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2019 (1) TMI 1594 - AT - Income TaxDepreciation on the intangible asset namely design and technical know-how - as submitted that the meaning of the term intangible assets u/s 32(1)(ii) is an inclusive definition -statutory auditor of the company has commented on the allowability of the depreciation claim made by the assessee in respect of intangible assets - HELD THAT:- On perusal of the comment of the statutory auditor of the company we find that claim of the assessee has not been denied for the depreciation on the intangible assets. The auditor has mentioned that they are unable to comment on the claim of the assessee on the depreciation of intangible assets. The expression used by the statutory auditor of the company cannot be construed as if the depreciation claimed by the assessee was denied Comment mentioned by the statutory auditor is not the deciding factor for the allowability of the claim of the assessee for the depreciation on the intangible assets. The statutory auditor of the company has no authority under the income tax Act to decide the issue whether any particular claim of the assessee is allowable. Assessee was entitled to the depreciation on the intangible assets on the cost incurred by it on its acquisition. There was no differentiation whether it is available to the industrial undertaking or otherwise. AO has limited the deduction of the depreciation in respect of know-how only concerning the industrial undertaking. More specifically the AO in the instant case concluded that the know-how used concerning industrial undertaking would be eligible for the depreciation. As per the AO industrial undertaking means the factory where the manufacturing activities are carried on by the assessee. We further observe that the assessee in the instant case has not acquired the factory of AFL. Accordingly, the AO was of the view that the assessee is not carrying out any industrial activity. AO also observed that AFL was also not carrying out any industrial activity on the ground that it was just engaged in the activity of stitching the fabrics which were manufactured by Arvind Mills Ltd. In view of the above, the AO was of the view that the assessee is not eligible for the depreciation on the technical know-how as discussed above. We disagree with the contentions of the AO on the ground that the use of technical know-how is not limited to any industrial undertaking. As such the use of technical know-how is also available even to the business activities where there was no manufacturing activity. In our considered view the AO has taken a narrow meaning of the technical knowhow on the basis of explanation 4 to section 32 of the Act. The purpose for the depreciation on the intangible assets has been explained in the memorandum of the finance Act to 1998, and there was no such limitation provided for the allowability of the depreciation on technical know-how. Therefore we are not inclined to uphold the finding of the AO that the depreciation on the technical know-how is available only in relation to the industrial undertaking. - Decided in favour of assessee. Whether the assessee has acquired any design and technical know-how from AFL? - HELD THAT:- Assessee has never claimed to have acquired any designs from AFL. Rather we find that as per the agreement between the assessee and AFL that the assessee shall provide the design to AFL - We also note that the pattern of design keeps on changing very rapidly in the garment industry and there cannot be any permanent designs which will prevail in the market beyond the particular point of time. As such we are of the view that there cannot be any fixed pattern of any design for any particular class of the people. Accordingly, we are not impressed with the finding of the AO that there was no design and technical know-how acquired by the assessee. Whether the assessee has used technical know-how acquired from AFL? - HELD THAT:- From the agreement it is transpired that AFL possessed the rich experience in the field of stitching of the garments. As a result of the agreement as discussed above the factory of AFL was working exclusively for the assessee. Thus it is implied that the assessee will use all the benefits held by the factory of AFL. Thus we are of the view that the technical know-how acquired by the assessee from AFL was used for its business activity. Assessee has also given works on a contract basis to the outside job workers who were working exclusively for the assessee. These job workers were performing the work for the assessee in the manner in which the factory of AFL was doing the work for the assessee. Therefore it is inferred that the procedures taken by the assessee from AFL were used for the work assigned to such outside job workers. Therefore we are of the view that the design and technical know-how acquired by the assessee from AFL were used for its business activities. The assessee has made the payment to AFL for the intangible assets which were created by the AFL over a period of time. Therefore we are of the view that the consideration paid by the assessee is representing the benefits which it is going to use for its business purposes - The expenditures incurred by the assessee have to be allowed as a deduction in one or the other way. Thus assessee is eligible for the depreciation in respect of the intangible assets as discussed above - Decided in favour of assessee Depreciation on goodwill disallowed - claim made by the assessee 1st time before the Ld. CIT(A) - assessee did not claim the depreciation on goodwill in its income tax return as well as before the AO during assessment proceeding u/s 143(3) - HELD THAT:- Issue of depreciation on goodwill was subject to litigation at various courts. Therefore the same was not claimed by the assessee in the income tax return. However at the time of hearing before the Ld. CIT(A) the Hon’ble Supreme Court has given the ruling that the depreciation on goodwill is allowed. Therefore the deduction was claimed. The scheme of the income tax Act requires that the assessee is liable to pay tax on the income which is chargeable to tax. Similarly, the assessee is entitled to the deductions which are eligible under the provisions of the Act. The Hon’ble Supreme Court has settled the issue on the issue of depreciation on the goodwill beyond doubt that the assessee’s claim of the depreciation on goodwill is rightful claim which has to be allowed to the assessee. In this regard, we find support and guidance from the judgment of Hon’ble Supreme Court in the case of Jute Corporation of India Ltd. Vs. CIT [1990 (9) TMI 6 - SUPREME COURT] - We hold that claim made by the assessee 1st time before the Ld. CIT(A) was rightful claim and within the provisions of law. Assessee is entitled for the claim of depreciation on the goodwill as relying on SMIFS SECURITIES LTD. [2012 (8) TMI 713 - SUPREME COURT] which says that 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 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). Disallowance on account of provision for obsolete inventory - As per the assessee, the market price of the inventory was reduced below the cost price. Therefore the provision was made in the books of accounts - HELD THAT:- Such provision was not shown as liability in the balance sheet. Thus there remains no doubt that the provision have actually been written off by the assessee in its books of accounts. Thus the provision is not representing the unascertained liability of the assessee as alleged by the AO. We also note that the assessee in its financial statement has reduced the provision from the inventory shown in its financial statement Once the provision has been written off by the assessee in its books of accounts than in our considered view there was no need to examine the valuation report. In view of the above we are not impressed with the finding of Ld. AO. Hence we do not find any reason to interfere in the order of CIT(A) and direct the AO to delete the addition made by him Disallowance made in respect of registration charges in respect of lease deed - Revenue or capital expenditure - HELD THAT:- The assessee out of such expenditure has not acquired any capital assets. Therefore the same cannot be treated as capital in nature. Accordingly, we treat them as revenue expenses. See CINCEITA PRIVATE LIMITED [1982 (2) TMI 58 - BOMBAY HIGH COURT] from it is clear that the expenses incurred in relation to the property taken on lease cannot be treated as capital in nature. Thus the ground raised by the assessee in its CO is allowed.
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