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Issues Involved:
1. Whether the payment of Rs. 84 lakhs made by the assessee to the four directors of Login Systems Innovations Pvt. Ltd. (LSI) was capital or revenue expenditure. Issue-wise Detailed Analysis: 1. Nature of Payment: Capital or Revenue Expenditure Facts and Background: The assessee-company, originally Synergy Credit Corporation Ltd., was in the finance business and purchased the business of computer software from LSI for Rs. 6 lakhs. The four directors of LSI entered into separate restrictive covenant agreements with the assessee on 15-10-1993, agreeing not to compete in the computer software business for five years in exchange for Rs. 21 lakhs each, totaling Rs. 84 lakhs. The assessee claimed this payment as a deduction from its income for the assessment year 1994-95. Assessing Officer's View: The Assessing Officer treated the payment as capital expenditure, arguing that: - The takeover of LSI and ensuring the services of four professionals added significant value to the assessee's business. - The software division's income increased substantially due to the induction of these professionals. - The payment was made to avail exclusive rights to their services and to ward off competition, thus it was of a capital nature. Case Laws Cited by the Assessee: The assessee cited several case laws to support its contention that the expenditure was revenue in nature, including: - CIT v. G.D. Naidu [1987] 165 ITR 63 (Mad.) - Champion Engg. Works Ltd. v. CIT [1971] 81 ITR 273 (Bom.) - CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902 (SC) - Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) Assessing Officer's Rebuttal: The Assessing Officer dismissed these case laws as inapplicable and cited: - Blaze & Central (P.) Ltd. v. CIT [1979] 120 ITR 33 (Mad.) - CIT v. Hindustan Pilkington Glass Works [1981] 139 ITR 581 (Cal.) CIT (Appeals) Decision: The CIT (Appeals) concluded that the payment was revenue in nature, noting that: - The restrictive covenants were negative agreements preventing the directors from working for others, not obligating them to work for the assessee. - The payment did not bring into existence any enduring asset. - The software business's success was due to various factors, not solely the four professionals. Tribunal's Analysis: The Tribunal upheld the CIT (Appeals) decision, emphasizing: - The restrictive covenants were to prevent competition, not to acquire any asset. - The agreements did not ensure the continuous service of the directors. - The growth in the software business was attributed to multiple factors, including the efforts of other recruited professionals and the principal promoter's expertise. Conclusion: The Tribunal confirmed that the payment of Rs. 84 lakhs was revenue expenditure, as it was incurred to prevent competition and did not result in the acquisition of any enduring asset. The appeal by the Department was dismissed.
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