Payments to acquire government agreements and leasehold/intangible rights are capitalizable and depreciable under s.32(1)(ii), including legal, technical and management costs

HC held that payments made to obtain government agreements and leasehold/intangible rights are capitalizable and eligible for depreciation under s.32(1)(ii). The court agreed that the acquired concession/business and commercial rights are intangible assets, transferable and conferring continuing benefits, so costs (legal, technical, management fees) incurred to secure those rights may be capitalized. The tribunal's view that such expenditures qualify for depreciation was endorsed; the Revenue had not successfully challenged the finding that the assessee acquired intangible rights.

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Issues:
1. Disallowance of depreciation on expenses incurred for acquiring business and commercial rights.
2. Eligibility of leasehold rights for depreciation under Section 32 of the Act.

Issue 1: Disallowance of Depreciation on Expenses for Acquiring Business and Commercial Rights:

The appellant, Bengaluru International Airport Ltd., challenged the disallowance of depreciation amounting to Rs. 4,00,01,168/- for the Assessment year 2010-2011. The Assessing Officer disallowed the depreciation, stating that the expenses incurred in obtaining support through legal, technical, and management fees did not qualify as expenses for acquiring business or commercial rights falling under the definition of 'intangible asset'. The Commissioner of Income Tax (Appeals) upheld this view, noting a lack of evidence showing payment for acquiring the rights. However, the Income Tax Appellate Tribunal (ITAT) held that the expenditure, though revenue in nature, qualified for capitalization among fixed assets. The ITAT disallowed the depreciation claimed by the assessee, leading to the current appeal.

The appellant argued that the ITAT correctly determined that the pre-operative expenditure qualifies for capitalization, citing relevant case law. The Revenue's standing counsel contended that since the expenditure was not proven before the Assessing Officer, the claim was rightly disallowed. The High Court found that the appellant had entered into agreements with governmental bodies, incurring certain expenses. The Court agreed that if the appellant demonstrates before the Assessing Officer the actual expenditure incurred to obtain the agreements, depreciation claims could be allowed.

Issue 2: Eligibility of Leasehold Rights for Depreciation under Section 32 of the Act:

The High Court examined whether leasehold rights could be considered intangible rights eligible for depreciation under Section 32 of the Act. The appellant argued that leasehold rights, being transferable, should be eligible for depreciation. The Court concurred with this view, noting that the intangible rights accrued to the appellant were transferable, making the cost incurred for acquiring leasehold rights eligible for depreciation. The Court upheld the appellant's position, ruling in favor of allowing depreciation on leasehold rights.

In conclusion, the High Court allowed the appeal in favor of the assessee on both substantial questions of law. The first issue was subject to the assessee demonstrating the actual expenditure to the Income Tax Officer, upon which the depreciation was claimed. The second issue, regarding the eligibility of leasehold rights for depreciation, was also decided in favor of the assessee against the Revenue.

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