THE issue before the Bench is - Whether collection of innovative ideas and development of academic gadgets for a nursery school can be construed as technical knowhow and thus, depreciation is allowable. And the answer is NO.
Facts of the case
The assessee, engaged in the business of running preparatory schools on its own and through franchisees, filed its return of income declaring loss of Rs.97,49,680/-. During the year the assessee had acquired running business of Little Kingdom Edutech Ltd. and had acquired total assets worth Rs.5 crores against which Rs 50 lacs shares were allotted to Little Kingdom Edutech Ltd. From the details of assets acquired, AO noticed that there was an asset of Rs.4,75,00,000/- under the head "Technical Know-how", on which the assessee had claimed depreciation @ 25% amounting to Rs.1,18,75,000/-.
A partnership firm, Little Kingdom Nursery School, consisting of two partners, namely, Ms. Neeru Kukreja and Rajesh Kukreja (HUF), having sharing ratio 90% and 10% respectively, was running a preparatory school under the name and style of "The Little Kingdom Nursery School" in the year 1999-2000. The firm had shown an amount of Rs.2,50,00,000/- as "Goodwill" and Rs.2,25,00,000/- on account of "software developed" in the balance sheet for the year ending 31-3-2000.
M/s Little Kingdom Edutech Ltd., a accompany in which Ms. Neeru Kukreja and Rajesh Kukreja (HUF), holding 100% share equity of the company, had taken over all assets of the partnership firm w.e.f. 1-4-2000. All the activities of this school were controlled by Ms. Neeru Kukreja, being M.D. of the company. In the schedule of fixed assets, M/s Little Kingdom Edutech Ltd. had shown the amount of Rs.2,50,00,000/- as "Goodwill & Technical know-how" and Rs.2,25,00,000/- on account of software. This company did not claim any depreciation either on the software or the amount of goodwill during the previous year relevant to A.Y. 2001-02.
M/s Little Kingdom World Ltd., the assessee company, during the year had taken over all the assets worth Rs.5 crores of the Little Kingdom Edutech Ltd. against which Rs 50 lacs shares of the company were allotted to this company for a consideration of the business assets. In the schedule of fixed assets, the assessee had mentioned a sum of Rs.475 lacs as "technical know-how". Ms. Neeru Kukreja Managing Director, was controlling the entire activities of the school. The other director was Shri Rajesh Kukreja.
After considering the above mode of acquisition of technical knowhow by the assessee company, the AO pointed out that assessee failed to explain how the amount of Rs.2.50 crores on account of goodwill had become technical know-how in the hands of the assessee company. Considering the assessee's reply that technical know-how was nothing but a collection of innovative ideas & techniques and academic gadgets developed and conceived by the founder of the nursery school, the AO pointed out that the assessee had admitted that there was no software for technical know-how. He concluded that the amount mentioned in the schedule of fixed asset was nothing but a notional one on which depreciation had been claimed by the assessee company. He further pointed out that there was no evidence on record to indicate that any software was earlier purchased by the firm or developed by the founder in earlier years. He further pointed out that good-will and software were two separate assets and could not be matched in any way with the technical know-how. Further, he pointed out that evidently assets on which depreciation @ 25% is admissible on intangible assets as per Rule 5, does not include goodwill and software. The AO pointed out that during the year assessee had purchased software worth Rs.35,100/- on which depreciation had been claimed and allowed separately. Further, assessee had claimed depreciation on computers, gadgets and toys, education aid, music system etc., which were used by the school. He, therefore, disallowed the assessee's claim of depreciation of Rs.1,18,75,000/-. The AO determined the income at Rs.21,37,110/-. CIT(A) dismissed the assessee's appeal.
On appeal, the Tribunal held that,
++ in view of above statutory provision of section 32(1)(ii) dealing with depreciation on intangible assets, one need to examine whether the assessee's claim come within the ambit of the expression know-how or not because in respect of other intangible assets the assessee has to specifically acquire them. Therefore, we have to confine only to the definition of knowhow. The definition of know-how clearly contemplates that some specific technique is to be developed which can assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits;
++ Gujarat High Court in the case of CIT Vs. Elecon Engg. Co. Ltd. 2003-TIOL-275-HC-AHM-IT has observed that "Know-how is a peculiar kind of assets. It is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. The whole of it is not in an intangible form even while it is in the process of being acquired and very often it takes a physical form as it grows in the shape of formulae, drawings, patterns, blue prints, specifications and so on. The material form it takes not only facilitates preservation, collation and ready reference but also makes it perceptible and visible and easily capable of being transmitted to others."
++ thus, there should be something concrete available with the assessee in the form of formulae, drawings, patterns, blue prints, specifications etc. to come within the ambit of know-how. Further, the know-how is mainly with reference to industrial manufacturing process and not with reference to any innovative technique allegedly developed by the managing director of assessee company for better imparting of education to children. The assessee's claim, inter alia, is that academic gadgets developed by it constitute 'know-how'. However, no such academic gadgets have been spelt out in the orders of lower revenue authorities. Be that as it may, since imparting of education in school cannot be equated with the information or technique helping in industrial manufacturing, technical know-how in the books of assessee acquired from M/s Little Kingdom Edutech Ltd. cannot be held to be entitled for depreciation in view of statutory provisions of section 32. Accordingly, assessee's appeal is dismissed.
