The Mumbai bench of the Income Tax Appellate Tribunal recently ruled that depreciation under section 32 of the Income Tax Act, 1961 is allowable on management rights acquired by the assessee since it falls within the said provision. Under section 32(1)(ii), an tax-payer who has acquired intangible rights after 01-04-1998 being know-how, patents, copy rights, trade marks, licenses and franchise and any other business or commercial rights of similar nature is eligible to claim depreciation on such intangible.
The assessee company is engaged in the business of running a hospital and has expertise in management of health centres and facilities. During the relevant assessment years, the assessee filed return by claiming depreciation in respect of management rights acquired by the assesseeand capitalized as intangibles. The Assessing Officer disallowed the same on ground that that the assessee company’s claim of purchasing management rights of Nagpur Hospital is nothing but premium paid for management agreement, which was a non-depreciable capital asset.
On appeal, the assessee maintained that as per terms of the agreement, the assessee company has acquired significant commercial and business rights from Dr. Bais Surgical and Medical Institute Private Limited for a period of 10 years, extendable for another two terms of 10 years at the option of the parties.According to the assessee the amount spent on the same is allowable as depreciation under section 32 of the Act. However, the Commissioner of Income Tax (Appeals) confirmed the impugned order by holding that management rights are not specifically included in Section 32(1)(ii) of the Act and such rights cannot be claimed as commercial rights of similar nature. The learned CIT(A) also held that the assessee company has capitalized the payments made for the acquisition of management rights in its books of accounts and hence the same is not allowable as expenses u/s 37(1) of the Act. Thereafter, the assessee approached the Appellate Tribunal for remedy.
Before the Tribunal, the assessee cited the decision of the Supreme Court in Smifs Securities Ltd. 348 ITR 302, in which it was held that intangible assets in the form of goodwill is eligible for claim of depreciation. The Co-ordinate bench of Mumbai Appellate Tribunal also applied the ratio of the above judgment in assessee’s own case in ITA no.2376-2378/Mum/2011.
Following the above decision, the Tribunal held that the assessee is entitled to depreciation on management rights.
Read the full text of the order below.
