Facts of the Case:
The Assessee company entered into two Business Transfer Agreements (BTAs) with its holding company, Infosys Ltd., during FY 2014-15 and FY 2015-16 for transfer of specified business divisions. Pursuant to the transfers, the assessee allocated the purchase consideration to various intangible assets such as technology, trade name, customer contracts and goodwill based on an independent valuer’s report and claimed depreciation under section 32(1)(ii) of the Act.
During the course of assessment proceeding the AO held that the valuation was artificial, that certain assets did not qualify as intangible assets within the meaning of Explanation 3 to section 32(1) of the Act, and that the transaction amounted to succession under section 170 of the Act; accordingly, applying the proviso to section 32(1) of the Act, depreciation was disallowed.
The learned CIT(A) concluded that although business contracts, technology, trademarks and goodwill qualify as intangible assets on merits under section 32(1)(ii) of the Act, the claim of depreciation is hit by the sixth proviso to section 32 of the Act due to the nature of succession involved in the present case. Accordingly, the learned CIT(A) upheld the Assessing Officer’s action in disallowing depreciation on intangible assets.
Being aggrieved by the said order the assessee preferred an appeal before tribunal.
Contention of Assessee:
The assessee contended that the assets acquired, namely technology, trade name, customer contracts and goodwill, qualify as “business or commercial rights of similar nature” within the meaning of section 32(1)(ii) of the Act and are therefore eligible for depreciation.
The assessee further contended that only specific business divisions were transferred, while the transferor company continued to carry on its remaining business; hence, such a piecemeal transfer of assets or divisions does not amount to succession under section 170 of the Act.
The assessee also argued that the sixth proviso to section 32(1) of the Act could not be invoked, as the said proviso applies only in cases where depreciation is allowable to both the predecessor and the successor in the same year and the aggregate claim is required to be restricted.
The Assessee also contended that even if succession existed, the restriction under the proviso applies only in the year of succession and not in later years.
Contention of Revenue:
The Revenue contended that the assessee had taken over running business divisions of the transferor along with all related assets, customers, contracts and technology, and that such transfer, in substance, amounted to succession under section 170 of the Act.
The Revenue further argued that once the transaction is regarded as succession, the sixth proviso to section 32(1) of the Act automatically applies, restricting the total depreciation claim of the predecessor and successor in the year of transfer to the amount that would have been allowable had no succession taken place.
The Revenue also contended that it is irrelevant whether the transferor actually claimed depreciation in its books; what is material is that depreciation was otherwise allowable, and therefore the restriction under the proviso must be enforced.
Ruling:
The Hon’ble Bangalore Tribunal ruled in favour of the assessee, holding that there was no succession of business within the meaning of section 170 of the Act in the present case. Consequently, the sixth proviso to section 32(1) was held to be inapplicable, and the disallowance of depreciation sustained by the learned CIT(A) was found to be unsustainable in law and depreciation claimed on intangible assets is allowed.
Editor’s Note:-
The ruling clarifies the limited scope of the sixth proviso to Section 32(1) and protects depreciation claims on intangible assets arising from business transfer agreements or slump acquisitions where there is no succession of the entire business.
Citation: Edgeverve Systems Limited, v ACIT Circle – 2(2)(1) (ITA Nos. 290 to 294/Bang/2025) of Hon’ble Bangalore Tribunal