ITAT Mumbai Rules: Excess Consideration in Slump Sale Over Tangible Assets Qualifies as Depreciable Goodwill
In a significant ruling concerning the tax treatment of business acquisitions, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has provided clarity on the classification of the "balancing figure" in slump sale transactions. The Tribunal held that when an assessee acquires a business undertaking for a lump sum consideration, the amount paid in excess of the value of identifiable tangible assets constitutes "Goodwill." Consequently, the assessee is entitled to claim depreciation on this intangible asset under Section 32(1)(ii) of the Income Tax Act 1961.
The decision was rendered in the case of Kovalam Resort Private Limited Vs DCIT, where the appellate authority set aside the restrictive interpretation adopted by the lower tax authorities regarding the valuation of acquired assets.
Background of the Dispute
The case arose from the assessment of a company engaged in the hospitality sector, specifically owning and operating a five-star hotel. The assessee acquired a hotel undertaking as a going concern through a slump sale arrangement. This transfer was executed under a Scheme of Arrangement sanctioned by the Hon’ble Bombay High Court. The agreed lump sum consideration for the acquisition was Rs. 500 crores, with the assessee also assuming liabilities worth Rs. 2 crores.
During the filing of returns, the assessee allocated the purchase consideration across various assets, including land, buildings, and other movables, based on independent valuation reports. Accordingly, the assessee claimed depreciation on the tangible assets based on this allocated cost.