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2016 (11) TMI 255 - ITAT HYDERABAD

2016 (11) TMI 255 - ITAT HYDERABAD - TMI - Claim of depreciation/deffered revenue expenditure on the lump sum consideration paid for creation of client base as an intangible asset - Held that:- Client creation cost is an intangible asset and is eligible for depreciation at 25%. Assessing Officer is directed to allow depreciation as claimed in the computation of income. - ITA. No. 24/Hyd/2013 - Dated:- 21-10-2016 - Shri D. Manmohan, Vice President And Shri B. Ramakotaiah, Accountant Member For As .....

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ired micro finance business consisting of loan portfolio of existing clients from the SWAS Society by paying a lump sum consideration of ₹ 6 Crore consisting of two parts- ₹ 4 Crore paid as a client creation cost @ ₹ 400 per customer and ₹ 2 Crore paid towards brand, logo, intellectual property, internal control systems, and related procedure based recovery systems. The assessee treated the same as deferred revenue expenditure as per the accounting policy stated at 2 (g) .....

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riting off the same to the extent either ₹ 120 Lakhs or 30% of the Profit Before Interest and Tax whichever is less. Accordingly, the assessee charged ₹ 56,19,306 being 30% of the PBIT to the profit and loss account of the relevant Previous Year. The assessee in the computation of income added back the amount of ₹ 56,19,306 being the amount debited to P& L Account and claimed ₹ 1,20,00,000 as deduction which is 20% of the total amount of ₹ 6 Crore paid being 1/5 .....

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tricted the allowance to ₹ 50,00,000 as depreciation @25% in respect of the ₹ 2 crore component of the consideration as intangible asset under Section 32 of the Income Tax Act, 1961. The alternate claim of the assessee that the client creation cost is also part of the intangible asset as the same relates to acquisition of business or commercial rights in the existing business and the component of ₹ 4 crore paid towards the client creation cost is also eligible for depreciation .....

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) Techno Shares and Stocks Ltd., (2010) 327 ITR 323 (SC) (iv) Skyline Caterers P Ltd., Vs. ITO (2008) 306 ITR (AT) 369 (Mum) (v) CIT vs. Mediworld Publication (2011) 337 ITR 178 (Del) The Commissioner (Appeals) rejected the contention that the amount of ₹ 4 Crore component should also be treated as intangible asset and depreciation to be allowed on the same. The alternate ground of allowing the claim of deferred revenue expenditure was also rejected by the Commissioner (Appeals) stating th .....

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ly fall within the scope of clause (b) of Explanation- 3 to sub-section (1) of section 32 of Income Tax Act, 1961, accordingly depreciation ought to have been allowed under section 32(1)(ii) of the said Act. 3.1. Ground Nos. 4 and 5 are alternate grounds that the amount can be allowed as deferred revenue expenditure proportionately as treated by the assessee or even allowed as expenditure under section 37(1) in the year of acquisition of the client base. 4. Learned Counsel for the assessee reite .....

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le-3(1), New Delhi in ITA.No.1299/Del./2010 dated 27.11.2013. He also relied on the decision of Hon ble Delhi High Court in the case of CIT, Delhi- 1 vs. MIS Bharti Teletech Ltd., in ITA.No.496/2014 dated 15.04.2015 in support of the claims. With reference to the alternate claim of deferred revenue expenditure, Learned Counsel for the assessee relied on the decision of Hon ble Supreme Court in the case of Madras Industrial Investment Corporation 225 ITR 802 and other decisions relied on before t .....

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There is no dispute with reference to the amount of ₹ 6 crore paid for acquiring the business of SWAS society out of which ₹ 2 crores was treated by the Assessing Officer itself as logo/intellectual property and allowed depreciation at 25%. The only dispute is with reference to ₹ 4 crore paid as client creation cost. The terms of MOU as considered by the Ld. CIT(A) in para 5.1 are as under : 5.1 The MOU inter alia provided as follows: TRANSFER OF PORTFOUO AND MICRO FINANCE OPER .....

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ber, 31, 2007 is attached in Schedule- 1A and position on March 31, 2008 on closing hours, would be provided to enable SCCI Ltd. to takeover. 5. TRANSFER AND USAGE OF BRAND "SWAWS" AND OTHER INTELLECTUAL PRPERTY RIGHTS ASSOCIATED WITH· ITS MICRO FINANCE BUSINESS 5.1. SWAWS also hereby transfers its brand name established as SWAWS" as well as associated logos etc. and allows SCCI Ltd. to use the logo, trademarks and' other inscriptions, method of writing, by-lines statin .....

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d consideration. 6.1.1. One time reimbursement of customer creation costs, for having identified, motivated, trained, credit checked and risk filtered, approximately 100,000 customers on December 31, 2007, since all of these customers are generating net positive revenue for SWAWS at present, aggregating to ₹ 40.00 Million at the rate of approximately ₹ 400 per customer. 6.1.1.1. This consideration shall become payable in cash to SWAWS in two or more instalments in whatever convenient .....

