Is the assessee entitled to depreciation on value of goodwill considering it as “other business or commercial rights of similar nature” within the meaning of an intangible asset?
B. Raveendran Pillai v. CIT (2011) 332 ITR 531 (Kerala)
Under section 32(1)(ii), depreciation is allowable on intangible assets, being know-how, patents, copyrights, trade marks, license, franchise, or any other business or commercial rights of similar nature.
In this case, a hospital was run in the same building, in the same town, in the same name for several years prior to purchase by the assessee. By transferring the right to use the name of the hospital itself, the previous owner had transferred the goodwill to the assessee and the benefit derived by the assessee was retention of continued trust of the patients, who were patients of the previous owners. When goodwill paid was for ensuring retention and continued business in the hospital, it was for acquiring a business and commercial right and it was comparable with trade mark, franchise, copyright etc., referred to in the first part of clause (ii) of section 32(1) and so, goodwill was covered by the above provision of the Act entitling the assessee for depreciation.
Can the waiver of principal amount of loan taken for purchase of capital asset by the bank be treated as “benefit arising out of business” or “a remission of trading liability” for taxability as business income of the company?
Iskraemeco Regent Ltd. v. CIT (2011) 331 ITR 317 (Mad.)
The assessee company, engaged in the business of development, manufacturing and marketing of electro-mechanical and static energy meters, took a bank loan for purchase of capital assets. The grant of bank loan for purchase of a capital asset is a capital receipt and not a trading receipt. The provisions of section 41(1) are attracted only in case of remission of a trading liability. Since the loan was taken for purchase of capital assets, waiver of a portion of principal would not amount to remission of a trading liability to attract the provisions of section 41(1). Further, such waiver cannot be treated as a benefit arising out of business and consequently, section 28(iv) will not apply in respect of such loan transaction.
Would expenditure incurred on feasibility study conducted for examining proposals for technological advancement relating to the existing business be classified as a revenue expenditure, where the project was abandoned without creating a new asset?
CIT v. Priya Village Roadshows Ltd. (2011) 332 ITR 594 (Delhi)
In this case, the assessee, engaged in the business of running cinemas, incurred expenditure towards architect fee for examining the technical viability of the proposal for takeover of cinema theatre for conversion into a multiplex/ four-screen cinema complexes. The project was, however, dropped due to lack of financial and technical viability. The issue under consideration is whether such expenses can be treated as revenue in nature, since no new asset has been created.
On this issue, the High Court observed that, in such cases, whether or not a new business/asset comes into existence would become a relevant factor. If there is no creation of a new asset, then the expenditure incurred would be of revenue nature. In this case, since the feasibility studies were conducted by the assessee for the existing business with a common administration and common fund and the studies were abandoned without creating a new asset, the expenses were of revenue nature.
Would refund of excise duty and grant of interest subsidy under the incentive scheme formulated by Central Government for public interest, namely, to accelerate industrial development, generate employment and create opportunities for self-employment in state of Jammu and Kashmir be treated as a revenue receipt or a capital receipt?
Shree Balaji Alloys v. CIT (2011) 333 ITR 335 (J&K)
In the present case, the Tribunal contended that excise duty refund and grant of interest subsidy received by the assessee in pursuance of the New Industrial Policy introduced in Jammu and Kashmir were revenue receipt and not capital receipt on the grounds that:-
(i) the aforesaid incentives were not given to establish industrial units because the industry was already established.
(ii) the incentives were available only on commencement of commercial production.
(iii) the incentives were recurring in nature.
(iv) the incentives were not given for acquisition of capital assets.
(v) the incentives were given for easy market accessibility and to run the business more profitably.
The High Court observed that the fact that incentives would become available to industrial units entitled thereto from the date of commencement of commercial production and the fact that these were not granted for creation of new assets were not the sole criteria for determining the nature of subsidy. The fact that such incentives were provided to achieve a public purpose should also be considered to determine the nature of subsidy and hence, such subsidy could not be construed as a production or operational incentive for the benefit of the assessee. Hence, the aforesaid incentives are capital receipts not liable to taxation.
Can expenditure incurred by a company on higher studies of the director’s son abroad be claimed as business expenditure under section 37 on the contention that he was appointed as a trainee in the company under “apprentice training scheme”, where there was no proof of existence of such scheme?
Echjay Forgings Ltd. v. ACIT (2010) 328 ITR 286 (Bom.)
On this issue, it was observed that there was no evidence on record to show that any other person at any point of time was appointed as trainee or sent abroad for higher education. Further, the appointment letter to the director’s son, neither had any reference number nor was it backed by any previous application by him. The appointment letter referred to “apprentice training scheme” with the company in respect of which no details were produced. There was no evidence that he was recruited as trainee by some open competitive exam or regular selection process. Hence, there was no nexus between the education expenditure incurred abroad for the director’s son and the business of the assessee company. Therefore, the aforesaid expenditure was not deductible.
Can an assessee engaged in letting out of rooms in a lodging house also treat the income from renting of a building to bank on long term lease as business income?
Joseph George and Co. v. ITO (2010) 328 ITR 161 (Kerala)
On the above issue, it was decided that while lodging is a business, however, letting out of building to the bank on long-term lease could not be treated as business. Therefore, the rental income from bank has to be assessed as income from house property.
Would the phrase "used for purpose of business" in respect of discarded machine include use of such asset in the earlier years for claim of depreciation under section 32?
CIT v. Yamaha Motor India Pvt. Ltd. (2010) 328 ITR 297 (Delhi)
The issue under consideration in this case is whether depreciation is allowable on the written down value of the entire block, even though the block includes some machinery which has already been discarded and hence, cannot be put to use during the relevant previous year.
On the above issue, it was observed that the expression "used for the purposes of the business" in section 32 when used with respect to discarded machinery would mean the use in the business, not in the relevant financial year/previous year, but in the earlier financial years. The discarded machinery may not be actually used in the relevant previous year but depreciation can be claimed as long as it was used for the purposes of business in the earlier years provided the block continues to exist in the relevant previous year. So, the condition for claiming depreciation in respect of the discarded machine would be satisfied if it is used in the earlier previous years for the business.
Can EPABX and mobile phones be treated as computers to be entitled to higher depreciation at 60%?
Federal Bank Ltd. v. ACIT (2011) 332 ITR 319 (Kerala)
On this issue, the High Court held that the rate of depreciation of 60% is available to computers and there is no ground to treat the communication equipment as computers. Hence, EPABX and mobile phones are not computers and therefore, are not entitled to higher depreciation at 60%.
Disclaimer
In this note, we have attempted
to summarise some of the significant aspects to be kept in mind by readers to
ensure compliance of Income tax laws and regulations. Readers should ensure to
verify specific provisions as applicable to each case before taking any
business decisions. It would be pertinent to note that some changes are being
made to the Income tax laws and rules and regulations on a continuous basis by
way of notifications, clarifications etc issued by the department based on
their practical experience in implementing the legislation.
It may be noted that nothing
contained in this note should be regarded as our
opinion. Professional advice should be sought for applicability of
legal provisions based on specific facts. Though reasonable efforts have been
taken to avoid errors or omissions in this note we are not responsible for any
liability arising to readers directly or indirectly due to any mis-statements
or error contained in this note. It must be noted that the views expressed in
the note are based on our understanding of the law and regulations as published
by the Government authorities and we may or may not agree or subscribe to such
views/ interpretations.
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