Section 32(1)(ii)

Section 32(1)(ii) — the law in short

What the courts have decided on section 32(1)(ii), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Techno Shares & Stocks Ltd v CIT Supreme CourtHelps taxpayer
  I bought a Bombay Stock Exchange membership card — can I claim depreciation on it as an intangible asset under section 32(1)(ii)?
  Yes, on these facts. The Supreme Court held on 9 September 2010 that the right of membership of the Bombay Stock Exchange, which includes the right of nomination, is a business or commercial right that gives a non-defaulting continuing member access to the Exchange and the ability to trade on its floor. Under Rule 5 membership is a personal permission from the Exchange, which is a licence, and Explanation 3 to section 32(1)(ii) declares a commercial right similar to a licence or franchise to be an intangible asset. The right vests in the Exchange only on default or demise. The Bombay High Court's contrary judgment was set aside.
• Nectar Beverages Pvt Ltd v DCIT Supreme CourtHelps taxpayer
  I wrote off my bottles and crates at 100% under the old proviso to section 32(1)(ii). Years later I sold them as scrap - is the sale money taxable under section 41(1)?
  No, for the years when section 41(2) was off the statute book. The Supreme Court held that the balancing charge in section 41(2) cannot be read into section 41(1). Depreciation is by its nature neither a loss nor an expenditure nor a trading liability, which is all section 41(1) reaches. Section 41(2), which taxed the balancing charge, was deleted from assessment year 1988-89 when the block of assets concept came in, so between then and its restoration the profit on sale of such assets was not taxable. Items costing under Rs.5,000 bought before 31 March 1995 also stayed outside the block, so section 50 did not catch them either.
• Mcorp Global (P) Ltd v CIT Supreme CourtCuts both ways
  In my own appeal the Tribunal has taken away a deduction the Assessing Officer had already allowed me — can it do that?
  No. The Supreme Court held that the Tribunal has no power to enhance an assessment or to take back a benefit the Assessing Officer had granted, applying Hukumchand Mills. Depreciation had been allowed on 42,000 bottles; the Tribunal and the High Court, by holding the whole transaction to be a financial arrangement rather than a lease, took that benefit away, and that was not permissible. The disallowance of Rs 18,04,572 was deleted. On the second transaction the Court upheld the concurrent finding that the lease was a sham and confirmed the disallowance of Rs 30,17,122. The appeal was partly allowed.
• Escorts Ltd v Union of India Supreme CourtHelps department
  I wrote off the whole cost of a laboratory building and its equipment under the scientific research provision. Can I also take depreciation on the same assets in later years, and can the department deny it for years before 1980 using an amendment made in 1980?
  No to the first, and yes to the second, and the reason for the second is the answer to the first. Section 35(2)(iv) as substituted by the Finance (No.2) Act 1980, with retrospective effect from 1 April 1962, provides that where a deduction is allowed for any previous year under section 35 in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clauses (i), (ii) and (iii) of section 32(1) for the same or any other previous year in respect of that asset. The petitioners said that was a new burden imposed on closed years and attacked it under Articles 14, 19(1)(g) and 300-A. The Supreme Court dismissed the petitions. It held that even before the 1980 amendment the Act did not permit depreciation on the cost of a capital asset acquired for scientific research to the extent that cost had been written off under the scientific research provision, so the amendment effected no change at all except to set out more clearly and categorically what the provision said even earlier. Being clarificatory, it took away no vested right. The reason the pre-amendment law was already to that effect is the sentence the case is now known for: there is an axiom, unwritten but fundamental, that no legislature could have intended a double deduction for the same business outgoing, and if it is intended it will be clearly expressed.
• Areva T&D India Ltd v ACIT High CourtHelps taxpayer
  On a slump sale I paid more than the value of the tangible assets and my books show the excess as goodwill. Can I claim depreciation on it under section 32(1)(ii)?
  Yes, where the excess is in truth the price of identifiable business or commercial rights. The Delhi High Court held that "business or commercial rights of similar nature" in section 32(1)(ii) is not confined to things resembling know-how, patents, trademarks, copyrights, licences or franchises individually - those six are themselves quite different from one another. What they share is that they are intangible assets forming part of the tools of trade. Business claims, business information, business records, contracts, skilled employees and know-how acquired on a slump sale fall in the same genus and are depreciable. The entries in the books are not conclusive; the true nature of the transaction governs.
• Punjab Bone Mills v CIT — s.38(2) proportionate disallowance where plant is shared with sister concerns High CourtHelps departmentNo later treatment found
  The Assessing Officer says my boiler was also used by my sister concerns and has cut my depreciation by two-thirds. Can he do that?
  Yes, if the asset was genuinely not used exclusively for your business. Section 38(2) requires depreciation under s.32 to be restricted to a fair proportionate part, which the Assessing Officer determines having regard to the user of the building, machinery, plant or furniture for the purposes of the business, and the Punjab and Haryana High Court upheld exactly such a restriction where the boiler was used by two sister concerns and the expenses were shared.
• Nirma Ltd v DCIT — depreciation on goodwill from amalgamation, and the date the Finance Act 2021 closed it ITATHelps taxpayerSuperseded by amendment
  The Assessing Officer has disallowed depreciation on goodwill that arose when a company amalgamated into mine. Which years can I still claim it for?
  Only assessment years up to AY 2020-21. The Finance Act 2021 removed goodwill of a business or profession from the definition of block of assets in s.2(11) and from s.32, excluded it from Explanation 3(b) to s.32(1), and amended s.43(6)(c)(ii) to require the written down value of goodwill to be reduced from the opening WDV where goodwill already formed part of a block; those amendments apply prospectively from AY 2021-22. For earlier years the Tribunal here allowed the claim on Smifs Securities, and the amendment gives the Assessing Officer no ground to disturb it.
• Statutory position — the second proviso to s.32(1): where an asset is acquired during the previous year AND put to use for less than 180 days in that year, depreciation is restricted to fifty per cent — the exact words, what the 180 days is counted on, and the further proviso giving the balance of the additional allowance in the succeeding year CBDT Circulars & InstructionsCuts both ways
  We bought plant in February and used it from March. The Assessing Officer has halved the depreciation. Is the 180 days counted from acquisition or from the date the asset was put to use, and what happens to the other half of the additional depreciation under s.32(1)(iia)?
  The proviso is worded on BOTH events, and that is the whole fight. As printed on the most recent departmental edition, it reads: "Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be :". So the restriction applies only where TWO things are true of the same previous year — the asset was acquired by the assessee during that previous year, and it was put to use for the purposes of business or profession for a period of less than 180 days in that previous year. The 180-day count is on the period of USE ("is put to use ... for a period of less than one hundred and eighty days"); acquisition during the previous year is a separate, cumulative condition, not the thing counted. An asset acquired in an earlier previous year is outside the proviso even if it is used for less than 180 days in the year in question. The further proviso, printed immediately after, gives back the missing half of the ADDITIONAL depreciation only: where an asset referred to in clause (iia) or the first proviso to clause (iia) is acquired during the previous year and put to use for less than 180 days in that year and the deduction is accordingly restricted to fifty per cent, "then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset". The footnote evidence I could read attaches that further proviso to an insertion effective 1 April 2016; the Act number as the departmental page prints it is set out in the editor note and I could not reconcile it.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.