2016 (4) TMI 1193 - AT - Income Tax

Disallowance on account of depreciation on brands under section 32(1)(ii) - whether the brand is not an intangible asset? - Held that - Brand name is an intellectual property right similar to knowhow, patents, trademarks and therefore the same is eligible for depreciation under section 32(1)(ii). See KEC International Ltd. vs. ACIT 2010 (6) TMI 523 - ITAT, MUMBAI . The Ld. A.R. has further brought our attention to the fact that in earlier assessment years right from the year 2002-03 up to A.Y. 2005-06, the assessee has been consistently been allowed depreciation on the brand name. In view of this, we do not find any justification on the part of authorities in disallowing the claim of depreciation on the brands for the year under consideration. - Decided in favour of the assessee Addition of contingent liabilities - Held that - A.R. has brought our attention to the opening lines of para 5.2 of the assessment order wherein the Assessing Officer has categorically mentioned that the contingent liabilities have neither been debited nor credited in the profit and loss account. The Ld. A.R. has further demonstrated from the balance sheet that such liabilities have never been claimed by the assessee as part of expenditure. When the assessee had not claimed the said liability as part of expenditure in the return of income, then there was no question of any disallowance of the same. The additions made by the AO in this respect are totally unwarranted. This issue is also accordingly allowed in favour of the assessee.

Summary

Issues:
1. Disallowance of depreciation on brands under section 32(1)(ii) of the Income Tax Act.
2. Disallowance and consequential addition of an amount in respect of contingent liabilities.

Analysis:

Issue 1: Disallowance of depreciation on brands under section 32(1)(ii) of the Income Tax Act
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of depreciation on brands for assessment year 2005-06. The lower authorities disallowed the claim of depreciation on the ground that brand is not an intangible asset. However, the assessee argued citing the decision of the Hon'ble Bombay High Court in various cases that brand is indeed an intellectual property right and thus eligible for depreciation under section 32(1)(ii). The assessee pointed out that in previous assessment years, depreciation on the brand name had been consistently allowed. The Tribunal, considering the legal precedents and consistent treatment in earlier years, ruled in favor of the assessee, allowing the claim of depreciation on brands.

Issue 2: Disallowance and consequential addition of an amount in respect of contingent liabilities
The second ground of appeal raised by the assessee pertained to the disallowance and consequential addition of a specific amount in relation to contingent liabilities. The Assessing Officer noted that these liabilities were neither debited nor credited in the profit and loss account. The assessee demonstrated that such liabilities were never claimed as part of expenditure in the balance sheet or return of income. Therefore, the assessee argued that since the liabilities were not claimed as expenditure, there was no basis for their disallowance. The Tribunal agreed with the assessee, stating that the additions made by the Assessing Officer were unwarranted. Consequently, this issue was also decided in favor of the assessee.

In conclusion, the Appellate Tribunal, ITAT Mumbai, allowed the appeal of the assessee, ruling in favor of the assessee on both grounds of disallowance of depreciation on brands and contingent liabilities. The judgment emphasized the eligibility of brand names for depreciation under the Income Tax Act and the importance of consistent treatment of liabilities in financial statements for tax purposes.