Businesses incur large expenditure in securing their Intellectual Property Rights, that includes intangible assets in the nature of trademarks, patents, copyrights, designs etc. The Income Tax Act allows business assesses to claim depreciation on intangible assets acquired by them. Recently, a controversy emerged as the Income Tax Department disallowed ‘Brand Name’ to be treated as an Intangible Asset eligible for deduction under the Income Tax Act. This was settled by a landmark judgment of the Delhi High Court (passed in August, 2023). Compliance Calendar breaks down this important ruling of the Delhi High Court for its readers and presents how businesses and brand owners can benefit from deductions on their brand names.
The concept of depreciation, in daily parlance, refers to a reduction in the usefulness of an object, due to use or lapse of time. However, in legal and financial terms, depreciation is a valuable accounting tool to reduce book profits by way of an expense charged, to ultimately reduce the overall value of taxable profits. The Income Tax Act allows depreciation on intangible assets under Section 32(1). Under the recent budget, depreciation on intangible assets can be claimed at the rate of 25% on the written down value of the assets.
In this case (PR Commissioner of Income Tax, Chandigarh v. M/S Kuantum Papers Ltd, 2023 DHC 6548, ITA 515/2019) , the assesses had claimed depreciation on their brand name by treating it as an intangible asset under Section 32(1)(ii) of the Income Tax Act. The CIT(A) as well as the Income Tax Appellate Tribunal in their rulings agreed with this understanding of allowing depreciation on the brand name.
However, the Assessing Officer as well Revenue (in appeal) contended that since the specific term ‘Brand Name’ has not been used in the language of Section 32, the assesses should not have claimed any depreciation on the same.
Landmark Supreme Court ruling that allowed deduction on account of depreciation on Goodwill - The Delhi High Court cited the observations of the Supreme Court in Commissioner of Income Tax v. Smifs Securities Ltd (2012) 348 ITR 302 (SC), where a deduction worth ?54.85 lacs was allowed as depreciation on goodwill that was acquired at the time of amalgamation.
Reference to language of Section 32(1), Explanation 3 : The Court delved into legal interpretations of the words used in Explanation 3 of Section 32 that states, ‘(b) intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.’ It was held that goodwill would fall under the expression “any other business or commercial right of a similar nature”.
Logical extension of the word ‘trademark’ to cover ‘Brand Name’ : The Delhi High Court made a reference to the case Commissioner Income Tax v. Glenmark Pharmaceuticals Ltd (2013) 351 ITR 359 (Bom), where trademarks were allowed as an intangible asset on which depreciation can be rightfully claimed. The court stated that brand names are also a species of trademark. A trademark is a mark that is capable of being represented graphically and is capable of distinguishing the goods or services of one person from those of others. It may include the shape of goods, their packaging, and combinations of colors. The expression "mark" which is defined in Section 2(m) of the Trademark Act, includes, among others, a "brand".
Brand names invest in the owner commercial rights: The Court also referred to the nature of a brand name, which invests its owner with valuable commercial rights, and thus, it certainly follows that these are within the scope of intangible rights, making them eligible for depreciation under Section 32(1)
(ii).Thus, the Delhi High Court expanded the understanding of intangible assets to cover brand name and held that the assesses was correct in claiming depreciation on their brand name.
Depreciation can be claimed upto 25% on the written down value basis on your intangible assets, such as patents, trademarks or brand name . Such depreciation is allowed on the actual cost of acquisition to the business. Thus, capital expenditure on these intangible assets that generate a long-term commercial benefit may be claimed as a deduction. However, certain issues pertaining to depreciation of intangible assets still remain contentious. The cost incurred on development of intangible assets has often been disallowed from being claimed as deduction, unless it can be established that it was scientific research expenditure relating directly to the business.
Until the year 2021, the amount spent on acquisition of goodwill was allowed to be claimed as deduction. This was considered valid when there was an excess value paid over fair consideration in cases of amalgamation, merger or transfer of business. This excess valuation was attributed to the amount spent on goodwill acquisition. However, after an amendment introduced by way of the Finance Act, 2021, the written down value of a block of assets may not be increased by the cost to acquire the goodwill of a business or profession, from the assessment year 2021-22 onwards. This also implies that capital gains tax may be payable on any excess value over fair consideration. Thus, there remains no distinction between self-acquired and purchased goodwill after the 2021 amendment.
Assesses must now classify the consideration among individual intangible assets that qualify for deductions such as intellectual property rights, copyrights, trademarks, etc.
Tax planning can help your business not just save money but also reduce the risk of non-compliance at a later stage. Consult with our qualified tax professionals and chartered accountants at Compliance Calendar to get specific advice regarding the tax treatment of your business assets and expenses.