We took over a business under a business transfer agreement and assumed liabilities far in excess of the assets, paying no cash. The Assessing Officer says we paid nothing, so there is no cost and no depreciation on the intangibles. Is that right?
No, on these facts. The Mumbai Tribunal held that where the buyer took over liabilities exceeding the assets by about Rs.125 crores and discharged those liabilities in later years, that discharge is consideration for acquiring the intangibles — business and commercial rights and goodwill — and depreciation follows. It also held that the fifth proviso to s.32(1) does not apply to a succession by way of slump sale.
Decided by the ITAT (Om Prakash Kant, Accountant Member and Sandeep Singh Karhail, Judicial Member) on 2024-05-13, reported as ITA Nos. 2829 to 2833/MUM/2023, Assessment Years 2013-14 to 2017-18, ITAT Mumbai Bench 'G'; heard 19 February 2024, pronounced 13 May 2024. It bears on section 50B, section 2(42C), section 32(1), section 43(1) of the Income Tax Act 1961, in Capital Gains and Deductions & Disallowances matters.
This is the buyer's side of the negative net worth problem and it is under-argued. The Revenue's usual objection is that no money moved, so there is no actual cost under s.43(1); the answer is that assuming and discharging a net liability is payment. The second holding is at least as useful: the proviso in s.32(1) that splits depreciation between predecessor and successor in the ratio of days is confined to succession, amalgamation and demerger, and does not reach a slump sale, so the buyer is not restricted to a part-year allowance on that footing. The Tribunal also refused the argument that the intangibles must be disregarded because the seller had never carried them in its books — they were self-generated in the seller's hands, so no depreciation could have been claimed there. Two warnings. The years are AY 2013-14 to 2017-18, so the outcome on goodwill would not repeat today: the Finance Act 2021 removed goodwill of a business from depreciable assets from AY 2021-22, and only separately identified business or commercial rights survive. And on the seller's side the Tribunal recorded that the coordinate bench, following the Special Bench in Summit Securities, had held the negative net worth of the going concern taxable under s.50B in the seller's hands, tax on which was paid under the Vivad se Vishwas scheme.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee acquired a business from its holding company, Gati Ltd, under a business transfer agreement, taking over the express distribution and supply chain business as a going concern. It acquired liabilities in excess of the assets amounting to about Rs.125 crores, and discharged those liabilities in subsequent years. It claimed depreciation on intangibles in the form of business and commercial rights and goodwill for AYs 2013-14 to 2017-18. The Assessing Officer and the CIT(Appeals) disallowed the claim on the grounds that no intangible in the form of business or commercial rights or goodwill had been specifically transferred under the agreement, that no consideration had been paid to Gati Ltd for acquiring such intangibles so that the entry was a mere book entry, that Gati Ltd had neither offered the corresponding income nor reduced the cost of its assets, and that the transaction attracted the then fifth proviso (now sixth proviso) to s.32(1). In the transferor's own assessment for the year, the Assessing Officer had by order dated 31 March 2015 treated the surplus on transfer of the business on a going concern basis as income from other sources; the CIT(Appeals) deleted that, and on the Revenue's further appeal the Tribunal reversed the CIT(Appeals) following the Special Bench in Summit Securities Ltd, holding that the negative net worth of a going concern is taxable under s.50B. The assessee brought on record that the coordinate bench had held the slump sale to result in capital gain in Gati Ltd's hands, that Gati Ltd had accepted that decision and had paid the tax under the Vivad se Vishwas scheme.
The appeals were allowed to the extent indicated: for AY 2013-14 partly for statistical purposes, for AY 2014-15 partly, for AY 2015-16 and 2016-17 wholly, and for AY 2017-18 partly (para 22). The Tribunal disagreed with the lower authorities' allegations that no intangibles had been transferred and that no consideration had been paid: the assessee had acquired liabilities in excess of assets amounting to Rs.125 crores, that liability was discharged and paid in subsequent years, and that discharge was consideration for acquiring intangibles in the form of business and commercial rights and goodwill (para 11). The proviso to s.32(1) apportioning depreciation relates only to transactions in the nature of succession, amalgamation or demerger, and not to succession through a slump sale; and since the business and commercial rights and goodwill were self-generated and did not appear in Gati Ltd's books, no depreciation could have been claimed by Gati Ltd, so the proviso could not be invoked (para 11).
