Full Text
HIGH COURT OF DELHI
ITA 905/2010
COMMISSIONER OF INCOME TAX ..... Appellant
Through : Mr. Puneet Rai, Senior Standing Counsel for Revenue along with
Ms.Adeeba Mujahid, Junior Standing Counsel for Revenue and Mr.Nikhil
Jain, Advocate.
Through : Mr. C.S. Aggarwal, Senior Advocate with Mr.Ravi Pratap Mall, Mr. Uma Shankar and Mr.Mahir Aggarwal, Advocates.
COMMISSIONER OF INCOME TAX DELHI –IV ..... Appellant
Through : Mr. Puneet Rai, Senior Standing Counsel for Revenue along with
Ms.Adeeba Mujahid, Junior Standing Counsel for Revenue and Mr.Nikhil
Jain, Advocate.
Through : Mr. C.S. Aggarwal, Senior Advocate with Mr.Ravi Pratap Mall, Mr. Uma Shankar and Mr.Mahir Aggarwal, Advocates.
Date of Decision: 17th October, 2022
HON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA
JUDGMENT
1. Present appeals have been filed by the Appellant, Revenue, under Section 260A of the Income Tax Act, 1961 (‘the Act’) to set aside the impugned order dated 24th October, 2008, passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No. 1571/Del/2005 for the Assessment Year (‘AY’) 2001-02 and impugned order dated 23rd December, 2011, in ITA No. 1404/Del/2010 for the AY 2002-03 respectively.
2. On 23rd July, 2010, ITA No. 905/2010 was admitted and the following substantial question of law was framed: “(1) Whether the ITAT was correct in law in deleting the additions made by the Assessing Officer amounting to Rs.50 lacs on account of depreciation on goodwill and Rs. 2,73,25,000/- on depreciation of patents and trademark?”
3. On 13th March, 2013, ITA No. 130/2013 was admitted and the following substantial question of law was framed: “(1) Whether the Income Tax Appellate Tribunal was correct in law in deleting the addition made by the Assessing Officer on account of depreciation of goodwill and on depreciation of patents and trademark?”
4. The facts giving rise to the present appeals are that the Assessee was engaged in the business of manufacturing and trading of air conditioners and water coolers. On 01st May, 2000, the Respondent, Assessee, entered into a Business Purchase Agreement (the ‘agreement’) with M/s Usha International Ltd. (‘UIL’) for the purchase of marketing and business rights for a period of twenty years, including the establishment, as well as the set up for marketing the products of air conditioners and water coolers, along with the benefit of current orders for supply of the air conditioners and the employees of UIL. In consideration for the transfer of the said marketing and business rights, goodwill and on the condition of non-competition, a consideration of Rs. 2,00,00,000 was paid by the Assessee to UIL. This amount was capitalised in the books of accounts of the Assessee under the head ‘goodwill’ in the schedule of its fixed assets. The Assessee claimed depreciation of Rs. 50,00,000 as per Section 32 of the Act, at the rate of 25% as prescribed in the schedule of rates in respect of intangible assets, for the AY 2001-02 by the Assessee. Depreciation of Rs. 3,75,00,000/- was claimed on this account for AY 2002-03.
5. The Assessee also seperately purchased the manufacturing business of M/s SIEL Aircon Ltd. (‘SAL’) vide an agreement dated 08th August, 2000, which included intellectual property rights such as brand name, logo, patents and trademarks (IP rights) for a sum of Rs. 10,93,00,000/-. The Assessee for AY 2001-02 claimed depreciation of Rs. 2,73,25,000/- at the rate of 25% as prescribed in this schedule of rates in respect of intangible assets. Depreciation of Rs. 2,04,93,750/- was claimed on this account for the AY 2002-03.
6. The Assessing Officer (‘AO’) rejected the aforesaid claim for depreciation on account of purchase of business rights under the agreement dated 1st May, 2000 on the ground that ‘goodwill’ is not covered under the definition of intangible assets under the provisions of the Act. The Commissioner of Income Tax (Appeals) [‘CIT(A)’] after considering the terms of the agreement dated 01st May 2000 and the nature of exclusive business rights purchased by the Assessee held that the said rights are valuable and therefore, the consideration paid by the Assessee to UIL is capital in nature and the same is entitled to be nomenclatured as ‘goodwill’. The CIT(A) further held that the nature of these exclusive rights are akin to license and within the meaning of an ‘intangible asset’ and therefore, the Assessee is entitled to claim depreciation on the said amount in accordance with the provisions of the Act and the schedule of rates as prescribed.
7. The AO also disallowed the depreciation of Rs. 2,73,25,000/- claimed by the Assessee on account of purchase of IP rights from SAL only for the reason that the said rights had not been transferred or registered in the name of the Assessee, as recorded by the auditor in Note no. 6 of the audited accounts. The AO held that since trademarks are registered under the Trademarks Act, 1999, in the absence of such a registration, the Assessee is not entitled to claim depreciation on these IP rights.
