Depreciation on Tenancy Rights allowable under the Income Tax Act

The Income Tax Appellate Tribunal (ITAT) has ruled that depreciation on tenancy rights is allowable under Section 32 of the Income Tax Act. The case involved M/s Premier Book Company challenging the disallowance of such depreciation. The ITAT noted that if depreciation on tenancy rights was allowed in the initial assessment year and the facts remained the same, it could not be disallowed in subsequent years. The tribunal expanded the scope of Section 32 to include business and commercial rights of a similar nature to know-how, patents, and trademarks, which are built over time and offer commercial advantage.

In M/s Premier Book Company v. The Additional. C.I.T Circle- 30(1) New Delhi [ITA No. 5149/DEL/2014 dated August 11, 2021], M/s Premier Book Company ("the Appellant") has filed the current appeal challenging the order by the Commissioner of Income Tax (Appeals) ("the CIT(A)") dated June 03, 2016 pertaining to Assessment Year ("A.Y") 2010-11, which upheld the disallowance of depreciation on tenancy rights.

The Assessing Officers disallowed the claim under section 32(1)(ii) of the Income Tax Act 1961 ("the IT Act") which provides that the depreciation is only allowed in respect of know-how patents, copyrights, trademarks, licences, franchisees, or any other business or commercial rights of similar nature, being intangible assets acquired on or after April 1998.

The Hon’ble Income Tax Appellate Tribunal, Delhi ("the ITAT") observed this was not the initial year of claim of depreciation. Unless the claim is disturbed in the initial A.Y of the claim, the same cannot be disturbed in the subsequent A.Y if the facts are same.

Further relied on the case of Commissioner of Income Tax-IV v. Hindustan Coca Cola Beverages [ITA Nos.1391/2010, 1394/2010 & 1396/2010 dated January 14, 2011] wherein the court by observing and widening the scope of section 32 had allowed depreciation on intangible assets.

Noted, that business and commercial rights should be of similar nature know-how, patents, copyrights, trademarks, licenses, franchises, etc. and all these assets which are not manufactured or produced overnight but are brought into existence by experience and reputation. They gain significance in the commercial world as they represent a particular benefit or advantage, or reputation built over a certain span of time and the customers associate with such assets

Therefore, the ITAT held that depreciation under section 32 of the IT Act is allowable on the tenancy rights thereby allowing the prayed relief to the Appellant.