By TIOL News Service

NEW DELHI, OCT 24, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether capital dues paid to legal heirs of deseased partner, which were amortised in firm's books and capitalised under the head "goodwill", is eligible for depreciation. YES is the answer.

Facts of the case:

The Assessee company had filed its return declaring a total income of Rs. 2,68,71,345/-. Subsequent to the processing of return u/s 143(1), scrutiny proceedings were initiated, wherein the AO observed that Assessee had claimed depreciation of Rs. 5,41,406/- @25% on the tenancy rights valued at Rs. 21,65,625/-. On query, the Assessee submitted that it had in A.Y 2008-09, settled the dispute between the legal heirs of a former partner late Shri P.C. Aggarwal and the amount paid towards the tenancy rights were amortised in books of Assessee firm on which this depreciation was claimed. However, the AO was of the opinion that as per provisions of section 32(1)(ii), depreciation was allowable only in respect of know-how, patents, copyrights, trademarks, franchises or any other business or commercial rights of similar nature being intangible assets acquired on or after April 01, 1998. The AO held that the tenancy rights acquired by Assessee could not be equated with the license provided u/s 32 so as to qualify it as an intangible asset eligible for depreciation. The AO therefore proceeded to add back the amount of Rs. 5,41,406/- to the income of assessee.

ITAT held that,

++ the question that arises is whether the tenancy rights fall within the definition of intangible assets for the purpose of depreciation allowance u/s 32(1)(ii). In the present case, it is undisputed that the amount of Rs. 21,65,629/- was paid to the legal heirs of a former partner as a consequence to an arrangement to settle the dispute between the firm and the deceased partner. The payment so made was capitalised under the head goodwill and tenancy rights in the books of the assessee firm and depreciation was claimed on such amortised amount. However, it is very much apparent that the payment was made to the legal heirs of the deceased partner and thus, the payment was towards the capital/outstanding dues of the deceased partner. It is also apparent that the firm was not a tenant/had not paid for acquisition of tenancy right but has made payments to the legal heirs of the deceased partners and has reflected the same as payment made for acquisition of tenancy rights in its books of account. In such a situation, it cannot be said that the payment was made for acquisition of tenancy rights and accordingly, the question as to whether tenancy rights would fall under the definition of intangible assets for the purpose of claiming depreciation u/s 32 does not arise in the present appeal.

(See 2017-TIOL-1458-ITAT-DEL)