2019 (1) TMI 1594 - AT - Income Tax

Depreciation on the intangible asset namely design and technical know-how - as submitted that the meaning of the term intangible assets u/s 32(1)(ii) is an inclusive definition -statutory auditor of the company has commented on the allowability of the depreciation claim made by the assessee in respect of intangible assets - HELD THAT - On perusal of the comment of the statutory auditor of the company we find that claim of the assessee has not been denied for the depreciation on the intangible assets. The auditor has mentioned that they are unable to comment on the claim of the assessee on the depreciation of intangible assets. The expression used by the statutory auditor of the company cannot be construed as if the depreciation claimed by the assessee was denied Comment mentioned by the statutory auditor is not the deciding factor for the allowability of the claim of the assessee for the depreciation on the intangible assets. The statutory auditor of the company has no authority under the income tax Act to decide the issue whether any particular claim of the assessee is allowable. Assessee was entitled to the depreciation on the intangible assets on the cost incurred by it on its acquisition. There was no differentiation whether it is available to the industrial undertaking or otherwise. AO has limited the deduction of the depreciation in respect of know-how only concerning the industrial undertaking. More specifically the AO in the instant case concluded that the know-how used concerning industrial undertaking would be eligible for the depreciation. As per the AO industrial undertaking means the factory where the manufacturing activities are carried on by the assessee. We further observe that the assessee in the instant case has not acquired the factory of AFL. Accordingly, the AO was of the view that the assessee is not carrying out any industrial activity. AO also observed that AFL was also not carrying out any industrial activity on the ground that it was just engaged in the activity of stitching the fabrics which were manufactured by Arvind Mills Ltd. In view of the above, the AO was of the view that the assessee is not eligible for the depreciation on the technical know-how as discussed above. We disagree with the contentions of the AO on the ground that the use of technical know-how is not limited to any industrial undertaking. As such the use of technical know-how is also available even to the business activities where there was no manufacturing activity. In our considered view the AO has taken a narrow meaning of the technical knowhow on the basis of explanation 4 to section 32 of the Act. The purpose for the depreciation on the intangible assets has been explained in the memorandum of the finance Act to 1998, and there was no such limitation provided for the allowability of the depreciation on technical know-how. Therefore we are not inclined to uphold the finding of the AO that the depreciation on the technical know-how is available only in relation to the industrial undertaking. - Decided in favour of assessee. Whether the assessee has acquired any design and technical know-how from AFL? - HELD THAT - Assessee has never claimed to have acquired any designs from AFL. Rather we find that as per the agreement between the assessee and AFL that the assessee shall provide the design to AFL - We also note that the pattern of design keeps on changing very rapidly in the garment industry and there cannot be any permanent designs which will prevail in the market beyond the particular point of time. As such we are of the view that there cannot be any fixed pattern of any design for any particular class of the people. Accordingly, we are not impressed with the finding of the AO that there was no design and technical know-how acquired by the assessee. Whether the assessee has used technical know-how acquired from AFL? - HELD THAT - From the agreement it is transpired that AFL possessed the rich experience in the field of stitching of the garments. As a result of the agreement as discussed above the factory of AFL was working exclusively for the assessee. Thus it is implied that the assessee will use all the benefits held by the factory of AFL. Thus we are of the view that the technical know-how acquired by the assessee from AFL was used for its business activity. Assessee has also given works on a contract basis to the outside job workers who were working exclusively for the assessee. These job workers were performing the work for the assessee in the manner in which the factory of AFL was doing the work for the assessee. Therefore it is inferred that the procedures taken by the assessee from AFL were used for the work assigned to such outside job workers. Therefore we are of the view that the design and technical know-how acquired by the assessee from AFL were used for its business activities. The assessee has made the payment to AFL for the intangible assets which were created by the AFL over a period of time. Therefore we are of the view that the consideration paid by the assessee is representing the benefits which it is going to use for its business purposes - The expenditures incurred by the assessee have to be allowed as a deduction in one or the other way. Thus assessee is eligible for the depreciation in respect of the intangible assets as discussed above - Decided in favour of assessee Depreciation on goodwill disallowed - claim made by the assessee 1st time before the Ld. CIT(A) - assessee did not claim the depreciation on goodwill in its income tax return as well as before the AO during assessment proceeding u/s 143(3) - HELD THAT - Issue of depreciation on goodwill was subject to litigation at various courts. Therefore the same was not claimed by the assessee in the income tax return. However at the time of hearing before the Ld. CIT(A) the Hon ble Supreme Court has given the ruling that the depreciation on goodwill is allowed. Therefore the deduction was claimed. The scheme of the income tax Act requires that the assessee is liable to pay tax on the income which is chargeable to tax. Similarly, the assessee is entitled to the deductions which are eligible under the provisions of the Act. The Hon ble Supreme Court has settled the issue on the issue of depreciation on the goodwill beyond doubt that the assessee s claim of the depreciation on goodwill is rightful claim which has to be allowed to the assessee. In this regard, we find support and guidance from the judgment of Hon ble Supreme Court in the case of Jute Corporation of India Ltd. Vs. CIT 1990 (9) TMI 6 - SUPREME COURT - We hold that claim made by the assessee 1st time before the Ld. CIT(A) was rightful claim and within the provisions of law. Assessee is entitled for the claim of depreciation on the goodwill as relying on SMIFS SECURITIES LTD. 2012 (8) TMI 713 - SUPREME COURT which says that Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Disallowance on account of provision for obsolete inventory - As per the assessee, the market price of the inventory was reduced below the cost price. Therefore the provision was made in the books of accounts - HELD THAT - Such provision was not shown as liability in the balance sheet. Thus there remains no doubt that the provision have actually been written off by the assessee in its books of accounts. Thus the provision is not representing the unascertained liability of the assessee as alleged by the AO. We also note that the assessee in its financial statement has reduced the provision from the inventory shown in its financial statement Once the provision has been written off by the assessee in its books of accounts than in our considered view there was no need to examine the valuation report. In view of the above we are not impressed with the finding of Ld. AO. Hence we do not find any reason to interfere in the order of CIT(A) and direct the AO to delete the addition made by him Disallowance made in respect of registration charges in respect of lease deed - Revenue or capital expenditure - HELD THAT - The assessee out of such expenditure has not acquired any capital assets. Therefore the same cannot be treated as capital in nature. Accordingly, we treat them as revenue expenses. See CINCEITA PRIVATE LIMITED 1982 (2) TMI 58 - BOMBAY HIGH COURT from it is clear that the expenses incurred in relation to the property taken on lease cannot be treated as capital in nature. Thus the ground raised by the assessee in its CO is allowed.

