INTERPRETATION OF THE EXPRESSION ‘ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE’ UNDER SECTION 32(1)(ii) OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Depreciation

Section 32 of the Income Tax Act, 1961 (‘Act’ for short) provides for depreciation.   Section 32(1) provides that In respect of depreciation of-

(i) buildings, machinery, plant or furniture, being tangible assets;

 (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-

 (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed.

Explanation 3 to this section defines the term ‘assets’ as-

(a) tangigble assets, being buildings, machinery, plant and furniture;

(b) intangible assets, being know-how, patents, copy rights, trade marks, licences, franchises or any other business or commercial rights of similar nature.

Issue

In this article the interpretation of the expression ‘any other business or commercial rights of similar nature’ will be discussed with reference to case laws.

Interpretation

Whether the expression ‘any other business or commercial rights of similar nature’ is an intangible asset?  Whether the principles of ejusdem generis can be applied?  According to this principle the rights referred to in the expression ‘any other business or commercial rights of similar nature’ should be similar to one or more of the specifically identified assets preceding such expression.  This interpretation is not acceptable by the Court.

As could be seen from the definition of intangible asset, specifically identified items like known-how, patents, copy rights, trade marks, licences, franchises are not of the same category but distinct from each other.  However, one thing common amongst these assets is, they are all part of the tool of the trade and facilitate smooth carrying on business.  Therefore, any other tangible asset which may not be identifiable with the specified items but is of similar nature would come within the expression ‘any other business or commercial rights of similar nature’. 

In ‘Areva T and D India Limited V. Deputy Commissioner of Income Tax’ – 2012 (4) TMI 79 - DELHI HIGH COURT  the High Court while interpreting the said expression by applying the principles of ejusdem generis observed, the right as finds place in the expression ‘business or commercial rights of similar nature’ need not answer the description of know-how, patents, trademarks, licence or franchises but must be of similar nature as the specified asset.  The Court observed, looking at the meaning of the categories specified intangible assets referred to in section 32(1)(ii) of the Act preceding the term ‘business or commercial rights of similar nature’, it could be seen that the said intangible assets are not of the same line and are clearly distinct from one another.  The Court observed, the use of the words ‘business or commercial rights of similar nature’, after the specified intangible assets clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified assets but also to other categories of intangible assets which were neither visible nor possible to exhaustively enumerate.  The Court, therefore, observed, in the circumstances the nature of business or commercial right cannot be restricted only to know-how, patents, trademarks, copyrights, licence or franchise.  The Court observed any intangible assets which are invaluable and result in smoothly carrying on the business as part of the tool of the trade of the assessee would come within the expression ‘any other business or commercial right of similar nature’.

Goodwill

In ‘Commissioner of Income Tax V. SMIFS Securities Limited’ – 2012 (8) TMI 713 - SUPREME COURT the Supreme Court, after interpreting the definition of intangible asset as provided in Explanation 3 to Section 32(1), while opining that the principle of ejusdem generis would strictly apply in interpreting the definition of intangible asset as provided by Explanation (b) of section 32, at the same time, held that even applying the said principle ‘goodwill’ would fall under the expression ‘any other business or commercial rights of similar nature’.  Thus, as could be seen, even though ‘goodwill’ is not one of the specifically identifiable assets preceding the expression ‘any other business or commercial rights of similar nature’,  however the Supreme Court held that ‘goodwill’ will come within the expression ‘any other business or commercial rights of similar nature’.

BSE Membership card

In ‘Techno Shares and Stocks Limited V. Commissioner of Income Tax’ – 2010 (9) TMI 6 - SUPREME COURT OF INDIA the Supreme Court while examining the assessee’s claim of depreciation on BSE Membership card, after interpreting the provisions of section 32(1)(ii), held that as the membership card allows a member to participate in a trading session on the floor of the exchange, such membership is a business or commercial right, hence, similar to licence or franchise, therefore, an intangible asset.

Four laning on BOT basis

In ‘Assistant Commissioner of Income Tax V. Progressive Constructions Limited’ – 2017 (3) TMI 1167 - ITAT HYDERABAD the assessee had taken up the project as a business venture with a profit motive.  The expenditure incurred by the assessee of ₹ 214 crores for creating the project or project facilities had created an intangible asset in the form of right to operate the project facility and collect toll charges.  Until the project was completed and ready for use by vehicles or persons the assessee could not collect toll charges for user of the project facilities.  Thus, the right to operate the project facility and collect toll charges was integrally connected to the completion of the project facility.

That by virtue of the concession agreement the assessee had only been granted a right to execute the project and operate the project facility during the concession period, on expiry of which the project/project facility will revert back to the Government of India.  The right granted to the concessionaire has not created any right, title or interest over the property.  Therefore, the right to operate the toll road or bridge and collect toll charges was a business or commercial right as envisaged under section 32(1)(ii) of the Act read with Explanation 3(b) of the Act.  Therefore was eligible to claim depreciation on written down value as an intangible asset as defined under Explanation 3(b) read with section 32(1)(ii).  Hence the assessee was eligible to claim depreciation on such asset at the specified rate.