Appeal success: Depreciation granted on trademark acquisition. Unregistered trademarks hold value. Beneficial ownership transferred.

The appellate tribunal allowed the appeal, overturning the CIT(A)'s decision to confirm the disallowance of depreciation on the acquisition of a trademark. The tribunal held that even an unregistered trademark holds value and rights, and the beneficial ownership of the trademark had been transferred to the assessee. It was found that the trademark was integral to the business transferred as a going concern. Therefore, the assessee was deemed eligible for depreciation on the trademark, and the AO was directed to grant the depreciation claim.

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Issues Involved:
1. Whether the CIT(A) was justified in confirming the disallowance of depreciation on the acquisition of a trademark during the year.

Issue-Wise Detailed Analysis:

1. Confirmation of Disallowance of Depreciation on Trademark Acquisition:

The appeal concerns the order dated 27th July 2011, by the CIT(A) regarding the assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2007-08. The primary issue is the confirmation of the disallowance of depreciation of Rs. 50,00,000 on the acquisition of a trademark.

The assessee, a company incorporated on 10th August 2006, acquired the business of Alps Technologies Pvt. Ltd. through a slump sale agreement dated 31st August 2007. The business included all assets and liabilities, and one of the transferred assets was a trademark valued at Rs. 2,00,00,000. The assessee claimed depreciation of Rs. 50 lakhs on this asset. However, during scrutiny, the Assessing Officer (AO) noted that the assessee was not the registered owner of the trademark and thus ineligible for depreciation. The AO argued that without registration, the assessee could not claim exclusive use or bar others from using the trademark, as per section 28(1) of the Trade Marks Act, 1999.

The AO concluded that the assessee failed the ownership test, which is a primary condition for claiming depreciation under section 32 of the Income Tax Act. The AO disallowed the depreciation claim and initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income.

The CIT(A) upheld the AO's order, stating that the appellant did not provide evidence of using the trademark during the relevant year. The CIT(A) emphasized that mere entry in the books of account is insufficient for claiming depreciation; the asset must be owned, used for business, and used during the relevant previous year. The CIT(A) noted that the trademark was registered in the appellant's name only around March 2010, and without registration, the appellant was not entitled to use it.

The appellate tribunal noted that the authorities' assumption that an unregistered trademark cannot be considered an asset for depreciation is fallacious. The Supreme Court in Cadila Health Care Limited Vs. Cadila Pharmaceuticals Limited clarified that even unregistered trademarks hold value and rights, such as preventing others from passing off goods as those of the trademark owner. The tribunal observed that the beneficial ownership of the trademark was transferred to the assessee, who was conducting business under the same trademark. The tribunal found no merit in the CIT(A)'s objection regarding the actual use of the trademark, as the business was transferred as a going concern, and the trademark was integral to it.

The tribunal concluded that the assessee was eligible for depreciation on the trademark, directing the AO to grant the depreciation claim. The appeal was allowed, and the order was pronounced on 8th March 2016.

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