2007 (3) TMI 745 - AT - Income Tax

Depreciation on the intangible asset, namely Patents and technical know-how - Payment for acquisition of marketing rights - HELD THAT - It is admitted fact that the transaction is not a sham transaction but is acted upon. Similar finding has been given also in the appeal of revenue cited (supra). We accordingly hold that the amount of ₹ 2 crores representing distribution franchise fee paid to Ambalal Sarabhai Enterprise is in respect of commercial rights referred in Section 32(1)(ii) of the Act. Accordingly, though Ground No.1 is to be dismissed, as contended in alternate Ground No.2, the claim of assessee in respect of depreciation is allowable. Since the amount was borrowed for acquisition of capital asset and such capital asset were not put to use prior to payment of the front end fees paid to ICICI bank, in view of the decision of Hon'ble Supreme Court in the case of Chellapalli Sugar Mills Ltd. 1974 (10) TMI 3 - SUPREME COURT , such interest has to be added to the cost of capital asset. Since the Tribunal has held that the assessee is entitled to depreciation in respect of various intangible assets and since the front end fees is to be added to the cost of such capital assets, the alternate claim made by the assessee in Ground No.4 regarding depreciation u/s 32(1) has to be allowed. Thus, though Ground No.3 is to be dismissed, Ground No.4 is allowed. In the result, the appeal is partly allowed.

Summary

Issues:
1. Disallowance of payment for Distribution Franchise Fees.
2. Disallowance of front end fees on a loan.
3. Claim for depreciation under section 32(1) on the above payments.

Issue 1: Disallowance of Payment for Distribution Franchise Fees:
The appellant company incurred a sum of Rs. 2 crores for acquiring Distribution Right from Ambalal Sarabhai Enterprises (ASE). The Assessing Officer (AO) disallowed this amount as expenditure, stating it was not justified. The CIT(A) upheld this disallowance. The appellant argued that the payment was pursuant to an agreement and should be treated as capital expenditure for claiming depreciation under section 32(1). The Tribunal held that the amount represented commercial rights under Section 32(1)(ii) of the Act, allowing depreciation even though the disallowance was confirmed. Therefore, the claim for depreciation was deemed allowable.

Issue 2: Disallowance of Front End Fees on a Loan:
The appellant claimed a deduction of Rs. 63 lakhs for front end fees paid on a loan from a financial institution, treated as deferred revenue expenditure in the books but claimed as revenue expenditure. The AO disallowed this amount as capital expenditure since the loan was for acquiring intangible assets not yet utilized. The CIT(A) upheld this disallowance. The appellant contended that based on a previous Tribunal decision allowing depreciation on intangible assets, the front end fees should also be considered for depreciation. The Tribunal agreed that the front end fees should be added to the cost of capital assets, allowing depreciation under section 32(1) despite dismissing the disallowance. Thus, the claim for depreciation on this amount was allowed.

Conclusion:
The Tribunal partially allowed the appeal, dismissing one ground while allowing the other. The judgment clarified the treatment of payments for Distribution Franchise Fees and front end fees on a loan, emphasizing the eligibility for depreciation under section 32(1) in both cases. The decision provided a detailed analysis of the legal provisions and previous rulings to support the allowance of depreciation on the contested payments.