2005 (1) TMI 620 - AT - Income Tax

Deduction towards payment of non-compete compensation - Whether this period of five definite years gives ending benefit to the assessee has also to be seen - Payment of fees for increasing the capital structure of the company by issuing shares. HELD THAT - The restrictive covenant was thus for a period of five definite years. The payment also made by the assessee to ward off the Competition for a definite period of five years. Which accordingly to the Revenue gave enduring benefit to the assessee. Therefore the expenditure clearly falls in Capital field is the vehement argument of the learned DR. We are of the view that the assessee who is saddled with the duty to establish that the expended amount falls in the Revenue field. Admittedly the payment was for the purpose of business of the assessee. The payment was expended to ward off the Competition in the field of assessee s business. Admittedly this restriction to compete or in other words the non-compete fee was paid by the assessee to Mr. Sasikumar Group to retrain them from the competitive business for the definite period of five years. In our view the contention of the learned CIT-DR have to be accepted. We are also of the view that the non-compete fee payment made by the assessee to Mr. Sasikumar group gave enduring benefit to the assessee in its business. In our view the facts which the learned representative of the parties pleaded and put forth tends us to take the firm view that the payment of non-compete fee falls within the capital field which is not an allowable expenditure. The order of the authorities are well supported by the cantena of decisions of Hon ble Supreme Court and the Hon ble High Courts. We therefore confirm the order of the authorities. The assessee s claim therefore fails. Payment being the fees for increasing the capital structure of the company by issuing shares . Both parties admit before us that on this issue of the shares there increased of their capital base of the assessee. That being the case the decision of the Hon ble Supreme Court in the case of Brooke Bond (India) Ltd. v. CIT 1997 (2) TMI 11 - SUPREME COURT is squarely applicable to the case present before us. Therefore we decline to interfere on this finding of the authorities below. In the result the appeal of the assessee is dismissed.

Summary

Issues:
1. Deduction towards non-compete compensation under section 37(1) of the Income-tax Act.
2. Disallowance of credit for tax deducted at source related to transponder charges.
3. Disallowance of deduction for the sale of vehicles.
4. Payment of fees for increasing the capital structure of the company by issuing shares.
5. Interest under sections 234B and 234C.

Issue 1: Deduction towards non-compete compensation under section 37(1) of the Income-tax Act:
The assessee claimed Rs. 10,50,00,000 as deduction for non-compete compensation, which was rejected by both authorities. The payment was made to ward off competition in the business for a period of five years. The Tribunal considered various legal precedents including the decisions of the Hon'ble Supreme Court and High Courts. The Tribunal concluded that the payment gave enduring benefit to the assessee and fell under the capital field, not as revenue expenditure. The assessee's claim was found unconvincing, and the Tribunal confirmed the order of the authorities, dismissing the appeal.

Issue 2: Disallowance of credit for tax deducted at source related to transponder charges:
The Assessing Officer disallowed the claim of credit for tax deducted at source amounting to Rs. 15,68,69,040 related to transponder charges paid to Mr. Menon U.K. Limited. The Assessing Officer found the claim legally and factually incorrect based on previous assessments. The Commissioner of Income-tax (Appeals) also upheld this decision, and the Tribunal rejected the arguments of the assessee's counsel, affirming the disallowance.

Issue 3: Disallowance of deduction for the sale of vehicles:
The Assessing Officer disallowed the deduction of Rs. 11,33,588 for the sale of vehicles as it was considered separately by the assessee-company. The decision was affirmed by the Commissioner of Income-tax (Appeals), and the Tribunal found no reason to interfere with the lower authorities' order on this issue.

Issue 4: Payment of fees for increasing the capital structure of the company by issuing shares:
The Tribunal applied the decision of the Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd. v. CIT [1997] 225 ITR 798 to the payment of fees for increasing the capital structure through issuing shares. Both parties admitted to the increase in the capital base of the assessee, leading the Tribunal to decline interference with the findings of the lower authorities on this matter.

Issue 5: Interest under sections 234B and 234C:
The Tribunal found the interest under sections 234B and 234C to be consequential and required no interference. Consequently, the appeal of the assessee was dismissed.