Landmark Cases on Depreciation and Allowances

Goodwill, whether arising from an amalgamation or a slump sale, is an intangible asset eligible for depreciation under Section 32(1) of the Income-tax Act. While the assessee must prove the existence and valuation of such goodwill, it is recognized as a depreciable asset.

An assessee engaged in the business of hire purchase or leasing, being the lessor, is entitled to claim depreciation on assets leased out, even if the assets are registered in the name of the lessee and used by the lessee.

For income tax purposes, the 'owner' of a property is the person who is entitled to receive income in their own right, bears the risks incidental to ownership, and utilizes the asset, even if the sale deed is not formally registered. This beneficial ownership is sufficient for claiming depreciation or capital gains exemption under relevant sections.

Interest on borrowed capital utilized for acquiring a capital asset is capitalized until business commences. Once business is set up, this interest is deductible under section 36(1)(iii) even if the asset has not yet been put to use, accepting commercial accounting standards in the absence of contrary statutory provisions.

This Supreme Court decision clarifies the conditions under which a capital subsidy received by an assessee should be reduced from the 'actual cost' of an asset for computing depreciation under Section 43(1) of the Income-tax Act, depending on whether the subsidy directly meets the cost of the asset.

Unabsorbed depreciation from Assessment Year 1997-98 to 2001-02, carried forward to AY 2002-03, is governed by Section 32(2) as amended by the Finance Act, 2001, allowing its unlimited carry forward and set off against income of subsequent years. Reassessment proceedings under Section 148 challenging such set-off require valid reasons and new tangible material.

Membership rights and business contracts, as 'business or commercial rights of similar nature' to a license or franchise, qualify as intangible assets eligible for depreciation under Section 32(1)(ii) of the Income-tax Act.

The claim of depreciation under Section 32 of the Income Tax Act for assets used by charitable trusts is permissible, affirming the Bombay High Court's view that such a claim does not amount to a 'double benefit'.

Depreciation is allowable on computer software, including software licenses, at the rate of 60%.

Additional depreciation is allowable under section 32(1)(iia) for new machinery or plant even when put to use for less than 180 days, with the unabsorbed balance available for claim in the subsequent year.

The amendment to Section 43A of the Income Tax Act, 1961, is prospective and applies only from April 1, 2003. This means it governs changes in the actual cost of assets due to exchange rate fluctuations from that date onwards.

The Legislature abolished terminal depreciation under section 32(1)(iii) and the taxing of balancing charge under section 41(2), replacing these provisions with the requirement to reduce sale proceeds of depreciable assets from the block of assets.

Business contracts and commercial rights of similar nature qualify as intangible assets under Section 32(1)(ii) and are eligible for depreciation. The decision also affirms that goodwill is an intangible asset eligible for depreciation.

Extraction and processing of iron ore constitutes "production" for the purpose of claiming tax benefits like investment allowance under Section 32A and additional depreciation under Section 32(1)(iia), even if it does not amount to "manufacture".

A financier owning machinery is entitled to investment allowance even if the machinery is used by its lessee for production purposes.

Depreciation under section 32 is allowable even if an asset is not actively used, provided it is kept in a condition of readiness or is put ready for use, as this amounts to passive user.

The actual cost of an asset is distinct from the cost of borrowing money for its purchase. Foreign exchange fluctuations on loan repayment do not alter the asset's actual cost and are not covered by Section 43A.

Computer peripherals and accessories, including printers, scanners, servers, UPS, and LAN/WAN, are considered an integral part of a computer system and are eligible for depreciation at the higher rate of 60%.

An assessee is entitled to claim the balance 10% of additional depreciation in the succeeding assessment year if the new plant and machinery were put to use for less than 180 days in the previous year.

Depreciation that is actually allowed as a deduction is considered, not notionally allowed depreciation. The wording of Sections 32 and 34 of the Income-tax Act, 1961, is specific and unambiguous.

Computer peripherals and accessories, such as printers, scanners, and Uninterruptible Power Supply (UPS) units, are considered an integral part of a computer system. Therefore, these items are eligible for the higher depreciation rate applicable to computers.

Depreciation on investments classified as 'Held to Maturity' or 'Available for Sale' is allowable as a deduction. Such depreciation is not restricted by the nature of the investment category.

Rights acquired under a concession agreement for highway construction, which generate revenue through toll collections, constitute an 'intangible asset' under section 32(1)(ii) of the Income-tax Act, 1961, eligible for depreciation, typically at 25%. This includes claiming depreciation on the opening Written Down Value (WDV) for such highway projects.

An Uninterruptible Power Supply (UPS) is not considered an integral part of a computer system for the purpose of claiming higher depreciation; it is generally eligible for the standard depreciation rate applicable to plant and machinery.