The Tribunal worked through each of the Revenue's objections. On the absence of consideration, it reasoned from the accounting and commercial substance: taking over a net liability of Rs.125 crores and actually paying it off is a cost, and the cost is referable to what was acquired beyond the tangible assets, that is the intangibles. On the objection that the transferor had not offered any gain, it recorded that the coordinate bench had held the transaction to give rise to capital gain in Gati Ltd's hands, following the Special Bench in Summit Securities that a negative net worth of a going concern is taxable under s.50B, and that Gati Ltd had accepted that and paid tax under the Vivad se Vishwas scheme; the objection therefore fell away on the facts. On the proviso to s.32(1), it construed the provision as confined to succession, amalgamation and demerger, and additionally held that because the intangibles were self-generated in the transferor's hands and absent from its books, the premise of the proviso — depreciation allowable to the predecessor — did not exist.
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Handle my notice → Ask a CA on WhatsAppNo, on these facts. The Mumbai Tribunal held that where the buyer took over liabilities exceeding the assets by about Rs.125 crores and discharged those liabilities in later years, that discharge is consideration for acquiring the intangibles — business and commercial rights and goodwill — and depreciation follows. It also held that the fifth proviso to s.32(1) does not apply to a succession by way of slump sale. This was decided by the ITAT (Om Prakash Kant, Accountant Member and Sandeep Singh Karhail, Judicial Member) and bears on section 50B, section 2(42C), section 32(1), section 43(1) of the Income Tax Act 1961. It is reported as ITA Nos. 2829 to 2833/MUM/2023, Assessment Years 2013-14 to 2017-18, ITAT Mumbai Bench 'G'; heard 19 February 2024, pronounced 13 May 2024. This is the buyer's side of the negative net worth problem and it is under-argued. The Revenue's usual objection is that no money moved, so there is no actual cost under s.43(1); the answer is that assuming and discharging a net liability is payment. The second holding is at least as useful: the proviso in s.32(1) that splits depreciation between predecessor and successor in the ratio of days is confined to succession, amalgamation and demerger, and does not reach a slump sale, so the buyer is not restricted to a part-year allowance on that footing. The Tribunal also refused the argument that the intangibles must be disregarded because the seller had never carried them in its books — they were self-generated in the seller's hands, so no depreciation could have been claimed there. Two warnings. The years are AY 2013-14 to 2017-18, so the outcome on goodwill would not repeat today: the Finance Act 2021 removed goodwill of a business from depreciable assets from AY 2021-22, and only separately identified business or commercial rights survive. And on the seller's side the Tribunal recorded that the coordinate bench, following the Special Bench in Summit Securities, had held the negative net worth of the going concern taxable under s.50B in the seller's hands, tax on which was paid under the Vivad se Vishwas scheme. If it applies to you, the first step is this: Quantify the excess of liabilities over assets assumed under the business transfer agreement and trace the actual discharge of those liabilities in later years; that record is what turns the assumption into consideration.
