The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has clarified that where the very Business Transfer Agreement from which goodwill is claimed to arise is unregistered and unsigned, such agreement has no legal sanctity and is merely an anonymous piece of paper in the eyes of law. Consequently, the goodwill allegedly emerging from such document has no value for tax purposes, and depreciation claimed thereon is liable to be disallowed.
The Tribunal’s reasoning rested on the additional circumstance that the agreement was stated to have been entered into prior to the LLP’s formation and between related persons despite the assessee’s assertion to the contrary.
The Division Bench comprising Madhumita Roy (Judicial Member) and Amitabh Shukla (Accountant Member) examined the assessee’s own financial statements and noted that the LLP was formed on Oct 26, 2016 and that one of its designated partners was Dr. Shavir Noorezdan. It further noticed that the alleged Business Transfer Agreement was said to have been entered into on Aug 23, 2016, i.e., prior to the LLP’s formation, and with Equinox Sales India, a sole proprietorship of Dr. Shavir S. Nooryezdan, who was otherwise the designated partner of the LLP. This, according to the Tribunal, contradicted the written submission of the assessee that “there was no relationship between the seller and the appellant.”
The Tribunal specifically observed that the Business Transfer Agreement produced by the assessee was unregistered and, from the reproduced signature page, unsigned insofar as it was to be “signed and delivered for and on behalf of Buyer.” It also recorded that none of the paper books contained any other agreement dated Aug 23, 2016 that could show that the agreement was duly signed or registered. On that basis, the Tribunal treated the agreement as lacking legal sanctity.
Relying on the Punjab and Haryana High Court judgment in PCIT v. Prahalad Singh [ITA No. 91 of 2019], the Tribunal observed that an unsigned document is an “anonymous piece of paper” to which no credence can be given. It also referred to CIT v. Balbir Singh Maini [398 ITR 531 (SC)] to state that after the 2001 amendment, an unregistered agreement would have no effect in law and would not be enforceable. The Tribunal therefore concluded that the Business Transfer Agreement being unregistered and unsigned, and also involving related parties contrary to the assessee’s submission, could not be relied upon to support the claim of goodwill.
Briefly, assessee, Straumann Dental India LLP, had filed its return declaring a total loss of Rs. 14.41 crores. The LLP had been converted from a private limited company and claimed to have entered into a Business Transfer Agreement with Equinox Sales India, a sole proprietorship of Dr. Shavir S. Nooryezdan, for acquisition of a running business on slump sale basis.
According to the assessee, the business was acquired for Rs. 134.51 crores, out of which Rs. 5.23 crores were attributed to tangible assets and Rs. 129.28 crores to business and commercial rights collectively termed as goodwill. On that basis, the assessee claimed depreciation of Rs. 16.16 crores on goodwill, asserting that 50% depreciation was available. The Assessing Officer disallowed this depreciation by treating the cost of goodwill in the hands of the assessee as nil, inter alia relying on Section 32(1), Explanation 3 thereto, Section 43(1), Explanation (7), and Section 43(6), Explanation 2. The CIT(A) affirmed the disallowance.
