9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2009 (9) TMI 957 - AT - Income TaxDepreciation on intellectual property rights - value of the goodwill from the value of IPR - business of software development and also licensing of softwares - claimed depreciation @ 25 per cent on the value of intellectual property rights - AO disallow the claim. CIT directed to allow the claim of depreciation on the reduced value, so calculated of IPRs. HELD THAT - We have examined few case law which were relied upon by learned CIT(A) and one of them is R.B. Bansilal Abirchand Spinning Weaving Mills Ltd. vs. CIT 1969 (3) TMI 17 - BOMBAY HIGH COURT for the proposition that there must be a finding of the AO about unacceptability of the method adopted by the assessee and to demonstrate the irregularity in the said method. In the absence of such a finding the method as adopted by the assessee could not be brushed aside. There is a direct decision of respected Co-ordinate Bench, Cochin reported as Season Rubbers Ltd. vs. Dy. CIT 1997 (8) TMI 101 - ITAT COCHIN wherein it was held that in a case when a limited company has taken over the assets of a partnership firm at revalued figures as recorded in the balance sheet then a company is entitled for claim of depreciation on the revalued or enhanced cost of assets. Likewise in the case of Bombay Household Industrial Plastic Mfg. Co. (P) Ltd. vs. ITO 1981 (11) TMI 73 - ITAT BOMBAY-D the assessee company took over under an agreement certain assets of its sister concern and for that purpose the takeover took place in accordance with the report of a valuer. In that case as well the price paid for the transfer was far more than the book value in the transferor's accounts. The respected Co-ordinate Bench has concluded that once there was no other material to suggest that the transfer was made for the purpose of deduction of income-tax liability of the transferee hence Expln. 3 to s. 43(1) could not be applied and the actual consideration paid should be taken as the cost. In the light of the foregoing discussion and the law settled by several Courts, we can draw a conclusion that there was no fallacy in the verdict of learned CIT(A) who has considered the factual matrix of the case in detail and thereafter arrived at a right conclusion that the assessee was entitled for claim of depreciation on the amount of IPR value. It has also been observed that the question of assessment of goodwill was not before the valuers and they only valued the IPR. It has also been observed that the goodwill depends upon the past performance of going concern; on the other hand, the IPR depends upon the probability of the future performance. Therefore both have independent and divergent directions of valuation. Since the learned CIT(A) has taken the due cognizance of the total consideration which had passed from one hand to another therefore he had no option but to reduce the amount of the goodwill which was so valued by the assessee himself on the basis of the relevant information as placed on record before learned CIT(A). We hereby uphold the reasoning of ld CIT(A) which results into dismissal of these grounds. Reduction of goodwill from the total amount of IPR - It has also been observed that the question of assessment of goodwill was not before the valuers and they only valued the IPR. It has also been observed that the goodwill depends upon the past performance of going concern; on the other hand, the IPR depends upon the probability of the future performance. Therefore both have independent and divergent directions of valuation. Since the learned CIT(A) has taken the due cognizance of the total consideration which had passed from one hand to another therefore he had no option but to reduce the amount of the goodwill which was so valued by the assessee himself on the basis of the relevant information as placed on record before learned CIT(A). We hereby uphold the reasoning of learned CIT(A) which results into dismissal of these grounds. Valuation of the IPR comprising of trade marks and copyrights - 'actual cost' incurred - the issue already stood decided in favour of the Revenue by decision of respected Co-ordinate Bench, Mumbai in the case of R.G. Keswani vs. Asstt. CIT 2008 (2) TMI 443 - ITAT BOMBAY-H wherein it was held that statute specified certain items of intangible assets eligible for depreciation in s. 32(1)(iii) namely know-how, patents, copyright, trade marks, licenses, franchise but apart from these listed categories of intangible assets no other intangible asset was not held as entitled for eligible claim of depreciation. So held that it was not tenable either in facts or in law. Further in the case of Bharatbhai J. Vyas vs. ITO 2005 (8) TMI 279 - ITAT AHMEDABAD-C , the respected Bench has held that while deciding allowability of depreciation on goodwill one has to take recourse to specified provisions. Following these two decisions and specially when no other decisions is cited from the side of the assessee we find no force in this ground of the assessee and dismiss the same. Payment for enhancement - expenses on upgrading existing softwares - nature of capital expenditure - eligible for depreciation @ 60 - The issue is now very well-settled by the decision of the respected Special Bench in the case of Amway India Enterprises vs. Dy. CIT 2008 (2) TMI 454 - ITAT DELHI-C , so as to decide whether the expenditure in question can be said to be capital in nature or revenue in nature. The decision which has been cited by the learned CIT(A) has been considered by the Special Bench therefore at this juncture there is no question of re-adjudication on this issue. Therefore we hereby follow the guidelines and decide the nature of expenditure de novo as per the guidelines issued. The only issue left is about the rate applicable for the year under consideration as prescribed in appendix to IT Rules for the year under consideration. It appears that the correct rate of depreciation as applicable for asst. yr. 2001-02 has missed the attention of the learned CIT(A), nevertheless, since we have restored the ground back to the AO therefore, also direct to apply the correct rate of depreciation as applicable for the year under consideration and grant justifiable deduction. Assessee's ground may be treated as allowed only for statistical purposes. In the result the appeals are partly allowed.