The assessee acquired a business from its holding company, Gati Ltd, under a business transfer agreement, taking over the express distribution and supply chain business as a going concern. It acquired liabilities in excess of the assets amounting to about Rs.125 crores, and discharged those liabilities in subsequent years. It claimed depreciation on intangibles in the form of business and commercial rights and goodwill for AYs 2013-14 to 2017-18. The Assessing Officer and the CIT(Appeals) disallowed the claim on the grounds that no intangible in the form of business or commercial rights or goodwill had been specifically transferred under the agreement, that no consideration had been paid to Gati Ltd for acquiring such intangibles so that the entry was a mere book entry, that Gati Ltd had neither offered the corresponding income nor reduced the cost of its assets, and that the transaction attracted the then fifth proviso (now sixth proviso) to s.32(1). In the transferor's own assessment for the year, the Assessing Officer had by order dated 31 March 2015 treated the surplus on transfer of the business on a going concern basis as income from other sources; the CIT(Appeals) deleted that, and on the Revenue's further appeal the Tribunal reversed the CIT(Appeals) following the Special Bench in Summit Securities Ltd, holding that the negative net worth of a going concern is taxable under s.50B. The assessee brought on record that the coordinate bench had held the slump sale to result in capital gain in Gati Ltd's hands, that Gati Ltd had accepted that decision and had paid the tax under the Vivad se Vishwas scheme. The matter was decided on 2024-05-13 by the ITAT (Om Prakash Kant, Accountant Member and Sandeep Singh Karhail, Judicial Member). On those facts the ITAT held as follows. The appeals were allowed to the extent indicated: for AY 2013-14 partly for statistical purposes, for AY 2014-15 partly, for AY 2015-16 and 2016-17 wholly, and for AY 2017-18 partly (para 22). The Tribunal disagreed with the lower authorities' allegations that no intangibles had been transferred and that no consideration had been paid: the assessee had acquired liabilities in excess of assets amounting to Rs.125 crores, that liability was discharged and paid in subsequent years, and that discharge was consideration for acquiring intangibles in the form of business and commercial rights and goodwill (para 11). The proviso to s.32(1) apportioning depreciation relates only to transactions in the nature of succession, amalgamation or demerger, and not to succession through a slump sale; and since the business and commercial rights and goodwill were self-generated and did not appear in Gati Ltd's books, no depreciation could have been claimed by Gati Ltd, so the proviso could not be invoked (para 11).
The Tribunal worked through each of the Revenue's objections. On the absence of consideration, it reasoned from the accounting and commercial substance: taking over a net liability of Rs.125 crores and actually paying it off is a cost, and the cost is referable to what was acquired beyond the tangible assets, that is the intangibles. On the objection that the transferor had not offered any gain, it recorded that the coordinate bench had held the transaction to give rise to capital gain in Gati Ltd's hands, following the Special Bench in Summit Securities that a negative net worth of a going concern is taxable under s.50B, and that Gati Ltd had accepted that and paid tax under the Vivad se Vishwas scheme; the objection therefore fell away on the facts. On the proviso to s.32(1), it construed the provision as confined to succession, amalgamation and demerger, and additionally held that because the intangibles were self-generated in the transferor's hands and absent from its books, the premise of the proviso — depreciation allowable to the predecessor — did not exist. The decision followed or applied DCIT v. Summit Securities Ltd. (Special Bench, ITAT Mumbai) — referred to as the basis on which the transferor was assessed on its negative net worth; Thermo Fisher Scientific India (P) Ltd. (ITAT, coordinate bench) — relied on for depreciation on goodwill recognised on purchase of a unit under a slump sale.
It was decided by the ITAT on 2024-05-13 and is reported as ITA Nos. 2829 to 2833/MUM/2023, Assessment Years 2013-14 to 2017-18, ITAT Mumbai Bench 'G'; heard 19 February 2024, pronounced 13 May 2024. 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 50B, section 2(42C), section 32(1), section 43(1), 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 helps the taxpayer. The appeals were allowed to the extent indicated: for AY 2013-14 partly for statistical purposes, for AY 2014-15 partly, for AY 2015-16 and 2016-17 wholly, and for AY 2017-18 partly (para 22). The Tribunal disagreed with the lower authorities' allegations that no intangibles had been transferred and that no consideration had been paid: the assessee had acquired liabilities in excess of assets amounting to Rs.125 crores, that liability was discharged and paid in subsequent years, and that discharge was consideration for acquiring intangibles in the form of business and commercial rights and goodwill (para 11). The proviso to s.32(1) apportioning depreciation relates only to transactions in the nature of succession, amalgamation or demerger, and not to succession through a slump sale; and since the business and commercial rights and goodwill were self-generated and did not appear in Gati Ltd's books, no depreciation could have been claimed by Gati Ltd, so the proviso could not be invoked (para 11). It arises in Capital Gains and Deductions & Disallowances matters, on section 50B, section 2(42C), section 32(1), section 43(1) of the Income Tax Act 1961, and was decided by Om Prakash Kant, Accountant Member and Sandeep Singh Karhail, 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. Do not label the excess as goodwill if you can identify the rights acquired; for AY 2021-22 onwards only identified business or commercial rights are depreciable, and goodwill is not. If the Assessing Officer invokes the proviso to s.32(1) apportioning depreciation between predecessor and successor, point out that it operates on succession, amalgamation and demerger and not on a slump sale. Anticipate the Revenue's cross-check of the seller: be ready to show how the seller treated the transaction, because the Tribunal here was influenced by the fact that the seller had been assessed to capital gain on the same transaction. Where the seller has a negative net worth, advise it that on the Special Bench line in Summit Securities the negative figure is not ignored, so the gain is the consideration increased by the negative net worth — a liability that is often overlooked when a loss-making division is given away — but advise it too that the point is live, the Bombay High Court having admitted substantial questions of law on it in Wockhardt Hospitals Ltd (ITA No.1311 of 2017, tagged with ITA No. 859 of 2012).
