ITAT Mumbai allows depreciation on licenses, approvals, registrations etc as intangible assets even though recorded as Goodwill in books

Brief : In the light of the above decisions, it can now be concluded that orders of CIT which set aside assessment orders on the ground that they are erroneous (due to non application of mind, etc) without recording any finding to show as to how the said assessment order is erroneous or prejudicial to the interest of revenue (without rejecting the claim of the taxpayer) are bad in law and liable to be quashed.

Citation : PIEM Hotels Ltd Vs. DCIT (ITA No. 523/Mum/2009) (Mum)

Court : ITAT Mumbai

Recently, in the case of PIEM Hotels Ltd Vs. DCIT (ITA No. 523/Mum/2009) (Mum) Mumbai bench of the Income-tax Appellate Tribunal (the tribunal) held that licenses, approvals, registrations, etc. qualify as intangible assets even though they are recorded as “goodwill” in books of accounts and therefore, entitled to depreciation under Section 32(1)(ii) of the Income-tax Act, 1961 (the Act).

Merely because the AO has not examined license, approvals, registrations, etc and had not applied his mind regarding allow ability of depreciation of asset claimed as intangible asset does not mean that the order passed by AO is erroneous and prejudicial to the interest of revenue.

Also, an authority exercising revisional power cannot direct the lower authority to complete the assessment in particular manner.

Facts of the case

• Taxpayer claimed depreciation under section 32(1)(ii) of the Act on licenses, approvals, registrations, etc by recording the same as “goodwill” in books of accounts.
• The Goodwill claimed included approvals taken from government bodies i.e. Registration of employees under PF Act, Family Pension, State Insurance Act, Payment of Wages Act, Bonus Act, Contract and Labor Act, Industrial & Employment act, approval for lift license, calibration of weights and measures, NOC from PWD, Liquor License, Service tax, TAN registration, etc.
• AO allowed depreciation under section 32(1)(ii) of the Act on the approval/ registration classified as “goodwill”.
• CIT issued notice under section 263 of the Act and held that the order passed by AO is erroneous and prejudicial to the interest of revenue on the following grounds:

-AO has allowed depreciation on goodwill though there is no mention of word “goodwill” under section 32(1) (ii) of the Act

-AO has passed the order without application of mind as the order is completely silent about the aspect of allowance of depreciation on licenses, approvals, registrations, etc.

-AO has not applied his mind as to whether these licenses, approvals, registrations, etc bring into existence any new asset or not.

– details of nature of licenses, approvals, registration, etc and its item wise valuation were not verified by him.

• Accordingly, the order passed by AO was set aside and assessment was directed to be made afresh after providing an opportunity of being heard to the taxpayer.

Taxpayer’s contention

• Issue regarding allow ability of depreciation on licenses, approval, registration recorded as “goodwill” in books of accounts was raised during assessment proceedings and since this issue is examined, it is outside the scope of jurisdiction under section 263 of the Act.
• The “goodwill” represents various intangible rights acquired in the form of valuable licenses, approval, registrations, etc. and though recorded as “Goodwill” in books of accounts is entitled to depreciation.
• The claim for depreciation was made in respect of opening Written Down Value (WDV) of Goodwill. In the year under consideration also AO has allowed the claim of opening WDV after due examination therefore, it cannot be inferred that AO did not apply his mind.
• Mere lack of discussion of the issue in the assessment order would not render the said order erroneous.

Issue before Tribunal

• Whether depreciation is allowable on the intangible assets in the form of licenses, approvals, registration, etc as “goodwill” in books of accounts?

• Whether CIT was justified in invoking jurisdiction under section 263 of the Act on the ground that AO has not applied his mind with regard to allow ability of depreciation on these intangible assets?

Tribunal’s ruling

• On merits, licenses, approvals, registrations, etc amount to “intangible assets” and entitled to depreciation under section 32(1)(ii) of the Act.
• The CIT had not recorded any finding to show how the assessment order was erroneous and prejudicial to the interest of the revenue. Merely because the AO had not examined whether the approvals / registrations etc. amounted to intangible assets and had not applied his mind to the examination and verification of the allow ability of depreciation on intangible assets did not mean that the assessment order was erroneous and prejudicial to the interests of the revenue. It was not the case of the CIT that depreciation was not allowable on such items of intangible assets;
• An authority exercising revisional power cannot direct the lower authority to complete the assessment in particular manner.

Our Comments

This decision can have far reaching impact as currently tax authorities are not allowing depreciation on acquired intangible assets of various forms including licenses, approvals, registration, etc. This decision clearly provides that government licenses, approvals, registrations, etc are part of intangible assets even though recorded as goodwill in books of accounts.

Also in light of the above decisions, it can now be concluded that orders of CIT which set aside assessment orders on the ground that they are erroneous (due to non application of mind, etc) without recording any finding to show as to how the said assessment order is erroneous or prejudicial to the interest of revenue (without rejecting the claim of the taxpayer) are bad in law and liable to be quashed.