The scope of the fifth proviso to section 32(1) cannot be extended to transactions of purchases between two unrelated parties

FACTS
The assessee, a private limited company, engaged in the business of providing vocational training to students in the fields of fire safety, lift technology, fibre optics, etc., is a subsidiary of TUV Rheinland (India) Pvt. Ltd. The A.O. noticed that the assessee had acquired a vocational training institute giving training to students from a person named Mr. M.V. Thomas who was running the said institution under the name and style of ‘Nife Academy’. It was observed that the holding company of the assessee had entered into a business transfer agreement (BTA) on 4th December, 2013 with Mr. M.V. Thomas for acquiring his academy for a lump sum amount of Rs. 28.50 crores plus some adjustment on slump sale basis. In pursuance of the said agreement, the assessee had paid an aggregate amount of Rs. 30.56 crores (Rs. 25.38 crores plus Rs. 5.18 crores). The purchase consideration paid over and above the value of tangible assets was treated as ‘goodwill’ and depreciation was claimed thereon. The A.O. held that the spirit of the fifth proviso to section 32(1) would suggest that the successor to an asset cannot get more depreciation than the depreciation which the predecessor would have got. He also noticed that the said Academy did not possess the asset of ‘goodwill’ and accordingly held that when an asset does not exist in the depreciation chart of the seller, then it cannot have a place in the depreciation chart of the buyer. Therefore, he disallowed the depreciation claimed on ‘goodwill’.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the view of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD
The Tribunal observed that in view of the decision of the Delhi High Court in the case of Truine Energy Services Pvt. Ltd. vs. Deputy Commissioner of Income-tax (2016) 65 Taxmann.com 288, the payment made over and above the net asset value, while acquiring a business concern, shall constitute goodwill. Upon considering the language of the fifth proviso to section 32(1), the Tribunal held that a careful perusal of the above proviso would show that the same is applicable to the cases of ‘succession’, ‘amalgamation’ and ‘demerger’, i.e., transactions between related parties. In the instant case, Nife Academy has been acquired through a business transfer agreement by the holding company of the assessee from Mr. M.V. Thomas. It is not the case of the Revenue that this transaction is between two related parties. Hence this purchase would not fall under the categories of succession, amalgamation and demerger. The Tribunal held that it does not agree with the view of the lower authorities that the spirit of the proviso should be applied to the present case.The Tribunal set aside the order passed by the CIT(A) on this issue and restored the matter to the file of the A.O. to examine certain factual aspects.