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2017-05-03
Depreciation, an allowance on capital assets acquired and put to use, is a non-cash deduction allowed u/s 32 of the Income Tax Act, 1961. This is one of the allowances originally provided by the Act which has evolved over time with advancements in businesses and judgments by various Courts. In this insight, Taxsutra Database editorial team has made an effort to bring to our readers some recent rulings on the most litigated and peculiar issues surrounding depreciation. Some of the issues covered in this insight are depreciation on intangibles, additional depreciation u/s 32(1)(iia), sale and lease back transaction and depreciation disallowance u/s 40(a)(ia).
A. Depreciation on Intangible Assets
1. [TS-6605-ITAT-2016(HYDERABAD)-O]
Client creation cost : Client creation cost is an intangible asset and is eligible for depreciation at 25% - ITAT accepts assessee’s appeal; Follows coordinate bench ruling in the case of SKS Micro Finance Ltd [TS-6900-ITAT-2013(Hyderabad)-O] wherein it was held that customer base acquisition is a source of assured economic benefit to the assessee and are tools of the trade which facilitates the assessee to carry on the business smoothly and effectively; Therefore, by acquiring the customer base, the assessee has acquired “business and commercial rights of similar nature” provided under the head “intangible assets” in clause (b) of Explanation- 3 to sub-section (1) of section 32.
2. [TS-6863-ITAT-2016(CHENNAI)-O]
Brand-acquisition cost : ITAT allows depreciation u/s 32 on brand-acquisition despite subsequent amalgamation with original owner - Chennai ITAT allows depreciation claim u/s 32 for AY 2011-12 on brand ‘Ishtaa’ acquired by assessee (engaged in manufacturing and sale of gold and diamond jewellery) from its associate company in 2009 despite subsequent amalgamation of associate company with assessee w.e.f. December 31, 2009; Revenue had argued that since the associate company itself was amalgamated subsequently resulting in transfer of all assets (including intangibles), there was no requirement for assessee to purchase the brand separately, thus it was argued that claim of depreciation was a colourable device.
3. [TS-7011-ITAT-2016(BANGALORE)-O]
Non-compete fees : ITAT allows depreciation on non-compete fees, Follows jurisdictional HC's Ingersoll decision over Sharp ruling - Bangalore ITAT allows depreciation on non-compete fees paid by assessee-company during AYs 2010-11 & 2011-12, relying on jurisdictional HC ruling in Ingersoll Rand wherein it was held that right acquired on payment of non compete fees is a commercial/business right, falling in the category of "Intangible Assets" on which depreciation is allowable u/s 32(1)(iii); ITAT notes that the Ingersoll ruling was based on the premise that the right acquired by way of non-compete can be transferred to any other person, while Delhi HC ruling in Sharp Business System relied by Revenue had denied depreciation on non-compete fees on the basis that right acquired by way of non-compete cannot be transferred.
4. [TS-5316-ITAT-2016(AHMEDABAD)-O]
Unregistered trademark : ITAT allows Sec 32 depreciation on ‘unregistered’ trademark, claim not contingent on registration - Ahmedabad ITAT grants depreciation u/s 32 on ‘trademark’ acquired by assessee-company under a slump-sale agreement for AY 2007-08; Rejects Revenue’s stand that since assessee was not the registered owner of trademark under the Trade Marks Act, 1999, it was not entitled to depreciation; ITAT notes that the person in whose name trademark was registered had already assigned its rights to assessee, further trademark’s acquisition was pursuant to entire business been transferred to assessee as a 'going concern' and assessee was carrying on business under the same trademark.
B. Additional Depreciation u/s. 32(1)(iia)
5. [TS-5370-ITAT-2017(PUNE)-O]
Additional depreciation on windmill : ITAT Third Member allows 'additional depreciation' on windmill; Sec 32(1)(iia) amendment of 2012 applicable retrospectively - Pune ITAT third member rules that process of generation of electricity through windmill amounts to ‘manufacture or production of article or thing’ as contemplated u/s 32(1)(iia), allows assessee’s ‘additional depreciation ’ claim on windmills for AYs 2011-12 & 2012-13; Accepts assessee’s stand that conversion of wind energy into electric energy by windmill amounts to ‘manufacture ’ as contemplated u/s 32 (1)(iia), relies on Madras HC ruling in Atlas Export Enterprises
6.[TS-5450-ITAT-2016(MUMBAI)-O]
Additional depreciation on assets acquired before March 31, 2005 : Additional Depreciation u/s. 32(1)(iia) claim allowable even though Plant and Machinery (P&M) acquired before March 31, 2005 - ITAT upholds CIT(A)’s order and rules in assessee’s favour ; It is stated in Memorandum to the Finance Bill 2005 that provisions are amended in order to encourage new investment, the initial depreciation on new machinery and plant was proposed to be increased to 20 per cent from the existing level of 15 percent and consequently the initial depreciation will be available to all new plant and machineries.
