Arcserve Software Solutions Private Limited vs Dcit Circle 1(1), Delhi

PER MANISH AGARWAL, A.M.:

The captioned cross-appeals filed by the assessee and the Revenue against the order dated 19.06.2025 passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-1/10655/2019-20 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 26.12.2019 passed u/s 143(3) of the Act pertaining to Assessment Year 2016-17.

Before us, both the parties have stated that the facts involved in both cross- appeals are identical and common, therefore, they are taken together and decided by a common order.

Brief facts of the case are that the assessee had filed its return of income on 30.10.2016, declaring total income of the INR 32434079/-. The case of the assessee was selected for scrutiny under CASS and notice u/s 143(2) was issued on 17.07.2017. The AO observed that during the year under appeal, assessee has made payment for acquisition of the division of CA (India) Technology Pvt. Ltd. in terms of Business Transfer Agreement executed on 25.02.2015 and a sum of INR 12,41,99,990/- was claimed as goodwill being paid in excess of the value of assets taken over. The AO was of the view that the assessee has since purchased the assets on slump sale, tax has to be deducted in terms of section 50(2) r.w.s. 194-IA of the Act which has not been done and therefore, the disallowance of INR 3,37,88,962/- was made. The AO further held that the amount claimed as goodwill is nothing but unexplained expenditure and made the addition u/s 69C of the Act for the same. Besides this, depreciation claimed on such goodwill was disallowed by observing in para 9 of the order that there was no amalgamation nor merger nor any takeover of the going concern and it is further observed by the AO that the seller company was also running the same business separately and thus no acquisition was taken places as going concern therefore, the depreciation claimed of INR 3,10,49,997/- was disallowed and total income was accordingly assessed at INR 22,14,73,030/-.

Against the said order, the assessee preferred and appeal before the ld. CIT(A) who vide order dated 19.06.2025, though had deleted the disallowance made u/s 40(a)(ia) of the Act and further deleted the addition made u/s 69C of the Act towards alleged unexplained expenditure however, has held that the depreciation is not allowable since the assessee has acquired the computers and servers which were valued as per their physical condition and not on the basis of their contents. Further, the valuer has considered only number of employees and their emoluments without going into the precise details of qualifications etc. and accordingly, claim of goodwill was disallowed and thus the appeal of the assessee was partly allowed.

Aggrieved by the order of ld. CIT(A), both the assessee and Revenue are in appeal before the Tribunal by taking various Grounds of appeal mentioned in the appeal memos filed by both the parties.

First we take the assessee’s appeal for Assessment Year 2016-17 in ITA No.5137/Del/2025.

Both the Grounds of appeal raised by the assessee are with respect to the disallowance of depreciation of INR 3,10.49.997/- claimed on goodwill u/s 32(1)(ii) of the Act by holding that no assets were not purchased under slump sale.

Before us, ld.AR for the assessee submits that the assessee has acquired business division of M/s. CA Technologies Inc. which provides key protections of software having various brands as a consequence of Business Transfer Agreement (“BTA”) wherein as per the preamble, sales as a going concern on the slump sale basis is agreed upon between the parties. The relevant preamble is reproduced herein below:-

Ld. AR further drew our attention to para 2.1.4 of the BTA which reads as under:-

Ld. AR submits that assessee has acquired movable property i.e. computer equipment amounting to INR 2,04,74,300/- and also taken over the liabilities of INR 3,20,44,415/- as against which the payment of INR 11,26,29,875/- was made therefore, the excess payment made over net asset taken over i.e. INR 12,41,99,990/- [INR 11,26,29,875 + INR 1,15,70,115 (3,20,44,415-2,04,74,300)] was treated as goodwill and depreciation @ 25% was claimed. Ld. AR submits that Hon’ble Supreme Court in the case of CIT vs Smifs Securities Ltd. reported in [2012] 348 ITR 302 (SC) has held that “goodwill is generated only in the case of amalgamation or merger or complete transfer of business and such goodwill is entitled for depreciation”. Ld.AR submits that the alleged of the AO that the M/s CA (India) Technologies Pvt. Ltd. is still active and doing same nature of business since trademark and customer base was not transferred and no thus goodwill was raised in the hands of the assessee which observations were confirmed by ld. CIT(A). In this regard, ld.AR drew our attention to clause 2.1.4 of the BTA as reproduced herein above, according to which it was agreed between the parties in very categorically terms that all the licenses, permissions were transferred to the assessee. Ld.AR further drew our attention to Schedule-1 of the BTA containing complete description of the assets of the seller transferred to the assessee and further states that the Schedule-2 of BTA contains the details of employees which were taken over by the assessee company. Ld. AR thus submits that the assessee has taken over the software division of M/s CA (India) Technologies Pvt. Ltd. on slump sale basis and therefore, the excess payment made over the value of assets taken over was claimed as goodwill.

