Delhi High Court Allows Depreciation Claim To Daikin For Goodwill On Exclusive Business Rights

The Delhi High Court while ruling in favour of the Daikin Shri Ram Aircon Pvt. Ltd. has held that the business rights acquired for valuable consideration constitute an intangible asset within the meaning of Section 32(1)(ii) of the Income Tax Act and depreciation is allowable.

The division bench of Justice Manmohan and Justice Manmeet Pritam Singh Arora has observed that the department has not disputed the exclusive nature of rights, payment of consideration and the same being of an enduring nature since it spanned for 20 years. The capitalisation of the business rights as an intangible asset has been correctly upheld by the appellate authorities. Therefore, the Assessee was entitled to claim depreciation.

The respondent/assessee was engaged in the business of manufacturing and trading of air conditioners and water coolers. The Assessee entered into a Business Purchase Agreement with M/s Usha International Ltd. (UIL) for the purchase of marketing and business rights for a period of twenty years, including the establishment, as well as the set up for marketing the products of air conditioners and water coolers, along with the benefit of current orders for supply of the air conditioners and the employees of UIL.

In consideration for the transfer of the marketing and business rights, goodwill and on the condition of non-competition, a consideration of Rs. 2,00,00,000 was paid by the assessee to UIL. The amount was capitalised in the books of accounts of the Assessee under the head 'goodwill' in the schedule of its fixed assets.

The Assessee claimed depreciation of Rs. 50,00,000 as per Section 32, at the rate of 25% as prescribed in the schedule of rates in respect of intangible assets, for the AY 2001-02 by the Assessee. A depreciation of Rs. 3,75,00,000 was claimed for AY 2002-03.

The Assessing Officer rejected the claim for depreciation on account of the purchase of business rights under the agreement on the ground that 'goodwill' is not covered under the definition of intangible assets.

The Commissioner of Income Tax (Appeals) after considering the terms of the agreement and the nature of exclusive business rights purchased by the Assessee held that the rights are valuable. Therefore, the consideration paid by the Assessee to UIL is capital in nature and it is entitled to be nomenclature as 'goodwill'. The CIT(A) held that the nature of the exclusive rights is akin to licence and within the meaning of an 'intangible asset'. The Assessee is entitled to claim depreciation on the amount in accordance with the provisions of the Act and the schedule of rates as prescribed.

The appellant/department while challenging the order of the CIT(A) contended that since the trademarks and other intellectual properties acquired from SAL is not registered in Assessee's name, Assessee is not entitled to the depreciation.

The department relied on the decision of the Supreme Court in the case of Dalmia Cements and Mysore Minerals. The Apex Court held that depreciation legitimately belongs to one who has invested in the capital asset, is utilising the capital asset and thereby losing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time.

The court held that the ownership of the IP rights of the Assessee stands proved on record, its use by the Assessee is also not disputed and therefore the appellate authorities have rightly held that the Assessee is entitled to claim depreciation under Section 32(1)(ii) on the IP rights.

Case Title: Commissioner Of Income Tax Versus Daikin Shri Ram Aircon Pvt Ltd.

Citation: 2022 LiveLaw (Del) 1026

Date: 17.10.2022

Counsel For Appellant: Senior Standing Counsel Puneet Rai

Counsel For Respondent: Senior Advocate C.S. Aggarwal

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