2016 (4) TMI 1193 - AT - Income Tax

ITAT Mumbai allows depreciation on brands under Income Tax Act, rejects disallowance of contingent liabilities

M/s. Creative Eye Limited Versus ACIT – 11 (1), Mumbai

M/s. Creative Eye Limited Versus ACIT – 11 (1), Mumbai - TMI Issues:1. Disallowance of depreciation on brands under section 32(1)(ii) of the Income Tax Act.2. Disallowance and consequential addition of an amount in respect of contingent liabilities.Analysis:Issue 1: Disallowance of depreciation on brands under section 32(1)(ii) of the Income Tax ActThe appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of depreciation on brands for assessment year 2005-06. The lower authorities disallowed the claim of depreciation on the ground that brand is not an intangible asset. However, the assessee argued citing the decision of the Hon'ble Bombay High Court in various cases that brand is indeed an intellectual property right and thus eligible for depreciation under section 32(1)(ii). The assessee pointed out that in previous assessment years, depreciation on the brand name had been consistently allowed. The Tribunal, considering the legal precedents and consistent treatment in earlier years, ruled in favor of the assessee, allowing the claim of depreciation on brands.Issue 2: Disallowance and consequential addition of an amount in respect of contingent liabilitiesThe second ground of appeal raised by the assessee pertained to the disallowance and consequential addition of a specific amount in relation to contingent liabilities. The Assessing Officer noted that these liabilities were neither debited nor credited in the profit and loss account. The assessee demonstrated that such liabilities were never claimed as part of expenditure in the balance sheet or return of income. Therefore, the assessee argued that since the liabilities were not claimed as expenditure, there was no basis for their disallowance. The Tribunal agreed with the assessee, stating that the additions made by the Assessing Officer were unwarranted. Consequently, this issue was also decided in favor of the assessee.In conclusion, the Appellate Tribunal, ITAT Mumbai, allowed the appeal of the assessee, ruling in favor of the assessee on both grounds of disallowance of depreciation on brands and contingent liabilities. The judgment emphasized the eligibility of brand names for depreciation under the Income Tax Act and the importance of consistent treatment of liabilities in financial statements for tax purposes.