Facts: Due to differences between the partners, the firm was dissolved when two partners of the firm applied for its winding up by filing Company Petition in the High Court. Pursuant to the order passed by the High Court an auction was conducted in which three of the erstwhile partners forming an association of persons (‘AOP’) 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. The Assessee 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. Assessing Officer disallowed both the claims made by the assessee. The High Court denied any benefit to the Assessee under Section 35A and Section 35AB of the Act, since it held that what was auctioned off was only goodwill and no amount was spent by AOP towards acquisition of trademarks, copyrights and know-how. In coming to this conclusion, reliance was placed on the Report of the Chartered Accountants.

Issue: Whether in AY 1995-96, when section 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 by treating the same as ‘plant’?

View: Prior to amendment by Finance (No. 2) Act of 1998 which specifically allowed depreciation on intangible assets, the Act provided for depreciation only on four categories of asset viz. buildings, machinery, plant or furniture. The term ‘plant’ is defined in section 43(3) of the Act to include ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession but does not include tea bushes or livestock or buildings or furniture and fittings. Thus, the definition of the term plant is an inclusive definition and it specifically includes some assets which are not in the nature of plant as understood commercially. As a result, Courts have interpreted this term in very wide sense so as to include within its ambit, all the assets which qualify for depreciation and which are not otherwise covered within the provisions of section 32. In such circumstances, the intangible assets which are acquired by incurring substantial sums and which have commercial value, should qualify for depreciation by treating the same as ‘plant’ for the purpose of the Act.

Held: The Supreme Court upholding the claim held that definition of the term ‘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 550wherein it was held that the word ‘plant’ must be given a wide meaning. Thereafter referring to intellectual properties in question i.e. trademarks, copyrights and know-how, the Court held that such assets should be considered as plant in the facts of the case, for the reason 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 ansd know-how is acquisition of a capital nature. Accordingly, the Court held that in 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. The Court, in this regard, also did not accept the action of the taxing authorities of rewriting 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. (CA. Nos 10547-10548 of 2011 dt 15-10 2015 (AY.1995-96)

Editorial: The amendment was bought in Finance Act, 1988 to include “Intangible Assets” in Section 32 of the Income-tax Act (‘the Act’). Post that all the intangible assets were covered under Section 32 of the Act and were eligible for depreciation under the said section.

However, later on controversy arose, whether goodwill would be treated as intangible asset and whether eligible for depreciation under Section 32 of the Act. The said controversy was put at rest by Hon’ble Supreme Court in case of CIT v. Smifs Securities Ltd. (2012) 348 ITR 302 / 75 DTR 417 / 252 CTR 233 / 210 Taxman 428 (SC)  the Court held that the   “Goodwill” is an intangible asset eligible for depreciation . The same view has also been adopted by Hon’ble Bombay High in case of Toyo Engineering India Ltd. (ITA No. 1330 of 2012)

Accordingly, the Stock exchange membership cards are assets eligible for depreciation.    In CIT v. Alps Theatre (1967) 65 ITR 377 (SC)  the Court held that the  Land is not eligible for depreciation

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