S. Ambika v. Deputy Commissioner of Income Tax, Circle-1 (2), Thiruvananthapuram

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 R1 FOR THE ASSESSMENT YEAR 2004-05 ALONG WITH A NOTICE OF DEMAND DATED 19/12/2007 ISSUED UNDER SECTION 156 OF THE ACT. ANNEXURE-B : COPY OF MEMORANDUM OF APPEAL DATED NIL FILED BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS)-1, THIRUVANANTHAPURAM ON 07/01/2008. ANNEXURE-C : COPY OF ARGUMENT NOTES DATED 14/01/2008 FILED IN ITA NO.51T/07-08 ON BEHALF OF THE APPELLANT. ANNEXURE-D : COPY OF ORDER DATED 20/01/2008 OF THE COMMISSIONER OF INCOME TAX (APPEALS)-1, THIRUVANANTHAPURAM IN ITA NO.51T/07-08. ANNEXURE-E : COPY OF MEMORANDUM OF APPEAL DATED 17/04/2008 IN I.T.A.NO.594/COCH/2008 FILED BY THE RESPONDENT BEFORE THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH. ANNEXURE-F : COPY OF ORDER DATED 20/04/2010 OF THE APPELLATE TRIBUNAL IN I.T.A.NO.594/COCH/2008. ANNEXURE-G : COPY OF CORRIGENDUM DATED 04/05/2010 ISSUED BY THE APPELLATE TRIBUNAL TO RECTIFY THE CAUSE TITLE OF ANNEXURE F ORDER. //TRUE COPY// PA TO JUDGE. jg C.R. C.N.RAMACHANDRAN NAIR & BHABANI PRASAD RAY, JJ. .................................................................... I.T. Appeal No.379 of 2010 .................................................................... Dated this the 24th day of June, 2011. ## J U D G M E N T ## Ramachandran Nair, J. The sole question raised in the appeal filed by the assessee is whether assessee is entitled to depreciation on the purchase value of abkari licence under Section 32(1)(ii) of the Income Tax Act. The assessee purchased a Bar attached hotel in November 2000 with land, building and FL-3 licence for carrying on retail sale of liquor in the Bar hotel for a total consideration of a little over Rs.80 lakhs. The assessee's case is that out of the total consideration paid, Rs.60 lakhs and odd represents sale price paid for the purchase of FL-3 licence issued for retail sale of liquor in Bar hotel under Rule 13 of the Foreign Liquor Rules prescribed under the Kerala Abkari Act. The assessment involved in this case is for the year 20042005 and in the returns filed assessee claimed depreciation at ITA 379/2010 2 25% of the cost of purchase of abkari licence. It is seen from the orders that this is the first scrutiny assessment after the purchase of the hotel with the abkari licence by the assessee. Therefore, it is not known whether in the three preceding assessment years the assessee made the claim of depreciation and the same got allowed without department scrutinising the eligibility for the same. In any case since depreciation claimed is disallowed by all the authorities including the Tribunal, the assessee has filed this appeal challenging the order of the Tribunal. We have heard Sri.Anil.K. Narendran, counsel appearing for the appellant-assessee and Standing Counsel appearing for the department. 2. The Income Tax Appellate Tribunal though observed that purchase of licence is a capital expenditure, held that assessee is not entitled to depreciation as the abkari licence does not depreciate. However, in order to demolish this finding of the Tribunal, counsel for the assessee relied on Division Bench judgment of this court in Raveendran Pillai vs. ITA 379/2010 3 Commissioner of Income Tax (332 ITR 531) wherein this court held that evidence of actual depreciation in the form of erosion in value is not required to be proved to entitle the assessee for eligibility for depreciation which is an allowance under the statutory provision. This court while holding so took into account the scheme of the Act provided under Section 41(2) and Section 50 providing for assessment of profit arising on sale of depreciable assets. In view of the above decision, we cannot uphold the basis on which Tribunal sustained the disallowance. So far as the claim on merits is concerned, counsel for the assessee has relied on recent decision 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 purchasing Bombay Stock Exchange membership card are entitled to depreciation on the cost of acquisition as an intangible asset falling under Section 32(1)(ii) of the Act. Standing Counsel for the department specifically referred to para 29 of the above ITA 379/2010 4 judgment wherein the Honourable Supreme Court has clarified that the judgment is rendered based on the conditions on which 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 Tax Act as explained by the Bombay High Court in their judgment in Commissioner of Income Tax vs. Techno Shares & Stocks Ltd. (323 ITR 69) is not upset by the Honourable Supreme Court, no matter their finding is reversed. 3. In other words, the contention of the learned Senior counsel for the Revenue based on the judgment of the Bombay High Court in Commissioner of Income Tax v. Techno Shares and Stocks Ltd. reported in 2009-BCR-6-757 is that only licences, franchises and business or other commercial rights referred to in Section 32(1)(ii) of the Act are intellectual property rights. Learned counsel for the assessee, on the other hand, contended that the bar licence is nothing but abkari licence issued in FL-3 under the Foreign Liquor Rules ITA 379/2010 5 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) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1[st] day of April, 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) of the Foreign Liquor Rules which provides for transfer of licence is as follows:- 19(i) under no circumstances shall any licence obtained under this notification be sold, transferred or sub rented without the previous sanction of the Excise Commissioner. (ii) Reconstitution of partnership by addition or deletion of members or reconstitution of Directors in a Company resulting in change of ownership which owns/manages or operates any licence issued under this rule shall be deemed to be transfer of licence.” ITA 379/2010 6 It is clear from the above that the licence is treated as a transfearable asset and the Excise Commissioner is authorised to approve transfers. Obviously, when licence is transferable according to the Rules under which it is issued, it is for consideration and there is no dispute that the appellant has paid massive amount for transfer of the licence, which will be renewed on an year to year basis. Once FL-3 licence is obtained that will be renewed every year unless general policy decision is taken by the Government against it, and so much so, it is a business asset for long term exploitation. Therefore, abkari licence is a business right given to the party to carry on liquor trade. In our view, the abkari licence squarely falls under Section 32(1)(ii) on which the assessee is entitled to depreciation at 25% of the written down value as provided under Section 32(1) read with Part B of Old Appendix I under Rule 5 of the Income Tax Rules. However, we notice that the assessee's claim for depreciation at 25% of the actual cost is not allowable because ITA 379/2010 7 depreciation has to be allowed only on written down value. The previous year relevant for the assessment year being the 3[rd] year of business, the assessee is entitled to depreciation at 25% of the written down value after reckoning depreciation for the preceding years. The appeal is accordingly allowed vacating the orders of the Tribunal and that of the lower authorities with a direction to the Assessing Officer to allow depreciation on the written down value of the purchase cost of abkari licence as stated above. C.N.RAMACHANDRAN NAIR Judge BHABANI PRASAD RAY Judge jg