Issues Involved:
1. Depreciation on Intellectual Property Rights (IPR) 2. Reduction of Goodwill from Total Amount of IPR 3. Nature of Software Development Expenditure (Capital or Revenue) Issue-wise Detailed Analysis: 1. Depreciation on Intellectual Property Rights (IPR): The primary issue in the Revenue's appeal was whether the CIT(A) erred in directing the AO to allow depreciation on IPR valued at Rs. 3,45,85,000. The AO observed that the assessee company, involved in software development and licensing, claimed depreciation on IPR after taking over the business of M/s Modular Systems. The AO noted that the firm's balance sheet did not list IPR as an asset, and the revaluation of assets before the takeover appeared to be an attempt to inflate asset values for higher depreciation claims. The AO disallowed the depreciation claim, arguing that the IPR had no associated cost and was non-existent. Upon appeal, the CIT(A) observed that the valuation of assets included goodwill, reducing the IPR value to Rs. 3,45,85,000. The CIT(A) directed that depreciation be allowed on this reduced value, referencing legal precedents supporting the valuation and recognition of intangible assets. The Tribunal upheld the CIT(A)'s decision, noting that the valuation was legitimate, and the transfer was not collusive. The Tribunal emphasized the applicability of Section 32 of the IT Act, which allows depreciation on intangible assets, and found no fault in the CIT(A)'s conclusion. 2. Reduction of Goodwill from Total Amount of IPR: The assessee appealed against the CIT(A)'s decision to reduce the goodwill from the total IPR value, arguing that the Rs. 4,27,00,000 represented the IPR value alone. The CIT(A) had considered the valuation of goodwill and reduced it from the IPR value. The Tribunal upheld the CIT(A)'s decision, noting that the valuation of goodwill was based on the information provided by the assessee and was necessary to determine the accurate value of IPR. The Tribunal dismissed the assessee's grounds, affirming that the CIT(A) rightly accounted for the goodwill in the valuation process. 3. Nature of Software Development Expenditure (Capital or Revenue): The assessee contended that expenses on upgrading existing software should be treated as revenue expenditure under Sections 35/37(1) of the IT Act, rather than capital expenditure. The CIT(A) held that such expenses were capital in nature, eligible for depreciation at 60%. The Tribunal referred to the Special Bench decision in Amway India Enterprises vs. Dy. CIT, which provided guidelines for determining the nature of software-related expenditure. The Tribunal restored the issue to the AO to decide de novo as per the Special Bench guidelines and directed the AO to apply the correct rate of depreciation for the relevant assessment year. Conclusion: The Tribunal upheld the CIT(A)'s decision to allow depreciation on the reduced IPR value and affirmed the reduction of goodwill from the total IPR value. The issue of software development expenditure was restored to the AO for re-evaluation as per the Special Bench guidelines. The appeals were partly allowed, providing a balanced resolution to the contested issues.
|
