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Can a Assessee claim any deduction on expenditure for acquisition of patent, trademarks, copyrights and know-how as depreciation?

Depreciation under the Income Tax Act is a deduction allowed for the reduction in the real value of a tangible or intangible asset used by a taxpayer. The concept of depreciation is used for the purpose of writing off the cost of an asset over its useful life. While computing one’s income, the depreciation as per Income Tax Act, 1961 is allowed while the book depreciation is disallowed. This is because the Income Tax Act prescribes its own rate of depreciation. The Income Tax Act allows depreciation on the Written down Value of the assets. The depreciation is computed on ‘Block of assets’ at the rates prescribed rates provided in the Income Tax Rules, 1962.

As per section 32 of Income Tax Act, 1961, an assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:

Assessee must be owner of the asset – registered owner need not be necessary.
The asset must be used for the purposes of business or profession
The asset must be used during the previous year.

Co-owners can claim depreciation to the extent of the value of the assets owned by each co-owner. Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have been allowed as a deduction irrespective of a claim made by a taxpayer in the profit & loss account.

However, can a Assessee claim any deduction on the alleged expenditure for acquisition of patent [trademarks] rights, copyrights and know-how as depreciation? Let us refer to the case of Mangalore Ganesh Beedi Works v. CIT (2015), to find the answer to this question.

Facts of the Case:

In 1939 late Sri S. Raghuram Prabhu started the business of manufacturing beedis.
He was later joined in the business by Sri Madhav Shenoy as a partner and thus M/s. Mangalore Ganesh Beedi Works (MGBW) came into existence
The partnership firm was reconstituted from time to time and its last reconstitution and partnership deed contained Clause 16 relating to the manner in which the affairs of the partnership firm were to be wound up after its dissolution.
According to Clause 16, if the partnership was dissolved, the going concern carried on under the name of the Firm Mangalore Ganesh Beedi Works and all the trademarks used in course of the said business by the said firm and under which the business of the partnership was carried on shall vest in and belong to the partner who offered and paid or two or more partners who jointly offered and paid the highest price
The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deed, instruments and applications and otherwise and him/her name or their names of all the said trademarks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee partner or partners.
Due to differences between the partners of MGBW, the firm was dissolved when two partners of the firm applied for its winding up by filing Petition in the High Court (HC).

While entertaining the Company Petition the HC appointed an Official Liquidator and eventually, after hearing all the concerned parties, a winding up order was passed
High Court held that the firm was dissolved and directed the sale of its assets as a going concern to the highest bidder amongst the partners.
Pursuant to the order passed by the HC, an auction was conducted in which three of the erstwhile partners forming an association of persons (AOP) emerged as the highest bidders and their bid of Rs.92 crores for the assets of MGBW was accepted by the Official Liquidator.
The business of the firm was then passed on into the hands of AOP
MGBW (Assessee) while filing its return, claimed a deduction of Rs. 12,24,700 as a revenue expenditure permissible under Section 37 of the Income-Tax Act, 1961 towards legal expenses incurred.
The Assessee also claimed depreciation under Section 35A and 35AB towards acquisition of Intellectual Property Rights such as rights over the trademark, copyright and technical know-how.
In the alternative, the Assessee claimed depreciation on capitalizing the value of the Intellectual Property Rights by treating them as plant.
Assessing Officer (AO) passed an order rejecting the claim of the Assessee under all the three Sections.

Order passed by Appellate Authorities

Feeling aggrieved, the Assessee preferred an appeal before the Commissioner of Income-Tax (Appeals) [CIT(A)].
The appeal was allowed in part inasmuch as it was held that the Assessee was entitled to a deduction towards legal expenses.
However, the claim of the Assessee regarding deduction or depreciation on the Intellectual Property Rights was rejected by the CIT(A).
As a result of the appellate order, the Revenue was aggrieved by the deduction granted to the Assessee in respect of legal expenses and so it preferred an appeal before the Tribunal.
The Assessee was aggrieved by the rejection of its claim in respect of the Intellectual Property Rights and also filed an appeal before the Tribunal.
The Tribunal allowed the appeal of the Assessee while rejecting the appeal of the Revenue

Appeal before the High Court (HC)

The three substantial questions of law considered by the High Court were as follows:

Whether amount claimed as revenue expenditure by the AOP which was constituted by the three partners of the erstwhile firm, MGBW, could be allowed as permissible deduction in the hands of the said AOP under Section 37 of the Income-Tax Act, 1961, as being laid out or expended wholly and exclusively for the purpose of business of the said Association of Persons?
Whether the Assessee was entitled to claim any deduction on the alleged expenditure for acquisition of patent [trademarks] rights, copyrights and know-how, in terms of Section 35A and 35AB of the Act?
Whether the Tribunal had erred in directing the AO to capitalize the value of trademarks, copyright and technical know-how by treating the same as plant and machinery and grant depreciation therein?

