Subject: Officer on the claim for depreciation, the assessee in the reply had stated their position
Referred Sections:
Section 32(1) (ii) of ITA
Section 32 of the Act
section 32 (1) of the Act.
Referred Sections:
Capital Bus Services Private Ltd Vs. CIT
*IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL No. 768/2018
Date of decision: 25th July, 2018
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Mr. Ashok K. Manchanda, Sr.
Standing Counsel with Mr. Aditya,
Advocate.
versus
SINOCHEM INDIA CO. PVT. LTD. ..... Respondent
Through Nemo.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE CHANDER SHEKHAR
SANJIV KHANNA, J. (ORAL):
CM No. 29468/2018
Exemption allowed, subject to all just exceptions.
ITA No. 768/2018 & CM No. 29467/2018
There is delay of 36 days in filing of the appeal. However,
before issuing notice on the application seeking condonation of
delay, we have proceeded to examine the appeal on merits.
2. This appeal by the Revenue in the case of Sinochem India
Company Private Limited relates to Assessment Year 2010-11 and
impugns order dated 13th December, 2017 passed by the Income
Tax Appellate Tribunal (Tribunal, for short) in ITA No.
3927/Del/2014.
ITA768/2018 Page 1 of 8
3. Question of law raised relates to the claim for depreciation
on intellectual property rights acquired and purchased by the
assessee from Monsanto India Limited.
4. During the period relevant to the assessment year, the
assessee had made an addition of Rs.17,88,300/- on account of
acquisition of intellectual property rights to the existing assets in
the form of intellectual property rights acquired earlier for
Rs.34.37/- crores.
5. The assessee had claimed depreciation of Rs. 3,44,37,935/-
on the said block of assets. On being questioned by the Assessing
Officer on the claim for depreciation, the assessee in the reply had
stated their position and stand as under:-
"As per Section 32(1) (ii) of ITA 1961,
depreciation is allowed on prescribed capital
assets purchased by the assessee. Out of
various prescribed assets, intangible assets are
one category of eligible assets and the
followring intangible assets qualify for
depreciation allowed at the rate of 25%
a. Know how;
b. Patents;
c. Copyrights;
d. Trademarks;
e. License;
f. Franchise;
g. Other business rights of similar nature;
h. Other commercial rights of similar nature;
ITA768/2018 Page 2 of 8
As per the provision of Income Tax Act, claim
of depreciation generally based on twin
conditions viz,
(1) Ownership of eligible assets, and
(2) Asset is put to use by the tax payer
As we have purchases the same from Monsanto
India Limited (It was using the same for many
years) and we have the ownership of the assets
and assets are in put to use for commercial
purpose before commencement our company,
hence we fulfill both the conditions as required
under the Act and have rightly claimed
deprecation on intellectual property right.
Hence it is requested to withdraw the objection
that the traders are not allowed depreciation
against intellectual property right by your good
self"
6. Assessment order dated 18th February, 2013 made an
addition of Rs.3,44,37,935/- by disallowing depreciation on the
intellectual property rights for the reasons recorded in paragraph
3.1, which we would like to reproduce:-
"3.1 The assessee in its reply above is incorrect
to state that the asset is being used by the
assessee. During the year assessee has only
purchased finished products from M/s
Monsanto USA in bulk and has sold in India in
the convenient packagings. Thus it is evidently
clear that assessee has not used its assets
towards manufacturing activities. Under these
facts & circumstances deprecation claimed on
account affixed assets in the category on
intellectual property for Rs.3,44,37,935/- is
disallowed and added back to the total income
of the assessee."
ITA768/2018 Page 3 of 8
(Addition of Rs.3,44,37,935/-)
(emphasis supplied)
Thus, the claim for depreciation was disallowed on the
ground that the capital asset in form of intellectual property rights
was not used for manufacturing activities. We have to examine the
disallowance made for the reason stated. Cost of acquisition,
ownership and eligibility to claim depreciation was not disputed.
Depreciation as claimed was disallowed on the ground of absence
of the intellectual property rights being put to use for
manufacturing activities.
7. The Commissioner of Income Tax (Appeals) deleted the
disallowance and allowed depreciation observing that the assessee
was engaged in manufacturing job work and trading in agro-
chemical (i.e. pesticides etc). The intellectual property rights
acquired were in respect of (a) product registration (b) right to
reference and use of registration data in support of the product
registration (c) benefits of continuing business contracts (d)
business information (e) business intellectual property rights (f)
trademarks and (g) all the sellers rights against third parties ,
including rights and warranties, conditions, guarantees or
indemnities relating to such assets.
8. The assessee had purchased products from Monsanto India
Limited and had thereafter sold these products with the acquired
and purchased trademarks like Lasso, Machete and Fast Mix.
