Depreciation Allowed on Workforce Intangible Acquired under Slump Sale

 In a recent ruling, the Delhi Tribunal held that depreciation is allowable on intangible assets in the form of “workforce” acquired pursuant to a slump sale transaction, where such assets have been independently valued and form part of the consideration paid for acquisition of the business as a going concern.

 

In this case, the assessee acquired the digital business undertaking of its holding company on a slump sale basis for a lump sum consideration of INR 20 crores. Out of the total consideration, an amount of approximately INR 6.09 crores was allocated towards intangible assets in the form of “workforce” based on an independent valuation report. The assessee capitalised the said workforce intangible and claimed depreciation thereon. The Assessing Officer disallowed the claim on the ground that the predecessor entity had not recognised or claimed depreciation on such intangible assets and therefore the assessee, being the successor entity, could not claim depreciation on the same. The Assessing Officer further alleged that the valuation of such intangibles resulted in creation of an artificial asset/goodwill with the objective of claiming additional depreciation. The CIT(A) upheld the disallowance.

 

The Tribunal observed that the acquisition was undertaken through a slump sale transaction and not pursuant to amalgamation or demerger. Accordingly, the restrictions applicable to carry forward of written down value in cases of amalgamation or succession could not be mechanically applied. The Tribunal further noted that the workforce intangible had been specifically identified, independently valued, and acquired for consideration as part of the business transfer. It was therefore held that such workforce-related rights constitute business or commercial rights eligible for depreciation under the Act. Accordingly, the Tribunal held that depreciation cannot be denied merely because the predecessor entity had not recognised such intangible assets in its books or claimed depreciation thereon, particularly where the intangible asset is demonstrably acquired for consideration under a slump sale transaction and supported by a contemporaneous valuation exercise.

 

This ruling provides useful guidance on the tax treatment of intangible assets arising in slump sale transactions and highlights the importance of robust valuation and transaction documentation in substantiating depreciation claims on identifiable business and commercial rights. While the Tribunal has rendered a favourable ruling, it remains to be seen whether the position will withstand scrutiny at higher appellate forums. Further, taxpayers should also evaluate whether recognition of other identifiable business or commercial rights may be more appropriate than characterising the asset as ‘workforce’.