In its conclusion, HC answered the first two questions in the negative and the third question in the affirmative in favour of the Revenue and against the Assessee. While doing so, the High Court set aside the findings of the Tribunal and restored the order of the AO.

Observations of the SC on whether legal expenses incurred for defending the business of the going concern and for protecting its interest could be said to be incurred for the purpose of the business and therefore, allowable under section 37(1)

SC observed that in Dalmia Jain & Co. Ltd. v. CIT [1971] (SC), it was held that the expenses for the purposes of protecting the business of the assessee as a going concern was allowable under section 37(1) of the Act.
SC held that there is a clear finding of fact by the Tribunal that the legal expenses incurred by the assessee were for protecting its business and there was no reason to reverse this finding of fact particularly since nothing has been shown to conclude that the finding of fact was perverse in any manner whatsoever.
Therefore, the legal expenses incurred for protecting the business were allowable as deduction under section 37(1) of the Act.

Observations of the SC on whether expenditure incurred on the acquisition of trademarks, copyrights and know-how is allowed for depreciation under Section 32

The Intellectual Property Rights such as trademarks, copyrights and know-how come within the definition of ‘plant’ for the reason that in a large business, control over intellectual property rights such as brand name, trademark etc. are absolutely necessary.
Moreover, the acquisition of such rights and know-how is acquisition of a capital nature.
Therefore, the trademarks, copyrights and know-how acquired by the assessee would come within the definition of ‘plant’ being commercially necessary and essential as understood by those dealing with direct taxes.
Therefore, the assessee was entitled to the benefit of section 32 read with section 43(3) of the Act.

Therefore, in conclusion, even prior to the insertion of “intangible assets” in section 32, intellectual property rights such as trademarks, copyrights and know-how constitute “plant” for purposes of depreciation. The department is not entitled to rewrite the terms of a commercial agreement. Also legal expenses incurred for defending the business of the going concern and for protecting its interest could be said to be incurred for the purpose of the business and therefore, allowable under section 37(1).

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December, 4
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Can Depreciation be Disallowable merely because Purchase of the Car is from the Personal Account?

The Income Tax Act allows depreciation on the Written down Value of the assets. The depreciation is computed on ‘Block of assets’ at the rates prescribed rates provided in the Income Tax Rules, 1962.

As per section 32 of Income Tax Act, 1961, an assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:

Assessee must be owner of the asset – registered owner need not be necessary.
The asset must be used for the purposes of business or profession.
The asset must be used during the previous year.

While computing the profit and gains from business or profession, there are certain expenditures which are disallowed. This means that the income tax department does not allow the benefit of such expenditures and the assessee is required to pay taxes on such expenditures by adding it back to the net profits. There are two primary reasons for disallowance of any expenditure:

The tax amount required to be deducted on certain expenditures are not deducted while making the payment.
The expenditure does not implicitly relate to the conduct of such business or profession

Let’s refer to the case of Desh Raj Arora Vs ITO (ITAT Delhi) where the issue under consideration was whether the depreciation on car purchased by assessee can be disallowed only because the payment towards purchase of the same is made through his personal account?

Facts of the Case

The assessee is an individual carrying on the business of trading of tools and hardware etc
The assessee filed his return of income which was assessed by the Assessing Officer (AO) u/s 143 (3) of the Income Tax Act making certain additions/disallowances.
The assessee preferred appeal before the Commissioner Of Income Tax (Appeals) [CIT(A)], who confirmed the order of the AO
Aggrieved with the order of the CIT(A), assessee appealed before the Income Tax Appellate Tribunal (ITAT).

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Observations of the ITAT on the disallowance of depreciation on the car purchased by the assessee

The assessee purchased the car in his personal name. The payment of the purchase of the car was also made from his personal account.
Therefore the AO took the view that as the assessee had used this car for his personal purposes, the depreciation on purchase of the new car was disallowed.
He further noted that assessee has not debited the expenses related to the car in the profit and loss account and therefore it was used for personal purposes and not for business purposes.
The assessee preferred appeal before the CIT(A) against the above disallowance who confirmed the addition.
ITAT observed that the assessee was a proprietor of M/s Diamond Tool (India) carrying on the trading of hardware and tools.
As the assessee is an individual so naturally the assessee will purchase the car in his own name only.
Therefore, ITAT did not find any reason that assessee should not be allowed depreciation on the car, which was used for the purposes of his business.
Merely because assessee had made payment for purchase of car from his personal account did not mean that it was not the business asset of the assessee.
Further the AO had not found any expenditure debited to the profit and loss account, however it could not be said that depreciation on the asset was not allowable to the assessee.
The assessee owned an asset, which was used for the purposes of the business of the assessee.
The AO has presumed that assessee was not using motor car for his business purposes, which could not be the basis of disallowance of depreciation.
ITAT directed the AO to delete the disallowance of depreciation and accordingly the same was deleted.
Let us also refer to the other 2 additions made by the AO in this case.