The court may allow additional depreciation under section 32(1)(iia) for new machinery if it is used in the business of any article or thing, even if not directly linked to increasing production capacity.

Goodwill arising on amalgamation is entitled to depreciation. This principle is established by multiple High Court decisions.

Goodwill arising on amalgamation is an intangible asset qualifying for depreciation under Section 32 of the Income Tax Act.

A non-compete fee paid as part of a business acquisition or transaction constitutes an intangible asset, eligible for depreciation under Section 32(1)(ii) of the Income-tax Act.

Depreciation is allowable on goodwill acquired through the slump sale of a business. When an assessee claims depreciation on the enhanced cost of an asset supported by a registered valuer's report, tax authorities must produce countervailing evidence, such as a departmental valuation report, to challenge it, rather than simply disregarding the expert opinion.

A non-compete fee, being a capital expenditure, is not allowable as a deduction from income and does not qualify for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961.

The literal rule of interpretation mandates that when statutory words are clear and unambiguous, they must be followed even if it leads to hardship, as deviating from this rule constitutes an impermissible judicial amendment of the law.

An asset, once installed and kept in an operational condition for business use, is eligible for depreciation even if it is not actively used during the entire previous year due to external business reasons.

Depreciation is allowable on a non-compete fee as it constitutes an intangible asset, even if the right acquired cannot be transferred, provided it is treated as part of a block of assets.

Amortization claimed on capitalized leasehold land, which is reported as an asset in the balance sheet, is an allowable deduction for income-tax purposes.

An assessee is eligible to claim depreciation on a road constructed and operated on a Build-Operate-Transfer (BOT) basis, treating it as an intangible asset under section 32(1)(ii) of the Income-tax Act.

An assessee engaged in the manufacture or production of an article or thing is entitled to additional depreciation under Section 32(1)(iia) for new machinery or plant, such as a windmill for power generation, even if it is not directly used in the primary manufacturing activity.

The definition of 'plant' for income tax purposes includes any apparatus used by a businessman for carrying on their business, excluding stock-in-trade, that is kept for permanent employment. Terms like 'plant' should be construed in their popular sense, as understood by people conversant with the subject matter.

The balance 50% of additional depreciation, for new machinery or plant put to use for less than 180 days in the year of acquisition, is allowable in the immediately succeeding assessment year. The second proviso to Section 32(1)(iia) restricts only the allowance for the first year, not the total benefit.

Additional depreciation under Section 32(1)(iia) is available for machinery purchased in a prior year but installed and put to use in the current previous year. Eligibility for the claim depends on the date of installation and use, not just the date of purchase.

Automated Teller Machines (ATMs) are classified as computers and are eligible for a higher rate of depreciation when their core mechanical functions are integrated with and dependent on the computer's processing capabilities.

A deduction for interest expense on borrowed funds used for interest-free advances to group companies is permissible only if the assessee establishes these advances were from surplus funds. The decision further clarifies eligibility for depreciation on intangible assets like non-compete fees, software, goodwill, and commercial rights under section 32(1)(ii), often arising from a slump sale.

A UPS is an integral part of a computer and is eligible for depreciation at 60%.

A golf course is not considered plant and machinery for the purpose of depreciation and is instead classified as a building.

Expenditure incurred to construct a building on leasehold land, where the assessee does not own the superstructure, is revenue expenditure. Explanation 1 to Section 32 applies only when the building itself is taken on lease, not when a building is constructed on leased land.

When a business is purchased as a going concern, the consideration paid in excess of the value of its tangible assets is classified as goodwill, which is an intangible asset eligible for depreciation without needing a separate valuation.

The Supreme Court in CIT v. Anand Theatres established that the functional test is decisive for classifying an asset as 'plant' or 'building' for depreciation purposes. It clarified that items like sanitary fittings and electrical installations in a hotel are considered 'plant', not part of the building, for depreciation.

Where goodwill is recorded pursuant to a merger based on purchase consideration determined by a valuation report, and no goodwill is transferred from the predecessor's books, the fifth proviso to section 32(1) of the Income-tax Act, 1961, is not applicable, and thus depreciation on such goodwill is not allowable.

Depreciation on goodwill arising from amalgamation is not admissible to the amalgamated company if no goodwill was admitted in the hands of the amalgamating company, applying Explanation 7 to Section 43(1) and the Sixth Proviso to Section 32(1)(ii).

The Supreme Court in Techno Shares & Stocks Ltd. v. CIT-IV held that depreciation is not available on a BSE membership card under section 32(1)(ii) of the Income Tax Act as it is not a depreciable asset for the purpose of business or commercial rights of a similar nature.

Registration of a motor vehicle under the Motor Vehicles Act is not a prerequisite for claiming depreciation under the Income Tax Act. Beneficial ownership and actual use for business purposes are sufficient.