On the other hand, ld. CIT DR for the Revenue vehemently supported the orders of the lower authorities and submits that the AO as well as ld. CIT(A) has dealt with this issue at length and observed that the assessee had not taken over the running business of M/s CA (India) Technologies Pvt. Ltd. as a going concern and the AO further observed that no confirmation was filed by M/s CA (India) Technologies Pvt. Ltd. to this effect. Ld.CIT DR submits that AO has referred the Note-25 of the Audit Report according to which the business was not acquired under slump sale basis and therefore, the action of the lower authorities in holding that no goodwill was acquired, deserves to be upheld.

Heard the contentions of both the parties at length and perused the material available on record. The main issue in this appeal is whether the assessee has acquired goodwill when the entire division doing business of development and marketing, sale and provision of data protections and software of M/s CA (India) Technologies Pvt. Ltd. was acquired by it. The allegation of the Revenue was that the assessee had partly acquired the business and entire business was not takeover as a going concern and therefore, it was not the case of slump sale. On the contrary, the assessee placed reliance on the BTA entered into between the parties at the time of transfer of division wherein both the parties have agreed that one of the division doing business of development and marketing, sale and provision of data protections and software was transferred to the assessee which is inclusive of all of its assets, employees and all the licenses and permits. In the said agreement, clause 2.1.4, as reproduced herein above is having most importance for the purpose of examination of fact whether the licenses and permits attached to the said division were actually transferred to the assessee or not. From the perusal of clause 2.1.4, it is clear in absolute terms that all the licenses and permits were transferred which are described as products in Schedule-4 of the BTA reproduced herein above and also at page 43 & 44 of the appellate order.

It is further observed that ld. CIT(A) has made incorrect observations at page 44 of the order that the assessee has not transferred any tangible assets like license and permits, data and records and as per the Schedule 1, the assets transferred were only computer server. It appears that the ld. CIT(A) has misunderstood the products sold by the assessee which are in the nature of computer software stored in the server and all the licenses and permits attached to such software were since transferred to the assessee company therefore, it cannot be said that the assessee has not purchased any intangible assets. Further, ld. CIT(A) at page 44 of the order has observed that only random employees were selected and random computers were purchased. Here it is relevant to state that as per BTA, the employees employed in the division of data protection software, marketing and sales were taken over and the same is clearly described in Schedule-2 of the BTA placed at pages 96 to 105 of PB which contained complete details of employees their job title, their office location, date of joining and other activities carried out by them are clearly spelt out. Further from the perusal of Schedule-1 i.e. immovable assets acquired by the assessee contained the details of laboratories, computer equipment etc. which were under solitary use by the division acquired by the assessee.

As observed above, in the preamble, it has been agreed between both the parties that the running business of sale division has been acquired on slump sale basis as going concern which includes all intangible assets relating to such business and all rights whether past, present and future and whether not registered. Therefore in our considered opinion, it is a case where the assessee has acquired the entire division of M/s CA (India) Technologies Pvt. Ltd. doing business of development, marketing and sale of data protection tools and software as a going concern and therefore, the payment made in excess of the value of assets acquired represents the intangible asset in the shape of goodwill. Accordingly, we hold that the assessee has acquired goodwill on which it is entitled for depreciation u/s 32(1) of the Act. This view is supported by the judgement of Hon’ble Apex Court in the case of Smifs Securities Ltd. (supra) and judgment of Hon’ble Jurisdictional High Court in the case of Triune Projects Pvt. Ltd. (supra) and Areva T & D India Ltd. (supra). Accordingly, we allow the depreciation claimed on goodwill holding that the same has intangible assets acquired by the assessee under slump sale. The Grounds of appeal Nos. 2 & 3 raised by the assessee are thus allowed.

The remaining Grounds of appeal raised by the assessee are general in nature, required no separate adjudication.

In the result, appeal of the assessee is allowed.

Now coming to the appeal of the Revenue in ITA No.5230/Del/2025 for Assessment Year 2016-17.

Ground of appeal No.1 raised by the Revenue is with respect to deletion of addition of INR 3,37,88,962/- made u/s 40(a)(ia) of the Act.

