2011 (9) TMI 1025 - AT - Income Tax

Disallowance made by the AO in respect of payments made for non-competition/restrictive covenant - Addition preliminary expenditure claimed under section 35D

Summary

Issues:
1. Disallowance of payments made for noncompetition/restrictive covenant as capital expenditure.
2. Claim for depreciation on non-compete fees.
3. Disallowance of preliminary expenditure claimed under section 35D of the Act.

Issue 1: Disallowance of payments made for noncompetition/restrictive covenant as capital expenditure:
The assessee claimed `34.47 crores as revenue expenditure, justifying it as expenses in the computation of income. The Assessing Officer (A.O.) disallowed the claim, considering it capital in nature. The Commissioner of Income-tax (Appeals) upheld the A.O.'s decision, stating that the expenditure was to ward off competition and did not create any asset eligible for depreciation. The appellant contended that if treated as capital, it should have been capitalized and depreciation allowed. The Tribunal held in favor of the assessee, citing precedents allowing depreciation on non-compete fees, directing the A.O. to allow depreciation on the amount.

Issue 2: Claim for depreciation on non-compete fees:
The assessee challenged the rejection of depreciation claim on non-compete fees before the Commissioner of Income-tax (Appeals). The Tribunal noted that precedents supported allowing depreciation on such fees as intangible assets. The Tribunal found in favor of the assessee, directing the A.O. to allow depreciation by apportioning the amount to fixed assets and plant machinery. The Tribunal relied on Chennai Bench decisions and allowed the depreciation claim.

Issue 3: Disallowance of preliminary expenditure under section 35D of the Act:
The Assessing Officer disallowed `206,320/- of preliminary expenses claimed under section 35D due to professional fees for FIPB and RBI approval not being covered by the Act. The Commissioner of Income-tax (Appeals) upheld the disallowance, leading to the assessee's appeal. The Tribunal found the disallowance justified as the professional fees were not covered under section 35D. Therefore, the disallowance of `206,320/- under section 35D was upheld, and the appeal on this ground was dismissed.

In conclusion, the Tribunal partly allowed the appeal, directing the A.O. to allow depreciation on non-compete fees and upholding the disallowance of preliminary expenditure under section 35D of the Act. The judgment provided clarity on the treatment of non-compete fees and the eligibility for depreciation, ensuring compliance with relevant legal provisions and precedents.