2015 (10) TMI 1283 - SC - Income Tax

Legal expenses under Section 37 allowed when protecting business interests not personal reasons Intellectual property rights qualify as plant under Section 32 for depreciation benefits

M/s Mangalore Ganesh Beedi Works Versus Commissioner of Income Tax, Mysore & Another

The SC reversed the HC's decision regarding legal expenses under Section 37, holding that the Tribunal's factual finding that expenses were incurred for ... Deduction under Section 37 - legal expenses - Nature of expenditure - claimed depreciation under Section 35A and 35AB of the Act towards acquisition of Intellectual Property Rights such as rights over the trademark, copyright and technical know-how - alternative, claimed depreciation on capitalizing the value of the Intellectual Property Rights by treating them as plant - Whether the expenses incurred by the Assessee were for protecting the business of the firm or were expenses incurred for personal reasons namely consequent to disputes or differences relating to the ownership of the going concern with the erstwhile partners of the Assessee - Tribunal noted that the legal expenses incurred were for defending the business of the going concern and for protecting its interests and not to be personal in nature, nor could it be said that the expenses were unreasonable or not bonafide but rejected by HC. Held that:- We are not at all impressed with the submission of learned counsel for the Revenue. There is a clear finding of fact by the Tribunal that the legal expenses incurred by the Assessee were for protecting its business and that the expenses were incurred after 18th November, 1994. There is no reason to reverse this finding of fact particularly since nothing has been shown to us to conclude that the finding of fact was perverse in any manner whatsoever. That apart, if the finding of fact arrived at by the Tribunal were to be set aside, a specific question regarding a perverse finding of fact ought to have been framed by the High Court. The Revenue did not seek the framing of any such question. See K Ravindranathan Nair Versus Commissioner of Income-Tax [2000 (11) TMI 3 - SUPREME COURT]. Accordingly, we hold that the High Court was not justified in upsetting a finding of fact arrived at by the Tribunal, particularly in the absence of a substantial question of law being framed in this regard. Therefore, we set aside the conclusion arrived at by the High Court on this question and restore the view of the Tribunal and answer the question in favour of the Assessee and against the Revenue. Eligibility of deduction on the alleged expenditure for acquisition of patent [trademarks] rights, copyrights and know-how, in terms of Section 35A and 35AB - High Court denied any benefit to the Assessee under Section 35A and Section 35AB since it was held that what was auctioned off was only goodwill and no amount was spent by AOP-3 towards acquisition of trademarks, copyrights and know-how - Held that:- As held, in our opinion rather speculatively by the High Court, that the valuation made by the Chartered Accountant of AOP-3 that is M.R. Ramachandra Variar that the goodwill was split into know-how, copyrights and trademarks only for the purposes of claiming a deduction under Section 35A and Section 35AB of the Act and the value of the goodwill was shown as nil and the deduction claimed did not represent the value of the know-how, copyrights and trademarks. We leave open the question of the applicability of Section 35A and Section 35AB of the Act for an appropriate case. This is because learned counsel submitted that if the Assessee is given the benefit of Section 32 read with Section 43(3) of the Act (depreciation on plant) as has been done by the Tribunal, the Assessee would be quite satisfied. Unfortunately, the alternative aspect of the Assessee's case was not looked into by the High Court. Would intellectual property such as trademarks, copyrights and know-how come within the definition of 'plant' in the 'sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it'? - Held that:- In our opinion, this must be answered in the affirmative for the reason that there can be no doubt that for the purposes of a large business, control over intellectual property rights such as brand name, trademark etc. are absolutely necessary. Moreover, the acquisition of such rights and know-how is acquisition of a capital nature, more particularly in the case of the Assessee. Therefore, it cannot be doubted that so far as the Assessee is concerned, the trademarks, copyrights and know-how acquired by it would come within the definition of 'plant' being commercially necessary and essential as understood by those dealing with direct taxes. Section 32 of the Act as it stood at the relevant time ‘In respect of depreciation of buildings, machinery, plant or furniture owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed –’ did not make any distinction between tangible and intangible assets for the purposes of depreciation. The distinction came in by way of an amendment after the assessment year that we are concerned with. That being the position, the Assessee is entitled to the benefit of depreciation on plant (that is on trademarks, copyrights and know-how) in terms of Section 32 of the Act as it was at the relevant time. We are, therefore, in agreement with the view taken by the Tribunal in this regard that the Assessee would be entitled to the benefit of Section 32 of the Act read with Section 43(3) thereof.- Decided in favour of assessee. Issues Involved:1. Deduction of Rs. 12,24,700/- as revenue expenditure under Section 37 of the Income-Tax Act, 1961.2. Entitlement to claim deduction for acquisition of patent rights, copyrights, and know-how under Sections 35A and 35AB of the Income-Tax Act.3. Treatment of trademarks, copyrights, and technical know-how as plant and machinery for depreciation purposes.Issue-wise Analysis:Issue 1: Deduction of Rs. 12,24,700/- as revenue expenditure under Section 37 of the Income-Tax Act, 1961The Tribunal examined whether the expenses incurred by the Assessee were for protecting the business of the firm or for personal reasons. It concluded that the legal expenses were for defending the business of the going concern and protecting its interests, not personal in nature. The expenses were incurred after the business was taken over by the Association of Persons (AOP-3) and related to ongoing legal proceedings. The High Court, however, did not accept this view, contending that the expenses were incurred before the bid acceptance date and were therefore personal. The Supreme Court found the Tribunal's findings to be factually correct and held that the High Court was not justified in upsetting these findings without framing a specific question regarding a perverse finding of fact. Therefore, the Supreme Court restored the Tribunal's view, allowing the deduction of Rs. 12,24,700/- as revenue expenditure in favor of the Assessee.Issue 2: Entitlement to claim deduction for acquisition of patent rights, copyrights, and know-how under Sections 35A and 35AB of the Income-Tax ActThe High Court denied benefits under Sections 35A and 35AB, holding that what was auctioned was goodwill, not trademarks, copyrights, and know-how. It relied on a Chartered Accountants' report that valued the firm's assets based on goodwill. The Assessee argued that the trademarks, copyrights, and know-how were separate intangible assets with significant value. The Supreme Court noted a previous Tribunal decision accepting that these intangible assets were part of the business assets, not goodwill, and that the Revenue had not challenged this. The Supreme Court left open the question of the applicability of Sections 35A and 35AB for an appropriate case, as the Assessee was satisfied with the benefit under Section 32 read with Section 43(3) for depreciation on plant.Issue 3: Treatment of trademarks, copyrights, and technical know-how as plant and machinery for depreciation purposesThe Supreme Court considered whether intellectual property rights such as trademarks, copyrights, and know-how could be classified as 'plant' under Section 43(3) of the Act. It referenced the inclusive definition of 'plant' and previous judgments that gave 'plant' a wide meaning, including intellectual property necessary for business. The Court concluded that these rights are commercially necessary and essential, thus falling within the definition of 'plant.' Consequently, the Assessee was entitled to depreciation on these intangible assets under Section 32 of the Act as it stood at the relevant time. The Supreme Court agreed with the Tribunal's view, granting the Assessee the benefit of depreciation on trademarks, copyrights, and know-how, and rejected the Revenue's contention that only goodwill was auctioned. The Supreme Court emphasized that the terms of the agreement between the partners explicitly included trademarks in the auctioned assets, and the taxing authorities could not re-write these terms.Conclusion:The Supreme Court set aside the High Court's conclusions on the first and third issues, restoring the Tribunal's findings in favor of the Assessee. The second issue was left open for future consideration. The appeals were disposed of with no costs.