Revenue Cannot Disallow Trademark Depreciation Once Accepted In Initial Year: ITAT Mumbai

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on 10 April held that depreciation on a trademark arising out of an amalgamation, once allowed in the initial year, cannot be disallowed in subsequent years in the absence of any change in facts.

A Bench comprising Accountant Member Om Prakash Kant and Judicial Member Sandeep Singh Karhail delivered the ruling while deciding Revenue's appeals and Transworld Furtichem Private Limited's cross-objections for multiple assessment years. It observed:

“once the Revenue has itself allowed the depreciation on Trademark in the very first year of claim by the assessee after verification/examination of the necessary facts and did not avail the remedy provided under the statute thereafter, despite again disputing the very similar claim in the second year, we are of the considered view that the Revenue is not justified in disallowing the claim of depreciation on Trademark in the year under consideration.”

The dispute arose from Transworld Furtichem's claim of depreciation under Section 32 on a trademark created pursuant to an amalgamation approved under the Companies Act.

The AO, while completing the assessment under Section 143(3), disallowed the depreciation after treating the trademark as a fictitious asset and questioning the valuation adopted at the time of amalgamation.

The Tribunal, however, found that the trademark “Nutrifeed” constituted a commercial asset of the transferor company and stood validly transferred to the taxpayer under the approved amalgamation scheme. It rejected the AO's conclusion that the asset lacked genuineness.

The Bench further noted that the trademark had been duly registered in the taxpayer's name under the Trade Marks Act, 1999, and relied on the documentary record to affirm its existence. It observed:

“we do not find any merit in the findings of the AO that the Trademark transferred to the assessee pursuant to amalgamation was fictitious.”

The Tribunal also recorded that the Assessing Officer (AO) had examined and allowed the depreciation claim in the first year after amalgamation during scrutiny proceedings under Section 143(3), and no revisionary proceedings followed. It held that the Revenue could not revisit the issue in later years when depreciation was computed on the opening written down value. It added:

“since the year under consideration is the second year of the claim of depreciation on Trademark by the assessee… therefore the entire exercise of determining the eligibility of claim in the year under consideration is merely academic.”

Emphasising finality of the written down value once accepted, the Tribunal held that the AO cannot disturb the opening block of assets in subsequent years without first unsettling the assessment of the initial year.

It further rejected the Revenue's attempt to deny depreciation in the second year after having accepted the claim in the first year without exercising available statutory remedies. The members stated:

“once the Revenue has itself allowed the depreciation on Trademark in the very first year… we are of the considered view that the Revenue is not justified in disallowing the claim of depreciation on Trademark in the year under consideration.”

On disallowance of expenditure relating to exempt income, the Tribunal upheld the deletion made by the appellate authority. It held that in the absence of any exempt income, no disallowance under Section 14A read with Rule 8D can survive. It also noted that the Finance Act, 2022 amendment applies prospectively. It observed:

“the disallowance computed under section 14A read with Rule 8D of the Rules by the AO is completely unwarranted in the facts and circumstances of the present case.”

Accordingly, the Tribunal dismissed all appeals filed by the Revenue and allowed Transworld Furtichem's cross-objections.

For Appellant: Dr. K. Shivram a/w Rahul Hakani

For Respondent: Himanshu Joshi, SR. DR