The main legal point established in the judgment is that for claiming depreciation on intellectual property rights, the assets must be put to use for business purposes, and the distinction between trading and manufacturing business is not relevant.

SANJIV KHANNA, J.

CM No. 29468/2018

Exemption allowed, subject to all just exceptions.

ITA No. 768/2018 & CM No. 29467/2018

There is delay of 36 days in filing of the appeal. However, before issuing notice on the application seeking condonation of delay, we have proceeded to examine the appeal on merits.

2. This appeal by the Revenue in the case of Sinochem India Company Private Limited relates to Assessment Year 2010-11 and impugns order dated 13th December, 2017 passed by the Income Tax Appellate Tribunal (Tribunal, for short) in ITA No. 3927/Del/2014.

3. Question of law raised relates to the claim for depreciation on intellectual property rights acquired and purchased by the assessee from Monsanto India Limited.

4. During the period relevant to the assessment year, the assessee had made an addition of Rs.17,88,300/- on account of acquisition of intellectual property rights to the existing assets in the form of intellectual property rights acquired earlier for Rs.34.37/- crores.

5. The assessee had claimed depreciation of Rs. 3,44,37,935/- on the said block of assets. On being questioned by the Assessing Officer on the claim for depreciation, the assessee in the reply had stated their position and stand as under:-

“As per Section 32(1) (ii) of ITA 1961, depreciation is allowed on prescribed capital assets purchased by the assessee. Out of various prescribed assets, intangible assets are one category of eligible assets and the following intangible assets qualify for depreciation allowed at the rate of 25%

a. Know how;

b. Patents;

c. Copyrights;

d. Trademarks;

e. License;

f. Franchise;

g. Other business rights of similar nature;

h. Other commercial rights of similar nature;

As per the provision of Income Tax Act, claim of depreciation generally based on twin conditions viz,

(1) Ownership of eligible assets, and

(2) Asset is put to use by the tax payer

As we have purchases the same from Monsanto India Limited (It was using the same for many years) and we have the ownership of the assets and assets are in put to use for commercial purpose before commencement our company, hence we fulfill both the conditions as required under the Act and have rightly claimed deprecation on intellectual property right.

Hence it is requested to withdraw the objection that the traders are not allowed depreciation against intellectual property right by your good self”

6. Assessment order dated 18th February, 2013 made an addition of Rs.3,44,37,935/- by disallowing depreciation on the intellectual property rights for the reasons recorded in paragraph 3.1, which we would like to reproduce:-

“3.1 The assessee in its reply above is incorrect to state that the asset is being used by the assessee. During the year assessee has only purchased finished products from M/s Monsanto USA in bulk and has sold in India in the convenient packagings. Thus it is evidently clear that assessee has not used its assets towards manufacturing activities. Under these facts & circumstances deprecation claimed on account affixed assets in the category on intellectual property for Rs.3,44,37,935/- is disallowed and added back to the total income of the assessee.”

(Addition of Rs.3,44,37,935/-)

(emphasis supplied)

Thus, the claim for depreciation was disallowed on the ground that the capital asset in form of intellectual property rights was not used for manufacturing activities. We have to examine the disallowance made for the reason stated. Cost of acquisition, ownership and eligibility to claim depreciation was not disputed. Depreciation as claimed was disallowed on the ground of absence of the intellectual property rights being put to use for manufacturing activities.

7. The Commissioner of Income Tax (Appeals) deleted the disallowance and allowed depreciation observing that the assessee was engaged in manufacturing job work and trading in agro-chemical (i.e. pesticides etc). The intellectual property rights acquired were in respect of (a) product registration (b) right to reference and use of