Pre-operative expenses and registration fee paid to SEBI are allowable as intangible asset and assessee can claim depreciation on the same

HSBC Asset Management (India) Private Limited Vs DDIT (ITAT Mumbai)- Pre-operative expenses and registration fee paid to SEBI are allowable as intangible asset and assessee can claim depreciation on the same and AO cannot question the allow ability if same was allowed in the earlier AY.

IN THE INCOME TAX APPELLATE TRIBUNAL,

MUMBAI BENCH “H”, MUMBAI

ITA No. 2028/MUM/2009 (A.Y. 2004-05)

M/s. HSBC Asset Management (India) Private Limited, Vs. The Dy. Director of Income Tax

ORDER

PER N.V.VASUDEVAN, J.M,

This is an appeal by the assesee against the order dated 22/1/2009 of CIT(A)XXXIII, Mumbai relating to assessment year 2004-05.

2. The assessee is a company. It acts as investment manager of HSBC Mutual Funds. The SEBI has approved the assessee to act as investment manager of mutual funds. The assessee received certificate of registration to act as Portfolio Manager under the SEBI(Portfolio Managers) Regulations 1993 w.e.f. 16/9/05.

3. On perusal of depreciation chart filed as Annexure to Tax Audit Report in Form No.3CD, the AO noticed that the assessee had claimed depreciation on intangible assets @ 25%. It was further stated by way of note that, the intangible assets comprised of Pre-operative expenses of Rs. 77,58,599/- and SEBI Registration fee of Rs. 25,00,000/-. According to the Assessee, the expenditure incurred in securing registration from SEBI by paying ITA NO.2028/MUM/2009(A.Y. 2004-05) registration fee of Rs.25,00,000/- was an intangible asset on which the Assessee can claim depreciation u/s.32(1)(ii) of the Act. Further the expenditure incurred prior to obtaining registration to act as Mutual fund manager of Rs. 77,58,599/- required to be capitalized and treated as intangible asset and the Assessee was entitled to claim depreciation u/s.32(1)(ii) of the Act. According to the AO, Pre-operative expenses and SEBI Registration fee does not specifically fall u/s. 32(1)(ii) of the Income Tax Act, 1961 (the Act) as intangible asset and therefore he called upon the assessee to justify its claim for depreciation on intangibles. In response the assessee vide letter dated 13/12/2006 submitted the breakup of the preoperative expenses incurred by the assessee during assessment Year 2002- 03 (i.e. relevant to previous year ended March, 31, 2002, prior to commencement of business by the assessee as follows:

The assessee pointed out to the AO that it had commenced its business on April 2, 2002 and that the above mentioned expenses were incurred prior to commencement of the business of the assessee. It was further clarified that  the Assessee was a company incorporated as a private company with the main object of carrying on the business of “Asset Management Company”. The sum of Rs. 25,00,000 which is the registration fee paid to SEBI under regulation 9 of the SEBI (Mutual Fund) Regulations, 1996 to obtain registration as n Asset Management Company, which is mandatory to commence its business. The registration fees paid by the assessee company is a one time registration fees. A copy of the Registration Certificate from SEBI was also filed. It was submitted by the Assessee that the registration fee is a payment made to obtain a commercial right without which the assessee could not have commenced its business as an “Asset Management Company. It was further submitted that the other expenses like rent and utilities, salaries, administration, etc. were incurred so as to enable the assessee to get the required registration under regulation 9 stated above. It was submitted that the other expenses incurred were also to obtain “a commercial right” (viz. registration from SEBI) without which the business of the assessee cannot be carried on. It was argued that the right obtained on registration with SEBI is similar to the right obtained by a member of a recognized stock exchange on obtaining membership of the Stock Exchange. The same principle can be applied to Registration required by the  assessee company to carry on the business of an Asset Management Company. The assessee relied on the following decisions in which it was held that the membership of a recognized stock exchange is in nature of commercial right, and is an “Intangible Asset” on which depreciation u/s. 32 is allowable viz., a) Techno Shares and Stock Limited vs. ITO (101 TTJ 349)(bom); M/s. Kaynet Capital Ltd. vs. DCIT (ITA No.3870/M/05)(Mum).

