2012 (5) TMI 162 - AT - Income Tax

Depreciation on the intangible assets - purchase of franchise for a consideration of ₹ 5.51 crores. - it was contended that the assessee has not acquired any particular asset but it is a case of transfer of a on-going concern. - held that - AFL transferred its rights of business and business network with respect to the money transfer business being the representative of the Western Union network. It is clear that it is not the case of entire on going concern i.e AFL or its brand name; but only business rights in respect of one of its various businesses. 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 u/s 32, if the assets used as a business tool for earning the income. The assessee paid the consideration for the purpose of enhancing its network in the field of money transfer business by acquiring the rights over infrastructure and other advantage attached to the marketing network and hence, the same falls under the category of intangible asset as contemplated u/s 32(1)(ii) of the IT Act. - Decided in favor of assessee.

Issues Involved:
1. Whether the CIT(A) erred in deleting the disallowance of depreciation claimed under Section 32(1)(ii) of the Income Tax Act.
2. Whether the transfer of the business network from AFL to the assessee constituted a transfer of intangible assets eligible for depreciation.
3. Whether the valuation of intangible assets and non-compete fees were correctly assessed.
4. Whether the assessee had the right to enforce the agreement against third parties.
5. Whether the transfer agreement was concluded and effective during the relevant assessment year.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Depreciation:
The primary issue was whether the CIT(A) erred in allowing the assessee's claim for depreciation on intangible assets under Section 32(1)(ii) of the Income Tax Act. The CIT(A) allowed the claim by following the Tribunal's decision in Kotak Forex Brokerage Ltd. v. Asstt. CIT, which established a precedent for allowing depreciation on intangible assets.

2. Transfer of Business Network as Intangible Assets:
The assessee acquired a franchise from AFL Pvt Ltd for Rs. 5.51 crores and claimed depreciation on this amount. The Assessing Officer disallowed the claim, arguing that the transfer involved an entire business network, including non-compete fees, rather than just intangible assets. However, the Tribunal found that the transfer agreement specifically included the transfer of licenses, franchises, distribution networks, customer lists, marketing strategies, and software, all of which qualify as intangible assets under Section 32(1)(ii). The Tribunal concluded that the transfer did not involve the entire ongoing concern but specific business rights related to the money transfer services.

3. Valuation of Intangible Assets and Non-compete Fees:
The revenue argued that the consideration paid included non-compete fees, and no separate valuation was provided. The Tribunal noted that the agreement did not mention any consideration for goodwill or non-compete fees, and the Assessing Officer had accepted the consideration paid for acquiring business assets. The Tribunal emphasized that physical wear and tear is not necessary for allowing depreciation on intangible assets, as established in the case of Medicorp Technologies India Ltd.

4. Right to Enforce Agreement Against Third Parties:
The revenue contended that the assessee had no right to enforce the agreement against third parties, such as Western Union and sub-representatives. The Tribunal dismissed this argument, stating that the agreement is enforceable against the parties involved, and the right acquired under the agreement is legally enforceable.

5. Conclusion of Transfer Agreement:
The revenue argued that the transfer was not concluded during the relevant assessment year. The Tribunal found that the agreement was executed and effective from 14.1.2007, and there were no unfulfilled terms. The denial of depreciation by the Assessing Officer was based on the non-wear and tear of assets, which is not a condition for depreciation on intangible assets.

Conclusion:
The Tribunal upheld the CIT(A)'s order, allowing the assessee's claim for depreciation on intangible assets. The Tribunal concluded that the assessee acquired business rights that qualify as intangible assets under Section 32(1)(ii), and the objections raised by the revenue were not supported by facts or relevant legal provisions. The appeal filed by the revenue was dismissed.

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