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.

A charitable institution registered under section 12A is entitled to claim depreciation on fixed assets, even if the expenditure incurred for acquiring such assets has already been treated as an application of income for exemption purposes.

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.

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.

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.

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 Supreme Court distinguishes between operating leases and finance leases by highlighting their key characteristics, which is essential for determining the actual owner of the asset and who is entitled to claim depreciation.

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".

Assets leased out by an assessee engaged in the business of leasing are considered used for the purpose of the assessee's business, entitling the assessee to claim depreciation and other allowances on such assets.

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.

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%.

Spill over additional depreciation under Section 32(1)(iia) is allowable, with the court considering the third proviso to Section 32(1)(ii) (w.e.f. April 1, 2016) and aligning with rulings from other High Courts.

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, 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.

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.

Depreciation is allowable on goodwill arising on amalgamation when the consideration paid exceeds the value of tangible assets. It is also allowable on other intangible assets, such as licenses or business/commercial rights of similar nature, under Section 32(1)(ii).

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.