A partnership firm, Little Kingdom Nursery School, consisting of two partners, namely, Ms. Neeru Kukreja and Rajesh Kukreja (HUF), having sharing ratio 90% and 10% respectively, was running a preparatory school under the name and style of "The Little Kingdom Nursery School" in the year 1999-2000. The firm had shown an amount of Rs.2,50,00,000/- as "Goodwill" and Rs.2,25,00,000/- on account of "software developed" in the balance sheet for the year ending 31-3-2000.
M/s Little Kingdom Edutech Ltd., a accompany in which Ms. Neeru Kukreja and Rajesh Kukreja (HUF), holding 100% share equity of the company, had taken over all assets of the partnership firm w.e.f. 1-4-2000. All the activities of this school were controlled by Ms. Neeru Kukreja, being M.D. of the company. In the schedule of fixed assets, M/s Little Kingdom Edutech Ltd. had shown the amount of Rs.2,50,00,000/- as "Goodwill & Technical know-how" and Rs.2,25,00,000/- on account of software. This company did not claim any depreciation either on the software or the amount of goodwill during the previous year relevant to A.Y. 2001-02.
M/s Little Kingdom World Ltd., the assessee company, during the year had taken over all the assets worth Rs.5 crores of the Little Kingdom Edutech Ltd. against which Rs 50 lacs shares of the company were allotted to this company for a consideration of the business assets. In the schedule of fixed assets, the assessee had mentioned a sum of Rs.475 lacs as "technical know-how". Ms. Neeru Kukreja Managing Director, was controlling the entire activities of the school. The other director was Shri Rajesh Kukreja.
After considering the above mode of acquisition of technical knowhow by the assessee company, the AO pointed out that assessee failed to explain how the amount of Rs.2.50 crores on account of goodwill had become technical know-how in the hands of the assessee company. Considering the assessee's reply that technical know-how was nothing but a collection of innovative ideas & techniques and academic gadgets developed and conceived by the founder of the nursery school, the AO pointed out that the assessee had admitted that there was no software for technical know-how. He concluded that the amount mentioned in the schedule of fixed asset was nothing but a notional one on which depreciation had been claimed by the assessee company. He further pointed out that there was no evidence on record to indicate that any software was earlier purchased by the firm or developed by the founder in earlier years. He further pointed out that good-will and software were two separate assets and could not be matched in any way with the technical know-how. Further, he pointed out that evidently assets on which depreciation @ 25% is admissible on intangible assets as per Rule 5, does not include goodwill and software. The AO pointed out that during the year assessee had purchased software worth Rs.35,100/- on which depreciation had been claimed and allowed separately. Further, assessee had claimed depreciation on computers, gadgets and toys, education aid, music system etc., which were used by the school. He, therefore, disallowed the assessee's claim of depreciation of Rs.1,18,75,000/-. The AO determined the income at Rs.21,37,110/-. CIT(A) dismissed the assessee's appeal.
On appeal, the Tribunal held that,
++ in view of above statutory provision of section 32(1)(ii) dealing with depreciation on intangible assets, one need to examine whether the assessee's claim come within the ambit of the expression know-how or not because in respect of other intangible assets the assessee has to specifically acquire them. Therefore, we have to confine only to the definition of knowhow. The definition of know-how clearly contemplates that some specific technique is to be developed which can assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits;
++ Gujarat High Court in the case of CIT Vs. Elecon Engg. Co. Ltd. 2003-TIOL-275-HC-AHM-IT has observed that "Know-how is a peculiar kind of assets. It is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. The whole of it is not in an intangible form even while it is in the process of being acquired and very often it takes a physical form as it grows in the shape of formulae, drawings, patterns, blue prints, specifications and so on. The material form it takes not only facilitates preservation, collation and ready reference but also makes it perceptible and visible and easily capable of being transmitted to others."
++ thus, there should be something concrete available with the assessee in the form of formulae, drawings, patterns, blue prints, specifications etc. to come within the ambit of know-how. Further, the know-how is mainly with reference to industrial manufacturing process and not with reference to any innovative technique allegedly developed by the managing director of assessee company for better imparting of education to children. The assessee's claim, inter alia, is that academic gadgets developed by it constitute 'know-how'. However, no such academic gadgets have been spelt out in the orders of lower revenue authorities. Be that as it may, since imparting of education in school cannot be equated with the information or technique helping in industrial manufacturing, technical know-how in the books of assessee acquired from M/s Little Kingdom Edutech Ltd. cannot be held to be entitled for depreciation in view of statutory provisions of section 32. Accordingly, assessee's appeal is dismissed.
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