Mangalore Ganesh Beedi Works vs. CIT (Supreme Court)

The Supreme Court had to consider whether in AY 1995-96, when s. 32 did not make any distinction between tangible and intangible assets, the Assessee was 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. HELD by the Supreme Court upholding the claim:

(i) The definition of ‘plant’ in Section 43(3) of the Act is inclusive. A similar definition occurring in Section 10(5) of the Income Tax Act, 1922 was considered in Commissioner of Income Tax v. Taj Mahal Hotel (1971) 3 SCC 550 wherein it was held that the word ‘plant’ must be given a wide meaning. The question is, would intellectual property such as trademarks, copyrights and know-how come within the definition of ‘plant’ in the ‘sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it’? In our opinion, this must be answered in the affirmative for the reason that there can be no doubt that for the purposes of a large business, control over intellectual property rights such as brand name, trademark etc. are absolutely necessary. Moreover, the acquisition of such rights and know-how is acquisition of a capital nature, more particularly in the case of the Assessee. Therefore, it cannot be doubted that so far as the Assessee is concerned, the trademarks, copyrights and know-how acquired by it would come within the definition of ‘plant’ being commercially necessary and essential as understood by those dealing with direct taxes.

(ii) Section 32 of the Act as it stood at the relevant time did not make any distinction between tangible and intangible assets for the purposes of depreciation. The distinction came in by way of an amendment after the assessment year that we are concerned with. That being the position, the Assessee is entitled to the benefit of depreciation on plant (that is on trademarks, copyrights and know-how) in terms of Section 32 of the Act as it was at the relevant time. We are, therefore, in agreement with the view taken by the Tribunal in this regard that the Assessee would be entitled to the benefit of Section 32 of the Act read with Section 43(3) thereof;

(iii) The 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 terms.’ (D. S. Bist & Sons v. CIT [1984] 149 ITR 276 (Delhi) referred);

(iii) There is a clear finding of fact by the Tribunal that the legal expenses incurred by the Assessee were for protecting its business and that the expenses were incurred after 18th November, 1994. There is no reason to reverse this finding of fact particularly since nothing has been shown to us to conclude that the finding of fact was perverse in any manner whatsoever. That apart, if the finding of fact arrived at by the Tribunal were to be set aside, a specific question regarding a perverse finding of fact ought to have been framed by the High Court. The Revenue did not seek the framing of any such question. 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 (K. Ravindranathan Nair v. Commissioner of Income Tax [2001] 247 ITR 178 (SC) followed)