Claiming set-off of losses suffered during amalgamation is no valid reason to deny depreciation to amalgamating company on brand value acquired: ITAT

THE ISSUE IS - Whether mere claiming set off of loss suffered during amalgamation, cannot be a reason to disallow the depreciation claimed by amalgamating company upon acquisition of brand value of such amalgamated company. YES is the answer.  

Facts of the case:

The assessee is engaged in the business of manufacturing and sale of gold and diamond jewellery, silver articles and other related business. During the year under consideration, the assessee was also engaged in derivatives through Multi Commodities Exchange. In the course of its business activity, the assessee acquired a brand called "Ishtaa". The assessee claimed depreciation on the intangible asset, namely, the brand "Ishtaa". The AO however, found that the brand "Ishtaa" was owned by M/s Ishtaa Gold Jewellery Pvt. Ltd., which was an associate company of the assessee. The company itself was amalgamated with assessee with effect from Dec 31, 2009. As per the scheme of amalgamation, the AO found that intellectual property rights was also transferred to the assessee. Therefore, the AO found that it was a colourable device for the purpose of reducing the tax effect by claiming depreciation on the brand value.

On appeal, the ITAT held that,

++ assessee claims depreciation on the brand "Ishtaa" claiming that it was purchased for a total consideration of Rs. 8.38 Crores. In fact, the funds were transferred through banking channel. There is no dispute about the details of payment made by the assessee for acquiring the brand value "Ishtaa". Subsequently, M/s Ishtaa Gold Jewellery Pvt. Ltd. which owned the brand "Ishtaa", was amalgamated with the assessee-company. Admittedly, M/s Ishtaa Gold Jewellery Pvt. Ltd. is the associate company of the assessee. Even though M/s Ishtaa Gold Jewellery Pvt. Ltd. is the associate company of the assessee, in the eye of law, the assessee is a separate and independent entity and M/s Ishtaa Gold Jewellery Pvt. Ltd. is also a different and distinct entity. Under the Income-tax Act, they are separate independent assessable unit. Therefore, for all practical purposes, the assessee as well as M/s Ishtaa Gold Jewellery Pvt. Ltd. has to be considered as independent and separate entity. The assessee has paid about Rs. 8.38 lakhs by means of cheque as referred in the earlier part of this order. The Revenue disallowed the claim of the assessee on the intellectual property, namely, brand name "Ishtaa" that the owner of the brand name "Ishtaa" was subsequently amalgamated with assessee-company. The AO also observed that M/s Ishtaa Gold Jewellery Pvt. Ltd. is a loss making company and after amalgamation, the assessee itself claiming set off of losses against the profit earned by it. This Tribunal is of the considered opinion that the mere claiming set off of loss suffered by the amalgamated company cannot be a reason to disallow the claim of the assessee for depreciation. As rightly submitted by counsel for the assessee, Explanation 3 to Section 32 specifically says that the brand name, the intangible asset is also one of the assets eligible for depreciation. Further, when the assessee claims that the brand name "Ishtaa" was acquired outside the scheme of amalgamation and the payment was also made, this Tribunal is of the considered opinion that the acquisition of brand name cannot be doubted especially when the payment was not in dispute;

++ the subsequent amalgamation made in respect of other intangible assets left out other than the brand name "Ishtaa". M/s Ishtaa Gold Jewellery Pvt. Ltd. is also engaged in designing, manufacturing and sale of gold jewellery, it has several intangible assets apart from the brand name. Therefore, the intangible assets other than the brand name, might have been transferred during the course of amalgamation. This Tribunal is of the considered opinion that merely because there was subsequent amalgamation with effect from 31.12.2009 that cannot be construed as if the assessee has not acquired any brand name. When the assessee acquired the brand name by making payment through banking channel before amalgamation, this Tribunal is of the considered opinion that the assessee is eligible for depreciation as claimed.