2017 (10) TMI 926 - AT - Income Tax

Depreciation on tenancy rights - whether the tenancy rights fall within the definition of intangible assets for the purpose of depreciation allowance u/s 32(1)(ii)? - Held that - In the present case it is undisputed that the amount of 21, 65, 629/- was paid to the legal heirs of a former partner as a consequence to an arrangement to settle the dispute between the firm and the deceased partner. The payment so made was capitalised under the head goodwill and tenancy rights in the books of the assessee firm and depreciation was claimed on such amortised amount. However it is very much apparent that the payment was made to the legal heirs of the deceased partner and thus the payment was towards the capital/outstanding dues of the deceased partner. It is also apparent that the firm was not a tenant/had not paid for acquisition of tenancy right but has made payments to the legal heirs of the deceased partners and has reflected the same as payment made for acquisition of tenancy rights in its books of account. In such a situation it cannot be said that the payment was made for acquisition of tenancy rights and accordingly the question as to whether tenancy rights would fall under the definition of intangible assets for the purpose of claiming depreciation u/s 32 of the Act does not arise in the present appeal - Decided against assessee.

Summary

Issues:
1. Whether tenancy rights qualify as intangible assets for depreciation under section 32(1)(ii) of the Income Tax Act, 1961.

Analysis:
The appeal was filed against the order of the ld. CIT(A) dismissing the assessee's appeal for the assessment year 2010-11. The Assessing Officer disallowed depreciation claimed by the assessee on tenancy rights valued at &8377; 21,65,625, leading to an addition of &8377; 5,41,406 to the income. The Assessing Officer relied on the ITAT Mumbai Bench's decision that tenancy rights do not qualify as intangible assets for depreciation under section 32(1)(ii). The CIT(A) upheld this decision. The assessee raised grounds of appeal challenging these findings.

The assessee argued that the ITAT Mumbai Bench's decision was wrongly relied upon and cited the Supreme Court judgment in CIT Kolkata vs Smifs Securities Ltd., stating that tenancy rights are akin to goodwill. The assessee also referred to an ITAT Delhi Bench ruling in ThyssenKrupp Elevator (India) Pvt. Ltd. vs ACIT, where excess consideration paid was considered goodwill eligible for depreciation under section 32(1)(ii).

The Departmental Representative supported the lower authorities' decision, arguing that the assessee's case was different from the judgments cited. The ITAT analyzed section 32 of the Act, defining intangible assets eligible for depreciation. The question was whether tenancy rights fell within this definition. The payment made by the assessee was towards settling a dispute with the legal heirs of a deceased partner, not for acquiring tenancy rights. Lack of evidence supporting the claim that the payment was for tenancy rights led to the dismissal of the appeal, upholding the CIT(A)'s decision.

Ultimately, the ITAT upheld the CIT(A)'s order, dismissing the assessee's appeal. The judgment was pronounced on 4th October 2017.