Summary

Issues Involved:
1. Deletion of disallowance of ?18,11,46,000/- made in respect of depreciation on intangible assets.
2. Deletion of disallowance of ?117.31 million on goodwill and the examination of the same by the Assessing Officer (AO).
3. Deletion of disallowance of ?1,21,74,000/- on account of provision for obsolete inventory.
4. Confirmation of disallowance of ?3,19,476/- in respect of registration charges.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance of ?18,11,46,000/- on Depreciation of Intangible Assets
The AO disallowed the depreciation claimed by the assessee on intangible assets such as design and technical know-how, vendor network relationship, and customer network relationship, arguing that these do not fall within the definitions of intangible assets eligible for depreciation under Section 32 of the Income Tax Act. The AO's main contention was that the assessee was not engaged in any manufacturing activity, and therefore, the technical know-how was not utilized.

The CIT(A) and the Tribunal found that the assessee had indeed acquired and used the intangible assets in its business. The Tribunal noted that the depreciation on intangible assets is not limited to industrial undertakings and can be claimed by businesses engaged in non-manufacturing activities as well. The Tribunal upheld the CIT(A)’s decision, allowing the depreciation claim on the intangible assets by referencing several judicial precedents that supported the broader interpretation of Section 32(1)(ii) to include business or commercial rights of similar nature.

2. Deletion of Disallowance of ?117.31 Million on Goodwill and Examination by AO
The AO disallowed the depreciation on goodwill, arguing that it was not claimed in the return of income or during the assessment proceedings. The CIT(A) directed the AO to examine the matter regarding the claim of depreciation on goodwill in light of the Supreme Court's decision in CIT vs. Smifs Securities Ltd., which allowed depreciation on goodwill.

The Tribunal upheld the CIT(A)'s decision, stating that the assessee's claim for depreciation on goodwill was valid and should be examined by the AO. The Tribunal emphasized that the claim was supported by the Supreme Court's ruling, which recognized goodwill as an intangible asset eligible for depreciation under Section 32(1)(ii).

3. Deletion of Disallowance of ?1,21,74,000/- on Provision for Obsolete Inventory
The AO disallowed the provision for obsolete inventory, arguing that it was an unascertained liability and that there was no valuation report to support the claim. The AO also noted that it was the second year of the assessee's operation, making the provision questionable.

The CIT(A) and the Tribunal found that the provision for obsolete inventory was made systematically and based on a detailed technical analysis of the realizable value of the inventory. The Tribunal noted that the provision was actually written off in the books of accounts and was not shown as a liability, thereby confirming that it was not an unascertained liability. The Tribunal upheld the CIT(A)’s decision to allow the provision for obsolete inventory as a deductible expense.

4. Confirmation of Disallowance of ?3,19,476/- in Respect of Registration Charges
The AO treated the registration charges for lease deeds as capital expenditure and disallowed them after allowing depreciation. The CIT(A) confirmed the AO's decision, treating the registration charges as capital expenditure related to the acquisition of property.

The Tribunal, however, disagreed with the AO and CIT(A), stating that the registration charges were incurred for leasing property and did not result in the acquisition of any capital asset. The Tribunal treated the registration charges as revenue expenses, referencing the judgment of the Bombay High Court in Cinceita (P) Ltd., which held that such expenses are revenue in nature.

Conclusion
The Tribunal dismissed the Revenue's appeal and allowed the Cross Objection of the assessee, confirming the deletion of disallowances related to depreciation on intangible assets and provision for obsolete inventory while treating the registration charges as revenue expenditure. The Tribunal also directed the AO to examine the claim of depreciation on goodwill in light of the Supreme Court's ruling.