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2016 (1) TMI 1094 - AT - Income TaxReopening of assessment - receipt of non-compete fee undisclosed - Held that - From the record we found that during the course of original assessment proceedings u/s 143(3) of the Act, the A.O. has called all the details with regard to the payment of non-compete fee and after examining the same, allowed the assessee s claim of such non-compete fee as revenue in nature. Thereafter, on the very same set of facts, the A.O. changed his opinion and reopened the assessment stating that non-compete fee paid by the assessee is capital in nature which gives enduring benefit to the assessee, hence, cannot be allowed. By the impugned order, the ld. CIT(A) has dealt with all the relevant details with regard to the facts on record to the effect that there is a change of opinion. Non-compete fee - revenue v/s capital expenditure - Held that - So far as assessee s claim of revenue expenditure is concerned, we set aside the order of the Ld. CIT(A) on this issue, by following the order of the Tribunal in assessee s own case in the A.Y. 2004-05 dated 28.02.2011 where non compete fee was treated as capital expenditure. Claim for depreciation on non compete fee - Held that - So long as the non compete fee in question is capital expenditure, the same is entitled for deprecation. Accordingly, we direct the AO to allow the claim of depreciation on the amount of non compete fee paid, treating the same as intangible assets. We direct accordingly.
Issues Involved:
1. Validity of the notice issued under Section 147 of the Income Tax Act. 2. Classification of non-compete fee as capital or revenue expenditure. 3. Eligibility of depreciation on non-compete fee. Issue-wise Detailed Analysis: 1. Validity of the Notice Issued Under Section 147: The Revenue contended that the CIT(A) erred in holding the notice issued under Section 147 as bad in law and the reassessment as invalid. The original assessment was completed under Section 143(3) on 31.03.2005, and the notice under Section 148 was issued on 30.03.2007. The assessee objected to the reopening on the grounds that all relevant details were submitted during the original assessment, and no fresh material was brought on record, indicating a mere change of opinion. The CIT(A) examined the assessment records and concluded that the issue of non-compete fee was already examined and allowed as revenue expenditure in the original assessment. The reopening without any fresh material was deemed a change of opinion, which is not permissible as per the Supreme Court's decision in CIT vs. Kelvinator of India Ltd. The Tribunal upheld the CIT(A)'s decision, emphasizing that reopening based on a change of opinion is not sustainable in law. 2. Classification of Non-Compete Fee as Capital or Revenue Expenditure: The assessee entered into a non-compete agreement with M/s. Rallis India Ltd., paying Rs. 10 crores as non-compete fee, claimed at Rs. 2.5 crores annually over four years. The AO initially allowed this as revenue expenditure but later reopened the assessment, treating it as capital expenditure. The CIT(A) allowed the assessee's claim, noting that the non-compete fee was for a limited period and did not provide a comprehensive enduring benefit. The Tribunal, however, reversed this decision, aligning with its earlier judgment in the assessee's case for AY 2004-05, where the non-compete fee was treated as capital expenditure. 3. Eligibility of Depreciation on Non-Compete Fee: The Tribunal considered whether the non-compete fee could be treated as an intangible asset eligible for depreciation. It concluded that the non-compete fee creates a commercial right, which qualifies as an intangible asset under the Income Tax Act. The Tribunal cited various judicial precedents, including decisions of the Madras High Court and the Supreme Court, supporting the view that non-compete fees, being capital in nature, are eligible for depreciation. Consequently, the Tribunal directed the AO to allow the claim of depreciation on the non-compete fee, treating it as an intangible asset. Conclusion: The Tribunal upheld the CIT(A)'s decision to quash the reassessment proceedings based on a change of opinion, thereby ruling in favor of the assessee on the issue of reopening. However, it reversed the CIT(A)'s decision on treating the non-compete fee as revenue expenditure, siding with the Revenue. Lastly, the Tribunal allowed the assessee's claim for depreciation on the non-compete fee, treating it as an intangible asset. The appeal filed by the Revenue was dismissed, and the order was pronounced on 14/01/2016.
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