Depreciation cannot be disallowed merely on ground that IPR was not used for Manufacturing Activities: Delhi HC [Read Judgment]

A division bench of the Delhi High Court has held that the claim for depreciation under Section 32 of the Income Tax Act, 1961 cannot be disallowed merely on the ground that the intellectual property rights were not used by the assessee for the manufacturing activity.

The assessee had purchased products from Monsanto India Limited and had thereafter sold these products with the acquired and purchased trademarks like Lasso, Machete and Fast Mix. Sales were through chain of dealers and retailers. Trademarks acquired and owned by the assessee were advertised for sale promotions. For the year under consideration, the assessee had claimed depreciation of Rs. 3,44,37,935/- on the said block of assets. The Assessing Officer disallowed the claim on the ground that the capital asset in form of intellectual property rights was not used for manufacturing activities.

On appeal, both the Commissioner of Income Tax (Appeals) and the Tribunal granted relief to the assessee. Aggrieved by the orders, the Revenue approached the High Court.

The division bench comprising Justices Sanjiv Khanna and Chander Sekhar noted that the purchase of intellectual property rights by the assessee, consideration paid, the nature and character of the intellectual property rights etc., are not disputed. The intellectual property rights purchased by the assessee included trademarks>

It was further noted that the respondent-assessee had borne the “Lasso”, “Machete” and “Fast Mix”, rights to reference and use of registration data in support of product registration, benefits of business contracts, business information, business intellectual property right, trademarks and rights against third parties.

“It is an accepted and admitted position that the products sold by the respondent-assessee had borne the trademarks “Lasso”, “Machete” and “Fast Mix”. Substantial advertisement and sales promotion expenditure was incurred. Use of intellectual property rights for sales and marketing was not questioned and commented upon in the assessment order. Depreciation was disallowed as the asset had not been put to use for manufacturing activities. This cannot be a ground and reason to hold that the assessee had not “put to use” the intellectual property rights assets in the year in question. Mere purchase of the products, from third party or the fact that assessee was not engaged in manufacturing activity, would not make any difference,” the bench said.