Intangible assets acquired as part of a slump sale, including business claims, business information, business records, contracts, skilled employees, and knowhow, are eligible for depreciation under Section 32(1)(ii) of the Income Tax Act.

SIDDHARTH MRIDUL, J.

1. The three appeals under Section 260A of the Income Tax Act, 1961(hereinafter referred to as „the Act?) raise a common issue of law and are being disposed of by this common order.

2. ITA No.315/2010 was admitted vide order dated 27th January, 2011 with the following substantial question of law:-

“Whether on the facts and in the circumstances of the case, the Tribunal erred in law in holding that know-how, business contacts, business information, etc. acquired as part of the slump sale described as „goodwill ?were not entitled for depreciation under Section 32(1)(ii) of the Income Tax Act?”

3. To appreciate the question of law involved in the present appeal the relevant facts necessary for disposal of ITA No.315/2010 are enumerated as below:-

(i) The assessee Company is presently engaged in transmission and distribution business of power. The business involves, inter alia, designing, manufacturing, supplying, installation, testing, commissioning and servicing transmission and distribution system of power on turnkey basis.

(ii) The assessee Company earlier was a subsidiary of an Indian Company viz. ALSTOM Projects India Ltd. (hereinafter referred to as the „transferor?). Subsequently, the appellant Company became the subsidiary of Areva T & D Holdings SA France (hereinafter referred as the „transferee?) w.e.f. 1st April, 2004 pursuant to transfer under a slump sale agreement dated 30th June, 2004.

(iii) Under the transfer/slump sale agreement, the business was transferred by the transferor lock, stock and barrel to the assessee Company. However, the transferor retained its „trademark?.

(iv) The business of the transferor was acquired by the assessee Company for a total sale consideration of Rs.44.7 Crores. On bifurcation, it is revealed that the tangible assets were transferred for a net value of Rs.28.11 Crores.

(v) The excess amount of Rs.16,58,76,000/-was claimed as payment made by the assessee Company for acquisition of various business and commercial rights categorized under the separate head, namely, “goodwill” in the books of account of the assessee. These business and commercial rights comprised of the following: Business claims; business information; business records; contracts; skilled employees; knowhow.

(vi) The assessee Company while filing its return for the relevant assessment year 2005-06 claimed depreciation under Section 32(1)(ii) of the Act with respect to the aforesaid amount of Rs.16,58,76,000/-as being a price paid for acquisition of above mentioned intangible assets.

(vii) The Assessing Officer(AO) while completing the assessment under Section 143(3) of the Act disallowed the depreciation on „goodwill?as claimed in the return vide order dated 28th December, 2007. The AO disallowed the claim of the assessee Company on two grounds, namely, (a) depreciation under Section 32(2)(ii) is not available on goodwill; (b) the assessee Company was unable to demonstrate that the amount of Rs.16,58,76,000/-shown as goodwill in the books of accounts was in fact a payment made towards acquiring of “certain business and commercial rights” and therefore eligible for depreciation in tax as per Section 32(1)(ii) of the Act.

(viii) After the order of assessment was framed the assessee Company invoked the jurisdiction of Commissioner of Income Tax (Appeals) [CIT(A)] challenging the validity of the assessment order with regard to depreciation.

(xi) The assessee Company filed its appeal contending, inter alia, that the sum of Rs.16,58,76,000/-was in actuality an amount paid by the assessee Company for acquiring intangible assets including valuable knowhow, employees, work orders, business information, business contracts etc., as specified in the slump sale agreement dated 30th June, 2004 which were compendiously termed as “goodwill” and therefore entitled to depreciation under Section 32(1)(ii) of the Act.

(x) The CIT(A) repelled the contention of the assessee Company vide order dated 4th April, 2008