S. Ambika vs Deputy Commissioner of Income Tax

C.N. Ramachandran Nair, J.—The sole question raised in the appeal filed by the assessee is whether assessee is entitled to depreciation on the purchase value of abkari licence under s. 32(1)(ii) of the IT Act. The assessee purchased a bar attached hotel in November, 2000 with land, building and FL-3 licence for carrying on retail sale of liquor in the bar hotel for a total consideration of a little over Rs. 80 lakhs. The assessec''s case is that out of the total consideration paid, Rs. 60 lakhs and odd represents sale price paid for the purchase of FL-3 licence issued for retail sale of liquor in bar hotel under r. 13 of the Foreign Liquor Rules prescribed under the Kerala Abkari Act. The assessment involved in this case is for the year 2004-05 and in the returns filed assessee claimed depreciation at 25 per cent of the cost of purchase of abkari licence. It is seen from the orders that this is the first scrutiny assessment after the purchase of the hotel with the abkari licence by the assessee. Therefore, it is not known whether in the three preceding assessment years the assessee made the claim of depreciation and the same got allowed without Department scrutinising the eligibility for the same. In any case since depreciation claimed is disallowed by all the authorities including the Tribunal, the assessee has filed this appeal challenging the order of the Tribunal. We have heard Sri Anil K. Narendran, counsel appearing for the appellant-assessee and standing counsel appearing for the Department.

The Tribunal though observed that purchase of licence is a capital expenditure, held that assessee is not entitled to depreciation as the Abkari licence does not depreciate. However, in order to demolish this finding of the Tribunal, counsel for the assessee relied on Division Bench judgment of this Court in Raveendran Pillai Vs. Commissioner of Income Tax, : (2011) 332 ITR 531 (Ker) wherein this Court held that evidence of actual depreciation in the form of erosion in value is not required to be proved to entitle the assessee for eligibility for depreciation which is an allowance under the statutory provision. This Court while holding so took into account the scheme of the Act provided under s. 41(2) and s. 50 providing for assessment of profit arising on sale of depreciable assets. In view of the above decision, we cannot uphold the basis on which Tribunal sutained the disallowance. So far as the claim on merits is concerned, counsel for the assessee has relied on recent decision of the Honourable Supreme Court in Techno Shares and Stocks Ltd. Vs. The Commissioner of Income Tax IV, : (2010) 327 ITR 323 (SC) wherein the Supreme Court held that stock brokers purchasing Bombay Stock Exchange membership card are entitled to depreciation on the cost of acquisition as an intangible asset falling under s. 32(1)(ii) of the Act. Standing counsel for the Department specifically referred to para 29 of the above judgment wherein the Honourable Supreme Court has clarified that the judgment is rendered based on the conditions on which BSE membership card is exploited by the stock brokers. Standing counsel contended that the scope of the term "intangible assets" covered by s. 32 of the IT Act as explained by the Bombay High Court in their judgment in Commissioner of Income Tax 4 Vs. Techno Shares and Stocks Limited and Others, : (2010) 323 ITR 69 (Bom) is not upset by the Honourable Supreme Court, no matter their finding is reversed.

In other words, the contention of the learned senior counsel for the Revenue based on the judgment of the Bombay High Court in CIT vs. Techno Shares & Stocks Ltd. (supra) is that only licences, franchises and business or other commercial rights referred to in s. 32(1)(ii) of the Act are intellectual property rights. Learned counsel for the assessee, on the other hand, contended that the bar licence is nothing but abkari licence issued in FL-3 under the Foreign Liquor Rules and the same is squarely covered by s. 32(1)(ii) on which the assessee is entitled to depreciation. For easy reference, we extract hereunder s. 32(1)(i) and (ii) of the IT Act.

32(1)(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998

The question whether an FL-3 licence is covered by s. 32(1)(ii) has to be considered with reference to the provisions in the Abkari laws. Admittedly, r. 19(f) and (ii) of the Foreign Liquor Rules which provides for transfer of licence is as follows :

19(i) under no circumstances shall any licence obtained under this notification be sold, transferred or sub-rented without the previous sanction of the Excise Commr.

(ii) Reconstitution of partnership by addition or deletion of members or reconstitution of directors in a company resulting in change of ownership which owns/manages or operates any licence issued under this rule shall be deemed to be transfer of licence.

It is clear from the above that the licence is treated as a transferable asset and the Excise Commr. is authorised to approve transfers. Obviously, when licence is transferable according to the Rules under which it is issued, it is for consideration and there is no dispute that the appellant has paid massive amount for transfer of the licence, which will be renewed on an year to year basis. Once FL-3 licence is obtained that will be renewed every year unless general policy decision is taken by the Government against it, and so much so, it is a business asset for long term exploitation. Therefore, abkari licence is a business right given to the party to carry on liquor trade. In our view, the abkari licence squarely falls under s. 32(1)(ii) on which the assessee is entitled to depreciation at 25 per cent of the written down value as provided under s. 32(1) r/w Part B of Old Appendix I under r. 5 of the IT Rules.

However, we notice that the assessee''s claim for depreciation at 25 per cent of the actual cost is not allowable because depreciation has to be allowed only on written down value. The previous year relevant for the assessment year being the third year of business, the assessee is entitled to depreciation at 25 per cent of the written down value after reckoning depreciation for the preceding years. The appeal is accordingly allowed vacating the orders of the Tribunal and that of the lower authorities with a direction to the AO to allow depreciation on the written down value of the purchase cost of abkari licence as stated above.