2015 Supreme(SC) 1001

SUPREME COURT OF INDIA
Madan B. Lokur, S.A. Bobde, JJ.
M/s. Mangalore Ganesh Beedi Works – Appellant
Versus
Commissioner of Income Tax, Mysore & Anr. – Respondents
CIVIL APPEAL NOS. 10547-10548 OF 2011
Decided On : 15-10-2015

IMPORTANT POINTS
High Court reversing Tribunal’s finding without showing any perversity therein or framing any substantial question of law – not justified.
Intellectual Property Rights such as brand name, trademark etc. being commercially necessary and essential for control of large business and nature of their acquisition being of capital nature they would come within the definition of ‘plant’ in terms of section 43(3) of the Income Tax Act, 1961.

Headnote:(a) Income-Tax Act, 1961 – Section 37 – Tribunal recording finding of fact that legal expenses incurred by the Assessee after 18th November, 1994 were for protecting its business – Finding not perverse – High Court reversing Tribunal’s finding without showing any perversity therein or framing any substantial question of law – Not justified. (Para 20)

       [2001] 247 ITR 178 (SC) – Relied upon

       [1971] 81 ITR 754 (SC); [1967] 63 ITR 207 (SC) – Referred

       (b) Income Tax Act, 1961 – Section 35A and 35AB – Intellectual Property Rights – Brand name – Has a value. (Para 21)

       (1993) 3 SCC 252 – Relied upon

       (c) Income Tax Act, 1961 – Section 43(3) – Definition of plant is inclusive – Intellectual Property Rights (IPR) whether included – IPR such as brand name, trademark etc. absolutely necessary for control of large business – They are commercially necessary and essential – Moreover, nature of acquisition of IPR is of capital nature – Therefore, qua the Assessee trademarks, copyrights and know-how acquired by it would come within the definition of ‘plant’. (Para 30, 31)

       (1971) 3 SCC 550 – Relied upon

       (d) Income Tax Act, 1961 – Section 32 r/w section 43(3) – Depreciation – Section 32 at relevant time not making distinction between tangible and intangible assets for depreciation – Hence IPR (trademarks, copyrights and know-how) being ‘plant’ in terms of section 43(3) qualified for depreciation at relevant time. (Para 32)

       (e) Income Tax Act, 1961 – Section 32 r/w section 43(3) – Depreciation – Clause 16 of agreement between erstwhile partners of MGBW – Going concern and all trademarks to vest in highest bidder – Revenue holding that only the goodwill and not the trademarks as auctioned – Virtually re-writing clause 16 – Not permissible. (Para 33,

       [1984] 149 ITR 276 (Delhi) – Cited with approval

       Facts of the case:

       The partnership firm M/s. Mangalore Ganesh Beedi Works came into existence with effect from 28th February, 1940.

       The partnership firm was dissolved on 14th June, 1991 with effect from 6th December, 1987 by the High Court which directed the sale of its assets as a going concern to the highest bidder amongst the partners.

       On 14th June, 1991 an auction was conducted in which three of the erstwhile partners forming an association of persons (‘AOP-3’) emerged as the highest bidders and their bid of Rs.92 crores for the assets of MGBW was accepted by the Official Liquidator on or about 17th November, 1994. With effect from 18th November, 1994 the business of the firm passed on into the hands of AOP-3 but the tangible assets were actually handed over by the Official Liquidator to AOP-3 on or about 7th January, 1995.

       MGBW (the ‘Assessee’) filed its return for the period 18th November, 1994 to 31st March, 1995 and subsequently filed a revised return. Broadly, the Assessee claimed a deduction of Rs. 12,24,700/-as a revenue expenditure permissible under Section 37 of the Income-Tax Act, 1961 towards legal expenses incurred. The Assessee also claimed depreciation under Section 35A and 35AB of the Act towards acquisition of Intellectual Property Rights such as rights over the trademark, copyright and technical know-how. In the alternative, the Assessee claimed depreciation on capitalizing the value of the Intellectual Property Rights by treating them as plant.

       The Assessing Officer rejected the claim of the Assessee under all the three Sections mentioned above.

       The Assessee preferred an appeal before the Commissioner of Income-Tax (Appeals) which was allowed in part inasmuch as it was held that the Assessee was entitled to a deduction towards legal expenses. However, the claim of the Assessee regarding deduction or depreciation on the Intellectual Property Rights was rejected by the Commissioner of Income-Tax (Appeals).

       The Revenue and the assessee both preferred appeal before the Tribunal.

       The Tribunal allowed the appeal of the Assessee while rejecting the appeal of the Revenue.

       The High Court set aside the findings of the Income-Tax Appellate Tribunal and restored the order of the Assessing Officer.

       Finding of the Court:

       Judgment of the High Court is not sustainable.

       Result: Appeal disposed of.