Goodwill and Depreciation

1. The Assessee has purchased the business alongwith goodwill. Goodwill is separately valued.
   Whether depreciation can be claimed on Goodwill purchased?
   
   Ans. As per the provisions of sec.32(1)(ii), depreciation is allowable on the know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible asset acquired on or after 1-4-1998. As has been held by the Courts, goodwill is nothing but composite name for various rights owned by the businesses. Therefore, it can be said that the expression “business or commercial right” of similar nature is broad enough to cover goodwill and hence, it can be contended that it is eligible for depreciation as an intangible asset.
   
   There is no direct decision on this issue. However, in respect of stock exchange membership obtained after 1-10-1998, the ITAT in the case of Techno Shares & Stocks Ltd. 101 TTJ 349 (Mum) and Kaynet Capital Ltd. [ITA No.3870 /71 / Mum / Dec. 2006 BCAJ 275] has held that it is a business or commercial right and therefore, eligible for depreciation. We understand that some of the Benches of the Tribunal have taken a different view.

Succession and Depreciation

2.  As per section 47(xiii) any transfer of capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, is not considered as transfer for the purpose of computation of capital gains.
   The Assessee firm revalued the assets and transferred the assets to the company after revaluation.
   Whether depreciation can be claimed on revalued assets?
   
   
   
   Ans. There is no specific prohibition in the sec.43(1) or u/s.32 for not granting depreciation on the revalued price. In fact, in respect of amalgamation and demerger, there is specific provision denying depreciation on the value of the assets at which these are taken over by the company from the firm. So also, merely because transfer of assets by the firm to the company is tax exempt as per sec.47(xiii), that does not mean, the successor cannot claim depreciation on the transfer price. Therefore, it would be possible to contend that if the assets are taken over by the company at market value duly supported by Valuation Report of the Approved Valuer, company can claim depreciation on the revalued price. It is to be noted that as per Expl.3 to sec.43(1), if the AO comes to a conclusion that the main purpose of transfer was to claim higher depreciation, then he can determine the correct value of assets and grant depreciation on such value.

Return and Part IX

3. In case the firm is converted into the company by Part IX of the Companies Act, whether two returns have to filed? Whether account have to be maintained for the entire financial year or have to be divided between the dates of conversation from firm to company?
   
   Ans. If the firm is converted into company as per Part IX of the Companies Act in-between the year, then there will have to be closure of books in the case of firm up to the date of conversion and separate accounts will have to be made in the hands of the company from the date of conversion till the end of the year. Two separate returns will have to be filed; one by firm and one by the company.

Tenancy Right and Depreciation

4. The business of the assessee to buy tenancy rights and lease the premises. The Assessee treated it as business income and claimed depreciation on tenancy rights. A.O. assessed it as income from other sources and disallowed depreciation.
   Whether such income is business income? Further can depreciation be claimed on tenancy right, irrespective of income being treated as business income or income from other sources?
   
   Ans. The amount paid for obtaining tenancy or leasehold rights is a capital asset and depreciation on the same could be claimed as an intangible asset. In the case of D. K. Sandu Bros. Pvt. Ltd. 271 ITR 1, the Supreme Court has reiterated that leasehold right is capital asset affirming the decision of Bawa Shiv Charan Singh 149 ITR 29 (Del). Accordingly, if amount is paid or cost is incurred for obtaining tenancy or leasehold right, it will be eligible for depreciation as an intangible asset.
   
   The Supreme Court has recently held that if the owner of the property lets out the property alongwith furniture, fixture, income will be treated as income from house property. Refer: Shambhu Investments Ltd. 263 ITR 143 (SC).
   
   In the present case income received from letting out of the premises will however, be assessed as income from other sources, since the Assessee is not owner of the premises.
   
   As per the provisions of sec.56(2)(iii), where Assessee lets on hire machinery, plant or furniture belonging to him and also buildings & letting of building is inseparable from letting off of the said machinery, plant or furniture, the income from such letting if not chargeable to income tax under the head “profits or gains of business”, then such income is to be assessed as income from other sources. The Mumbai High Court in the case of Kanhere 92 ITR 535 and the Madras High Court in the case of Smt. P. Andal Ammal 243 ITR 715, have held that inseparability is to be seen with reference to the income derived from letting of furniture, plant with the buildings. It may however, be noted that as per sec.56 & sec.57, expenditure incurred wholly and exclusively for earning such income including depreciation on the assets will be allowed. As per the provisions of sec.56(2)(iii), if furniture, fixtures alongwith land and building is let out, then it is to be assessed as income from other sources and depreciation will be allowed as per sec.57(ii).

Stock Brokerage Income
 

5. Q.5. The Assessee is a stock broker and principle business is brokerage. He mainly derives income from brokerage which is treated as business income. During the year the Assessee, does some transaction of purchase and sales of shares on his own account. He incurs loss on share trading on own account.
   Whether explanation to section 73, can be applied to such loss on share trading on own account, since trading in his own account is part and parcel of the share brokerage income and is incidental to the business.
   Whether brokerage income be treated as speculation income, so as to set off the loss against the brokerage income?
   
   Ans. If the broker carries on the business of purchase and sale of shares on his own account, then it will be treated as his business income or loss. If the broker is a company, the Expl. to sec.73 will become applicable in case of loss in trading in shares. If the broker’s case falls in the exception provided in Expl. to sec.73, then loss will not be treated as speculation loss.
   Brokerage income cannot be treated as speculation income, as it is part of business carried on by the Assessee and therefore, deemed speculation loss cannot be set off against the brokerage income.

Change of user and transfer

6. Q.6. Seven persons have purchased undivided shares of certain Khasras of agricultural land since 1990 to 1997 measuring around 8.67 hectare. Now they have decided to apply to Jaipur Development Authority jointly for land conversion for residential / commercial use. Jaipur Development Authority permitted land conversion partly in commercial and partly in residential with total measuring 60777 mtrs. Rest of the land was left for roads and general utility area. This 60777 mtr. has been divided by these seven persons in ratio of their ownership in the agricultural land according to their old possession. Now they will sell these residential plot in their individual capacity, my query is that:
   
   • Whether they are supposed to pay any income tax on such land conversion and division.
   
   • Whether they can get the benefit of reinvestment in bonds deeming it as long term capital gain
   
   Ans. In the present case, the assessee is holding the agricultural land as his capital asset. If the land is converted from capital asset into stock-in-trade for carrying out business or for adventure, then the provisions of sec.45(2) becomes applicable and the difference in the market value on the date of conversion and the indexed cost of the asset will be liable as long term capital gain in the year of conversion. However, the tax will be payable only when such stock-in-trade is sold or otherwise transferred. You may refer the test laid down by the Bombay High court in the case of V. A. Trivedi 172 ITR 95 as to when transaction could be called as adventure or sale of capital asset
   
   If however, the agricultural land is sold without doing any development but simply convert it into non-agricultural land for obtaining better price, then such act of obtaining permission, as non-agriculture will not attract any tax.