ITAT Mumbai: Depreciation on Trademark Allowed in First Year Cannot Be Denied Later Without Change in Facts

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that once depreciation on a trademark arising from an amalgamation has been allowed in the first year after scrutiny, the Revenue cannot disallow the same in subsequent years in the absence of any change in facts or circumstances.

The ruling came in the case of DCIT – Central Circle – 3(4), Mumbai v. Transworld Furtichem Private Limited, where the Tribunal dismissed the Revenue’s appeals for assessment years 2017–18 to 2020–21 and allowed the assessee’s cross-objections.

The dispute concerned the assessee’s claim of depreciation under Section 32 of the Income Tax Act, 1961 on a trademark valued at approximately ₹15.9 crore, recorded pursuant to an amalgamation scheme approved by the National Company Law Tribunal (NCLT). The amalgamation resulted in the transfer of all assets and liabilities of the transferor company, including the trademark “Nutrifeed,” which had been used in business since 2007–08.

During assessment proceedings, the Assessing Officer (AO) disallowed depreciation on the trademark, alleging that the intangible asset was fictitious since it was not reflected in the books of the transferor company prior to amalgamation. The AO also questioned the valuation methodology, stating that it was based on unverified projections and arbitrary assumptions.

However, the Tribunal rejected these findings. It noted that the trademark was a genuine commercial asset used by the transferor company and that its registration was subsequently transferred to the assessee under the Trade Marks Act, 1999. The Bench categorically held that there was no merit in the AO’s conclusion that the asset was fictitious.

A key factor in the Tribunal’s decision was that the depreciation claim had already been examined and allowed in the first year post-amalgamation (AY 2016–17) under scrutiny proceedings. Importantly, no revision proceedings under Section 263 were initiated by the Revenue to disturb that assessment.

The Tribunal emphasized that in subsequent years, depreciation is computed on the opening written down value (WDV), and therefore, re-examining the eligibility of the asset itself becomes redundant unless there is a material change in facts. It observed that such an exercise in the second year was “merely academic.”

Relying on the principle of consistency laid down by the Supreme Court in Radhaswami Satsang v. CIT, the Tribunal held that a position accepted in earlier years cannot be arbitrarily disturbed in later years. It further reiterated that the Assessing Officer cannot revisit or question the correctness of the opening WDV once it has been accepted in prior assessments.

On the issue of disallowance under Section 14A, the Tribunal upheld the deletion made by the Commissioner (Appeals). It held that where no exempt income is earned during the relevant assessment year, no disallowance under Section 14A read with Rule 8D can be made. The Bench also clarified that the amendment introduced by the Finance Act, 2022—extending Section 14A even to cases with no exempt income—operates prospectively and does not apply to the years under consideration.

Accordingly, the Tribunal dismissed all appeals filed by the Revenue and allowed the assessee’s cross-objections, affirming the allowability of depreciation on the trademark.