2012 (6) TMI 349 - HC - Income Tax

Whether assessee is entitled to depreciation on the purchase value of abkari licence under Section 32(1)(ii) of the Income-tax Act Held that - abkari licence is a business right given to the party to carry on liquor trade. abkari licence squarely falls under section 32(1)(ii) on which the assessee is entitled to depreciation at 25% of the written down value as provided under Section 32(1) read with Part B of Old Appendix I under rule 5 of the Income-tax Rules. However, assessee s claim for depreciation at 25% of the actual cost is not allowable because depreciation has to be allowed only on written down value. The previous year relevant for the assessment year being the 3rd year of business, the assessee is entitled to depreciation at 25% of the written down value after reckoning depreciation for the preceding years. appeal is accordingly allowed

Summary

Issues:
1. Entitlement to depreciation on the purchase value of abkari licence under Section 32(1)(ii) of the Income-tax Act.

Analysis:
The appeal raised the issue of whether the assessee is entitled to depreciation on the purchase value of an abkari license under Section 32(1)(ii) of the Income-tax Act. The assessee had acquired a Bar attached hotel with land, building, and FL-3 license for retail sale of liquor. The contention was that a significant portion of the consideration paid was for the purchase of the FL-3 license. The Tribunal disallowed the depreciation claim, stating that the abkari license does not depreciate. However, the counsel for the assessee cited a Division Bench judgment that depreciation eligibility does not require proof of actual depreciation but is an allowance under statutory provisions. The court considered the Act's scheme under Section 41(2) and Section 50 regarding depreciable assets, overturning the Tribunal's decision on disallowance.

The next issue involved the interpretation of "intangible assets" under Section 32(1)(ii) of the Income-tax Act. The Revenue argued that only specific intellectual property rights such as licenses, franchises, and business rights fall under this provision. On the other hand, the assessee contended that the FL-3 license is covered by Section 32(1)(ii) as a business right, entitling depreciation. The court examined the Abkari laws, particularly Rule 19(i) & (ii) of the Foreign Liquor Rules, which allow for the transfer of licenses with the Excise Commissioner's approval. The court concluded that the FL-3 license is a business asset for long-term exploitation, falling under Section 32(1)(ii) for depreciation purposes.

Regarding the calculation of depreciation, the court noted that depreciation should be allowed on the written down value, not the actual cost. As it was the third year of business, the assessee was entitled to depreciation at 25% of the written down value after considering depreciation for preceding years. Consequently, the appeal was allowed, overturning the Tribunal's decision, and directing the Assessing Officer to allow depreciation on the written down value of the purchase cost of the abkari license.