PR. COMMISSIONER OF INCOME TAX -1, CHANDIGARH ….. Appellant
Versus
M/S KUANTUM PAPERS LTD. ….. Respondent
Date of Order:- 16.08.2023
This was an Income Tax appeal concerning Assessment Year (AY) 2008-09.
Via this appeal, the appellant/revenue seeked to assail the order dated 11.05.2017, passed by the Income Tax Appellate Tribunal.
The Appeal had two issues arise for consideration:
(i) Whether the respondent/assessee has rightly claimed depreciation amounting to Rs.7,44,36,019/- concerning the chemical recovery plant?
(ii) Whether the claim for depreciation on the brands used by the respondent /assessee, concerning its paper manufacturing business, were intangible assets within the meaning of Section 32(1)(ii) of the Income Tax Act, 1961 [in short, “Act”] and hence, amenable to the claim of depreciation?
Insofar as the first issue was concerned, the entire controversy veers around one single aspect i.e., whether or not the respondent/assessee has commenced the use of the chemical recovery plant as of 21.03.2008. Qua this aspect, the Assessing Officer (AO) held against the respondent/assessee, which triggered the respondent/assessee‟s appeal before the Commissioner of Income Tax-Appeals CIT(A).
While the appeal was in progress before the CIT(A), the respondent/assessee filed certain additional documents to establish the use of the chemical recovery plant with effect from 21.03.2008,
then CIT(A) called for a remand report from the AO. The AO submitted the remand report, dated 27.01.2012, concerning the additional documents.
Based on the additional documents, the CIT(A) concluded that the chemical recovery plant had, in fact, commenced production with effect from 21.03.2008. Therefore, the proportionate depreciation amounting to Rs.7,44,36,019/-, as claimed by the respondent/assessee was allowed.
SECOND ISSUE(The Main Issue about Brand)
For Second issue CIT(A) ruled in favour of the respondent/assessee and sustained the claim of depreciation on the brand names by treating the same as intangible assets, which, according to him, fell within the purview of Section 32(1)(ii) of the Act. Being aggrieved, the appellant/revenue carried the matter in appeal to the Tribunal. The Tribunal, via the impugned order, has sustained the view of the CIT(A).
Hon’ble DB of Delhi High COurt said,
First Issue discussed by Hon’ble Court :- Double Bench of Delhi High Court observed that both the CIT(A) and the Tribunal were correct. The argument raised by Appellant that the additional evidence could not have been admitted by the CIT(A) is nothing but a red herring.
DB of Delhi High Court said, this argument is completely misconceived. The remand report that the AO was called upon to furnish gave an opportunity to him to rebut the contents of the additional document and/or have his say qua the same.
Second Issue discussed by Hon’ble Court:- As regards the other aspect, Hon’ble Court said , that whether the respondent/assessee could claim depreciation qua brand names, this issue is no longer res integra, in view of the judgment of the Supreme Court in Commissioner of Income-Tax vs. Smifs Securities Ltd. (2012) 348 ITR 302 (SC). The Supreme Court‟s observations are as under:
“[Question (b) 5. “Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on „goodwill‟ is allowable under the said section?” Answer 6. In the present case, the assessee had claimed deduction of Rs 54,85,430 as depreciation on goodwill. In the course of hearing, the explanation regarding origin of such goodwill was given as under: “In accordance with the scheme of amalgamation of YSN Shares and Securities (P) Ltd. with Smifs Securities Ltd. (duly sanctioned by the Hon’ble High Courts of Bombay and Calcutta) with retrospective effect from 1-4-1998, assets and liabilities of YSN Shares and Securities (P) Ltd. were transferred to and vest in the company. In the process goodwill has arisen in the books of the company.” It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities (P) Ltd. (amalgamating company) should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the amalgamating company was enjoying in order to retain its existing clientele. 7. The assessing officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 (“the Act”, for short). 8. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: “Explanation 3.—For the purposes of this sub-section, the expressions „assets‟ and „block of assets‟ shall mean— (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.” Explanation 3 states that the expression “asset” shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of the words “any other business or commercial rights of similar nature” in clause (b) of Explanation 3 indicates that goodwill would fall under the expression “any other business or commercial right of a similar nature”. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 9. In the circumstances, we are of the view that “goodwill” is an asset under Explanation 3(b) to Section 32(1) of the Act. 10. One more aspect needs to be highlighted. In the present case, the assessing officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) has come to the conclusion that the authorised representatives had filed copies of the orders of the High Court ordering amalgamation of the above two companies; that the assets and liabilities of M/s YSN Shares and Securities (P) Ltd. were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee Company stood increased. This finding has also been upheld by the Income Tax Appellate Tribunal . We see no reason to interfere with the factual finding. 11. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. 12. For the aforestated reasons, we answer Question (b) also in favour of the assessee.”
A careful perusal of Section 32(1)(ii) of the Act, read with clause (b) of Explanation 3 would show that trademarks are covered under the said provision.
Brand names are a specie of the trademark. This is evident upon reading the definition of “trademark” and “mark” provided in the allied statute i.e., Trademarks Act, 1999 [in short, “TM Act”]. The relevant provisions are extracted hereafter:
“2.Definitions and interpretation. (1) In this Act, unless the context otherwise requires,- xxx xxx xxx “(n)“mark” includes a device, brand, heading, label, ticket, name, signature, word, letter, numeral, shape of goods, packaging or combination of colours or any combination thereof;” xxx xxx xxx (zb) “trade mark” means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include shape of goods, their packaging and combination of colours; and…”
Court said , A perusal of the definition would show that the trademark means a mark which is capable of being represented graphically, and is capable of distinguishing the goods or services of one person from those of others, and may include the shape of goods, their packaging, and combination of colours.
The expression “mark” which is defined in Section 2(m) of the TM Act, includes, among others, a “brand‟.
Therefore, a conjoint reading of these Sections would clearly point in the direction that the expression “trademark” under Section 32(1)(ii) and in the appended Explanation i.e., Explanation 3(b) would clearly include brand names. For a clearer understanding of the issue, for the sake of convenience, the relevant parts of Section 32(1)(ii) and Explanation 3(b) are set forth hereafter:
“32. Depreciation. (1) In respect of depreciation of— (i) xxx xxx xxx (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed— (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: Provided that no deduction shall be allowed under this clause in respect of— (a) any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975 but before the 1st day of April, 2001, unless it is used— (i) in a business of running it on hire for tourists ; or (ii) outside India in his business or profession in another country ; and (b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42 : Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be : xxx xxx xxx Explanation 3.—For the purposes of this sub-section, the expression “assets” shall mean— (a) xxx xxx xxx (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature…”
A careful perusal of clause (b) of Explanation 3 extracted hereinabove shows that the definition of assets, as explained in the Explanation, includes commercial rights of similar nature. Brand names certainly invest in the owner commercial rights, and therefore, will fall within the scope of intangible assets, which are amenable to deprecation under Section 32(1)(ii) of the Act.
Court said, for the foregoing reasons, no substantial question of law arises for our consideration.
The appeal was dimissed.
Read, Reveiwed & Edited by
Neeraj Gogia, Advocate