Before us, ld. CIT DR vehemently supported the order of AO on this issue and submits that claim of the assessee was that it had acquired running business of M/s CA (India) Technologies Pvt. Ltd. as a going concern under slump sale and therefore, it attracts provisions of section 194IA and since no TDS was deducted therefore AO has rightly invoked the provision of section 40(a)(ia) of the Act and made the disallowance. Ld. CIT DR submits that while deleting the disallowance, ld. CIT(A) has held that only part business was purchased and no immovable assets were acquired therefore, provision of section 194-IA are not applicable. Ld.CIT DR thus, submits that order of AO deserves to be uphold.

On the other hand, ld.AR for the assessee vehemently supported the order of ld. CIT(A) and submits that the assessee has acquired assets in the shape of computers etc. and no immovable property was acquired therefore, the provision of section 50(2) r.w.s. 194-IA of the Act are not applicable. He therefore, requested for the confirmation of the order of ld. CIT(A).

Heard the contentions of both the parties at length and perused the material available on record. In the instant case while deciding the appeal of the assessee, we have already hold that the assessee has purchased entire division of data protection software business of M/s CA (India) Technologies Pvt. Ltd. as a going concern on slump sale basis therefore, to that extent, we are not in agreement with the observations of ld. CIT(A) that provisions of section 2(42C) of the Act are not applicable. Before going further, provision of section 194-IA of the Act is reproduced as under:-

As per the aforesaid section, an assessee is required to deduct tax at source where any immovable property is acquired. In the instant case as observed above, assessee had required computer systems and also made the payments for the intangible assets and no immovable property was acquired therefore, the provision of section 194-IA of the Act are not applicable. To this extent, we confirmed the order of ld. CIT(A).

Once the provision of section 194I(A) are not applicable and it is held that the assessee was not required to deduct tax at source and the payments made at the time of acquisition of running business of data and protection software division of M/s CA (India) Technologies Pvt. Ltd., the provision of section 40(a)(ia) of the Act cannot be invoked and accordingly, we hold that no disallowance could be made under this section. In view of above discussion and facts of the case, we uphold the order of ld. CIT(A) in deleting the disallowance made by invoking the provisions of section 40(a)(ia) of he Act. Accordingly, Ground of appeal No.1 raised by the Revenue is dismissed.

Ground of appeal Nos. 2 & 3 of the Revenue are with respect to the deletion of addition of INR 12,41,99,990/- made u/s 69C by holding that the payment made in excess of the assets acquired as unexplained expenditure.

Before us, ld. CIT DR for the Revenue vehemently supported the order of AO and submits that no prudent businessman would make the payments in excess of assets acquired and thus, it is an unexplained expenditure made without any proper justification and therefore, requested for the confirmation of the order of the AO.

On the other hand, ld.AR for the assessee submits that in the instant case from the perusal of BTA, it is clear that the assessee has acquired running business of e-software protection division of M/s CA (India) Technologies Pvt. Ltd. and also acquired all the patents and licenses attached to it and had made payment according to which there was negative balance of assets and liabilities in the shape of provision of compensation of INR 1,15,70,115/-. Since the assessee has paid total consideration of INR 11,26,29,875/- therefore, the excess amount payment made over the assets acquired i.e. 12,41,99,990/- was towards the acquisition of intangible assets including all licenses and permits with respect to the software etc. acquired therefore, it constitutes goodwill and thus, no unexplained expenditure was paid by the assessee and therefore, the provision of section 69C could not be invoked in the instant case. He thus, requested for the confirmation of the order of ld. CIT(A).

Heard the contentions of both the parties at length and perused the material available on record. In the instant case, we have already held that the payment made in excess of value of assets over liabilities acquired of INR 12,41,99,990/-, and the same is held as goodwill paid by the assessee for acquiring the running division of M/s CA (India) Technologies Pvt. Ltd. relating to the key data protection software division as a going concern on slump sale basis therefore, there is no question of holding the said payment as unexplained expenditure u/s 69C of the Act. It is also a matter of fact that this payment has been duly recorded in the books of accounts in terms of the BTA executed between the parties and assessee has not claimed any such expenditure of this amount in P&L account and rather accounted for the same as goodwill in the books of accounts thus, there is no question of holding that same as unexplained expenditure. Accordingly, we find no error in the order of ld. CIT(A) in deleting the disallowance made u/s 69C of the Act on mere assumptions and presumptions. In view of above discussions, Grounds of appeal Nos. 2 & 3 raised by the Revenue are dismissed.

In the result, appeal of the Revenue is dismissed.

In the final result, appeal of the assessee in ITA No.5137/Del/2025 for Assessment Year 2016-17 is allowed and appeal of the Revenue in ITA No.5230/Del/2025 for Assessment Year 2016-17 is dismissed.