TaxTMI 
TaxTMI 
2015 (10) TMI 1283
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....ection 35A and 35AB of the Act? iii) Whether the Tribunal had erred in directing the Assessing Officer to capitalize the value of trademarks, copyright and technical know-how by treating the same as plant and machinery and grant depreciation therein? 3. In its conclusion, the High Court answered the first two questions in the negative and the third question in the affirmative in favour of the Revenue and against the Assessee. While doing so, the High Court set aside the findings of the Income-Tax Appellate Tribunal (for short 'the Tribunal") and restored the order of the Assessing Officer. The relevant assessment year is 1995-96. 4. Broadly, the facts of the case indicate that in 1939 late Sri S. Raghuram Prabhu started the business of manufacturing beedis. He was later joined in the business by Sri Madhav Shenoy as a partner and thus M/s. Mangalore Ganesh Beedi Works (for short 'MGBW') came into existence with effect from 28th February, 1940. 5. The partnership firm was reconstituted from time to time and its last reconstitution and partnership deed contained Clause 16 relating to the manner in which the affairs of the partnership firm were to be wound up after it....
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....eferred to as 'AOP-3') emerged as the highest bidders and their bid of Rs. 92 crores for the assets of MGBW was accepted by the Official Liquidator on or about 17th November, 1994. With effect from 18th November, 1994 the business of the firm passed on into the hands of AOP-3 but the tangible assets were actually handed over by the Official Liquidator to AOP-3 on or about 7th January, 1995. 10. MGBW (hereinafter referred to as the 'Assessee') filed its return for the period 18th November, 1994 to 31st March, 1995 and subsequently filed a revised return. Broadly, the Assessee claimed a deduction of Rs. 12,24,700/- as a revenue expenditure permissible under Section 37 of the Income-Tax Act, 1961 (hereinafter referred to as 'the 'Act') towards legal expenses incurred. The Assessee also claimed depreciation under Section 35A and 35AB of the Act towards acquisition of Intellectual Property Rights such as rights over the trademark, copyright and technical know-how. In the alternative, the Assessee claimed depreciation on capitalizing the value of the Intellectual Property Rights by treating them as plant. 11. The Assessing Officer passed an order on 30th Mar....
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....Jain and Company Limited v. Commissioner of Income Tax [1971] 81 ITR 754 (SC) it was held that the expenses incurred by the Assessee were honest and reasonable and were incurred for the purposes of protecting the business of the firm as a going concern. In Dalmia Jain, this Court relied upon Shree Meenakshi Mills v. CIT [1967] 63 ITR 207 (SC) and held: "[D] eductibility of expenditure incurred in prosecuting a civil proceeding depends upon the nature and purpose of the legal proceeding in relation to the assessee's business and the same cannot be affected by the final outcome of that proceeding. However wrong-headed, ill advised, unduly optimistic or overconfident in his conviction the assessee might appear in the light of the ultimate decision; expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in computing the taxable income merely because the proceeding had failed, if otherwise the expenditure was laid out for the purpose of the business wholly and exclusively, that is, reasonably and honestly incurred to promote the interest of the business. Persistence of the assessee in launching the proceeding and carrying it from Cou....
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.... regard. Therefore, we set aside the conclusion arrived at by the High Court on this question and restore the view of the Tribunal and answer the question in favour of the Assessee and against the Revenue. Question Nos. 2 & 3 21. As a preface to answering these questions, we must accept and acknowledge that intellectual property rights have a value. There is a tacit acceptance of this in Bharat Beedi Works (P) Ltd. v. CIT (1993) 3 SCC 252, paragraph 13. wherein it has been observed that there is a value attached to a brand name. 22. Proceeding from this starting point, it must be noted that the fundamental basis on which these questions were decided against the Assessee and in favour of the Revenue is the finding of the High Court that what was sold by way of auction to the highest bidder was the goodwill of the partnership firm and not the trademarks, copyrights and technical know-how. Reliance was placed on the Report dated 24th January, 1989 of the Chartered Accountants Rao and Swamy, commissioned during the pendency of Company Petition in the High Court. In this Report, the total assets of MGBW were valued at Rs. 28,58,01,410.02. The total liabilities were valued at Rs. 26,5....
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....wed and the sale of Mangalore Ganesh Beedi Works as a going concern with all its assets, tangible and intangible whatsoever and wherever they are with trade name and all other trade marks copy rights and privileges owned and enjoyed by the said firm together with all liabilities of the out-going partners excluding their tax liabilities is hereby confirmed in favour of the purchasing group namely applicants in Company Application No.436/1994; subject to the final orders that may be passed in Company Application No.433/1994. The out-going group of partners presently in Management of the affairs of M/s Mangalore Ganesh Beedi Works, are hereby directed to deliver forthwith the possession of the entire business of the said dissolved partnership firm together with all trade marks, trade names, copy rights, Book of Accounts, documents relating to assets and liabilities, Bank Accounts etc., under the supervision of the Official Liquidator, who shall submit a report as to the completion of the process of delivery of possession as aforesaid to this Court, within four weeks from today. It is on this basis (and the extant accounting practice) that the Assessee made necessary entries in i....
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....5A and Section 35AB of the Act and the value of the goodwill was shown as nil and the deduction claimed did not represent the value of the know-how, copyrights and trademarks. 28. We leave open the question of the applicability of Section 35A and Section 35AB of the Act for an appropriate case. This is because learned counsel submitted that if the Assessee is given the benefit of Section 32 read with Section 43(3) of the Act (depreciation on plant) as has been done by the Tribunal, the Assessee would be quite satisfied. Unfortunately, the alternative aspect of the Assessee's case was not looked into by the High Court. 29. Therefore, now the question to be answered is whether the Assessee is entitled to any benefit under Section 32 of the Act read with Section 43(3) thereof for the expenditure incurred on the acquisition of trademarks, copyrights and know-how. 30. The definition of 'plant' in Section 43(3) of the Act is inclusive. "plant" includes ships, vehicles, books, scientific apparatus and surgical equipment used forthe purposes of the business or profession but does not include tea bushes or livestock; A similar definition occurring in Section 10(5) of the Inco....