Ita 379/2010 v. Ita 379/2010

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY FRIDAY, THE 24TH JUNE 2011 / 3RD ASHADHA 1933 ITA.No. 379 of 2010() --------------------- AGAINST THE ORDER DATED 20/04/2010 IN ITA 594/COCH/2008 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT / RESPONDENT / APPELLANT/ ASSESSEE : ----------------------------- S.AMBIKA, SUKANYA BHAVAN, T.C.XII/582, VADAYAKADU,KUNNUKUZHI, THIRUVANANTHAPURAM - 6 95 037. BY ADV. SRI.ANIL K.NARENDRAN RESPONDENT(S): / APPELLANT / RESPONDENT / REVENUE --------------- THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE -1 (2), AAYAKAR BHAVAN, KAWADIAR, THIRUVANANTHAPURAM - 6 95 003. ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 24/06/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A.NO.379/2010 APPENDIX APPELLANT'S EXHIBITS ANNEXURE-A :COPY OF ASSESSMENT ORDER DATED 19/12/2007 ISSUED BY R1FOR THE ASSESSMENT YEAR 2004-05 ALONG WITH A NOTICE OF DEMAND DATED19/12/2007 ISSUED UNDER SECTION 156 OF THE ACT. ANNEXURE-B :COPY OF MEMORANDUM OF APPEAL DATED NIL FILED BEFORETHE COMMISSIONER OF INCOME TAX (APPEALS)-1, THIRUVANANTHAPURAM ON07/01/2008. ANNEXURE-C :COPY OF ARGUMENT NOTES DATED 14/01/2008 FILED IN ITANO.51T/07-08 ON BEHALF OF THE APPELLANT. ANNEXURE-D :COPY OF ORDER DATED 20/01/2008 OF THE COMMISSIONER OFINCOME TAX (APPEALS)-1, THIRUVANANTHAPURAM IN ITA NO.51T/07-08. ANNEXURE-E :COPY OF MEMORANDUM OF APPEAL DATED 17/04/2008 INI.T.A.NO.594/COCH/2008 FILED BY THE RESPONDENT BEFORE THE INCOME TAXAPPELLATE TRIBUNAL, COCHIN BENCH. ANNEXURE-F :COPY OF ORDER DATED 20/04/2010 OF THE APPELLATETRIBUNAL IN I.T.A.NO.594/COCH/2008. ANNEXURE-G :COPY OF CORRIGENDUM DATED 04/05/2010 ISSUED BY THEAPPELLATE TRIBUNAL TO RECTIFY THE CAUSE TITLE OF ANNEXURE F ORDER. //TRUE COPY// jg PA TO JUDGE. C.N.RAMACHANDRAN NAIR &BHABANI PRASAD RAY, JJ. ....................................................................I.T. Appeal No.379 of 2010 .................................................................... Dated this the 24th day of June, 2011. C.R. J U D G M E N T Ramachandran Nair, J. The sole question raised in the appeal filed by theassessee is whether assessee is entitled to depreciation on thepurchase value of abkari licence under Section 32(1)(ii) of theIncome Tax Act. The assessee purchased a Bar attached hotelin November 2000 with land, building and FL-3 licence forcarrying on retail sale of liquor in the Bar hotelfor a totalconsideration of a little over Rs.80 lakhs. The assessee's caseis that out of the total consideration paid, Rs.60 lakhs and oddrepresents sale price paid for the purchase of FL-3 licenceissued for retail sale of liquor in Bar hotel under Rule 13 of theForeign Liquor Rules prescribed under the Kerala Abkari Act.The assessment involved in this case is for the year 2004-2005 and in the returns filed assessee claimed depreciation at ITA 379/2010 25% of the cost of purchase of abkari licence. It is seen fromthe orders that this is the first scrutiny assessment after thepurchase of the hotel with the abkari licence by the assessee.Therefore, it is not known whether in the three precedingassessment years the assessee made the claim of depreciationand the same got allowed without department scrutinising theeligibility for the same. In any case since depreciationclaimed is disallowed by all the authorities including theTribunal, the assessee has filed this appeal challenging theorder of the Tribunal. We have heard Sri.Anil.K. Narendran,counsel appearing for the appellant-assessee and StandingCounsel appearing for the department. ITA 379/2010 25% of the cost of purchase of abkari licence. It is seen fromthe orders that this is the first scrutiny assessment after thepurchase of the hotel with the abkari licence by the assessee.Therefore, it is not known whether in the three precedingassessment years the assessee made the claim of depreciationand the same got allowed without department scrutinising theeligibility for the same. In any case since depreciationclaimed is disallowed by all the authorities including theTribunal, the assessee has filed this appeal challenging theorder of the Tribunal. We have heard Sri.Anil.K. Narendran,counsel appearing for the appellant-assessee and StandingCounsel appearing for the department. 2. The Income Tax Appellate Tribunal though observedthat purchase of licence is a capital expenditure, held thatassessee is not entitled to depreciation as the abkari licencedoes not depreciate. However, in order to demolish thisfinding of the Tribunal, counsel for the assessee relied onDivision Bench judgment of this court in Raveendran Pillai vs. ITA 379/2010 Commissioner of Income Tax(332 ITR 531) wherein this courtheld that evidence of actual depreciation in the form oferosion in value is not required to be proved to entitle theassessee for eligibility for depreciation which is an allowanceunder the statutory provision. This court while holding sotook into account the scheme of the Act provided underSection 41(2) and Section 50 providing for assessment ofprofit arising on sale of depreciable assets. In view of theabove decision, we