The Karnataka High Court has held that the income tax deduction is allowable on the cost of trademarks acquired for use.
The bench of Justice S.G.Pandit And Justice C.M. Poonacha has observed that the assessee has acquired the right to use the trademark of Philips India Ltd., for a period of 36 months. In respect of the right to use the trademarks for the period of 36 months, the assessee had sought to claim deduction, which it has amortised over the said period of 36 months. Further, the deduction claimed by the assessee as expenditure for the use of the trademark for AYs 2003-04 and 2004-05 has been accepted.
Background
The appellant/assessee is a public limited company engaged in, inter alia, the business of manufacture and sale of automobile components, diesel fuel injection equipment, auto electrical items, etc.
The assessee acquired the business of communication products and close circuit television products from Philips India Ltd. In consideration for acquiring non-exclusive and indivisible rights to use the trademarks of the products so acquired by the agreement for 36 months, the assessee paid a sum of Rs. 75,70,000. Since the right to use the trademarks was granted for a limited period of 36 months, the assessee proportionately claimed deduction of the amount over the period of 36 months from January 2003.
The assessee’s claim for deduction was allowed in the assessment order passed under Section 143(3) for the first two years after acquiring the said rights i.e., for AYs 2003-04 and 2004-05. However, for AY 2005-06 and 2006-07 the proportionate deduction was claimed, which was disallowed by the Assessing Officer.
The assessee preferred appeals before the Commissioner of Income Tax (Appeals), Bangalore, which were dismissed and the appeals filed by the assessee before the Tribunal were also dismissed.
Issue Raised – Income Tax Deduction On Use Of Trademark
The issue raised was whether the Tribunal was right in sustaining the 1st Respondent’s action in disallowing the claim for deduction of the cost of trademarks over a three year period when the said trademarks had admittedly been acquired for use for a period of only three years?
Arguments
The assessee contended that the deduction by the AO regarding the amount sought to be amortised in respect of the use of trademarks was rejected on the ground that the deduction is covered by Section 32(1) as well as under Section 43(6). Section 32(1) would require the assessee to “own” the trademark and Section 43(6) would require the assessee to “acquire” the trademark and having regard to the fact that admittedly the assessee had only the right to use the trademark for a period of 36 months, neither Section 32(1) nor Section 43(6) of the Act would stand attracted.
The assessee contended that the authorities have erred in not considering the contention of the assessee regarding the “rule of consistency”, inasmuch as the deduction as claimed by the assessee having been accepted for AYs 2003-04 and 2004-05, the same could not have been rejected for the subsequent years i.e., AYs 2005-06 and 2006-07.
The department contended that the assessee has failed to demonstrate that the expenditure was a revenue expenditure having regard to Section 37 and hence, the decision of the authorities is just and proper.
Conclusion
The court noted that in order for Section 32(1) to be attracted, the assessee is required to ‘own’ the asset and for Section 43(6) to be attracted the assessee ought to have ‘acquired’ the asset. Hence, reliance placed by the AO on the said sections to deny the deduction is ex facie untenable and liable to be rejected.
Case Title: Bosch Limited Versus DCIT
Case No.: I.T.A. No.72 OF 2017
Date: 04/09/2024
Counsel For Petitioner: Senior Advocate Percy Pardiwalla
Counsel For Respondent: Advocate E.I. Sanmathi