Observations of the ITAT on addition on account of cash deposited in savings bank account of the appellant

The appellant explained before the AO that he had sold his old car and had purchased a new car.
The old car was sold for Rs 90,000 and the cash was deposited in the savings bank account of the appellant.
The assessee also produced two cash receipts of Rs 45,000 each against sale of the old car.
This evidence was also submitted before the CIT(A). However as the assessee had not made any application under rule 46A for admission of the additional evidence the CIT(A) did not admit it and confirmed the addition made by the AO.
ITAT carefully considered the rival contention and found that assessee has sold his old car for INR 90,000 and has also shown two cash receipts of Rs 45,000 each against the sale of old car and therefore the addition made by the lower authorities deserved to be deleted.
Merely because the assessee had not made any application under rule 46A for admission of the additional evidence the CIT(A) had not considered the above evidence and confirmed the disallowance.
ITAT did not find the confirmation of the addition by the CIT(A) in accordance with the law. Therefore ITAT directed the AO to delete the addition.

Observations of the ITAT with respect to low household withdrawal by the assessee

The addition was made by the AO noting that the assessee had shown total drawing of Rs 190,000 for the year under assessment.
From the perusal of the balance sheet, the assessee was asked to give the justification for the withdrawal.
The assessee stated that his family consisted of himself, his wife and 2 independent children having their own income.
However the AO made the addition of Rs 50,000 holding that personal and household expenses are Rs 20,000 month amounting to Rs 240,000 p.a.
The CIT(A) also confirmed the same.
ITAT found that appellant’s family consisted of 4 persons wherein the children were independent. Therefore the assessee has to bear the expenditure of self and his wife.
For this purpose the assessee had shown the total withdrawal of Rs 190,000 p.a.
Before the AO and CIT(A), assessee had stated that he was residing in a colony where the cost of livelihood was less.
ITAT did not find any reason to sustain the above addition because of the reason that no expenditure was found to have been incurred by the assessee outside the books of accounts. In view of this, ITAT directed the AO to delete the addition of RS 50,000 because of low withdrawal.

Therefore, in conclusion, merely because an assessee has made payment for purchase of car from his personal account does not mean that it is not the business asset of the assessee. Depreciation will be available if the said asset is used for business purposes.

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September, 5
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Is Civil and Interior Works expense eligible for Depreciation at 10%(rate on Building) or 15% (rate on Furniture)?

Introduction

While computing one’s income, the depreciation as per Income Tax Act, 1961 is allowed while the book depreciation is disallowed. This is because the Income Tax Act prescribes its own rate of depreciation.The Income Tax Act allows depreciation on the Written down Value of the assets. The depreciation is computed on ‘Block of assets’ at the prescribed rates provided in the Income Tax Rules, 1962.

As per section 32 of Income Tax Act, 1961, an assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:

Assessee must be owner of the asset – registered owner need not be necessary.
The asset must be used for the purposes of business or profession.
The asset must be used during the previous year.

The Income Tax Law prescribes varied rates of depreciation with different blocks of assets. This also leads to several issues regarding classification of assets under the specified block and their subsequent classification. Some cases where issues have been raised pertaining to classification of assets are as follows:-

In the case of S. T. Reddiar & Sons vs. Dy. CIT, assessee was engaged in printing business and had used certain hardware for execution of printing process. It was ruled that the said hardware could not be categorized as ‘computer’ and would not be eligible for higher depreciation. It is only where machine is being used essentially and predominantly for computing capability and where it is not being harnessed for other specialized industrial uses, be it mechanical, electric or electronic (or a composite thereof) activity that it could be called as a computer.
In CIT v P Glass Works it was ruled that generator is to be depreciated @ 15% not 20%.
In S T Reddia & Sons v DCIT it was ruled that hardware like danippon screen, electronic plate processor & K rite 510 involved in execution of printing Processing by assessee does not qualify to be categorized as computers and thus not eligible for a higher rate of depreciation.
In the case of Asst CIT v Eskay Agencies (2010) it was ruled that designs and interior decoration work carried out in its office by the assessee carrying on the business of interior designing for the purpose of demonstrating its work to the prospective clients and exhibition purpose cannot partake the character of “furniture and fittings” but is “Plant” and is entitled to depreciation applicable to plant.
In DCIT v Datacraft India Limited it was ruled that routers & switches are to be included in Block of Computer entitled to depreciation @ 60%.
In S.C. Thakur & Brosit was ruled that higher rate of depreciation is also admissible when motor lorry is used by assessee in his own business of transportation of goods on hire.

