It is impossible to presume that expression `licence’ provided in section 32(l)(ii) is an endless expression and even a tenancy right can be brought under it

The agreement of the assessee to acquire a rented property for running its office cannot be considered as an intangible asset similar to know how, patents, copy rights, trade marks, etc under section 32(1)(ii).

CASE LAWS DETAILS

DECIDED BY: ITAT, COCHIN BENCH, COCHIN, IN THE CASE OF: ACIT  v. Malayala Manorama Co. Ltd., APPEAL NO: ITA NO. 323/Coch/2007, DECIDED ON JULY 10, 2009

FACTS

In the previous year relevant to the assessment year under appeal, the assessee has renewed its leave and licience agreement with M/s. M. M. Rubber Co. Ltd. to continue the use of premises of M/s. M. M. Rubber Co. Ltd. taken on lease, as the Chennai Brahch Office of the assessee-company. The leave and licence agreement was executed on payment of a lump-sum amount of Rs.50 lakhs by the assessee-company to M/s. M/s. M. M. Rubber Co. Ltd. and with a monthly rent of Rs.47,500/-. The assessee company treated this lump-sum payment of Rs.50 lakhs as an item of “intangible asset” and claimed depreciation. The depreciation amount was worked out to Rs.6,25,00/-. The Assessing Officer found that the assessee has not acquired any intangible asset in the nature of know how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. The Assessing Officer found that the assessee has merely obtained the right to use the premises let out by M/s. M. M. Rubber Co. Ltd. as its Chennai Office. The Assessing Officer further noticed that the agreement entered into between the assessee and M/s. M. M. Rubber Co. Ltd. prohibits the assessee from exploiting its tenancy right in any commercial manner and the right itself was not transferable. Accordingly the Assessing Officer came to a conclusion that it was only a case of rent advance/lease deposit and therefore the payment of Rs.50 lakhs cannot be treated as paid for acquisition of any intangible asset.

When the matter travelled through the CIT(Appeals), in first appeal, she accepted the contention that the payment of Rs.50 lakhs made by the assessee company to M/s. M. M. Rubber Co. Ltd. was in the nature of an intangible asset, in the light of the concept of depreciation on intangible asset introduced by the Finance (No. 2) Act, 1998. The CIT(Appeals) explained different kinds of intangible assets such as know how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. She was further of the view that any capital expenditure incurred by an assessee on acquiring such intangible asset need to be treated as eligible for depreciation. She observed that this position emerges with effect from 1st day of April 1999 and applies to the assessment year 1999-2000 onwards. She also referred to the Memo explaining the provisions in the Finance (No.2) Act 1998 and found that the new scheme was introduced to widen the scope of depreciation so as to grant the allowance where intangible assets are owned wholly and partly by the assessees and used for the purpose of business or profession. She held that the agreement entered into by the assessee with M/s. M. M. Rubber Co. Ltd. is in the nature of licence and therefore it is an intangible asset within the meaning of explanation given u/s.32, where the meaning of the term ‘intangible asset’ has been explained in the statute. The claim of the assessee was thus accepted by the CIT(Appeals) and directed the Assessing Officer to allow depreciation allowance claimed by the assessee.

HELD
Section 32 (l)(ii) provides for depreciation on intangible assets acquired on or after the 1st day of April, 1998. Clause (ii) of sub section (1) of section 32 explains the nature of intangible assets as know how, patents, copy rights., trade mark, licences, franchise or any other business or commercial rights of similar nature being intangible assets acquired on or after the first day of April, 1998.

The know how, patents, copy rights, trade marks, etc. do not have any nexus with a premises being taken on lease, licence or rent for running the office of an assessee. Know-how means as provided under Explanation 4 to section 32(1), any industrial information or technic likely to assist in the manufacture or processing of goods etc. So it is to be seen that know-how is an intangible asset in the nature of technical knowledge capable of exploiting for. commercial or industrial purposes. It is necessary to have the know how of producing a particular article or thing. Even though it is intangible, that know-how has an identity and commercial value as that know-how is essential for manufacturing or producing a particular article or thing. It is not in the nature of a licence, which provides an assessee a right to use a portion of a building as its office. It has nothing to do with acquiring of tenancy right. This is the case also of the expressions like patents, copyrights, trade marks etc. They are recognized as commercial and industrial rights that are very much connected with carrying on of business. An assessee can run its office either in building (a) or (b) or (c) but if it wants to enter into a particular business, it will have to acquire a particular patent or copy right or trade mark as the case may be. Sq even by any distant imagination, it is impossible to presume that expression licence, provided in section 32(l)(ii) is an endless expression and even a tenancy right can be brought under it.