Sales were through chain of dealers and retailers. Trademarks
acquired and owned by the assessee were advertised for sale
ITA768/2018 Page 4 of 8
promotions. Total sales had increased and jumped from Rs.8.19
crores in the last year to Rs. 100.19 crores in the period relevant to
the Assessment year 2009-10. Business and market intelligence
information acquired was put to use in the sales and marketing
activities. Section 32 of the Act does not make any distinction
between trading business or manufacturing business. As long as
the intellectual property rights were used for the purpose of
business, condition of Section 32 that the asset should be used for
business would be satisfied and met. In the alternative, reference
was made to the decision of Delhi High Court in Capital Bus
Service Private Limited versus CIT, (1980)123 ITR 404 that
depreciation could be allowed even if the assets are kept ready for
actual use the moment the need arises.
9. Aggrieved, the Revenue had preferred an appeal before the
Tribunal, which has been dismissed by the impugned order. The
reasoning given by the Tribunal while dismissing the appeal reads
as under:-
"8. We have carefully considered the rival
contention as well as perused the orders of the
lower authorities. Admittedly during the year
the appellant has claimed depreciation on
business intellectual property right amounting
to Rs.5,66,14,759/- as acquired from Monsanto
India Ltd for Rs.34,55,06,220/. The company
is admittedly using this brand for the past year
also and the depreciation for the earlier
assessment year has already been allowed to
the assessee on similar facts. These facts have
not been disputed by the ld. Departmental
Representative or by the Assessing Officer.
ITA768/2018 Page 5 of 8
Further, the Ld. CIT (A) has also mentioned
that no remedial action has been taken by the
Ld. Assessing Officer for assessment year
2009-10, in which the original depreciation
was allowed by the Ld. Assessing Officer. The
Ld. CIT(A) allowed the claim of the assessee
holding that assessee is engaged in the trading
activity of such products which have definitely
taken place during the year under
consideration, as well as in the immediately
preceding previous year. Further, according to
him as there is no distinction between the
trading business or manufacturing business of
the assessee as the amounts have been used for
the purposes of the trading business the
appellant is entitled for depreciation under
section 32 (1) of the Act. He alternatively
relied upon the decision of the Honble Delhi
High Court in case of Capital Bus Services
Private Ltd Vs. CIT, wherein it is held that the
allowance of depreciation does not depend
upon the actual use of the assets but it is
sufficient if the asset in question is By the
appellant ready for actually using, the profit
making apparatus the movement a need arises.
However, he has held that appellant case is on
stronger footing since the business intellectual
property rights were in hand with the appellant
for manufacturing the products and also the
appellant has used it for the trading purposes
under the seal of its own by using the brand
name of Monsanto. In view of the above facts
we do not find any infirmity in the order of the
Ld. CIT (A) and none has been pointed out by
the Ld. departmental representative. It could
not be controverted by the revenue that the
assessee has used these brands for the purpose
of its trading business. furthermore, no
provision could be shown before us that if the
assets have been used for the purpose of the
ITA768/2018 Page 6 of 8
trading business depreciation on intellectual
property cannot be allowed. In view of this we
uphold the findings of the Ld. First appellate
Authority in deleting the depreciation
disallowance made by the Ld. Assessing
Officer on business intellectual property rights
amounting to Rs. 3,44,37,935/-. In the result,
the solitary ground raised by the revenue is
dismissed."
10. The purchase of intellectual property rights by the assesse
are not disputed. Consideration paid is also not disputed. The
nature and character of the intellectual property rights, as noticed
in the order passed by the Commissioner of Income Tax (Appeals),
are again not disputed. The intellectual property rights purchased
by the assessee included trademarks ,,Lasso, ,,Machete and ,,Fast
Mix, rights to reference and use of registration data in support of
product registration, benefits of business contracts, business
information, business intellectual property right, trademarks and
rights against third parties. It is an accepted and admitted position
that the products sold by the respondent-assessee had borne the
trademarks ,,Lasso, ,,Machete and ,,Fast Mix. Substantial
advertisement and sales promotion expenditure was incurred. Use
of intellectual property rights for sales and marketing was not
questioned and commented upon in the assessment order.
Depreciation was disallowed as the asset had not been put to use
for manufacturing activities. This cannot be a ground and reason
to hold that the assessee had not "put to use" the intellectual
property rights assets in the year in question. Mere purchase of the
ITA768/2018 Page 7 of 8
products, from third party or the fact that assessee was not engaged
in manufacturing activity, would not make any difference.
11. In view of the aforesaid position, we are not inclined to issue
notice on the application for condonation of delay. Consequently,
the said application and as a sequitur the appeal would be treated
as dismissed. No costs.
SANJIV KHANNA, J.
CHANDER SHEKHAR, J.
JULY 25, 2018
MR/VKR
ITA768/2018 Page 8 of 8
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