Case Law Details

Case Name : SWAWS Credit Corporation (P) Ltd., Hyderabad vs. DCIT (ITAT Hyderabad)
Appeal Number : ITA.No.24/Hyd/2013: 21/10/2016
Date of Judgement/Order : 2009-2010
Related Assessment Year :
Courts : All ITAT (6907) ITAT Hyderabad (369)
Advocate Akhilesh Kumar Sah

Section 32 of the Income Tax Act, 1961(herein referred to as ‘the Act’) deals with the depreciation. The Appendix I to the Income Tax Rules, 1962 classifies in two parts the assets entitled to depreciation. Part A describes assets in respect of tangible assets mentioned therein while Part B provides depreciation @ 25% in respect of intangible assets mentioned as know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

Recently, in SWAWS Credit Corporation (P) Ltd., Hyderabad vs. DCIT [ITA.No.24/Hyd/2013 A.Y.2009-2010, decided on 21.10.2016], the issue in the appeal was with reference to claim of depreciation/deferred revenue expenditure on the lump sum consideration paid for creation of client base as an intangible asset.

In the above-mentioned appeal, briefly, the assessee company in the previous year 2008-09 relevant to the A.Y. 2009-10 had acquired micro finance business consisting of loan portfolio of existing clients from the S.Society by paying a lump sum consideration of Rs.6 crore consisting of two parts- Rs.4 crore paid as a client creation cost @ Rs.400 per customer and Rs.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) – of the Significant Accounting Policies in Schedule 17 Annexed to the Annual Financial Statements i.e., Balance Sheet as on 31.03.2009, Income and Expenditure Account for the Year ended 31.03.2009 and cash flow statement for the year ended 31.03.2009. Accordingly, assessee followed the policy of treating the same as deferred revenue expenditure by grouping the same under “Miscellaneous Expenditure (to the extent not written off or adjusted) in the Balance Sheet and followed the policy of writing off the same to the extent either Rs.120 Lakhs or 30% of the Profit Before Interest and Tax(PBIT) whichever is less. Accordingly, the assessee charged Rs.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 Rs.56,19,306 being the amount debited to P& L Account and claimed Rs.1,20,00,000 as deduction which was 20% of the total amount of Rs.6 crore paid being 1/5th of the expenditure.

Before the AO, the assessee claimed that the same was a revenue expenditure and that the deferred revenue expenditure was allowable. The assessee relied on:

  1. Madras Investment Corporation Ltd. vs. CIT (1997) 91 Taxman 340 (SC),
  2. Hindustan Aluminum Corporation Ltd. vs. CIT (1982) 11 Taxman 129 (Cal),
  3. CIT vs. Prakash Pictures (2003) 127 Taxman 654 (Bom) and
  4. ITO vs. Shreys Shipping Ltd. (2003) 86 ITD 556 (Mum).

The AO disallowed the claim and restricted the allowance to Rs.50,00,000 as depreciation @25% in respect of the Rs.2 crore component of the consideration as intangible asset under Section 32 of the Act. The alternate claim of the assessee that the client creation cost was also part of the intangible asset as the same related to the acquisition of business or commercial rights in the existing business and the component of Rs.4 crore paid towards the client creation cost was also eligible for depreciation @ 25% within the meaning of Section 32(1)(ii) was rejected by the AO.
Thereafter, the assessee preferred an appeal before the CIT(A) and reiterated the claim under Section 32(1)(ii) and also reiterated the alternate claim of deferred revenue expenditure. The assessee placed reliance on the following decisions :

  1. Areva T and D India Ltd. vs. DCIT (2012) 345 ITR 421 (Del)
  2. CIT vs. Hindustan Coca Cola Beverages P Ltd. (2011) 331 ITR 192
  3. Techno Shares and Stocks Ltd. vs. CIT (2010) 327 ITR 323 (SC)
  4. Skyline Caterers P Ltd. vs. ITO (2008) 306 ITR (AT) 369 (Mum)
  5. CIT vs. Mediworld Publication (2011) 337 ITR 178 (Del)

The CIT(Appeals) rejected the contention that the amount of Rs.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 CIT(Appeals) stating that there was specific submission and there is no provision in the Act for allowing deferment of expenditure except in specific circumstances.

Against the order of the CIT(A), the assessee preferred appeal before ITAT, Hyderabad.

The learned members of the ITAT observed that the only dispute was with reference to Rs.4 crore paid as client creation cost.  Hon’ble Members considering the rival submissions, the nature of payment, relied on the Coordinate Bench decision in the case of SKS Micro Finance Ltd. vs. DCIT, Circle-3(2), Hyderabad (2013) 145 ITD 111 (ITAT-HYD) and finally held that the client acquisition cost paid by the appellant was towards acquiring an intangible asset and therefore eligible for depreciation under section 32(1)(ii) of the Act @ 25%.


With the help of above- mentioned decision of the Hyderabad, ITAT client creation cost can be taken as an intangible asset entitled to depreciation.

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One Comment

  1. N.SUNDARAM says:

    Under the Incometax Act Intangible Asset are entitled for depreciation @25%. When Revenue
    expenditure are deferred for reasons that the
    expenditure incurred for marketing the products
    and other one time expenditure were deferred since the benefits are enduring in nature. Please
    clarify whether Expenditure such as Advertisment
    sales promotion which are treated as deferred can be treated as intangible asset ?

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