Depreciation could be claimed @ of 25% on intangible assets acquired, ITAT

Facts in Brief:

1.  The assessee was engaged in the business of trading in two wheeler brake systems and components. 

2.  The plea of the assessee was that as per section 2(11), the block of assets comprised of tangible assets being buildings, machinery, plant or furniture and the intangible assets comprised of know-how, patents, copyrights, trademarks, licences, etc. Under the Income-tax Act, depreciation on intangible assets acquired were entitled to depreciation at the rate of 25 per cent.

3.  The Assessing Officer, Since section 32 granted depreciation in respect of specified assets, the intangible assets in possession of the assessee did not qualify for the basic characteristics of depreciable assets that happened due to wear and tear and efflux of time.

4.  The DRP upheld the proposal made by the Assessing Officer and consequently, the Assessing Officer in the order passed under section 143(3) read with section 144C(13), disallowed depreciation on the intangible assets.

   On appeal, ITAT held as under:

5.  There is no merit in the plea of the Assessing Officer that the said assets were not depreciable assets as the same were not subject to wear and tear due to diminish in value with use and efflux of time. In the case of intangible asset being commercial/business rights diminution in value or physical wear and tear is not an essential condition for admissibility for depreciation under section 32, if the assets used as a business tool for earning the income. There is no merit in the plea of Assessing Officer in denying the claim of depreciation under section 32(1)(ii). 

6.  Even otherwise, if the same are treated as goodwill of the business acquired by the assessee the alternate plea of the assessee is to be allowed vis-a-vis the claim of depreciation on goodwill. Further, there is no merit in the observations of Assessing Officer that the seller did not possess any intangible assets as the same were not reflected in its balance sheet. The assets acquired by assessee were self-generated assets of seller and hence no value reflected in its balance sheet. 

7.  There is no merit in the observations of Assessing Officer in this regard and the same is dismissed. The next observation of Assessing Officer that no separate costs had been attributed to individual assets acquired by the assessee have no relevance and the same is dismissed. Accordingly, the Assessing Officer is directed to allow depreciation on the written down value (WDV) of intangible assets acquired in the preceding year and brought forward in the year under consideration. 

8.  Thus, the Assessing Officer is directed to allow depreciation on intangible assets. The grounds of appeal raised by the assessee are thus, allowed.

  RELEVANT PARAS OF JUDGMENT ARE AS UNDER:

9.  Depreciation under section 32 is allowable in respect of assets which are owned wholly or partly by the assessee and are used for the purposes of business or profession. The Finance (No.2) Act, 1998 with effect from 1-4-1999 had recognized the depreciation on intangible assets in addition to the depreciation being allowed on tangible assets. 

10.  The tangible assets constitute of building, machinery, plant or furniture. The intangible assets comprised know-how, patents, copyrights, trademarks, licenses, franchise or any other business or commercial rights of similar nature. The basis for allowance of depreciation on both tangible and intangible assets is the ownership of such assets by the assessee and its usage for the purpose of business or profession. 

11.  Coming to the agreement entered into between the assessee and BCSIL, the assessee had acquired the entire business along with industrial and technical know-how in relation to the business of two wheeler braking system being carried out in India. Where the assessee acquired the customer base, the list of material suppliers, process know-how, then the said acquisitions were the licenses for assessee to carry on the business of two wheeler braking system in India on its acquisition from BCSIL. The said assets are the intangible assets acquired by the assessee and are eligible for deduction under section 32(1)(ii). 

12.  Similarly, the assessee had acquired technical manpower, wherein the entire team of Engineers, Supervisors and skilled operators were offered to the assessee and the said officers/technicians brought in their knowledge and experience for carrying on the business by the assessee. 

13.  The drawings and designs with respect to local adaptation in the products manufactured for Indian application, i.e., technology involved in operating the business was also handed over to the assessee and such acquisition is clearly for strengthening the carrying on the business by the assessee and is comparable to a license to carry on the business and thus, is an intangible asset acquired by the assessee.