Intangible assets in case of professions – cost of education and training to acquire know-how, expertise, to be eligible for grant of licenses – depreciation can be claimed.

[CA DEV KUMAR KOTHARI]

License – in relation to professions:

From reading of various definitions of license or licence   we find that it is understood in the sense of an official permission or permit or registration or recognition which allow   to carry profession over a period of time within limited or unlimited territory etc. In case a license is granted then such license shall also include the document of that permission or permit and also documents which are pre-requisites to obtain such license.

 

Professions and licenses:

For carrying any recognized profession anyone (generally individual) who want to pursue  and practice a profession has to undergo prescribed education and training , pass prescribed examinations and tests and then obtain a license from concerned authority or body who regulate such profession.

Generally grant of such license is a pre-condition for carrying such profession. This may be called by any name or nomenclature like, degree, license, permission, approval, Certificate of Practice (COP), certificate of registration, or certificate of membership of particular professional body etc. These may be granted for life or for limited period and may be require renewal from time to time, every year or at intervals of certain periods.

Continuity of licenses:

Continuing education and training in relevant field are also prescribed in many professions for renewal or extension of such license.  

Cost of licenses in case of professions:

Education and training and passing of examinations to acquire know-how, information, expertise to be entitled for grant of license are preconditions. Therefore all costs incurred for the purpose of the same can be considered as actual cost of such license. In case advanced licenses are obtained after acquiring basic license, then cost of such advanced licenses will also be eligible for deduction on account of depreciation allowance.

Example of license in case of medical profession:

Therefore, for instance in case of a Doctor his graduation degree and then registration as a Registered Medical Practioner (RMP) or registration by medical council are part of preliminary license. After graduation, a doctor may purse specialization and then super specialization in subject of his choice (in which he can get admission). The degree of MD/ MS as specialist in particular field and registration and recognition as such will be another license.

Similarly after MD/ MS if one do super specialization and obtain degree of DCH or DM or any other similar degree  in particular subject or field he get another license ,approval, permission or recognition as such.

Therefore we find that there can be several licenses in any profession.

Another form of licenses can be like a license granted by a party to another party as an agreement between those parties granting certain permissions for use, carrying business, profession, practices and use of trade names, brands , technology  etc.

Intangible assets and depreciation under Income-tax Act (ITA):

Concept to allow deduction by way of depreciation allowance on  intangible assets was first introduced in the ITA  by the Finance (No. 2) Act, 1998, w.e.f.  1-4-1999 that is from assessment year 1999-2000 for which previous year or financial  year was  1998-99 – ended on 31.03.1999.

Relevant provisions relating to depreciation on intangible assets are re-produced below with highlights added:

Statutory Provisions

Income-tax Act, 1961

Depreciation.

     32. (1) [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-]

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

     [Explanation 3.-For the purposes of this sub-section, [the expression "assets"] shall mean-

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

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

     Explanation 4.-For the purposes of this sub-section, the expression "know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto).

From appendix –I to Income tax Rules- rate of depreciation:

	PART B INTANGIBLE ASSETS
	Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature	25

 

 Wider scope:

From reading of above provisions it is clear that deduction for depreciation on intangible assets is eligible against business income and professional income both. If an intangible asset is used for carrying a profession the professional person shall be entitled to claim depreciation on such intangible asset. It has also been held that various items which are generally called parts or components of  goodwill of a business or profession and which are used for carrying such business or professions  are also intangible assets.

In course of claims and their examinations by tax authorities, and in case of disputes by   appellate authorities and courts it has been held that the scope of ‘intangible assets’ is wider, in view of language used in provisions and also the purpose of granting depreciation allowance  which is a statutory allowance or deduction and is a sort of privilege. Liberal views are taken by courts for granting depreciation allowance on intangible assets.

Definitions of certain terms relevant to income from profits and gains of business or profession.

     43. In sections 28 to 41 and in this section, unless the context otherwise requires-

      (1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:

Xxx

[Explanation 10.-Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assesse :

     Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assesse.]

Therefore in the first year one has to compute ‘actual cost ‘of intangible assets. Actual cost incurred by assesse himself   will be eligible for allowing depreciation allowance.

As such intangible assets are created over a long period of time, a reasonable estimate of costs can be made. Any cost incurred out of  loan shall also include interest during period prior to obtaining license. Therefore, interest on education loan can be included in cost of license. Similarly expenses incurred during education, from own expenses will be actual cost.

Expenses incurred by parents, other family members out of their personal expenses / drawings can be part of cost if such costs are to be reimbursed to parents and family members.

In fact, expenses though met by parents, can still be ‘actual cost’ of intangible asset but it will be an area of dispute.  

Scholarships granted by governments and other organizations to promote education and training are for public purposes and are in nature of capital receipts. Such receipts should not be reduced from ‘actual cost’. However, this is an area where two or more views are possible. Then rule of favourable view to be applied will help to contend that scholarship should not be reduced from cost of license. Courts have taken liberal view and even subsidies received by industry which were granted for public purpose have been held as capital receipt and not deductible from actual cost.

Scholarships granted to meet the cost of education which are  also exempt under section 10 (16)

 Of the ITA and are also capital receipts.

Amendments in definition of income about subsidies:

   Section 2 - Definitions:

24) "income" includes-

  ⁹¹[(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee ⁹³[other than,-

(a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or

 91. Inserted vide THE FINANCE ACT, 2015 w.e.f. 1st day of April, 2016

93. Substituted vide THE FINANCE ACT, 2016 with effect from the 1st day of April, 2017 before it was read as,  “other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43”

From reading of provisions it can be said that scholarships which are exempt u/s 10 (16) are of different nature, and they should not be reduced from cost of intangible assets. Scholarships are granted with a public purpose and not granted to meet cost of any books, education or cost of any intangible assets created by a person by pursuing education and training.

However, on such issue disputes can arise as provisions are new.

In view of author amendment to treat any subsidy, which is of capital nature, as income is not a valid provision and it is beyond the powers conferred upon the Central Government which is restricted to  impose tax on income. However, this need to be challenged.