A recent ruling of the Income Tax Appellate Tribunal (ITAT), Delhi Bench has reignited an important debate in tax jurisprudence: Can an acquired workforce be regarded as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961?
The bench of Vikas Awasthy (Judicial Member) and Brajesh Kumar Singh (Accountant Member) treated an acquired workforce as a depreciable intangible asset falling within the expression “any other business or commercial rights of similar nature,” may have significant implications for mergers, acquisitions, slump sales, and business restructuring transactions across India.
The controversy arose from the acquisition of a digital business by T.V. Today Network Limited from its holding company, Living Media India Limited, through a slump sale transaction. As part of the purchase price allocation exercise, a portion of the consideration was attributed to intangible assets, including the value assigned to the acquired workforce.
The company claimed depreciation on the workforce-related intangible asset under Section 32(1)(ii), which permits depreciation on know-how, patents, copyrights, trademarks, licences, franchises, and “any other business or commercial rights of similar nature.”
The tax department challenged the claim, arguing that the workforce did not constitute an asset recognized under the depreciation provisions of the Income-tax Act.
At the heart of the controversy lies a fundamental legal issue.
Depreciation under tax law presupposes the existence of an asset that is owned by the taxpayer. Ownership is therefore a foundational requirement.
However, unlike patents, trademarks, licences or contractual rights, employees cannot be owned. They remain independent individuals who are free to resign, change employers, or terminate employment relationships subject to contractual obligations.
A business may acquire an organized workforce structure, access to experienced personnel, or continuity of operations. Yet this does not necessarily translate into ownership of the workforce itself.
Critics of the Tribunal’s approach argue that if a workforce is incapable of being owned in the conventional legal sense, treating it as a depreciable asset creates a conceptual inconsistency within the statutory framework governing depreciation.
There is little dispute that an experienced workforce contributes substantial economic value to an enterprise.
In many acquisitions, a trained employee base may represent one of the most important commercial advantages obtained by the buyer. Valuation experts frequently assign significant monetary value to workforce-related assets while conducting purchase price allocations.
However, tax law does not grant depreciation merely because something possesses economic value.
The legal inquiry is not whether a workforce is valuable, but whether it constitutes an identifiable business or commercial right recognized under Section 32(1)(ii).
This distinction between “value” and “depreciable asset” is increasingly becoming a focal point of tax litigation involving intangible assets.
One of the strongest arguments against treating a workforce as a depreciable asset emerges from the Delhi High Court’s observations in the case of Sharp Business Systems.
The High Court held that business or commercial rights eligible for depreciation should generally possess characteristics akin to rights in rem—rights enforceable against the world at large—rather than mere rights in personam, which exist only against specific individuals.
Traditional intangible assets such as trademarks, patents, copyrights, licences, and franchises exhibit proprietary characteristics and can ordinarily be transferred, licensed, enforced, or protected against third parties.
An employment relationship, however, is inherently personal.
The relationship exists between employer and employee and is subject to termination by either party under applicable laws and contractual arrangements. Such relationships lack many of the proprietary attributes normally associated with depreciable intangible assets.
Viewed through this lens, critics argue that workforce-related value may not satisfy the test laid down by the Delhi High Court for qualifying business or commercial rights.
Although the Supreme Court subsequently allowed the appeal in Sharp Business Systems, it did not specifically examine or overrule the High Court’s reasoning concerning the nature of qualifying business or commercial rights.
Consequently, the High Court’s observations regarding rights in rem versus rights in personam continue to hold persuasive value in future disputes involving intangible assets.
This leaves open an important legal question that may ultimately require authoritative determination by higher judicial forums.
The issue assumes particular significance in modern mergers and acquisitions.
As businesses increasingly derive value from intellectual capital, human resources, customer relationships, technology platforms, and digital ecosystems, purchase price allocations often involve assigning substantial values to intangible components.
Tax authorities and taxpayers frequently disagree on whether such identified intangibles constitute depreciable assets.
The workforce question represents a broader challenge facing courts: where should the line be drawn between commercially valuable advantages and legally recognized depreciable rights?
The implications extend far beyond a single case.
If workforce-related value is treated as a depreciable intangible asset, taxpayers involved in acquisitions could potentially claim substantial depreciation deductions over time.
Conversely, if higher courts conclude that workforce value lacks the ownership and proprietary characteristics necessary for depreciation, numerous existing claims may face scrutiny.
The controversy highlights an evolving trend in tax litigation where disputes are increasingly shifting from valuation issues to legal characterization questions.
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