As seen above there are several issues pertaining to the rate of depreciation and its applicability.

Whether expenditure on account of civil work coupled with interior works liable for depreciation at 10% or at 15%?

Let us now refer to the case of M/s Microsoft Corporation (India) Pvt Ltd vs Dy. C.I.T where the above issue was taken under consideration.

Facts of the Case

The assessee is a wholly owned subsidiary of Microsoft Corporation, US.
The assessee creates awareness of Microsoft products in India in general through seminars, conferences, advertisement in public media, promotional campaigns.
During the course of assessment proceedings, the assessee was asked to furnish details of the additions to fixed assets made during the year.
On studying the same, the Assessing Officer (AO) found that the assessee has made addition in the nature of lease hold improvement to its fixed assets and has claimed depreciation @ 15% under the block furniture and fixtures.
The AO was of the firm belief that the assessee has claimed depreciation under a wrong block i.e. furniture and fittings @ 15%.
According to the AO in view of Explanation 1 to section 32, any capital expenditure incurred by the assessee on the construction of any structure or by way of renovation or extension or improvement to the building in respect of which the assessee holds a lease or other right of occupancy for the purposes of its business, then depreciation shall apply as if the said structure or work is a building owned by the assessee.
Accordingly the AO allowed depreciation @ 10%.

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

1.Aggrieved with the order of the AO, assessee appealed before the CIT(A)

2. The CIT(A), observed that:-

i. Majority of the expenditure of the assessee on account of Civil and interior works were paid to M/s M. S. Decorators Pvt. Ltd.

ii. Similarly interior designing payment and other main expenditure were pertaining to electric fitting and air-conditioning work.

3. From pattern of expenditure it was clear to the CIT(A) that there was improvement of civil supply in the expending/altering the building by civil work, interior design coupled with electric fitting and air-conditioning work.

4. Pattern of expenditure reveled that though they were lease hold assets, there was improvement in the building which would enhance its life.

5. Therefore, CIT(A) confirmed the decision of the AO of deducting depreciation @ 10% treating them as part of building instead of furniture and fixture.

6. In the view of the CIT(A), the expenditure showed that there was addition of civil work, such addition of civil work even on long lease was to be treated a building for providing depreciation.

Appeal to Income Tax Appellate Tribunal (ITAT)

Aggrieved with the order of the CIT(A), assessee appealed before the ITAT
Before the ITAT, assessee stated that expenditure incurred by the assessee was towards furniture and fixtures and, therefore, rate of depreciation applied for block of furniture and fixtures should be allowed.
However, the Departmental Representative strongly supported the findings of the CIT(A).
According to the ITAT, it was no dispute that, expenditure on account of civil and interior works and payment was been made only to one M/s Decorator Pvt Ltd.
Considering the nature of expenditure, it could be safely concluded that the entire expenditure was made for improvement of the building by civil work.
Such civil work definitely gave a benefit of stability.
Therefore, ITAT did not find any error in the findings of the CIT(A) and AO.

Therefore, Civil and Interior Works expense is eligible for Depreciation at 10% and not 15% which is charged on furniture.

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August, 21
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section 32 of Income Tax Act 1961

Tag: section 32 of Income Tax Act 1961

Can a Assessee claim any deduction on expenditure for acquisition of patent, trademarks, copyrights and know-how as depreciation?

Can a Assessee claim any deduction on expenditure for acquisition of patent, trademarks, copyrights and know-how as depreciation?

Facts of the Case:

Order passed by Appellate Authorities

Appeal before the High Court (HC)

Observations of the SC on whether legal expenses incurred for defending the business of the going concern and for protecting its interest could be said to be incurred for the purpose of the business and therefore, allowable under section 37(1)

Observations of the SC on whether expenditure incurred on the acquisition of trademarks, copyrights and know-how is allowed for depreciation under Section 32

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Can Depreciation be Disallowable merely because Purchase of the Car is from the Personal Account?

Can Depreciation be Disallowable merely because Purchase of the Car is from the Personal Account?

Facts of the Case

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Observations of the ITAT on the disallowance of depreciation on the car purchased by the assessee

Observations of the ITAT on addition on account of cash deposited in savings bank account of the appellant

Observations of the ITAT with respect to low household withdrawal by the assessee

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Is Civil and Interior Works expense eligible for Depreciation at 10%(rate on Building) or 15% (rate on Furniture)?

Is Civil and Interior Works expense eligible for Depreciation at 10%(rate on Building) or 15% (rate on Furniture)?

Introduction

As per section 32 of Income Tax Act, 1961, an assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:

Whether expenditure on account of civil work coupled with interior works liable for depreciation at 10% or at 15%?

Facts of the Case

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

Appeal to Income Tax Appellate Tribunal (ITAT)

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