Trademark depreciation, section 14A and book profit computation: consistency and absence of exempt income defeated the disallowance.

Depreciation on a trademark was treated as allowable on the opening written down value in subsequent years where the claim had already been accepted in the first year on the same facts, applying the principle of consistency. The material also explains that disallowance under section 14A is not to be mechanically imported into book profit computation under section 115JB, because clause (f) of Explanation 1 operates independently. It further states that section 14A does not apply where no exempt income is earned during the relevant year, and the later statutory amendment was regarded as prospective.

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Issues: (i) Whether depreciation under section 32(1)(ii) of the Income-tax Act, 1961 was allowable on the trademark on the opening Written Down Value in the succeeding assessment years after it had been accepted in the first year of claim. (ii) Whether disallowance under section 14A of the Income-tax Act, 1961 could be added while computing book profit under section 115JB of the Income-tax Act, 1961. (iii) Whether disallowance under section 14A of the Income-tax Act, 1961 was sustainable where no exempt income was earned during the relevant previous year.

Issue (i): Whether depreciation under section 32(1)(ii) of the Income-tax Act, 1961 was allowable on the trademark on the opening Written Down Value in the succeeding assessment years after it had been accepted in the first year of claim.

Analysis: The trademark formed part of the amalgamated business assets and depreciation had already been allowed in the first year of claim after examination of the relevant facts. In the later years, the depreciation was only on the opening Written Down Value and there was no change in facts or circumstances. The Revenue was therefore not justified in taking a different view in subsequent years, and the settled principle of consistency applied.

Conclusion: The claim of depreciation on the trademark was allowable and the disallowance was not sustainable; the issue was decided in favour of the assessee.

Issue (ii): Whether disallowance under section 14A of the Income-tax Act, 1961 could be added while computing book profit under section 115JB of the Income-tax Act, 1961.

Analysis: The computation under clause (f) of Explanation 1 to section 115JB(2) is to be made independently and not by importing the disallowance mechanism under section 14A read with Rule 8D. The Tribunal followed the Special Bench view that section 14A computation cannot be mechanically transplanted into book profit computation.

Conclusion: The deletion of the disallowance while computing book profit was upheld and the issue was decided in favour of the assessee.

Issue (iii): Whether disallowance under section 14A of the Income-tax Act, 1961 was sustainable where no exempt income was earned during the relevant previous year.

Analysis: In the relevant year, no exempt income had accrued or been received. The judicial position applied was that section 14A does not operate in the absence of exempt income for the year under consideration. The subsequent statutory amendment by the Finance Act, 2022 was treated as prospective and did not govern the year in question.

Conclusion: The disallowance under section 14A was not sustainable and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's challenges failed on all contested issues, while the assessee succeeded on the depreciation claim and on the section 14A issues.

Ratio Decidendi: Where a claim of depreciation on an asset has been accepted in the first year on the same factual foundation, it should ordinarily be followed in subsequent years in the absence of changed circumstances; further, section 14A disallowance cannot be imported into section 115JB book profit computation and does not apply where no exempt income is earned in the relevant year.

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