2022 (11) TMI 318 - HC - Income Tax

Disallowance of the depreciation - Appellant had not acquired any business and commercial rights - HELD THAT - In the case on hand, assessee has entered into various agreements with Central and State Government, etc. The assessee's agreement referred to hereinabove is with the Central Government. Assessee's case is, to obtain that agreement it has incurred certain expenditure. Shri Suryanarayana, pointed out that in case the assessee transfers its rights under the agreement, it will be transfer of an intangible asset similar to the one considered in Areva T D India Ltd., and he is right in his submission. A Concession or a right which accrues over a period of time under an agreement will be in the form of an intangible asset and when transferred, the transferee will also be entitled for continuation of the benefit. AO has stated that the expenses in this case are mostly towards legal, technical and management fee. Such expenditure is incurred to obtain a legally enforceable agreement. ITAT has rightly held that such expenses can be capitalized. It is settled that assessee shall be entitled to claim depreciation on such expenses which can be capitalized. CIT(A) has recorded that the assessee has not proved the expenditure also merits consideration. It is relevant to note that CIT(A), on appreciation of material on record, has held assessee had acquired business and commercial rights and licenses by making payment which were in the nature of 'intangible asset' entitled for claiming depreciation u/s 32(1)(ii) of the Act. This finding has not been challenged by the Revenue before the ITAT. Whether a lease right constitutes an intangible right ? - In our view, Shri Suryanarayana is right in his submission because, the intangible right accrued in favour of assessee is transferable and therefore, the cost incurred towards acquiring leasehold rights shall be eligible for depreciation.

Summary

Issues:
1. Disallowance of depreciation on expenses incurred for acquiring business and commercial rights.
2. Eligibility of leasehold rights for depreciation under Section 32 of the Act.

Issue 1: Disallowance of Depreciation on Expenses for Acquiring Business and Commercial Rights:

The appellant, Bengaluru International Airport Ltd., challenged the disallowance of depreciation amounting to Rs. 4,00,01,168/- for the Assessment year 2010-2011. The Assessing Officer disallowed the depreciation, stating that the expenses incurred in obtaining support through legal, technical, and management fees did not qualify as expenses for acquiring business or commercial rights falling under the definition of 'intangible asset'. The Commissioner of Income Tax (Appeals) upheld this view, noting a lack of evidence showing payment for acquiring the rights. However, the Income Tax Appellate Tribunal (ITAT) held that the expenditure, though revenue in nature, qualified for capitalization among fixed assets. The ITAT disallowed the depreciation claimed by the assessee, leading to the current appeal.

The appellant argued that the ITAT correctly determined that the pre-operative expenditure qualifies for capitalization, citing relevant case law. The Revenue's standing counsel contended that since the expenditure was not proven before the Assessing Officer, the claim was rightly disallowed. The High Court found that the appellant had entered into agreements with governmental bodies, incurring certain expenses. The Court agreed that if the appellant demonstrates before the Assessing Officer the actual expenditure incurred to obtain the agreements, depreciation claims could be allowed.

Issue 2: Eligibility of Leasehold Rights for Depreciation under Section 32 of the Act:

The High Court examined whether leasehold rights could be considered intangible rights eligible for depreciation under Section 32 of the Act. The appellant argued that leasehold rights, being transferable, should be eligible for depreciation. The Court concurred with this view, noting that the intangible rights accrued to the appellant were transferable, making the cost incurred for acquiring leasehold rights eligible for depreciation. The Court upheld the appellant's position, ruling in favor of allowing depreciation on leasehold rights.

In conclusion, the High Court allowed the appeal in favor of the assessee on both substantial questions of law. The first issue was subject to the assessee demonstrating the actual expenditure to the Income Tax Officer, upon which the depreciation was claimed. The second issue, regarding the eligibility of leasehold rights for depreciation, was also decided in favor of the assessee against the Revenue.