IPR Acquired Pre 1999 Amendment entitled for Depreciation in Tax - Supreme Court of India
The Supreme Court of India on October 15, 2015 in a dispute between M/s Mangalore Ganesh Beedi Works (the Appellant/ Assessee) and Commissioner of Income Tax (CIT), Mysore (the Respondent) has ruled in favour of the Assessee and observed that a firm can claim deduction or depreciation in income tax on expenses incurred for acquisition of intellectual property, such as patent and trademarks rights, copyrights and know-how, as they are capital in nature.
In the present case, the M/s Mangalore Ganesh Beedi Works (MGBW), a partnership firm was dissolved and a new company comprising of association of persons (three erstwhile partners) was constituted to continue the business.
The Assessee claimed a deduction as revenue expenditure permissible under Section 37 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) towards the legal expenses incurred. The Assessee also further claimed depreciation under Section 35 A and 35 AB of the Act towards acquisition of Intellectual Property Rights. In the alternative, the Assessee claimed depreciation on capitalizing the value of the Intellectual Property Rights (IPR) by treating them as ‘plant’.
The Assessing Officer rejected the claim of the Assessee under all the above three sections. Hence, an appeal was preferred by the Assessee before the Commissioner of Income Tax / CIT (Appeals) who allowed the appeal in part and held that the Assessee was entitled to a deduction towards legal expenses. However, the claim of the Assessee regarding deduction or depreciation on the IPR was rejected. Thus, aggrieved by the order of the CIT (Appeals), a further appeal was preferred by the parties before the Tribunal, where the Tribunal allowed the appeal of the Assessee in respect of the claim of IPR.
An appeal was preferred in the Hon’ble High Court of Karnataka which considered the following three substantial questions of law:
Whether the revenue expenditure claimed by the Association of persons which was constituted by the three partners of the erstwhile firm, MGBW, can be allowed as permissible deduction in the hands of the said association of persons under Section 37 of the Act, as being laid out or expended wholly or exclusively for the purpose of business of the said Association of persons.
Whether the Assessee was entitled to claim any deduction on the alleged expenditure for acquisition of patents, trademark rights, copyrights and know-how, in terms of Section 35 A and 35 AB of the Act?
Whether the Tribunal had erred in directing the Assessing Officer to capitalize the value of trademarks, copyright and technical know-how by treating the same as plant and machinery and grant depreciation therein?
The High Court of Karnataka answered the first two questions in the negative and the third question in the affirmative in favour of the Revenue Officer and against the Assessee. Thus the High Court restored the order of the Assessing Officer by setting aside the findings of the Income Tax Appellate Tribunal.
The Apex Court, while considering the impugned order passed by the High Court in an appeal preferred by the Assessee, observed in respect of the first question that the High Court was not justified in upsetting a finding of fact arrived by the Tribunal, as there existed no reason to reverse its finding as nothing has been shown to conclude that the finding was perverse in any manner whatsoever. Therefore, the question was answered in favour of the Assessee and against the Revenue Officer and the conclusion arrived by the High Court on the first question was set aside and the view of the Tribunal was upheld.
The Apex Court, while considering the second and third questions, accepted and acknowledged that intellectual property has a value and stated that the trademarks of the Assessee were given value since in the beedi industry, trademarks and brand names have a value and the Assessee’s product under trademark ‘501’ had a national and international value. As far as copyright valuation is concerned, the Assessee had a copyright on the content of the labels, wrappers and the colour combination on them. Similarly, the know-how had a value since aroma of beedis differ from one manufacturer to another, depending on the secret formula for mixing and blending tobacco.
The Apex Court left open the question of applicability of Sections 35A and 35AB of the Act for an appropriate case and laid focus on the applicability of Section 32 of the Act read with the inclusive definition of ‘plant’ under Section 43 (3) of the Act. The Apex Court held that 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 discussed in the present case, and that being the position, the Assessee is entitled to the benefit of depreciation on plant (i.e. on trademarks, copyrights and know-how) in terms of Section 32 of the Act as it was at the relevant time.
The Apex Court, in the instant case, further observed that when a firm acquires the plant of another, the intellectual property would fall within the definition of 'plant' as “there can be no doubt that for the purposes of a large business, control over IPR such as brand name, trademark etc. are absolutely necessary.” The Apex Court also stated that “the acquisition of such rights and know-how is acquisition of a capital nature. Therefore, it cannot be doubted that so far as the firm 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 Apex Court further observed that the case at hand states that though the definition of ‘plant’ in the Act mentions “vehicles, books, scientific apparatus and surgical equipment purchased for the purposes of the business, profession or vocation”, it must be given an expanded meaning including Intellectual Property Rights within its ambit.
The present case is more academic in nature as it deals with the assessment year 1994- 95, a pre-amendment scenario which did not demarcate between the tangible and intangible assets. Therefore post the amendment to Section 32 of the Act, which clearly demarcated between tangible and intangible assets the situation of commercial rights being akin to know- how, patents and other intellectual property rights being eligible for depreciation has been amply clarified for future purposes.
Thus, it is clarified that the instant case holds significance for such cases where the assessment year in question was before 1999 i.e. prior to the amendment and where there existed a situation of ambiguity in respect to depreciation of tangible and intangible assets.