Additional depreciation not claimed fully in year of acquisition : ITAT sets aside orders of the lower authorities, allows part of additional depreciation u/s. 32(1)(iia), which was not claimed in the earlier year (i.e., year of installation of new machinery), to be claimed in the current year; Assessee had claimed only 50% of additional depreciation u/s. 32(1)(iia) in AY 2009-10 as the machinery was put to use for less than 180 days and claimed the balance in AY 2010-11.
C. Depreciation on Machinery installed on the last of the Previous Year
8. [TS-6512-ITAT-2016(MUMBAI)-O]
Machinery installed on last day of PY : ITAT denies depreciation claim u/s.32 on machinery installed on last day of FY relevant to AY 2010-11 , since not being actually used; Rejects assessee’s submission that the trial run/production would also be construed as having put the machinery to use for the purpose of business; Holds that word ‘used’ occurring in Depreciation to be considered as ‘ready to use’; Upholds CIT(A)’s order of rejecting the trial production claim since there was nothing to show that the windmill worked or even any electricity generated by March 31,2010; Further rejects assessee’s defence of ‘passive use’ of asset by reasoning that ‘as the machinery had not been put to use as any time earlier and was put to use for assessee’s business for the first time, it could not be regarded as an asset in passive use’.
D. Sale and lease back Transaction
Sham sale and lease back transaction : SC upholds HC-order, denies depreciation claim on ‘sham’- sale and lease back transaction - SC rejects assessee's depreciation claim on machinery purchased from Andhra Pradesh State Electricity Board (APSEB) and then leased back to APSEB; HC had noted findings by lower authorities that transaction was 'sham' after taking into account that : i) documents were not registered ii) machinery was attached to earth and there was no actual handing over possession of machinery by APSEB upon sale to assessee iii) WDV / Market value of machinery not identified etc; HC had ruled that "the said finding is not liable to be interfered with in exercise of our power under Section 260A of the Act. It is not permissible for this Court to re-appreciate the evidence over and again and come to a different conclusion."
E. Depreciation Provision for Book Profits u/s. 115JA
Depreciation provision for book profits : Allows excess depreciation-provision reduction from book-profits u/s 115JA, rejects purposive interpretation - HC reverses ITAT’s order, allows reduction of excess provision (credited to P&L account) of Rs. 130 lakhs consequent to change in depreciation method while computing book profits u/s 115JA for AY 1997-98; Observes that Explanation (i) to Sec 115JA(2) specifically provides for such reduction; Appreciates Revenue’s concern that by a jugglery of the accounting methods, assessee makes itself a “zero tax” company even while making profits
F. Depreciation on expenditure on lease-hold building
11. [TS-5445-HC-2015(KERALA)-O]
Expenditure on lease-hold building : Joy Alukkas' ruling allowing renovation expenditure on lease-hold building requires re-consideration - Kerala HC Division Bench opines that law laid down by co-ordinate bench in Joy Alukkas on allowability of expenditure incurred on refurbishing leasehold buildings requires reconsideration; Co-ordinate bench had ruled that expenditure incurred for refurbishing building taken on lease shall be treated as revenue expenditure as no enduring benefit derived by assessee.
G.Depreciation disallowance under section 40(a)(i)
12.[TS-5384-ITAT-2017(Bangalore)-O]
Depreciation disallowance under section 40(a)(i) : Sec. 40(a)(i) cannot be invoked for disallowance of depreciation - ITAT rules in favor of assessee; Holds that any amount paid outside India or to a Non Resident without deduction of tax at source that has been capitalized in fixed assets and claimed only as depreciation, cannot be subjected to the provisions of Sec. 40(a)(i); Clarifies that the question of disallowance u/s 40(a) arises only when an expenditure is claimed by the assessee without deducting the tax at source as per the provisions of Chapter-XVIIB.
H. Vehicle registered in director name used for company propose
13. [TS-6464-ITAT-2015(Ahmedabad)-O]
Vehicle registered in director’s name : Assessee need not be the ‘registered owner’ of the vehicle under Motor Vehicles Act to be eligible for depreciation u/s. 32 – ITAT allows depreciation claim by the assessee-company on motor car registered in name of the Director; Holds that “mere non-registration of a vehicle in the name of the company under the Motor Vehicles Act, cannot disentitle it in regard to its claim of depreciation, when the facts on record are undisputed that the asses see company has, in fact, made the investment in pur chase of the vehicle and such vehicle is being used for its business”
