Section 32 – Assessee acquired entire business of ‘S’ – Depreciation claimed by assessee on acquisition of rights of clients of ‘S’ contending that consideration paid towards transfer of clients was an intangible asset eligible for depreciation – AO and CIT(A) disallowed the claim holding that the right acquired was not an intangible asset – Tribunal held that by acquiring the customer base the assessee has acquired business and commercial rights of similar nature and hence eligible for depreciation.
Facts:
The assessee was engaged in the business of Micro Financial Lending Services through small joint liability groups and direct micro loans. The assessee entered into memorandum of understanding (MOU) with ‘S’, another company which was also engaged in the business of micro finance and acquired the entire business of ‘S’. This also included the acquisition of rights over more than 1.10 lakhs existing clients of ‘S’. The assessee claimed depreciation on the amount contending that the consideration paid to ‘S’ towards transfer of clients was for an intangible asset eligible for depreciation. It was contended that the customers were a source of assured economic benefits over the next 5 years and in that process, the assessee capitalised the cost in the books and amortised the cost over a period of 5 years.
The AO disallowed depreciation holding that the intangible asset claimed to have been acquired by the assessee does not come under any of the identified assets appearing in the depreciation schedule (intangible asset) i.e. know-how, patents, copy rights, trade marks, licenses, franchises or any other business or commercial rights of similar nature. The AO held that as the assessee had acquired part of the already existing business of ‘S’, the said asset had not been created during the course of business of the assessee and hence cannot be considered to be a business or commercial rights of similar nature.
The CIT (A) held that the customer base acquired by the assessee cannot be considered a licence or business or commercial right of similar nature as it does not relate to any intellectual property whereas section 32(1)(ii) contemplate depreciation in respect of those licenses or rights which relate to intellectual property.CIT(A) relied on decision of the Hon’ble Bombay High Court in case of CIT vs. Techno Shares & Stocks Ltd. [2009] 184 Taxman 103.
Held:
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. Therefore, by acquiring the customer base the assessee has acquired business and commercial rights of similar nature.
The Hon’ble Delhi High Court in the case of Areva T & D India Ltd. ([2012] 345 ITR 421) while interpreting the term “business or commercial rights of similar nature” has held that 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. In the circumstances, the nature of “business or commercial rights” cannot be restricted to only know-how, patents, trade marks, copyrights, licences or franchisees. All these fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business.
The CIT(A) while coming to his conclusion had relied upon the decision of the Bombay High Court in case of CIT vs. Techno Shares & Stock Ltd. wherein the 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 High Court has been reversed by the Supreme Court in the case of Techno Shares and Stocks Ltd. vs. CIT [2010] 327 ITR 323. The SC has held that intangible assets owned by the assessee and used for the business purpose 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.
Based on all the above decisions, it was held 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 depreciation under that section.
Readers may also read Mumbai Tribunal decision in case of India Capital Markets (P.) Ltd. vs. Dy. CIT [2013] 29 taxmann.com 304/56 SOT 32 (Mum.)
