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Issues Involved:
1. Deductibility of the Non-Compete fee of Rs. 40 lakhs as revenue expenditure under section 37(1) of the Income-tax Act, 1961. 2. Alternative plea for the amortization of the Non-Compete fee over a period of ten years. Issue-wise Detailed Analysis: 1. Deductibility of the Non-Compete Fee: The primary issue in the appeal for the assessment year 1997-98 was whether the Non-Compete fee of Rs. 40 lakhs paid by the assessee to M/s. DIL could be considered as revenue expenditure under section 37(1) of the Income-tax Act, 1961. The assessee argued that the payment was made to avoid competition from M/s. DIL, which could have manufactured the same formulation under a different brand name. The assessee claimed that this payment was essential for maintaining and increasing the profit-earning capacity of the brand acquired and should be treated as revenue expenditure. The Assessing Officer (AO) and the CIT(A) held that the Non-Compete fee provided an enduring benefit by eliminating competition, thus treating it as capital expenditure. The AO relied on various judicial pronouncements to support this view, including Behari Lal Beni Parshad v. CIT and Truck Operators Union v. CIT, which emphasized the enduring nature of the benefit derived from such payments. The Tribunal examined the facts and legal principles, noting that the Non-Compete Agreement and the acquisition of the brand name were executed contemporaneously. The Tribunal concluded that the Non-Compete fee was essentially part of the consideration for acquiring the brand ownership, thus treating it as capital expenditure. The Tribunal also referenced the Supreme Court's ruling in Empire Jute Co. Ltd. v. CIT, which stated that enduring benefit alone is not the ultimate test but must be considered in the context of the specific facts. The Tribunal found that the payment of Rs. 40 lakhs was in the nature of an initial outlay necessary for launching a new product, thus confirming it as capital expenditure. 2. Alternative Plea for Amortization: The assessee alternatively contended that if the Non-Compete fee could not be allowed as a deduction in the assessment year 1997-98, it should be amortized over the period of the Non-Compete Agreement (ten years). The Tribunal rejected this plea, referencing the ITAT Mumbai Bench decision in Montgomery Watson Consultants India (P.) Ltd. v. Asstt. CIT, which held that capital expenditure cannot be treated as deferred expenditure. The Tribunal also distinguished the case from the Supreme Court's decision in Madras Industrial Investment Corpn. Ltd. v. CIT, where the allowed expenditure was revenue in character. Conclusion: The Tribunal dismissed the appeals for both assessment years 1997-98 and 1998-99, confirming that the Non-Compete fee of Rs. 40 lakhs was capital expenditure and not eligible for deduction under section 37(1) of the Income-tax Act, 1961. The alternative plea for amortizing the expenditure over ten years was also rejected.
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