2022 (10) TMI 988 - HC - Income Tax

Depreciation on goodwill and depreciation of patents and trademark - HELD THAT - There is no infirmity in the finding returned by the appellate authorities that the business rights acquired by the Assessee under its agreement with UIL for valuable consideration constitutes an intangible asset within the meaning of Section 32(1)(ii) - Revenue has not disputed the exclusive nature of rights, payment of consideration and the same being of an enduring nature, since it span for 20 years. In these facts, the capitalisation of the said business rights as an intangible asset has been correctly upheld by the appellate authorities. Therefore, the Assessee was entitled to claim depreciation. Similarly, with respect to the acquisition of IP rights from SAL, Revenue does not dispute the nature of the rights acquired and the limited contention raised is with respect to confirmation of the payment of consideration recorded in the agreement. The said contention raised by Revenue is firstly a question of fact, which objection is not borne out from the record and secondly, Assessee has stated that the said agreement was executed under the aegis of BIFR, since SAL was a sick company and there was no doubt raised by Revenue with respect to the payment of consideration. The ownership of the IP rights of the Assessee stands proved on record, its use by the Assessee is also not disputed and therefore the appellate authorities have rightly held that the Assessee is entitled to claim deprecation u/s 32(1)(ii) of the Act on the said IP rights. The facts as well as the law were properly and correctly assessed by the CIT(A) and the ITAT. We, therefore, answer the question of law framed in these appeals against the Revenue and in favour of the Assessee.

Summary

Issues Involved:
1. Deletion of additions on account of depreciation on goodwill.
2. Deletion of additions on account of depreciation on patents and trademarks.

Detailed Analysis:

Issue 1: Deletion of Additions on Account of Depreciation on Goodwill

Background:
- The Assessee entered into a Business Purchase Agreement with UIL on 1st May 2000, acquiring marketing and business rights for Rs. 2,00,00,000, which was capitalized as goodwill.
- Depreciation of Rs. 50,00,000 was claimed for AY 2001-02 and Rs. 3,75,00,000 for AY 2002-03.

Assessing Officer (AO) Decision:
- The AO rejected the depreciation claim, stating that 'goodwill' is not covered under the definition of intangible assets as per the Act.

Commissioner of Income Tax (Appeals) [CIT(A)] Decision:
- CIT(A) held that the rights acquired were valuable and akin to a license, qualifying as intangible assets, thus allowing the depreciation claim.

Income Tax Appellate Tribunal (ITAT) Decision:
- ITAT modified CIT(A)'s decision, allowing depreciation for exclusive business rights amounting to Rs. 1,73,00,000 but disallowed Rs. 27,00,000 as goodwill, which is not a depreciable intangible asset under Section 32(1)(ii).

High Court Decision:
- The High Court found no infirmity in the appellate authorities' findings, confirming that the business rights acquired were intangible assets and upheld the depreciation claim. The court emphasized that goodwill is not a depreciable asset under Section 32(1)(ii).

Issue 2: Deletion of Additions on Account of Depreciation on Patents and Trademarks

Background:
- The Assessee purchased intellectual property rights from SAL for Rs. 10,93,00,000, claiming depreciation of Rs. 2,73,25,000 for AY 2001-02 and Rs. 2,04,93,750 for AY 2002-03.

Assessing Officer (AO) Decision:
- The AO disallowed the depreciation claim, arguing that the IP rights were not registered in the Assessee's name.

Commissioner of Income Tax (Appeals) [CIT(A)] Decision:
- CIT(A) held that the Assessee was entitled to use the IP rights and had indeed used them in business, thereby allowing the depreciation claim based on Supreme Court judgments in Mysore Minerals and Dalmia Cement.

Income Tax Appellate Tribunal (ITAT) Decision:
- ITAT concurred with CIT(A), stating that the Assessee had acquired ownership of the IP rights upon payment and was entitled to depreciation as per Section 32(1)(ii).

High Court Decision:
- The High Court upheld the appellate authorities' findings, confirming that the Assessee was entitled to claim depreciation on IP rights. The court noted that registration of trademarks was not a prerequisite for claiming depreciation and emphasized the principle that the tax benefit of depreciation belongs to the one who invests in and uses the capital asset.

Conclusion:
The High Court dismissed the Revenue's appeals, affirming the appellate authorities' decisions that the Assessee was entitled to claim depreciation on both the exclusive business rights and intellectual property rights acquired. The court confirmed that goodwill is not a depreciable asset under Section 32(1)(ii) and upheld the depreciation claims for intangible assets as per the provisions of the Income Tax Act.