Depreciation

The assessee was entitled to depreciation on the pre-operative expenses incurred in connection with obtaining registration of the mutual fund from SEBI and the fees paid for the registration as a mutual fund as the same was allowed in an earlier assessment year also, as held by MumTrib in HSBC Asset Management (India) Private Limited v Dy CIT — In favour of: The assessee; ITA No 2028/Mum/2009: (AY 2004–2005).

HSBC Asset Management (India) Private Limited v Dy. CIT

ITAT BENCH 'H', MUMBAI

ITA No. 2028/Mum/2009

Assessment Year: 2004-2005

N V Vasudevan, JM and R K Panda, AM

Decided on: 15 June 2011

Counsel appeared:

Shri Yogesh Thar for the appellant

Shri V V Shashi for the respondent

Order

Per: N V Vasudevan, JM:

This is an appeal by the assesee against the order dated 22/1/2009 of CIT(A)XXXIII, Mumbai

relating to assessment year 2004-05.

2. The assessee is a company. It acts as investment manager of HSBC Mutual Funds. The SEBI

has approved the assessee to act as investment manager of mutual funds. The assessee received

certificate of registration to act as Portfolio Manager under the SEBI(Portfolio Managers)

Regulations 1993 w.e.f. 16/9/05.

3. On perusal of depreciation chart filed as Annexure to Tax Audit Report in Form No.3CD, the

AO noticed that the assessee had claimed depreciation on intangible assets @ 25%. It was further

stated by way of note that, the intangible assets comprised of Pre-operative expenses of Rs.

77,58,599/- and SEBI Registration fee of Rs. 25,00,000/-. According to the Assessee, the

expenditure incurred in securing registration from SEBI by paying registration fee of

Rs.25,00,000/- was an intangible asset on which the Assessee can claim depreciation u/s.32(1)(ii)

of the Act. Further the expenditure incurred prior to obtaining registration to act as Mutual fund

manager of Rs. 77,58,599/- required to be capitalized and treated as intangible asset and the

Assessee was entitled to claim depreciation u/s.32(1)(ii) of the Act. According to the AO, Preoperative

expenses and SEBI Registration fee does not specifically fall u/s. 32(1)(ii) of the

Income Tax Act, 1961 (the Act) as intangible asset and therefore he called upon the assessee to

justify its claim for depreciation on intangibles. In response the assessee vide letter dated

13/12/2006 submitted the breakup of the preoperative expenses incurred by the assessee during

assessment Year 2002- 03 (i.e. relevant to previous year ended March, 31, 2002, prior to

commencement of business by the assessee as follows:

 

S.No. Particulars Amount Amount

1. Rent & Utilities 9,37,003

2. Compensation & Benefits 44,20,975

- Salary & Allowances

- Contractual benefits

- Pension fund contribution

- Provident fund contribution

- Recruitment Cost

- Sitting Fees – Director

-Sitting Fees - Trustee

38,90,609

40,085

1,88,219

2,03,419

21,143

25,000

52,500

3. General & Administrative Expenses 24,00,621

4. SEBI Registration Fees 25,00,000

Total Expenditure incurred before

commencement of business. On April 2,2002

1,02,58,599

==========

Less: Depreciation claimed @ 25% for

assessment year 2003-04 (relevant to previous

year ended Marchg, 2003)

(-)25,64,650

WDV as on April 1, 2003 76,93,949

Less: Depreciation claimed @ 25% for

Assessment Year 2004-05 (relevant to previous

year ended March 31,2004)

(-)19,23,487

WDV as on April 1, 2004 57,70,462

The assessee pointed out to the AO that it had commenced its business on April 2, 2002 and that

the above mentioned expenses were incurred prior to commencement of the business of the

assessee. It was further clarified that the Assessee was a company incorporated as a private

company with the main object of carrying on the business of “Asset Management Company”. The

sum of Rs. 25,00,000 which is the registration fee paid to SEBI under regulation 9 of the SEBI

(Mutual Fund) Regulations, 1996 to obtain registration as an Asset Management Company, which

is mandatory to commence its business. The registration fees paid by the assessee company is a

one time registration fees. A copy of the Registration Certificate from SEBI was also filed. It was

submitted by the Assessee that the registration fee is a payment made to obtain a commercial

right without which the assessee could not have commenced its business as an “Asset

Management Company. It was further submitted that the other expenses like rent and utilities,

salaries, administration, etc. were incurred so as to enable the assessee to get the required

registration under regulation 9 stated above. It was submitted that the other expenses incurred

were also to obtain “a commercial right” (viz. registration from SEBI) without which the business

of the assessee cannot be carried on. It was argued that the right obtained on registration with

SEBI is similar to the right obtained by a member of a recognized stock exchange on obtaining

membership of the Stock Exchange. The same principle can be applied to Registration required

by the assessee company to carry on the business of an Asset Management Company. The

assessee relied on the following decisions in which it was held that the membership of a

recognized stock exchange is in nature of commercial right, and is an “Intangible Asset” on

which depreciation u/s. 32 is allowable viz., a) Techno Shares and Stock Limited v. ITO (101 TTJ

349)(bom); M/s. Kaynet Capital Ltd. v. DCIT (ITA No.3870/M/05)(Mum)

4. The AO however was of the view that an amount of Rs. 77,58,599/- was incurred prior to the

commencement of business mainly on account of rent & utilities, salaries, administration, etc.