Superseded by amendment. So far as it allows depreciation on goodwill acquired in a business transfer, the order cannot be applied to AY 2021-22 or later: the Finance Act 2021 removed goodwill of a business or profession from the definition of block of assets and from depreciable assets, and inserted Explanation 2(aa) to s.50B taking self-generated goodwill at nil in the seller's net worth (verified on the department's section 50B page as amended up to 2025, https://www.incometaxindia.gov.in/w/section-50b-26). The two other holdings — that assumption and discharge of a net liability is consideration, and that the depreciation-apportionment proviso to s.32(1) does not reach a slump sale — are not touched by that amendment and remain available, though neither has been tested in a High Court so far as this pass could establish. Whether the Revenue has appealed this order was not checked. On the negative net worth point which this order records against the transferor, note that the question is not settled: the Bombay High Court admitted substantial questions of law on exactly it in Wockhardt Hospitals Ltd v. Addl. CIT, Income Tax Appeal No.1311 of 2017, by order dated 20 January 2020, directing the appeal to be listed with Income Tax Appeal No. 859 of 2012 — the questions admitted being whether the capital gain has to be arrived at by adding the negative net worth to the full value of consideration, and whether an undertaking can have a negative cost for section 50B purposes. That admission order was retrieved and read; the outcome of those appeals was not traced and a title search on indiankanoon returned no Bombay High Court income-tax judgment in the matter. 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.
No key_quote is given. An earlier pass believed the wording differed between channels, but on verification paragraph 11 was retrieved in full and contains both phrases in a single sentence — 'and such liability is discharged by the assessee in subsequent years and therefore, that liability discharged and paid is in the form of consideration for acquiring intangibles in the form of business and commercial rights and goodwill' — so there was no discrepancy. The sentence is available and may be quoted by a later pass; it is not quoted here only because this entry was written without it. The disposal was confirmed separately: para 22 records that the appeal for AY 2013-14 is allowed partly for statistical purposes, the appeal for AY 2014-15 is partly allowed, the appeals for AY 2015-16 and 2016-17 are allowed and the appeal for AY 2017-18 is allowed partly, pronounced in open court on 13 May 2024. The paragraph numbering seen was 9.12, 9.13, 11 and 22; the intervening paragraphs were not retrieved, so this entry does not describe the Tribunal's treatment of the other grounds beyond noting that one concerned bad debts and advances. 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 appeals were allowed to the extent indicated: for AY 2013-14 partly for statistical purposes, for AY 2014-15 partly, for AY 2015-16 and 2016-17 wholly, and for AY 2017-18 partly (para 22). The Tribunal disagreed with the lower authorities' allegations that no intangibles had been transferred and that no consideration had been paid: the assessee had acquired liabilities in excess of assets amounting to Rs.125 crores, that liability was discharged and paid in subsequent years, and that discharge was consideration for acquiring intangibles in the form of business and commercial rights and goodwill (para 11). The proviso to s.32(1) apportioning depreciation relates only to transactions in the nature of succession, amalgamation or demerger, and not to succession through a slump sale; and since the business and commercial rights and goodwill were self-generated and did not appear in Gati Ltd's books, no depreciation could have been claimed by Gati Ltd, so the proviso could not be invoked (para 11).
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