets for business and commercial rights under a slump sale is goodwill; the direction to treat the balancing figure as goodwill was therefore correct. In the words reproduced by the source cited on this page: "Hence it has succeeded the transferee company. The provisions of section 170 are clearly applicable on the facts of the present case." The decision followed or applied Triune Energy Services (P.) Ltd. v. Dy. CIT [2016] 65 taxmann.com 288 / 237 Taxman 230 (Delhi); CIT v. K.H. Chambers [1965] 55 ITR 674 (SC).
It was decided by the ITAT on 2020-06-15 and is reported as [2021] 124 taxmann.com 432 (Mumbai - Trib.) — IT Appeal Nos. 6919 (Mum) of 2018 and 306 (Mum) of 2019 (AY 2014-15). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 170, section 32(1), section 2(42C), section 50B, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The assessee's appeal and its cross objection were dismissed and the Revenue's appeal partly allowed. The Bench held that a purchase of an undertaking under a business transfer agreement on a slump sale basis is a succession within section 170, so that the fifth proviso to section 32(1) applies and depreciation on the assets taken over is computed on the transferor's written down value. It held in the alternative that, on the principle of noscitur a sociis, an asset transferred under a slump sale falls within the sweep of the fifth proviso even without invoking section 170(1). It also held that the balancing figure between the slump sale consideration and the written down value of the assets taken over qualifies as goodwill and is eligible for depreciation as such. The assessee's separate grounds on the acquisition cost of motor vehicles and furniture and fixtures failed, the Commissioner (Appeals)'s direction to adopt the seller's written down value for those two blocks standing. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 170, section 32(1), section 2(42C), section 50B of the Income Tax Act 1961, and was decided by ITAT Mumbai — Shri Shamim Yahya (Accountant Member) and Shri C.N. Prasad (Judicial Member). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask for the transferor's block-wise written down value and depreciation schedule as a closing deliverable, so the capped claim can actually be computed. Do not run the argument that a purchase of a running business cannot be a succession; it was rejected on the Supreme Court's decision in K.H. Chambers.
Superseded by amendment. The goodwill limb no longer operates. Goodwill of a business or profession ceased to be a depreciable asset from AY 2021-22, and depreciation already obtained on goodwill is reduced from its cost, so the direction at para 26 to treat the balancing figure as depreciable goodwill cannot be applied to a current year. The succession and written-down-value limb is untouched by that change. No later decision applying, following or affirming this order was found, and no appellate history for it was traced. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order calls the relevant proviso the fifth proviso to section 32(1) and sets out its text, so the commentary describing it as the sixth is wrong for this decision — but quote the words of the proviso rather than its number, since the numbering has moved with later insertions. Two things a reader should carry. The Bench gave two independent routes to the same result: succession under section 170, and, separately, noscitur a sociis bringing a slump sale within the fifth proviso without section 170 at all. And the goodwill half of the result is dead for current years, goodwill having ceased to be a depreciable asset from AY 2021-22. No later treatment of this order was found and no appellate history was traced. The order records at para 26 that the Supreme Court confirmed the Delhi High Court on goodwill in a case it names as 'Arevat T&D India Ltd.', but that decision appears nowhere in the CASES REFERRED TO list and its citation is not on the order, so it is not recorded here as authority. Sections 170A and 170(2A), on modified returns after a business reorganisation, post-date this order and were not checked against a primary source. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The assessee's appeal and its cross objection were dismissed and the Revenue's appeal partly allowed. The Bench held that a purchase of an undertaking under a business transfer agreement on a slump sale basis is a succession within section 170, so that the fifth proviso to section 32(1) applies and depreciation on the assets taken over is computed on the transferor's written down value. It held in the alternative that, on the principle of noscitur a sociis, an asset transferred under a slump sale falls within the sweep of the fifth proviso even without invoking section 170(1). It also held that the balancing figure between the slump sale consideration and the written down value of the assets taken over qualifies as goodwill and is eligible for depreciation as such. The assessee's separate grounds on the acquisition cost of motor vehicles and furniture and fixtures failed, the Commissioner (Appeals)'s direction to adopt the seller's written down value for those two blocks standing.
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