Facts of the Case

The respondent-assessee, Sinochem India Co. Pvt. Ltd., had acquired intellectual property rights (IPRs) from Monsanto India Limited, including trademarks, business information, and related commercial rights. The assessee claimed depreciation on these intangible assets under Section 32(1)(ii) of the Income Tax Act.

During Assessment Year 2010–11, the assessee added certain IPRs to its block of assets and claimed depreciation amounting to Rs. 3,44,37,935/-. The Assessing Officer disallowed the depreciation on the ground that the assessee was not engaged in manufacturing activities and therefore had not “used” the assets.

Issues Involved

  1. Whether depreciation under Section 32 is allowable on intellectual property rights when used in trading activities and not manufacturing.
  2. Whether “use of asset” requires actual manufacturing use or includes use in business such as marketing and trading.

Petitioner’s Arguments (Revenue)

  • The intellectual property rights were not used for manufacturing purposes.
  • The assessee merely purchased finished goods and sold them in India.
  • Since the assets were not used in production or manufacturing, depreciation should not be allowed.

Respondent’s Arguments (Assessee)

  • Intellectual property rights fall within intangible assets eligible for depreciation under Section 32(1)(ii).
  • The assessee owned the assets and used them in its business operations (sales, branding, and marketing).
  • Use of trademarks and business rights in trading activities constitutes valid “use” for business purposes.
  • Reliance was placed on judicial precedent that depreciation is allowable even if assets are kept ready for use.

Court’s Findings / Order

  • The Delhi High Court upheld the Tribunal’s decision allowing depreciation.
  • It held that:
    • Section 32 does not distinguish between manufacturing and trading businesses.
    • Use of intellectual property rights in sales, branding, and marketing qualifies as “use for business”.
    • Disallowance merely because assets were not used for manufacturing is incorrect.
  • The Court dismissed the Revenue’s appeal and refused to interfere with the Tribunal’s findings.

Important Clarifications by the Court

  • “Use” of an asset under Section 32 includes commercial utilization such as marketing and trading.
  • Intellectual property rights like trademarks and business rights are valid depreciable assets when used in business operations.
  • Manufacturing activity is not a prerequisite for claiming depreciation.
  • Even readiness for use can suffice (as per precedent).

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:4517-DB/SKN25072018ITA7682018.pdf

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