4. The AO however was of the view that an amount of Rs. 77,58,599/-  was incurred prior to the commencement of business mainly on account of rent & utilities, salaries, administration, etc. According to the AO, the intangible asset contemplated by section 32(1)(ii) should be in the nature of know-how, patent, copyrights, trade marks, licences, commercial rights etc. and the same should have been “acquired” by the assessee on or after 1/4/1998. According to the AO by no stretch of imagination can the  expenses like rent & utilities, salaries, administration, etc. be considered intangible asset nor can it be said that the assessee acquired any intangible asset. Accordingly, the depreciation claimed by the assessee on preoperative expenses were disallowed. For identical reasons the AO held that depreciation on registration fee treating it as intangible asset cannot also be allowed.

5. Before CIT(A) the assessee apart from reiterating its stand as was made before the A.O., submitted that in A.Y 2003-04 the assessee had claimed depreciation on fees paid to SEBI for registration of Rs. 25,00,000/- and also the pre-operative expenses by treating them as part of the actual cost of the block of intangible assets and the AO had allowed depreciation in the said assessment year in the order passed under section 143(3) of the Act. It was submitted that in the present assessment year it was not possible to disallow depreciation on item of asset which has already in the block of assets and in respect of which depreciation had already been allowed. This submission of the assessee was not considered by the CIT(A). The CIT(A) confirmed the order of the AO holding that there were no intangible assets on which depreciation can be allowed.

6. Aggrieved by the order of the CIT(A) the assessee has filed the present appeal before the Tribunal.

7. Though the Assessee has raised many grounds of appeal, it was submitted by the learned counsel for the Assessee that the Assessee would press for adjudication only the ground raised by the assessee before the Tribunal that depreciation should be allowed treating the SEBI Registration fee as intangible asset or in the alternative the same should be allowed as deduction under section 37(1) of the Act. Further it was submitted that the pre-operative expenses incurred in connection with obtaining registration of the mutual fund from SEBI should be capitalized and treated as part of the block of assets “intangible assets” and depreciation allowed on the same. The learned D.R. relied on the order of the Revenue authorities.

8. We have heard the rival submissions. It is seen from Page No.63 of the assessee’s paper book that in A.Y 2003-04 the assessee had claimed depreciation of Rs. 25,64,650/- as allowable as per the provisions of the IT Act on Block of Assets under the head “intangible Assets”. The AO allowed the claim of the assessee of depreciation for A.Y 2003-04 by an order passed under section 143(3) dated 28/3/2006. Thus it is clear that the fees paid for registration as a mutual fund to SEBI and the pre-operative expenses prior to such registration have already been treated as intangible asset and form part of the block of assets of the assessee as on 1/4/2004. The provisions of Sec.32 (1) (ii) of the Act provides as follows:

“32. Depreciation.–(1) In respect of depreciation of–

(i) buildings, machinery, plant or furniture being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession the following deductions shall be allowed–

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed.

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:

Provided that……..

Explanation 2.–For the purposes of this sub-section “written down value of the block of assets” shall have the same meaning as in clause (c) of sub-section (6) of section 43;

Explanation 3.–For the purposes of this sub-section, the expressions “assets” and “block of assets” shall mean–

(a) tangible assets, being buildings, machinery, plant or furniture ;

(b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature.

Sec.43(6)( c) of the Act defines written down value and it reads as follows:

“43. Definitions of certain terms relevant to income from profits and gains of business or profession.–In section 28 to 41 and in this section, unless the context otherwise requires—

(6) “written down value” means–

(a)

(b)

(c) in the case of any block of assets,–

(i)

(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).”

In other words in terms of section 32(1)(ii) of the Act, the AO has to allow depreciation on the WDV of the block of assets and the prescribed rates. The AO cannot in the present Assessment year dispute the opening WDV of the block of Assets nor can he examine the correctness or otherwise of the opening WDV brought forward from the earlier year. It was also submitted by the ld. counsel for the assessee that the order under section 143(3) for A.Y 2003-04 continues to exist and has not been disturbed by any proceedings under the Act. We are therefore, of the view that it was not possible for the AO in the present assessment year to take a stand different from the one taken in the earlier assessment year. Having allowed the depreciation in the immediately preceding year it is not open to the AO to take different stand for the year under consideration. On this short ground, we direct that the depreciation claimed by the assessee should be allowed. In view of the above, we have not gone into the question whether the sums in question would be terms as intangible assets entitled to depreciation. For the reasons given above we allow the appeal of the assessee.

9. In the result, the appeal of the assessee is allowed Order pronounced in the open court on the 15th day of June, 2011.