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Wednesday, 21 October 2015 16:14

Section 32 - Depreciation on intellectual property such as trademarks, copyrights and know-how comes under 'Plant' and depreciation is allowable - Supreme Court Featured

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Whether intellectual property such as trademarks, copyrights and know-how come within the definition of ‘plant’ - Held 'Yes'. Depreciation u/s 32 is thus allowable


1. 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 came into existence with effect from 28th February, 1940

2. The partnership firm was reconstituted from time to time

3. Due to differences between the partners of MGBW, the firm was dissolved on or about 6th December, 1987

4. While entertaining the Company Petition the High Court appointed an Official Liquidator and eventually, after hearing all the concerned parties, a winding up order was passed on 14th June, 1991

5. Pursuant to the order passed by the High Court on 14th June, 1991 an auction was conducted in which three of the erstwhile partners
forming an association of persons emerged as the highest bidders and their bid of Rs.92 crores for the assets 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

6. 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

7. Assessee claimed a deduction of Rs. 12,24,700/- as a revenue expenditure permissible under Section 37 of the Income-Tax Act, 1961  towards legal expenses incurred

8. 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

9. In the alternative, the Assessee claimed depreciation on capitalizing the value of the Intellectual Property Rights by treating them as plant

10. The Assessing Officer passed an order on 30th March, 1998 rejecting the claim of the Assessee under all the three Sections mentioned

11. Feeling aggrieved, the Assessee preferred an appeal before the Commissioner of Income-Tax (Appeals) who passed an order on 15th
October, 1998. The appeal was allowed in part inasmuch as it was held that the Assessee was entitled to a deduction towards legal expenses. However, the claim of the Assessee regarding deduction or depreciation on the Intellectual Property Rights was rejected by the Commissioner of Income-Tax (Appeals)

12. As a result of the appellate order, the Revenue was aggrieved by the deduction granted to the Assessee in respect of legal expenses and so it preferred an appeal before the Tribunal. The Assessee was aggrieved by the rejection of its claim in respect of the Intellectual Property Rights and also filed an appeal before the Tribunal

13. By an order dated 19th October, 2000 the Tribunal allowed the appeal of the Assessee while rejecting the appeal of the Revenue

14. Revenue moved to the High Court and the High Court set aside the findings of the Income-Tax Appellate Tribunal and restored the order of the Assessing Officer

15. Assessee moved to the Supreme Court who reversed the order of the High Court and decided in favour of the assessee


A. For Expenses : Accordingly, we hold that the High Court was not justified in upsetting a finding of fact arrived at by the Tribunal, particularly in the absence of a substantial question of law being framed in this 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

B. For Depreciation on Intellectual Property Rights : Income Tax Act does not clothe the taxing authorities with any power or jurisdiction to re-write the terms of the agreement arrived at between the parties with each other at arm’s length and with no allegation of any collusion between them. ‘The commercial expediency of the contract is to be adjudged by the contracting parties as to its termsThe issue, looked at from any angle, would lead to the conclusion that Question No. 3 is required to be answered in the negative, in favour of the Assessee and against the Revenue. We do so accordingly.

Cases referred to

1. Dalmia Jain and Company Limited v. Commissioner of Income Tax [1971] 81 ITR 754 (SC)

2. Shree Meenakshi Mills v. CIT [1967] 63 ITR 207 (SC)

3. K. Ravindranathan Nair v. Commissioner of Income Tax [2001] 247 ITR 178 (SC)

4. Bharat Beedi Works (P) Ltd. v. CIT (1993) 3 SCC 252

5. Commissioner of Income Tax v. Taj Mahal Hotel (1971) 3 SCC 550

6. D. S. Bist & Sons v. CIT [1984] 149 ITR 276 (Delhi)

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