8. The CIT(A), after perusing the terms of the agreement executed between the Assessee and SAL held that upon payment of consideration for the IP rights, the Assessee had become legally entitled to use the trademarks, brand name and the logos for marketing its products. The CIT(A) has also returned a finding that the facts brought on record evidence that the Assessee had in fact after acquistion of the said rights carried on business using the said brand name, logos and trademark. The CIT(A) relying upon the judgment of the Supreme Court in the case of Mysore Minerals vs. Commissioner of Income Tax, [1999] 239 ITR 775 and Dalmia Cement (Bharat) Ltd. vs. Commissioner of Income Tax, Delhi, [2001] 247 ITR 267 concluded that the Assessee had become the owner of the IP rights by virtue of the said agreement dated 8th August, 2000 and the absence of the registration of the trademarks and other IP rights in the name of the Assessee would not affect its rights to claim depreciation. The CIT(A) directed the AO to allow the Assessee to claim depreciation at the rate of 25%.
9. In the appeal filed by Revenue against the aforesaid findings of the CIT(A), the ITAT after perusing the terms of the agreement dated 1st May, 2000, modified the order of the CIT(A) and held that the Assessee is entitled to claim depreciation on account of the aforesaid purchase of exclusive business rights from UIL to the extent of Rs. 1,73,00,000/- and it disallowed the claim of depreciation on goodwill with respect to the amount of Rs.27,00,000/-. The relevant finding of the ITAT with respect to the agrrement with UIL reads as under:-
10. Similarly, the ITAT also concurred with the finding of the CIT(A) and held that with respect to the agreement dated 8th August, 2000 with SAL, the Assessee had acquired ownership of the IP rights on payment of valuable consideration and it was therefore, an intangible asset as per Section 32(1)(ii) of the Act on which the Assessee was entitled to claim depreciation. The relevant finding of the ITAT reads as under:-
11. Learned Senior Counsel for the Respondent has relied upon the judgments of Apex Court in Mysore Minerals Ltd. (supra) and Dalmia Cements (supra), to contend that registration is not a condition precedent, in order to claim depreciation under Section 32 of the Act. The ITAT and CIT(A) also take note of the said judgments. The ratio in Mysore Minerals (supra) reads as follows:-
reliance on the ratio in Mysore Minerals (supra) which was subsequently followed in Dalmia Cements (supra).
12. In the present appeals, during the course of arguments, the learned counsel for the Appellant, Revenue, has only contended that the payment of the consideration by the Assessee to SAL is not recorded in the agreement dated 08th August, 2000. In reply, the learned Senior Counsel for the Respondent, Assessee, has drawn our attention to the order of the CIT(A) which categorically records at paragraph No.6 that SAL was a sick company registered with BIFR and with the approval of BIFR, the Assessee entered into an agreement with SAL for the purchase of IP rights for valuable consideration. He states that the consideration of Rs. 10.93 crores was paid by the Assessee to SAL for the purchase of the intellectual property rights under supervision of BIFR. He states that there is no dispute raised on this issue before the appellate authorities with respect to the payment of consideration by the Assessee to SAL.
13. The learned Senior Counsel has further drawn our attention to the fact that in the subsequent AYs 2003-04 and 2004-05, the claim of depreciation for goodwill on exclusive rights acquired from UIL and IP acquired from SAL has been similarly upheld by the ITAT and the said orders have attained finality, as no appeal has been filed by the Department against the said orders. He states that on this count as well the present appeals are not maintainable on the principles of consistency.
14. In these appeals as well the learned Senior Standing Counsel of the Revenue has not disputed the findings of the CIT(A) and the ITAT with respect to the acquisition of exclusive business rights by the Assessee from UIL and transfer of IP rights from SAL. The Revenue does not dispute that the said business is being carried out by the Assesee and the trademarks and logos are being used by the Assessee. The findings of the appellate authorities that the aforesaid rights constitutes IPR is not disputed by the Revenue and the only contention raised is as regards non-registration of the trademarks in the name of the Assessee, however, the said issue is no longer res integra as in light of the judgments relied upon by the appellate authorities. The Revenue has not brought to our attention any provision of law, which disentitles the Asessee from asserting ownership in a trademark in the absence of registration of the assignment under the Trademark Act,
1999.
15. We are of the considered view that there is no infirmity in the finding returned by the appellate authorities that the business rights acquired by the Assessee under its agreement with UIL for valuable consideration constitutes an intangible asset within the meaning of Section 32(1)(ii) of the Act. The learned counsel for the Revenue has not disputed the exclusive nature of rights, payment of consideration and the same being of an enduring nature, since it span for 20 years. In these facts, the capitalisation of the said business rights as an intangible asset has been correctly upheld by the appellate authorities. Therefore, the Assessee was entitled to claim depreciation.
16. Similarly, with respect to the acquisition of IP rights from SAL, the learned counsel for Revenue does not dispute the nature of the rights acquired and the limited contention raised is with respect to confirmation of the payment of consideration recorded in the agreement. The said contention raised by Revenue is firstly a question of fact, which objection is not borne out from the record and secondly, learned Senior Counsel for the Assessee has stated that the said agreement was executed under the aegis of BIFR, since SAL was a sick company and there was no doubt raised by Revenue with respect to the payment of consideration. The ownership of the IP rights of the Assessee stands proved on record, its use by the Assessee is also not disputed and therefore the appellate authorities have rightly held that the Assessee is entitled to claim deprecation under Section 32(1)(ii) of the Act on the said IP rights.
17. The facts as well as the law were properly and correctly assessed by the CIT(A) and the ITAT. We, therefore, answer the question of law framed in these appeals against the Revenue and in favour of the Assessee. We see no merits in the appeals and accordingly, the present appeals are dismissed.
MANMEET PRITAM SINGH ARORA, J MANMOHAN, J OCTOBER 17, 2022/msh/kv/j