Case Law Details
Issue- The learned Commissioner of Income Tax (Appeals)-IV, Hyderabad, failed to note that “right to access the members of the society was an Intangible asset” falling within the meaning of the definition contained intangible asset as laid down in section 32(1) (ii) of the Income Tax Act, 1961 and therefore the Appellant was entitled to claim the depreciation at Rs.99,25,284/-.
Fats :- Briefly the facts relating to the issue in dispute are, the assessee, a private limited company is engaged in the business of Micro Financial Lending Services to women in rural areas through small joint liability groups and direct micro loans. For the impugned assessment year the assessee filed its return of income on 15-11- 2006 declaring income of Rs.12,79,373/-. Initially the return was processed u/s 143(1) of the Act. Subsequently, assessee’s case was selected for scrutiny assessment. During the scrutiny assessment proceeding while examining the assessee’s statement of accounts the Assessing Officer noticed that the assessee had claimed depreciation at 25% in respect of intangible asset amounting to Rs.99,25,284 by mentioning that during the financial year relevant to the assessment year under dispute the assessee had incurred client creation cost of Rs.3,97,01,135 and written off 25% of that intangible asset amounting to Rs.99,25,284/- to the P & L A/c. In response to further query made by the Assessing Officer, the assessee submitted that the assessee acquired over one lakh clients at a cost of Rs.3.97 crores @Rs.350 per customer. It was further submitted that these were trained, motivated, credit checked and risk filtered and are a source of assured economic benefits over the next five years and in that process, the assessee capitalised the cost in the books and amortised the cost over a period of five years. It was submitted that the assessee has the capacity to control the future benefits from the customer which arises from legal rights enforceable in a court o f law. It was submitted that the customers once acquired would have business relationship with the assessee company between three to five years and the association was reasonably secured and assured and the cost was also measured reliably as those have been separately identified and paid for. It was therefore contended that the consideration paid to Swayam Krishi Sangam (SKS)towards transfer of customers was for an intangible asset eligible for depreciation.
The Assessing Officer noted that as per appendix to Rule-5 of the IT Rules any assessee would be eligible for depreciation @ 25% in respect of intangible assets of know-how, patents, copy of rights, trade marks, licenses, franchises or any other business or commercial rights of similar nature. The Assessing Officer was of the view 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. The Assessing Officer was also of the view that since the assessee had acquired part of the already existing business of SKS the said asset had not been created during the course of business of the assessee, hence cannot be considered to be a business or commercial rights of similar nature. The Assessing Officer observed that the amount of Rs.3,97 crores paid by the assessee for acquisition of clients who were already enrolled with SKS and participating in their finance business. The Assessing Officer further noted that subscribers were already having a participation in the finance business of SKS and had got finance assistance from that concern and were in the process of repayment of the financial facility already availed. Assessing Officer felt that the fruits of the business were being enjoyed by SKS. Whereas, the assessee had only acquired the clientele available on the rolls of SKS by making a lumpsum payment. The Assessing Officer therefore concluded that, the same could not be compared with the intangible assets mentioned in Rule 5 of the schedule as it was not amounting to an asset in the assessee’s business and could not have been said to be used in its business. Further the clientele acquired by the assessee did not have similar characteristics as that of know-how, patent etc., identified as intangible assets by the statute.
The Assessing Officer referred to the definition of ‘plant’ in section 43(3) of the Act which includes all other things except livestock, furniture and fittings and buildings. Furniture and fittings are kept under a separate head under rule 5. Thus, the only item left is livestock. The Assessing Officer was of the view that the assessee cannot be said to have purchased the clients of another concern by paying specific consideration. He observed that even if the assessee had obtained a specific number of clients by making lumpsum payment and taken them to into its business hold, it could only mean that the assessee had acquired future business rights with them, excluding the transferor concerned from the picture as they had foregone the rights of having business relationship with the existing business customers. The Assessing Officer opined that the assessee made the lumpsum payment in lieu of foregoing of future business relationship by the transferor company, hence the expenditure incurred by the assessee is of capital nature. However, the Assessing Officer was of the view that by such lumpsum payment the assessee did not bring any durable asset into existence. He observed that for claiming depreciation ownership and user are the prerequisites whereas members taken over from SKS are living beings who can default in payment at any time and therefore even though the assessee had the right of legal action, it could not be said to be the owner of such clients. The Assessing Officer also opined that mere collections of instalments in respect of the finances already made by the SKS cannot be said as amounting to user for the purpose of its business. The Assessing Officer finally concluded that as no intangible asset has come into the possession of the assessee no depreciation can be allowed. Accordingly, the Assessing Officer disallowed the depreciation claimed of Rs.99,25,284/-.
Held :- The learned departmental representative has relied upon a decision of Hon’ble Delhi High Court in case of Sharp Business Systems vs. CIT ( ITA No.492/Del/2012 dated 5-11-2012) wherein the Hon’ble Delhi High Court has held that depreciation cannot be allowed on non compete fee as it does not come within the meaning of intangible asset as provided u/s 32(1)(ii) of the Act. However, a reading of the aforesaid judgment would make it clear that the Hon’ble Delhi High court came to such a conclusion as it held that an agreement on non compete fee is purely personal. The Hon’ble High Court further held that the words similar or commercial rights have to necessarily result in an intangible asset against the entire world which can be asserted as such to qualify for depreciation u/s 32(1) (ii) of the Act. However, the facts in the present case are different. The MOU between the assessee and SKS Society cannot be said to be purely personal. On the other hand, the acquisition of rights over the assets of SKS Society including the customer base is an intangible asset against the entire World as held by the Hon’ble Delhi High Court. Therefore, the facts of the case considered in the light of the ratio laid down by various judicial precedents referred to hereinabove, in our view, the client acquisition cost paid by the assessee is towards acquiring an intangible asset and therefore eligible for depreciation u/s 32(1)(ii) of the Act. In aforesaid view of the matter, we direct the Assessing Officer to allow the assessee’s claim of depreciation. Hence, the grounds raised by the assessee are allowed.
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