cannot uphold the basis on which Tribunalsustained the disallowance. So far as the claim on merits isconcerned, counsel for the assessee has relied on recentdecision of the Honourable Supreme Court in Techno Shares &Stocks Ltd. vs. Commissioner of Income Tax(327 ITR 323)wherein the Supreme Court held that stock brokers purchasingBombay Stock Exchange membership card are entitled todepreciation on the cost of acquisition as an intangible assetfalling under Section 32(1)(ii) of the Act. Standing Counsel forthe department specifically referred to para 29 of the above ITA 379/2010 judgment wherein the Honourable Supreme Court has clarifiedthat the judgment is rendered based on the conditions onwhich BSE membership card is exploited by the stock brokers.Standing Counsel contended that the scope of the term"intangible assets" covered by Section 32 of the Income TaxAct as explained by the Bombay High Court in their judgmentin Commissioner of Income Tax vs. Techno Shares & StocksLtd.(323 ITR 69) is not upset by the Honourable SupremeCourt, no matter their finding is reversed.3.In other words, the contention of the learned Seniorcounsel for the Revenue based on the judgment of the BombayHigh Court in Commissioner of Income Taxv. Techno Sharesand Stocks Ltd.reported in 2009-BCR-6-757 is that onlylicences, franchises and business or other commercial rightsreferred to in Section 32(1)(ii) of the Act are intellectualproperty rights. Learned counsel for the assessee, on theother hand, contended that the bar licence is nothing butabkari licence issued in FL-3 under the Foreign Liquor Rules ITA 379/2010 and the same is squarely covered by Section 32(1)(ii) on which the assessee is entitled to depreciation. For easy reference, we extract hereunder Section 32(1)(i) & (ii) of the IT Act. “32(1)(i)being tangible assets; buildings, machinery, plant or furniture, (ii)know-how, patents, copyrights, trade marks,licences, franchises or any other business orcommercial rights of similar nature, beingintangible assets acquired on or after the 1[st] day ofApril, 1998” 4. The question whether an FL-3 licence is covered by Section 32(1)(ii) has to be considered with reference to the provisions in the Abkari laws. Admittedly, Rule 19(i) & (ii) ofthe Foreign Liquor Rules which provides for transfer of licenceis as follows:- ITA 379/2010 and the same is squarely covered by Section 32(1)(ii) on which the assessee is entitled to depreciation. For easy reference, we extract hereunder Section 32(1)(i) & (ii) of the IT Act. “32(1)(i)being tangible assets; buildings, machinery, plant or furniture, (ii)know-how, patents, copyrights, trade marks,licences, franchises or any other business orcommercial rights of similar nature, beingintangible assets acquired on or after the 1[st] day ofApril, 1998” 4. The question whether an FL-3 licence is covered by Section 32(1)(ii) has to be considered with reference to the provisions in the Abkari laws. Admittedly, Rule 19(i) & (ii) ofthe Foreign Liquor Rules which provides for transfer of licenceis as follows:- 19(i) under no circumstances shall any licence obtained under this notification be sold,transferred or sub rented without the previoussanction of the Excise Commissioner. (ii)Reconstitution of partnership by additionor deletion of members or reconstitution ofDirectors in a Company resulting in change ofownership which owns/manages or operatesany licence issued under this rule shall bedeemed to be transfer of licence.” ITA 379/2010 It is clear from the above that the licence is treated as atransfearable asset and the Excise Commissioner is authorisedto approve transfers. Obviously, when licence is transferableaccording to the Rules under which it is issued, it is forconsideration and there is no dispute that the appellant haspaid massive amount for transfer of the licence, which will berenewed on an year to year basis. Once FL-3 licence isobtained that will be renewed every year unless general policydecision is taken by the Government against it, and so muchso, it is a business asset for long term exploitation. Therefore,abkari licence is a business right given to the party to carry onliquor trade. In our view, the abkari licence squarely fallsunder Section 32(1)(ii) on which the assessee is entitled todepreciation at 25% of the written down value as providedunder Section 32(1) read with Part B of Old Appendix I underRule 5 of the Income Tax Rules. However, we notice that the assessee's claim fordepreciation at 25% of the actual cost is not allowable because ITA 379/2010 depreciation has to be allowed only on written down value.The previous year relevant for the assessment year being the3[rd] year of business, the assessee is entitled to depreciation at25% of the written down value after reckoning depreciation forthe preceding years. The appeal is accordingly allowedvacating the orders of the Tribunal and that of the lowerauthorities with a direction to the Assessing Officer to allowdepreciation on the written down value of the purchase cost ofabkari licence as stated above. C.N.RAMACHANDRAN NAIRJudge BHABANI PRASAD RAYJudge