S. 32

India Capital Markets (P) Ltd v DCIT IT Appeal No. 2948 (Mum.) of 2010 dtd December 12, 2012 (Mum ITAT) Background: Assessee is a share broker and the main source of income is generated through brokerage. During the year, the assessee has purchased entire clientele business of M/s. Ashmavir Financial Consultants Pvt. Ltd. (AFC) by assigning all clients to the assessee for a consideration of Rs. 2.50 crores . Assessee booked these expenses as purchase of goodwill and has claimed 25% of depreciation amounting to Rs. 62,50,000 thereon. After considering the provisions of section 32, AO was of the opinion that in the said provision, it is apparently clear that goodwill as such does not find any reference and accordingly, disallowed the claim of depreciation on account of goodwill at Rs. 62,50,000. 

Purchase of clientele data is intangible/ goodwill eligible for depreciation – Mum ITAT

CIT v Smifs Securities Limited [2012] 24 taxmann.com 222 (SC) Background: In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon’ble High Courts of Bombay and Calcutta) with retrospective efect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company. The assessee claimed that the extra consideration over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961. CIT(A) came to a conclusion that the assessee in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee stood increased. This finding was also been upheld by Income Tax Appellate Tribunal.

Goodwill is an intangible asset eligible for depreciation – Supreme Court

Prakash Leasing Ltd v DCIT [IT APPEAL NO.2557 OF 2005] (Karnataka HC) Background: The assessee company is engaged in the business of finance and leasing. During the year under consideration, the assessee company had purchased vehicles and had leased out the same. Assessing Authority was of the view that if the vehicles were purchased by this alleged lessees, the ownership of the vehicles lies only with them and not with the assessee company. Relying on the statements of 35 persons, the truck drivers, it was held that they have purchased the vehicles under the financial assistance from the assessee and therefore, the assessee is not the owner of the 36 motor vehicles owned and therefore, he is not entitled to depreciation. Similarly, 26 persons to whom summons had been issued did not turn up. Therefore, the Assessing Authority disallowed the depreciation claimed on these vehicles allegedly leased to the 26 persons. 

Lessor is entitled to depreciation even if lessees use the assets in their business – ...

Prakash Leasing Ltd v DCIT [ITA Nos 301,302 & 491 OF 2007] (Karnataka High Court) Background: The assessee was a non-banking financial company. The assessee received a sum of Rs. 11.84 crores as the lease rentals. The assessee had deducted a sum of Rs. 4.35 crores representing the lease equalization account from lease rentals of Rs. 11.84 crores. It contended that the lease equalization charges should not be added as income. The assessing authority disallowed the said claim on the ground that the same was neither a liability, nor an allowance and nor an expenditure. He held that same was just a matching entry for the purpose of tallying the accounts with regard to the assets leased out. He was also of the opinion that the said claim was made for the first time during the year and also that the depreciation was provided in the books and the lease income was recognized.

Lease Equalisation Charges – Accounting standards of ICAI to be followed – Karnataka HC

DCIT Vs M/s Coromandal Bio Tech Industries (I) Ltd [ITA No.287/Hyd/2007] Hyderabad ITAT Facts of the case The Assessee company for the AY 2001-02 and 2002-03, filed its return of income declaring loss after claiming depreciation on Ponds and Plant & Machinery business of which is discontinued long back. The Assessing Officer observed that the claim of depreciation was not proper and the assessment was reopened u/s 147. In the reassessment, the AO disallowed and added back the depreciation on ponds and plant & machinery. Similarly, for the AY 2003-04 and 2004-05, on the grounds the business of prawn and shrimp farming had been apparently discontinued, the AO held that the assets were not put to use and the assessee was not entitled to depreciation on ponds and plant & machinery.

Depreciation allowable even on assets of discontinued business – Hyderabad ITAT

CIT vs. The Instalment Supply Ltd (Delhi High Court) The assessee bought 1614 items of computer systems for Rs.40 lacs from HCL Hewlett Packard Ltd and leased back to the same company. The assessee claimed 100% depreciation on the ground that the cost of each itemswas less than Rs.5,000. The AO & CIT (A) held that the lease was not a bona fide transaction and that the transaction was a finance transaction. It was held that the assessee had advanced Rs.40 lacs to HCL Hewlett Packard Ltd and agreed to receive back this amount along with the interest over six years. However, the Tribunal upheld the claim on the ground that the conditions of a valid lease were satisfied. On appeal by the department to the High Court,

Difference between Finance Lease and Operating Lease