According to the AO, the intangible asset contemplated by section 32(1)(ii) should be in the

nature of know-how, patent, copyrights, trade marks, licences, commercial rights etc. and the

same should have been “acquired” by the assessee on or after 1/4/1998. According to the AO by

no stretch of imagination can the expenses like rent & utilities, salaries, administration, etc. be

considered intangible asset nor can it be said that the assessee acquired any intangible asset.

Accordingly, the depreciation claimed by the assessee on preoperative expenses were disallowed.

For identical reasons the AO held that depreciation on registration fee treating it as intangible

asset cannot also be allowed.

5. Before CIT(A) the assessee apart from reiterating its stand as was made before the A.O.,

submitted that in A.Y 2003-04 the assessee had claimed depreciation on fees paid to SEBI for

registration of Rs. 25,00,000/- and also the pre-operative expenses by treating them as part of the

actual cost of the block of intangible assets and the AO had allowed depreciation in the said

assessment year in the order passed under section 143(3) of the Act. It was submitted that in the

present assessment year it was not possible to disallow depreciation on item of asset which has

already in the block of assets and in respect of which depreciation had already been allowed. This

submission of the assessee was not considered by the CIT(A). The CIT(A) confirmed the order of

the AO holding that there were no intangible assets on which depreciation can be allowed.

6. Aggrieved by the order of the CIT(A) the assessee has filed the present appeal before the

Tribunal.

7. Though the Assessee has raised many grounds of appeal, it was submitted by the learned

counsel for the Assessee that the Assessee would press for adjudication only the ground raised by

the assessee before the Tribunal that depreciation should be allowed treating the SEBI

Registration fee as intangible asset or in the alternative the same should be allowed as deduction

under section 37(1) of the Act. Further it was submitted that the pre-operative expenses incurred

in connection with obtaining registration of the mutual fund from SEBI should be capitalized and

treated as part of the block of assets “intangible assets” and depreciation allowed on the same.

The learned D.R. relied on the order of the Revenue authorities.

8. We have heard the rival submissions. It is seen from Page No.63 of the assessee’s paper book

that in A.Y 2003-04 the assessee had claimed depreciation of Rs. 25,64,650/- as allowable as per

the provisions of the IT Act on Block of Assets under the head “intangible Assets”. The AO

allowed the claim of the assessee of depreciation for A.Y 2003-04 by an order passed under

section 143(3) dated 28/3/2006. Thus it is clear that the fees paid for registration as a mutual fund

to SEBI and the pre-operative expenses prior to such registration have already been treated as

intangible asset and form part of the block of assets of the assessee as on 1/4/2004. The

provisions of Sec.32(1)(ii) of the Act provides as follows:

“32. Depreciation.-(1) In respect of depreciation of-

(i) buildings, machinery, plant or furniture being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other

business or commercial rights of similar nature, being intangible assets acquired on or

after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or

profession the following deductions shall be allowed-

(i) in the case of assets of an undertaking engaged in generation or generation and

distribution of power, such percentage on the actual cost thereof to the assessee as may

be prescribed.

(ii) in the case of any block of assets, such percentage on the written down value

thereof as may be prescribed:

Provided that……..

Explanation 2.-For the purposes of this sub-section "written down value of the block of

assets" shall have the same meaning as in clause (c) of sub-section (6) of section 43;

Explanation 3.-For the purposes of this sub-section, the expressions "assets" and

"block of assets" shall mean-

(a) tangible assets, being buildings, machinery, plant or furniture ;

(b) intangible assets, being know-how, patents, copyrights, trade marks, licences,

franchises or any other business or commercial rights of similar nature.

Sec.43(6)(c) of the Act defines written down value and it reads as follows:

“43. Definitions of certain terms relevant to income from profits and gains of business

or profession.-In section 28 to 41 and in this section, unless the context otherwise

requires-

(6) "written down value" means-

(a)

(b)

(c) in the case of any block of assets,-

(i)

(ii) in respect of any previous year relevant to the assessment year commencing on or

after the 1st day of April, 1989, the written down value of that block of assets in the

immediately preceding previous year as reduced by the depreciation actually allowed

in respect of that block of assets in relation to the said preceding previous year and as

further adjusted by the increase or the reduction referred to in item (i).”

In other words in terms of section 32(1)(ii) of the Act, the AO has to allow depreciation on the

WDV of the block of assets and the prescribed rates. The AO cannot in the present Assessment

year dispute the opening WDV of the block of Assets nor can he examine the correctness or

otherwise of the opening WDV brought forward from the earlier year. It was also submitted by

the ld. counsel for the assessee that the order under section 143(3) for A.Y 2003-04 continues to

exist and has not been disturbed by any proceedings under the Act. We are therefore, of the view

that it was not possible for the AO in the present assessment year to take a stand different from

the one taken in the earlier assessment year. Having allowed the depreciation in the immediately

preceding year it is not open to the AO to take different stand for the year under consideration.

On this short ground, we direct that the depreciation claimed by the assessee should be allowed.

In view of the above, we have not gone into the question whether the sums in question would be

terms as intangible assets entitled to depreciation. For the reasons given above we allow the

appeal of the assessee.

9. In the result, the appeal of the assessee is allowed.