Ejusdum generis is the rule of generic word following more specific ones. The rule is that when general words follow specific words of the same nature, the general words must be confined to the same kind as those specified. The specific words must form a distinct genesis or category. This rule reflects an attempt to reconcile incompatibility between specific and general words. The specific words provided in section 32(l)(ii) conform a distinct genesis or category in as much as all those expressions relate to exploitable know-how patents, copy rights, trade marks, etc. which are always acclaimed as business and commercial properties. In such circumstances, the expressions licence and I business or commercial rights also should be read along with the meaning of those specific words forming themselves into a special category. If this principle of interpretation is rightly applied in the present case, the agreement of the assessee to acquire a rented property for running its office cannot be considered as an intangible asset similar to know how, patents, copy rights, trade marks, etc. Therefore, we are unable to subscribe to the arguments advanced by the learned Chartered Accountant that the expression licences and business or commercial rights should be given an endless meaning not necessarily similar to the meaning of the expressions like, know-how patents, copy rights, trade marks, etc. Therefore, it is certain that the meaning of the expression licences and business or commercial rights reflected in section 32(1 )(ii) should be similar to know-how, patents, copy rights, trade marks, etc. The tenancy right acquired by the assessee in the present case is no-where near to section 32(1 )(ii).

RELEVANT  PARAGRAPHS

13. We heard both sides in detail. Section 32 (l)(ii) provides for depreciation on intangible assets acquired on or after the 1st day of April, 1998. Clause (ii) of sub section (1) of section 32 explains the nature of intangible assets as know how, patents, copy rights., trade mark, licences, franchise or any other business or commercial rights of similar nature being intangible assets acquired on or after the first day of April, 1998.

14. A reading of the provisions of law contained in section 32(1)(ii) provides that the intangible assets entitled for depreciation are specific set of asset/ rights of similar nature. In addition to that, the intangible assets must be acquired by an assessee either in full Ownership or partial ownership. In furtherance of the main provisions of law contained in section 32(l)(ii), Explanation 3 again throws light on the concept of intangible assets While explaining the expressions “assets” and “block of assets’, the explanation has detailed the nature pf intangible assets again as know how, patents, copy rights, trade marks, licences, franchises or any other business or commercial rights of similar nature. The assessee is emphasizing on the expression “licences”, “business of commercial rights”. But it is to be seen that the licence or any other business or commercial rights must be of similar nature. What is similar in nature? It is the licence or any other business or commercial rights of that nature similar to know how, patents, copyrights, trade marks, and franchises. The expressions licences and business pr commercial rights are found in the company of expressions like know how, patents, copyrights, trademarks, franchises. If one applies the principle of statutory interpretation of ejusdum generis, the expressions ” licences and business or commercial rights” ‘have to be read in the company of the preceding expressions such as know how, patents, copyrights, trade marks, etc.

15. The know how, patents, copy rights, trade marks, etc. do not have any nexus with a premises being taken on lease, licence or rent for running the office of an assessee. Know-how means as provided under Explanation 4 to section 32(1), any industrial information or technic likely to assist in the manufacture or processing of goods etc. So it is to be seen that know-how is an intangible asset in the nature of technical knowledge capable of exploiting for. commercial or industrial purposes. It is necessary to have the know how of producing a particular article or thing. Even though it is intangible, that know-how has an identity and commercial value as that know-how is essential for manufacturing or producing a particular article or thing. It is not in the nature of a licence, which provides an assessee a right to use a portion of a building as its office. It has nothing to do with acquiring of tenancy right. This is the case also of the expressions like patents, copyrights, trade marks etc. They are recognized as commercial and industrial rights that are very much connected with carrying on of business. An assessee can run its office either in building (a) or (b) or (c) but if it wants to enter into a particular business, it will have to acquire a particular patent or copy right or trade mark as the case may be. Sq even by any distant imagination, it is impossible to presume that expression licence, provided in section 32(l)(ii) is an endless expression and even a tenancy right can be brought under it. Expressions licence and business or commercial rights appearing in the (company of know how patents, copy rights, trade marks, etc. cannot be singled out and imputed with a different meaning.

16. Ejusdum generis is the rule of generic word following more specific ones. The rule is that when general words follow specific words of the same nature, the general words must be confined to the same kind as those specified. The specific words must form a distinct genesis or category. This rule reflects an attempt to reconcile incompatibility between specific and general words. The specific words provided in section 32(l)(ii) conform a distinct genesis or category in as much as all those expressions relate to exploitable know-how patents, copy rights, trade marks, etc. which are always acclaimed as business and commercial properties. In such circumstances, the expressions licence and I business or commercial rights also should be read along with the meaning of those specific words forming themselves into a special category. If this principle of interpretation is rightly applied in the present case, the agreement of the assessee to acquire a rented property fair running its office cannot be considered as an intangible asset simUac to know how, patents, copy rights, trade marks, etc under section 32(1)(ii). Therefore, we are unable to subscribe to the arguments advanced by the learned Chartered Accountant that the expression licences and business or commercial rights should be given an endless meaning not necessarily similar to the meaning of the expressions like, know-how patents, copy rights, trade marks, etc. Therefore, it is certain that the meaning of the expression licences and business or commercial rights reflected in section 32(1)(ii) should be similar to know-how, patents, copy rights, trade marks, etc. The tenancy right acquired by the assessee in the present case is no-where near to section 32(1)(ii).

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