Depreciation on Tenancy Rights allowable under section 32 of the Income Tax Act
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Case Details: |
Premier Book Company vs. Addl. CIT |
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Appeal No.: |
ITA No. 5149/Del/2014 |
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Order pronounced by: |
ITAT Delhi |
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Date of Order: |
11-08-2021 |
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In Favour of: |
Assessee |
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Assessment Year: |
2010-11 |
Brief Facts:
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During the course of scrutiny assessment, the A.O. observed that the assessee has claimed depreciation of Rs. 5,41,406/- @ 25% on the tenancy rights. The A.O. issued show cause notice to the assessee intending to disallow the depreciation claim on the tenancy rights. |
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In response, the assessee submitted that in A.Y. 2008-09, they settled dispute between the legal heirs of a former partner late P.C. Agarwal and the amount was paid towards goodwill and tenancy rights. The value of these payments is amortized in the books of the assessee firm and depreciation is claimed in this respect being an intangible asset whose cost is borne by the assessee business. |
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The A.O. dismissed the reply of the assessee in belief that depreciation u/s 32 is allowed only in respect of know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 01-04-1998. The A.O. disallowed the depreciation claim of the assessee. The Ld. CIT(A) also upheld the decision of the A.O. Hence, the assessee preferred an appeal with Tribunal. |
Observations of Tribunal:
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The Tribunal relied upon the judgement in the case of Hindustan Coco Cola Beverages as held by Delhi High Court which examined the provisions of section 32 of the Act: “It is worth noting, the scope of section 32 which has been widened by the Finance Act, 1998, whereby depreciation is now allowed on intangible assets acquired on or after 1st April 1998. As per Section 32(1)(ii), depreciation is allowable in respect of knowhow, patent, copyrights, trademarks, licenses, franchisees or any other business or commercial rights of similar nature being intangible assets. Scanning the anatomy of the section, it can be safely be stated that the provision allows depreciation on both tangible and intangible assets and clause (ii), as has been indicated hereinbefore, enumerates the intangible assets on which depreciation is allowable. The assets which are included in the definition of ‘intangible assets’ includes, along with other things, any other business or commercial rights of similar nature. The term “similar” has been dealt with by the Apex Court in Nat Steel Equipment Pvt. Ltd. v. Collector of Central Excise AIR 1988 SC 631 wherein the Apex Court has opined that the term ‘similar’ means corresponding to or resembling to in many aspects.” |
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It is worth noting that the meaning of business or commercial rights of similar nature has to be understood in the backdrop of Section 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood is a wider term which encompasses in its fold many facets. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. |
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The dictionary clause clearly stipulates that business or commercial rights should be of similar nature as knowhow, patents, copyrights, trademarks, licenses, franchises etc. and all these assets which are not manufactured or produced overnight but are brought into existence by experience and reputation. They gain significance in the commercial world as they represent a particular benefit or advantage, or reputation built over a certain span of time and the customers associate with such assets. |
ITAT Judgement:
On the basis of the above observations and relying upon the judgement of CIT vs. Hindustan Coca Cola Beverages [supra], the Tribunal rendered the judgement in the instant case. The Hon’ble Tribunal ruled as below:
- We find that this is not the initial year of claim of depreciation on tenancy rights. The assessee is claiming depreciation on the tenancy rights from earlier years. In our considered opinion, unless claim is disturbed in the initial A.Y. of the claim, the same cannot be disturbed in the subsequent A.Y. if the facts are the same.
- Considering the facts of the case in hand in light of the decisions of the Hon’ble High Court of Delhi [supra], we direct the A.O. to delete the addition of Rs. 5,41,406/-.
Conclusion: Tenancy Rights are to be treated as ‘intangible asset’ falling under ‘Other business or commercial rights of similar nature’ as per the definition of intangible assets. Thus, Depreciation can be claimed on Tenancy Rights at the rate of 25% as prescribed under section 32 of the Income Tax Act.
Read Complete Judgement: Premier Book Company vs. Addl. CIT- ITAT Delhi
Disclaimer: The above article is based upon the judgement of ITAT Delhi and is meant for informative purposes only. Readers are requested to act diligently and under guidance of a professional before acting on the basis of the facts & ruling of the above judgement.
Source: This article is based on the judgement of ITAT Delhi in the case of M/s Premier Book Company vs. ACIT. The source of the judgement is www.itat.gov.in
