Trademark acquisition treated as bona fide; necessity not for revenue authority to question; depreciation on trademark allowed

ITAT held the trademark purchase was genuine and the Assessing Officer could not question the necessity of the expenditure; depreciation on the acquired trademark, being an intangible asset, is allowable at prescribed rates. The tribunal set aside the lower authorities' orders disallowing depreciation and allowed the assessee's grounds of appeal.

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Issues Involved:
1. Re-opening of assessment
2. Disallowance of depreciation on trademark

Issue-wise Detailed Analysis:

1. Re-opening of assessment:

The assessee contended that the re-opening of the assessment was not valid in law as it was based on a change of opinion on the same set of facts already in existence. The original assessment for the AY 2007-08 was completed under section 143(3) of the Income Tax Act, 1961. During the assessment proceedings for AY 2010-11, the Assessing Officer (AO) found that the claim of depreciation on the intangible asset was incorrect and initiated re-assessment proceedings by issuing a notice under section 148. The assessee filed a reply and sought reasons for the re-opening, which were provided by the AO. The AO completed the assessment by disallowing the depreciation on the trademark acquired from M/s. Univercell Telecommunications India Pvt. Ltd. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the validity of the re-assessment proceedings. However, the assessee did not press this ground during the appeal before the Tribunal, and thus, it was dismissed as not pressed.

2. Disallowance of depreciation on trademark:

The primary issue was whether the transaction of purchasing the trademark "Univercell" for Rs. 3,48,00,000 from Shri. D. Satish Babu was genuine. The AO doubted the genuineness of the transaction for the following reasons:
- The agreement dated 01.02.2007 was on post-dated stamp paper.
- The transaction was perceived as a device to evade taxes.
- There was no necessity to buy the trademark and allow M/s. Univercell Telecommunications India Pvt. Ltd. to use it for a nominal consideration of 0.01% of the turnover.

The Tribunal noted that there is no legal requirement for an agreement to purchase a trademark to be on stamp paper. The agreement was in writing to avoid misunderstandings, and the post-dated stamp paper was immaterial. The AO did not dispute the eligibility of the trademark for depreciation or the cost of acquisition but doubted the transaction's genuineness. The Tribunal observed that even after disallowing the depreciation, the assessment resulted in losses, indicating no motive for tax evasion. It is a settled law that the AO cannot question the necessity of incurring expenditure or how the assessee conducts its business. The Tribunal referenced the Supreme Court and Delhi High Court judgments, which held that the AO cannot dictate the business decisions of the assessee or question the necessity of expenses incurred for business purposes.

The Tribunal concluded that the reasons assigned by the AO for disallowing the depreciation could not stand the test of law. Intangible assets like trademarks qualify for depreciation at prescribed rates. Therefore, the Tribunal set aside the orders of the lower authorities and allowed the grounds of appeal filed by the assessee regarding the disallowance of depreciation on the trademark.

Judgment:

The appeals filed by the assessee for the assessment years 2007-08, 2008-09, and 2009-10 were partly allowed. The Tribunal allowed the appeals on the same lines as indicated in the appeal for AY 2007-08, thereby granting relief to the assessee concerning the disallowance of depreciation on the trademark. The order was pronounced on 16th May 2019 at Chennai.

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