2008 (5) TMI 668 - AT - Income Tax

Summary

Issues Involved:
1. Whether the non-compete charges of Rs. 5,00,000 paid by the assessee should be treated as revenue expenditure or capital expenditure.
2. Whether depreciation u/s 32 of the Income-tax Act should be allowed if the non-compete charges are considered capital expenditure.

Issue 1: Non-Compete Charges - Revenue vs. Capital Expenditure

The CIT(A) upheld the ACIT's decision to disallow non-compete charges of Rs. 5,00,000 paid to a partner of M/s. Lund & Blockley, treating it as capital expenditure. The assessee argued that the expenditure did not result in the acquisition of any asset or an advantage of an enduring nature and should be allowed as revenue expenditure. The assessee paid the non-compete charges to enhance profitability and claimed it as revenue expenditure in the computation of income. The Assessing Officer, referencing the Madras High Court judgment in Tamilnadu Dairy Development Corpn. v. CIT [1999] 239 ITR 142, treated the expenditure as capital expenditure, disallowing the claim.

The Tribunal noted that the non-compete agreement restricted the recipient from engaging in similar business for 5 years, implying a temporary benefit rather than an enduring one. The Tribunal referred to various judgments, including CIT v. Late G.D. Naidu [1987] 165 ITR 63 (Mad.) and Smartchem Technologies Ltd. v. ITO [2005] 97 TTJ (Ahd.) 818, which supported the view that non-compete fees for a shorter period should be considered revenue expenditure. The Tribunal emphasized that the nature of expenditure should be viewed from the business perspective and not from the Revenue's attitude.

The Tribunal concluded that the non-compete charges were paid to restrain the recipient from entering similar trades for 5 years, thus providing a temporary benefit. Therefore, the expenditure was deemed revenue in nature and allowable. However, it should be spread over 5 years rather than being claimed in a lump sum in the assessment year.

Issue 2: Depreciation u/s 32

Since the Tribunal treated the non-compete charges as revenue expenditure, the question of allowing depreciation u/s 32 did not arise. Consequently, the Tribunal rejected the ground related to depreciation.

Conclusion:

The appeal of the assessee was partly allowed, treating the non-compete charges as revenue expenditure to be spread over 5 years. The ground related to depreciation was rejected.