Depreciation on Intellectual Properties cannot be denied on ground that they are not approved by the Govt: ITAT Kolkata [Read Order]

The Kolkata Bench of Income Tax Appellate Tribunal, in a recent ruling, opined that the depreciation on intangible assets cannot be disallowed for the reason that they are not approved by the Government or any other competent authority. In the light of the above observations, the Tribunal allowed depreciation towards the intellectual property rights and goodwill. The Tribunal observed that these two items are eligible to depreciation under the provisions of Income Tax Act, 1961.

The assessee in the instant case is a company engaged in the business of manufacturing and distribution of electric meters and related components.The Assessing Officer disallowed the claim of depreciation by holding that the assets are not intangible assets eligible for depreciation. The Officer further observed that the Income Tax Rules recognizes intangible assets such as know how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature and these assets must possess certain certification / authenticity / sanctity and or recognition from Government or from competent authority. He further observed that the nature of the IP assets acquired by the assessee does not fall in any of the category or similar nature as mentioned in IT Rules. The assessee preferred objections before the Hon’ble Dispute Resolution Panel, in which the above observations were sustained. Therefore, the assessee preferred an appeal before the ITAT.

Regarding the issue of allowing depreciation on Intellectual Property rights, the Tribunal placed reliance on the decision of the Co-ordinate bench decision of Pune Tribunal in the case of Modular Infotech P Ltd vs DCIT reported in 131 TTJ 243 (Pune), the facts of the case are, in the opinion of the Tribunal, similar to the instant case. In this case, the Tribunal set aside the Order in which the assessee was held as not entitled to depreciation on Intellectual Property Rights.While applying the ratio of the above cases, to the present case, the Tribunal held that the assessee in entitled to depreciation in respect of intellectual property rights.

The Tribunal noticed the decision of the Supreme Court in NTPC Ltd vs CIT reported in 229 ITR 383 (SC) and CIT vs Smifs Securities ltd reported in 348 ITR 302 (SC), in which the Supreme Court allowed the claim of depreciation on goodwill.

The Tribunal bench comprising of Judicial Member S. S. Viswanethra Ravi and Accountant Member M.Balaganesh  found that “It is not in dispute that the assessee had paid consideration towards acquisition of Goodwill. This issue is now well settled and not with any dispute”.

Following the above decision, the Tribunal accepted the contentions of the assessee and allowed their claim for depreciation towards Goodwill.

The Tribunal further added that “The main emphasis for disallowance is only on the point that the intellectual properties is not approved by any government or any competent authority. Nowhere the income tax act mandates the registration of the intellectual properties for the purpose of granting depreciation u/s 32 of the Income Tax Act. Getting the intellectual properties registered is within the domain of the assessee and it only offers protection to the assessee from preventing other parties to use the same. The revenue cannot thrust the mandate of registration of the same and mere non-registration of the same does not make the transaction in genuine or sham. Hence the version of the revenue that IP should be certified by the government authority and it does not fall within the assets specified in IT Rules is without any basis and not tenable.”

Read the full text of the order below.