Can IPRs be treated as ‘plant’ under Section 43(3) of the Income Tax Act?

On 15th October, the Supreme Court of India delivered its judgment in Mangalore Ganesh Beedi Works v. CIT (judgment available here) on the issue whether the acquisition of trademarks, copyright and technical know-how can be treated as “plant and machinery” so that depreciation/amortization may be claimed on them under Section 32 of the Income Tax Act, 1961.

Facts of the Case:

Mangalore Ganesh Beedi Works (MGBW) is a beedi-manufacturing business, which was established in 1940 as a partnership firm. The firm which was reconstituted from time to time contained Clause 16 which related to winding-up of the firm’s affairs after its dissolution.

Clause 16 read as follows:
“If the partnership is dissolved, the going concern carried on under the name of the Firm Mangalore Ganesh Beedi Works and all the trademarks used in course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the partner who offers and pays or two or more partners who jointly offer and pay the highest price therefor as a single group at a sale to be then held as among the partners shall be entitled to bid. The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deed, instruments and applications and otherwise and him/her name or their names of all the said trademarks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee partner or partners.”

Clause 16 provided for an auction sale to be conducted among the partners of the firm on the dissolution of the partnership, where the business of the firm and all the trademarks used in the course of the firm’s business would vest in the partner who offers (or an association of two or more partners who jointly offer) to pay the highest price for the business.

The firm was eventually dissolved in December, 1987 by filing a Company Petition in the Karnataka High Court; the High Court appointed an Official Liquidator and passed a winding up order in June, 1991. In its order, the Court fixed Rs. 30 crores as the minimum (reserved) price for the auction.

An auction was duly conducted and the business of the firm passed into the hands of three former partners of the firm, forming an association of persons (hereinafter ‘AOP-3’) who had bid Rs. 92 crores for the assets of MGBW; the sale took effect on 18th November, 1994.

MGBW (hereinafter referred to as the ‘Assessee’) filed income tax returns for the period 18th November, 1994 to 31st March, 1995. The Assessee claimed depreciation under Sections 35A and 35AB of the Act towards acquisition of IP such as trademark, copyright and technical know-how (Section 35A allows deductions for expenditure on acquiring patents and copyrights and section 35AB on acquisition of know-how); alternatively, the Assessee claimed deduction through depreciation on the value of the IPRs by treating them as “plant”.

On 30th March, 1998 the Assessing Officer passed an order rejecting all the claims of the Assessee. Subsequently, the order was appealed by the Assessee and the Commissioner of Income-Tax (Appeals) rejected the Assessee’s claim for depreciation on IPRs.

The Assessee appealed the order before the Income-Tax Appellate Tribunal (hereinafter ‘the Tribunal’) which allowed the Appeal.

The Revenue appealed the order of the Tribunal in the Karnataka HC which set aside the Tribunal’s findings and restored the order of the Assessing Officer. The Assessee appealed to the Supreme Court.

Whether the Assessee was entitled to claim any deduction on the alleged expenditure on acquisition of patent [trademarks] rights, copyrights and know-how, in terms of Section 35A and 35AB of the Act?

The Karnataka HC had ruled in favour of the Revenue on this issue because the Court accepted the Revenue’s contention that what was transferred in the auction sale was the goodwill of the firm and not MGBW’s IPRs as alleged by the Assessee. The Supreme Court chose not to rule on the applicability of Sections 35A and 35AB in the instant case and instead focussed on the alternative issue involved in the case, i.e. whether the Assessee can claim depreciation on the acquisition of IPRs by treating them as “plants and machinery”.

Whether the Assessee can claim benefit under Section 32 read with 43(3)?

The SC observed that the definition of ‘plant’ in section 43(3) of the Act is inclusive and took into account its decision in CIT v. Taj Mahal Hotel wherein it was held that the word ‘plant’ must be given a wide import:
“Now it is well settled that where the definition of a word has not been given, it must be construed in its popular sense if it is a word of everyday use. Popular sense means “that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it”.

The Court held that intellectual property (specifically ‘trademarks, copyrights and technical know-how’) would come within the definition of ‘plant’ under the Act:
“…there can be no doubt that for the purposes of a large business, control over intellectual property rights such as brand name, trademark etc. are absolutely necessary. Moreover, the acquisition of such rights and know-how is acquisition of a capital nature, more particularly in the case of the Assessee. Therefore, it cannot be doubted that so far as the Assessee is concerned, the trademarks, copyrights and know-how acquired by it would come within the definition of ‘plant’ being commercially necessary and essential as understood by those dealing with direct taxes.”

The Court further observed that Section 32 of the Act initially did not distinguish between tangible and intangible assets for the purposes of depreciation and that the distinction came about by way of an amendment after the relevant assessment year in the present case. Therefore, the Assessee should be entitled to claim benefit under section 32 read with section 43(3) of the Act.

The Court further remarked that in denying that the trademarks were auctioned to AOP-3, the Revenue is attempting to rewrite Clause 16 of the partnership agreement; clause 16 specifically states that “the going concern and all the trademarks used in the course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the highest bidder.” Therefore, the Court found it difficult to accept the Revenue’s contention that it was the goodwill and not the trademarks that were auctioned in the sale. The Court cited D.S. Bist and Sons v. CIT wherein it was held that “the Act does not clothe the taxing authorities with any power or jurisdiction to re-write the terms of the agreement arrived at between the parties with each other at arm’s length and with no allegation of any collusion between them. ‘The commercial expediency of the contract is to be adjudged by the contracting parties as to its terms.’”

The Court found in favour of the Assessee & accordingly disposed of the appeal.


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2 thoughts on “Can IPRs be treated as ‘plant’ under Section 43(3) of the Income Tax Act?”

  1. Gajendra Phulwari

    If we talk in popular sense “Plant” is a or should be a tangible asset, no stretch of imagination no matter how wider we try to construe it gives us a hint that plant could be something which could be intangible, so including IPR under the definition of Plant, does not only dictate the legislative intent but violate the literal rule of interpretation which prohibit unnecessary interpretation of a term which is not ambiguous.

    However Honorable Supreme Court has respected its previous decision but I think it could have taken a different stand as its not bound by principle of Stare Decisis.

    However, taxation laws should always be construed to the benefit of the assessee but such a wider interpretation without need of interpretation would create Tax Heaven.

  2. When I first read the title of the post, the first thought that came to my mind was: obviously not, and it shouldn’t. It is very difficult to construe the word “plant” to include IPR. This goes beyond the rules of literal interpretation. The legislative intention could surely have been only to include tangible, fixed assets used in generation of goods. The very nature of the word “plant” indicates only tangible property and cannot possible be intended to include IPR.

    The SC is right in trying to give the interpretation a “popular sense”, but it is not popular sense to consider “plant” as including IPR.

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