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ration will be done through allotment of 60,00,000 Equity shares of Class B of face value of ₹ 10 each fully and up. (whose voting rights along with other investors in this clause shall always be not less than 52%) in SWAWS credit corporation India Ltd. upon transfer of business and not later than 1st April, 2008 to SWAWS." 6.1. These terms are similar to the terms agreed by SKS Finance when it acquired a business of similar nature. The said company acquired the client base from M/s. .....

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e acquisition of client base of SKS society is neither an intangible asset nor a business or commercial right of similar nature. Before venturing into deciding the issue, it is necessary at this stage to look at the actual nature of transaction between the assessee and SKS society. As per the terms of MOU (page-15 of the paper book) SKS Society transferred all the assets and properties including the existing loans and the receivables in relation to the Micro Finance Activity carried out by it ti .....

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deration payable for the Portfolio transfer to SKS Company. One time reimbursement of customer transfer costs ₹ 39.70 Million for having identified, motivated, trained, credit checked and risk-filtered, approximately 113,270 customers on August 31, 2005, or at the cost of ₹ 350.50 per customer, since all of these customers are generating net positive revenue for SKS at present. (b) One time reimbursement of an amount of ₹ 8.25 million towards cost of internal controls systems, .....

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urces, establishing/upgrading the MIS and ongoing accounting, quality control and internal audit systems. (d) ₹ 3.32 MilIion towards furniture, computers and fixtures. In consideration of the SKS Company agreeing to pay the above amounts, SKS Society agrees to transfer the Portfolio to SKS Company. It is hereby agreed and acknowledged between the Parties that the transfer of the loans would require the consent of the lenders, Parties agree to cooperate with each other to ensure that the ap .....

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ng Officer even has accepted it as a capital asset. However, both the Assessing Officer as well as CIT (A) have disallowed the claim of depreciation solely on the ground that the right acquired over the clients of SKS Society is not an intangible asset u/s 32(1)(ii) of the Act. At this stage it would be appropriate to look into the provision contained u/s 32(1)(ii) of the Act. 32(1) In respect of depreciation of - (i)………………………&hellip .....

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e assets being know-how, patents, copy-rights, trade marks, licenses, franchises or any other business or commercial rights of similar nature if the following conditions are fulfilled. i) Such asset is acquired after 1-4-1998. ii) The asset is owned wholly or partly by the assessee iii) Such asset is used for the purpose of business or profession of the assessee So far as the aforesaid conditions are concerned, it appears from facts on record that the assessee has acquired the asset after 1-4-19 .....

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ition of the existing customer base of SKS Society. It is also a fact that, the customer base acquired by the assessee has provided an impetus to the business of the assessee as the customers acquired are with proven track record since they have already been trained, motivated, credit checked and risk filtered. They are source of assured economic benefit to the assessee and certainly are tools of the trade which facilitates the assessee to carry on the business smoothly and effectively. Therefor .....

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D India Ltd. Vs. DCIT (supra) while interpreting the term business or commercial rights of similar nature by applying the principle of ejusdem generis held as under : In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression "business or commercial rights of similar nature& .....

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e kind and are clearly distinct from one another. The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of "busine .....

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case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and know-how, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a licence to carry out the existing transmission and distribution business of the transferor. .....

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urpose which enables the assessee to access the market and has an economic and money value is a "licence" or "akin to a licence" which is one of the items falling in section 32(1) (ii) of the Act. In view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in section 32(1)(ii) of the Act and were accordingly eligible for .....

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Coca Cola Beverages Pvt. Ltd. (supra) the Hon ble Delhi High Court upholding the view of the Income-tax Appellate Tribunal, Delhi Bench in treating goodwill as an intangible asset held that the meaning of business or commercial rights of similar nature if understood in the backdrop of section 32(1)(ii) of the Act would mean commercial rights or such rights which are obtained for effectively carrying on business and commerce and commerce as is understood is a wider term which encompasses in its f .....

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bad Bench in case of AP Paper Mills Ltd. Vs. ACIT (128 TTJ 596) while allowing depreciation on goodwill holding it to be an intangible asset observed that it is a business of commercial rights of similar nature to the rights mentioned in section 32 of the IT Act. The Income-tax Appellate Tribunal Mumbai Bench in case of M/s India Capital Markets P. Ltd. Vs. DCIT (ITA No.2948/Mum/2010 dated 12-12-2012 while considering a similar nature of acquisition of clientele held that acquisition of such cli .....

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hno Shares and Stocks Ltd. And Others (225 CTR 337) wherein the Hon ble Bombay High Court while considering the issue of transfer of membership card of Bombay Stock Exchange has held that it does not constitute an intangible asset. However, this decision of the Hon ble High Court has been reversed by the Hon ble Supreme Court in Techno Shares and Stocks Ltd. Vs. CIT (327 ITR 323). 14. The learned departmental representative has relied upon a decision of Hon ble Delhi High Court in case of Sharp .....

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