Wear & tear is not an essential condition for depreciation on intangible assets


Assessee Company is engaged in the business of dealing in foreign exchange, money transfer and wind power generation. During the year under consideration, the assessee company had acquired franchise from AFL Pvt Ltd (ALF) – filed its ROI claiming depreciation on franchise rights. During the course of assessment proceedings the AO took a view that depreciation was not available on such things – Aggrieved with the order of the AO assessee contended the issue before the CIT(A) who after analyzing the agreement of franchise allowed the appeal of the assessee.

Held that:  

  •  It is pertinent to mention at this stage that in the case of intangible asset physical wear & tear is not necessary and also not required for allowing the claim of depreciation u/s 32(1)(ii). Further, no such conditions is provided under the provisions of the Act that deprecation on intangible asset is allowable only if there is wear & tear in the value;


  • Therefore, in the case of intangible asset being commercial/business rights diminution in value or physical wear and tear is not an essential condition for admissibility for depreciation u/s 32, if the assets used as a business tool for earning the income;


  • The business/commercial rights are held to be eligible for depreciation being intangible asset like patents, copyrights, license, franchise as held by the Chennai Bench of the Tribunal in the case of Medicorp Technologies India Ltd;


  • As observed by the High Court in the above case the meaning of the word “plant” would not be limited to the articles which are capable of diminution in value year after year by reason of wear and tear; but it would also take in other articles which diminish in value on account of other known factors such as obsolescence;


  • The Delhi High Court in the case of CIT v. Hindustan Coco Cola Beverages P. Ltd. (2011-TIOL-33-HC-DEL-IT) has held that the meaning of business or commercial rights of similar nature has to be understood in the context of purpose of such rights obtained as for effectively carrying on the business and commerce;


  • If the facts of the case in hand are analysed, in the light of the decisions discussed above, it is clear that the assessee paid the consideration for the purpose of enhancing its network in the field of money transfer business by acquiring the rights over infrastructure and other advantage attached to the marketing network and hence, the same falls under the category of intangible asset as contemplated u/s 32(1)(ii) of the I-T Act.

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