2021 (4) TMI 274 - HC - Income Tax

Depreciation on franchisee cost - whether the depreciation has to be allowed on the entire bid amount of ₹ 3,36,00,000/- or only on the amount of installment paid during the relevant year? - Tribunal held that the depreciation under Section 32(1)(ii) has to be allowed on the entire cost of franchise rights as against franchise fee installment paid during the particular year applicable to tax? - HELD THAT - The Tribunal has neither taken note of relevant statutory provisions nor has assigned any reasons as to how the order of Chennai Bench of the Tribunal M/S THE INDIA CEMENTS LTD 2016 (1) TMI 1028 - ITAT CHENNAI is applicable to the instant case. The order passed by the Tribunal is bereft of any reasonings and suffers from the vice of non application of mind. The Tribunal which is a final fact finding authority has to assign reasons in support of its decision. The impugned order therefore is cryptic and cannot be sustained in the eye of law. The same is therefore quashed and the matter is remitted to the Tribunal for afresh consideration of matter on merits by a speaking order in the light of relevant statutory provisions expeditiously.

Summary

Issues:
1. Interpretation of Section 32(1)(ii) of the Income Tax Act regarding depreciation on franchise fees.
2. Whether depreciation should be granted on total franchisee cost in the first year itself on accrual basis or only on the franchisee fees paid during the year in question.

Analysis:
1. The appeals were filed by the revenue under Section 260-A of the Income Tax Act against the order of the Income Tax Appellate Tribunal. The main issue was whether depreciation should be granted on the total franchisee cost in the first year on accrual basis or only on the franchisee fees paid during the year. The franchise agreement required payment in 10 yearly installments, but the Assessing Officer disallowed the deduction claimed by the assessee. The Commissioner of Income Tax (Appeals) directed the Assessing Officer to treat the franchise fees as revenue expenditure. The Tribunal allowed the cross-objection by the assessee and dismissed the appeal by the revenue.

2. The revenue contended that depreciation should only be allowed on the amount paid during the relevant assessment year, while the assessee argued that depreciation should be allowed on the entire cost of the franchise rights. The Tribunal's order lacked reasoning and did not consider relevant statutory provisions. Therefore, the High Court quashed the order and remitted the matter back to the Tribunal for a fresh consideration with a speaking order.

3. The assessee argued that the franchise rights were an intangible asset eligible for depreciation under Section 32(1)(ii) of the Act. They claimed that depreciation should be allowed on the entire cost of the franchise rights, not just the installment paid during the year. The High Court did not answer the substantial question of law due to the lack of reasoning in the Tribunal's order.

4. The High Court emphasized the importance of the Tribunal providing reasons for its decisions and following relevant statutory provisions. The lack of reasoning in the Tribunal's order led to the quashing of the order and a remittance of the matter for fresh consideration. The issue of depreciation on franchise fees remains unresolved pending a new decision by the Tribunal.