2012 (8) TMI 713 - SC - Income Tax

Depreciation allowed on stock exchange membership cards and goodwill under Sections 32 & 36 for bad debts

Commissioner of Income Tax, Kolkata Versus Smifs Securities Ltd.

The SC upheld the allowance of depreciation under Section 32 on stock exchange membership cards, recognizing such membership rights as intangible assets ... Claim of Depreciation on Stock Exchange Membership Cards - Eligibility for depreciation u/s 32 - Depreciation on goodwill - expression 'asset' - Held that:- As decided in M/s Techno Shares & Stocks Ltd. Versus CIT IV [2010 (9) TMI 6 - SUPREME COURT] by virtue of Explanation 3 to Section 32(1)(ii) the commercial or business right which is similar to a 'licence' or 'franchise' is declared to be an intangible asset, therefore, the right of membership, which includes right of nomination, is a 'licence' or 'akin to a licence' which is one of the items which falls in Section 32(1)(ii) of and the Tribunal was right in holding that depreciation was allowable on the cost of the membership card - in favour of assessee. Claim of Depreciation on goodwill - Scheme of Amalgamation - Held that:- Explanation 3 states that the expression `asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words `any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature' - in favour of assessee. Cancellation of disallowance of bad debt - Held that:- Bad debt claimed by the assessee was incurred in the normal course of business and, therefore, the assessee was entitled to deduction u/s 36(1)(vii)- the manner in which the assessee maintains its accounts is not conclusive for deciding the nature of expenditure - in favour of assessee. Issues:1. Whether Stock Exchange Membership Cards are assets eligible for depreciation under Section 32 of the Income Tax Act, 1961Rs.2. Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on 'goodwill' is allowable under the said SectionRs.3. Cancellation of disallowance of an amount of Rs.83,02,976/- as a bad debt.Analysis:Issue 1:The first question pertains to whether Stock Exchange Membership Cards qualify as depreciable assets under Section 32 of the Income Tax Act, 1961. The court relied on a previous decision in the case of Techno Shares and Stocks Limited vs. Commissioner of Income Tax, where it was held in favor of the assessee. The Additional Solicitor General conceded that the issue was covered by the said decision, thereby supporting the assessee's position.Issue 2:The second question revolves around whether goodwill constitutes an asset under Section 32 of the Income Tax Act, 1961, and if depreciation on goodwill is permissible. The court examined the explanation provided by the assessee regarding the origin of goodwill arising from an amalgamation process. The Assessing Officer initially disallowed depreciation on goodwill, contending that it did not fall under the definition of assets in Explanation 3 to Section 32(1) of the Act. However, the court interpreted Explanation 3 to include goodwill as an intangible asset falling under 'any other business or commercial rights of similar nature.' The court upheld the findings of the lower authorities that the excess consideration paid for goodwill during amalgamation should be considered as a depreciable asset, leading to a ruling in favor of the assessee.Issue 3:The final issue concerns the cancellation of disallowance of a bad debt amount. The Revenue argued that the amount was incurred on capital account based on the Tax Audit Report, thus disallowing the deduction for bad debt. However, both the CIT(A) and the ITAT concluded that the bad debt was incurred in the normal course of business, making the assessee eligible for deduction under Section 36(1)(vii) of the Act. The court emphasized that the assessee's accounting method does not conclusively determine the nature of expenditure. The court upheld the concurrent findings of the lower authorities, ruling in favor of the assessee and dismissing the civil appeal filed by the Department.In conclusion, the Supreme Court's judgment addressed the issues of depreciable assets, goodwill as an intangible asset, and deduction for bad debts under the Income Tax Act, 1961, ultimately ruling in favor of the assessee in all three matters.