2015 (3) TMI 308 - AT - Income Tax

Depreciation on intangible asset disallowed - Customer Base, Material Suppliers, Technical Manpower,Technology and Patents - assessee was engaged in the business of trading in two wheeler brake systems and components - Held that - No merit in the plea of the Assessing Officer that the assets were not depreciable assets as the same were not subject to wear and tear due to diminish in value with use and efflux of time. In the case of intangible asset being commercial/business rights diminution in value or physical wear and tear is not an essential condition for admissibility for depreciation under section 32, if the assets used as a business tool for earning the income, was the proposition laid down by Mumbai Bench of the Tribunal in DCIT Vs. Weizmann Forex Ltd. (2012 (5) TMI 162 - ITAT MUMBAI). Following the same, we find no merit in the plea of Assessing Officer in denying the claim of depreciation under section 32(1)(ii) of the Act. Even otherwise, if the same are treated as goodwill of the business acquired by the assessee, then following the ratio laid down by the Hon'ble Supreme Court in CIT Vs. Smifs Securities Limited (2012 (8) TMI 713 - SUPREME COURT), the alternate plea of the assessee is to be allowed vis- -vis the claim of depreciation on goodwill. Further, there is no merit in the observations of Assessing Officer that the Seller did not possess any intangible assets as the same were not reflected in its Balance Sheet. The assets acquired by assessee were self generated assets of Seller and hence no value reflected in its Balance Sheet. We find no merit in the observations of Assessing Officer in this regard and the same is dismissed. The next observation of Assessing Officer that no separate costs had been attributed to individual assets acquired by assessee have no relevance and the same is dismissed. Accordingly, we direct the Assessing Officer to allow depreciation on the WDV of intangible assets acquired in the preceding year and brought forward in the year under consideration. Thus, the Assessing Officer is directed to allow depreciation on intangible assets - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on intangible assets amounting to Rs. 2,26,62,278/-.
2. Eligibility of assets for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961.
3. Treatment of intangible assets as goodwill and eligibility for depreciation.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Intangible Assets:
The assessee, engaged in trading two-wheeler brake systems, claimed depreciation on intangible assets acquired from Bosch Chassis Systems India Ltd. (BCSIL) under an agreement dated 01.02.2006. The intangible assets included Customer Base, Material Suppliers, Low Cost Process Know-how, Technical Man Power, Technology, and Patents. The Assessing Officer (AO) disallowed the depreciation claim, arguing that the assets did not meet the criteria of depreciable assets under Section 32(1)(ii) of the Income-tax Act, 1961. The AO contended that the assets were not subject to wear and tear, were not measurable, and lacked independent existence. The Dispute Resolution Panel (DRP) upheld the AO's disallowance.

2. Eligibility of Assets for Depreciation Under Section 32(1)(ii):
The Tribunal examined whether the intangible assets acquired by the assessee qualified for depreciation under Section 32(1)(ii). The assessee argued that the assets were acquired for business purposes and were eligible for depreciation. The Tribunal referred to the agreement and valuation reports, which identified and valued the intangible assets. The Tribunal noted that the assets, such as Customer Base, Material Suppliers, Process Know-how, Technical Man Power, and Technology, were integral to the business and facilitated its operations. Citing various judicial precedents, the Tribunal held that these assets were intangible assets eligible for depreciation under Section 32(1)(ii).

3. Treatment of Intangible Assets as Goodwill:
The AO argued that the intangible assets could at best be considered as goodwill and not eligible for depreciation. The assessee countered that even if the assets were treated as goodwill, they were still eligible for depreciation based on the Supreme Court's decision in CIT Vs. Smifs Securities Limited. The Tribunal agreed with the assessee, stating that the intangible assets, including Customer Base and Material Suppliers, were akin to goodwill and eligible for depreciation. The Tribunal also referred to the Delhi High Court's decision in Areva T & D India Ltd. Vs. DCIT, which supported the depreciation claim on business or commercial rights.

Conclusion:
The Tribunal concluded that the intangible assets acquired by the assessee were eligible for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961. The Tribunal directed the AO to allow depreciation on the intangible assets amounting to Rs. 2,26,62,278/-. The appeal of the assessee was allowed.