2021 (4) TMI 1201 - AT - Income Tax

Tribunal allows depreciation on intangible assets, overturns Assessing Officer decision

The Tribunal allowed depreciation on Non compete fees, Distribution network rights, Customer list, and Goodwill, overturning the disallowance made by the ... Depreciation on intangible assets - depreciation under section 32(1)(ii) of the Income Tax Act - non-compete fees - goodwill - distribution network rights - customer list - precedent of Smifs Securities Ltd. - depreciation on goodwill - follow-on application of Tribunal precedentDepreciation on intangible assets - non-compete fees - distribution network rights - customer list - depreciation under section 32(1)(ii) of the Income Tax Act - follow-on application of Tribunal precedent - Entitlement to depreciation in assessment year 2014-15 on opening written down value of intangible assets classified as non-compete fees, distribution network rights and customer list. - HELD THAT: - The assessee acquired an electroplating business and allocated part of the consideration to various intangible assets. Identical disallowances for the two preceding assessment years had been adjudicated in favour of the assessee by the Tribunal (order dated 17.02.2020 in ITA Nos.974 & 975/PUN/2017) allowing depreciation on non-compete fees, distribution network rights and customer list. The authorities below followed their earlier contrary orders for the instant year. In absence of any distinguishing facts, the Tribunal, applying the principle of follow-on precedent, held that the assessee is entitled to depreciation under section 32(1)(ii) on the opening written down value of those intangible assets and allowed depreciation accordingly. [Paras 4]Depreciation on opening written down value of non-compete fees, distribution network rights and customer list is allowed.Goodwill - precedent of Smifs Securities Ltd. - depreciation on goodwill - depreciation under section 32(1)(ii) of the Income Tax Act - Entitlement to depreciation on goodwill for assessment year 2014-15. - HELD THAT: - Although the Assessing Officer had inadvertently included depreciation on goodwill in the disallowance, he had in principle accepted that depreciation on goodwill is allowable. The Tribunal relied on the Supreme Court authority in Smifs Securities Ltd. (which recognises allowance of depreciation on goodwill) and, following that precedent, directed that depreciation on goodwill be allowed for the year under consideration. [Paras 5]Depreciation on goodwill is allowed.Addition to intangible asset during the year - nature and quantum of post-acquisition payment - remand for verification - Treatability of the Rs. 1 crore addition to non-compete fees and entitlement to depreciation thereon. - HELD THAT: - The assessee claimed depreciation on an additional Rs. 1 crore attributed to non-compete fees arising from a post-acquisition payment said to be payable under a formula in the acquisition agreement. No computation or documentary demonstration of the formulaic calculation was placed before the Tribunal. For want of material establishing the nature and computation of that payment, the Tribunal set aside the matter and remitted it to the Assessing Officer to examine the true nature, quantum and admissibility of depreciation on the additional amount, permitting the assessee a reasonable opportunity of being heard. If the AO finds the addition consistent with the agreement and law, depreciation should be granted; otherwise the AO may decide as per law. [Paras 6]Issue of depreciation on the additional Rs. 1 crore is remitted to the Assessing Officer for verification and fresh adjudication.Final Conclusion: Appeal partly allowed: depreciation on opening WDV of non-compete fees, distribution network rights, customer list and on goodwill is allowed; claim of depreciation on the additional Rs. 1 crore is remitted to the Assessing Officer for examination of its nature and computation. Issues:Confirmation of disallowance of depreciation on Intangible assets.Analysis:The appeal was against the order passed by the ld. CIT(Appeal), Pune-1 related to the assessment year 2014-15. The only issue raised was the confirmation of disallowance of depreciation amounting to Rs. 2,01,68,047/- on Intangible assets. The assessee acquired electroplating business of Chemetall Rai India Ltd. during the previous year relevant to the assessment year 2012-13. The Assessing Officer disallowed depreciation on Non compete fees, Distribution net work rights, and Customer list, but allowed depreciation on Goodwill. The ld. CIT(Appeals) upheld the view of the Assessing Officer. The Tribunal, after hearing the contentions, held that the assessee was entitled to depreciation on Non compete fees, Distribution net work rights, Customer list, and Goodwill based on the precedent set in earlier years.The Assessing Officer inadvertently made a disallowance of depreciation on Goodwill, even though in principle, the assessee was entitled to it. The Tribunal directed to allow depreciation on Goodwill as well, following the precedent set by the Hon’ble Supreme Court. The impugned order was overturned pro tanto, resulting in the grant of depreciation on the opening written down value of the intangible assets. The assessee had made an additional payment of Rs. 1 crore during the year on Non compete fees, claiming depreciation on it. The matter was remitted to the Assessing Officer to examine the true nature of this additional amount. If found to be in accordance with the terms of the agreement, depreciation should be granted; otherwise, the AO was free to decide as per law.In conclusion, the appeal was partly allowed, and the order was pronounced on 29th April 2021.