Whether Client Creation Cost is an Intangible Assets - Held Yes
Whether Depreciation can be claimed on Client Creation Cost - Held Yes
Client Creation Cost is an Intangible Asset and is eligible for Depreciation at 25%.
1. Assessee company in the previous year 2008-09 relevant to the Assessment Year 2009-10 has acquired micro finance business consisting of loan portfolio of existing clients from the SWAS Society by paying a lump sum consideration of Rs.6 Crore consisting of two parts- Rs.4 Crore paid as a client creation cost @ Rs.400 per customer and Rs.2 Crore paid towards brand, logo, intellectual property, internal control systems, and related procedure based recovery systems
2. The assessee treated the same as deferred revenue expenditure as per the accounting policy stated at 2 (g) - of the Significant Accounting Policies in Schedule 17 Annexed to the Annual Financial Statements i.e., Balance Sheet as on 31.03.2009, Income and Expenditure Account for the Year ended 31.03.2009 and Cash Flow Statement for the year ended 31.03.2009
3. Accordingly, assessee followed the policy of treating the same as deferred revenue expenditure by grouping the same under "Miscellaneous Expenditure (to the extent not written off or adjusted) in the Balance Sheet and followed the policy of writing off the same to the extent either Rs.120 Lakhs or 30% of the Profit Before Interest and Tax whichever is less. Accordingly, the assessee charged Rs.56,19,306 being 30% of the PBIT to the profit and loss account of the relevant Previous Year
4. The assessee in the computation of income added back the amount of Rs.56,19,306 being the amount debited to P& L Account and claimed Rs.1,20,00,000 as deduction which is 20% of the total amount of Rs.6 Crore paid being 1/5th of expenditure
5. Before the Assessing Officer, the assessee claimed that the same is a revenue expenditure and that the deferred revenue expenditure is allowable
6. The Assessing Officer however, disallowed the claim and restricted the allowance to Rs.50,00,000 as depreciation @25% in respect of the Rs.2 crore component of the consideration as intangible asset under Section 32 of the Income Tax Act, 1961
7. The alternate claim of the assessee that the client creation cost is also part of the intangible asset as the same relates to acquisition of business or commercial rights in the existing business and the component of Rs.4 crore paid towards the client creation cost is also eligible for depreciation at the rate of 25% within the meaning of Section 32(1)(ii) was rejected by the Assessing Officer
8. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A) and reiterated the claim under Section 32(1)(ii) and also reiterated the alternate claim of deferred revenue expenditure
9. The Commissioner (Appeals) rejected the contention that the amount of Rs.4 Crore component should also be treated as intangible asset and depreciation to be allowed on the same. The alternate ground of allowing the claim of deferred revenue expenditure was also rejected by the Commissioner (Appeals) stating that there is specific submission and there is no provision in the Income Tax Act for allowing deferment of expenditure except in specific circumstances
10. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal in which the main relief is claimed in ground No.3 which is as under :
“On the facts and in the circumstances of the case the Ld. CIT(A) ought to have appreciated that the said payment is the payment for acquisition of business or commercial rights and accordingly fall within the scope of clause (b) of Explanation- 3 to sub-section (1) of section 32 of Income Tax Act, 1961, accordingly depreciation ought to have been allowed under section 32(1)(ii) of the said Act.
Learned Counsel for the assessee reiterated the submissions made before the authorities and relied on the Coordinate Bench decision in the case of SKS Micro Finance Ltd., vs. DCIT, Circle-3(2), Hyderabad (2013) 145 ITD 111 (ITAT-HYD) wherein on similar facts the Coordinate Bench has allowed the claim of depreciation. He also relied on the decision of the Hon’ble Supreme Court in the case of CIT vs. Smifs Securities Ltd., 348 ITR 302(SC) and also ITAT, Delhi Bench decision in the case of M/s. Cyber India Online Limited vs. ACIT, Circle-3(1), New Delhi in ITA.No.1299/Del./2010 dated 27.11.2013. He also relied on the decision of Hon’ble Delhi High Court in the case of CIT, Delhi- 1 vs. MIS Bharti Teletech Ltd., in ITA.No.496/2014 dated 15.04.2015 in support of the claims. With reference to the alternate claim of deferred revenue expenditure, Learned Counsel for the assessee relied on the decision of Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation 225 ITR 802 and other decisions relied on before the Assessing Officer. It is also the contention, as raised in ground No.5, that entire expenditure can be treated as revenue expenditure and allowed under section 37(1) as the expenditure incurred for the purpose of business.
Ld. D.R. however, relied on the orders of the Assessing Officer and Ld. CIT(A) to submit that expenditure is capital in nature but not an intangible asset as decided by the authorities
"The Hon’ble High Court further held that the words similar or commercial rights have to necessarily result in an intangible asset against the entire world which can be asserted as such to qualify for depreciation u/s 32(1) (ii) of the Act. However, the facts in the present case are different. The MOU between the assessee and SKS Society cannot be said to be purely personal. On the other hand, the acquisition of rights over the assets of SKS Society including the customer base is an intangible asset against the entire World as held by the Hon’ble Delhi High Court. Therefore, the facts of the case considered in the light of the ratio laid down by various judicial precedents referred to hereinabove, in our view, the client acquisition cost paid by the assessee is towards acquiring an intangible asset and therefore eligible for depreciation u/s 32(1)(ii) of the Act. In aforesaid view of the matter, we direct the Assessing Officer to allow the assessee’s claim of depreciation. Hence, the grounds raised by the assessee are allowed."
Since the facts are similar, respectfully following the same, we are of the opinion that client creation cost is an intangible asset and is eligible for depreciation at 25%. Assessing Officer is directed to allow depreciation as claimed in the computation of income.
Cases Referred to
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