Facts of the Case

The assessee companies were engaged in manufacturing and trading air conditioners and acquired:

  1. Business & Marketing Rights from Usha International Ltd. for ₹2 crore (treated as goodwill and business rights).
  2. Intellectual Property Rights (IPR) including trademarks, patents, brand name, and logos from SIEL Aircon Ltd. for ₹10.93 crore.

The assessee claimed depreciation @25% under Section 32 on:

  • Goodwill and business rights
  • Patents, trademarks, and other IP rights

The Assessing Officer disallowed:

  • Depreciation on goodwill (not considered intangible asset)
  • Depreciation on IP rights (due to non-registration)

CIT(A) and ITAT partly allowed the claims. Revenue appealed before the High Court.

Issues Involved

  1. Whether goodwill qualifies as an intangible asset eligible for depreciation under Section 32(1)(ii)?
  2. Whether business/commercial rights acquired under agreements qualify for depreciation?
  3. Whether registration of trademarks/IPR is mandatory to claim depreciation?
  4. Whether ownership and usage without registration is sufficient for claiming depreciation?

Petitioner’s Arguments (Revenue)

  • Goodwill is not expressly included in Section 32(1)(ii), hence depreciation is not allowable.
  • Trademarks and IP rights were not registered in the name of the assessee; therefore, depreciation should be denied.
  • Consideration payment for IP rights was disputed in terms of documentation.

Respondent’s Arguments (Assessee)

  • Business rights acquired are commercial rights akin to intangible assets, eligible under Section 32.
  • Ownership for depreciation does not require formal registration; beneficial ownership and usage suffice.
  • Reliance placed on:
    • Mysore Minerals Ltd. vs CIT (SC)
    • Dalmia Cement (Bharat) Ltd. vs CIT
  • IP rights were actually used in business, fulfilling the condition for depreciation.

Court Findings / Judgment

The Delhi High Court held:

1. Business Rights = Intangible Assets

  • Exclusive business and marketing rights are commercial rights of enduring nature.
  • These fall within “intangible assets” under Section 32(1)(ii) and are eligible for depreciation.

2. Goodwill Treatment

  • ITAT correctly distinguished between:
    • Specific business rights (eligible)
    • Residual goodwill (not eligible in this case)

3. IP Rights Depreciation Allowed

  • Ownership was established through agreement and usage.
  • Registration is not a mandatory condition for claiming depreciation.

4. Principle of Beneficial Ownership

  • Following Supreme Court rulings, depreciation is allowable to the person:
    • Who has dominion over the asset, and
    • Uses it for business purposes.

Final Order

  • Appeals of Revenue dismissed.
  • Decision in favour of the assessee.

Important Clarification

  • Registration of trademarks/IP is NOT compulsory for claiming depreciation.
  • Economic ownership + business use = sufficient compliance under Section 32.
  • Distinction must be made between:
    • Identifiable business/commercial rights (eligible)
    • Unspecified goodwill (may not always qualify depending on facts)

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/58917102022ITA1302013_164835.pdf

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