2010 (6) TMI 557 - AT - Income Tax

Revenue or Capital expenditure - ld. counsel submitted that non compete fee was purely a revenue outgo since the advantage was only for a period of four years - . As against this, ld. D.R. submitted that assessee had acquired all rights for manufacturing, that too in a new line of business and hence the outgo was capital in nature - the cited decision of Hon ble Apex Court would definitely come to the aid of the assessee on its contention that the outgo should be treated as deferred revenue in nature and hence allowable over a period of four years prorate In the result Assessing Officer is directed to allow the claim of expenses on account of non-compete fee paid spread over a period of four years starting from the impugned assessment year - Appeal of assessee is partly allowed

Issues Involved:
1. Whether the non-compete fee of Rs. 2 crores paid by the assessee should be treated as capital expenditure or revenue expenditure.
2. Whether the non-compete fee, if considered as revenue expenditure, should be allowed as deferred revenue expenditure over the period of the agreement.
3. Whether the non-compete fee, if considered as capital expenditure, qualifies as an intangible asset eligible for depreciation under section 32(1)(ii) of the Income-tax Act, 1961.

Detailed Analysis:

1. Treatment of Non-Compete Fee as Capital or Revenue Expenditure:

The assessee argued that the non-compete fee should be treated as a revenue expenditure under section 28(va) of the Income-tax Act, 1961, which considers non-compete fees received by a person as income. The assessee cited the case of Smartchem Technologies Ltd. v. ITO, where a similar fee was treated as revenue expenditure.

However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the non-compete fee as capital expenditure, citing the enduring benefit obtained by the assessee. The AO relied on the Supreme Court's decision in Assam Bengal Cement Company Ltd. v. CIT, which characterized payments that provide enduring benefits as capital expenditure. The CIT(A) supported this view, noting that the non-compete fee was paid for establishing a new business line, thus providing a long-term advantage.

The Tribunal agreed with the lower authorities, citing precedents from M/s Hatsun Agro Products Ltd., M/s Asianet Communications P Ltd., and ACT India Ltd., where non-compete fees were treated as capital expenditure. The Tribunal emphasized that the non-compete fee provided a benefit of enduring nature, thus confirming its treatment as capital expenditure.

2. Deferred Revenue Expenditure:

The assessee alternatively argued that if the non-compete fee was not considered as revenue expenditure in one go, it should be treated as deferred revenue expenditure and allowed over the agreement period of four years. The assessee relied on the Supreme Court's decision in Madras Industrial Investment Corporation, where discount on debentures was treated as deferred revenue expenditure and spread over the tenure of the debentures.

The Tribunal accepted this alternative argument, noting that the non-compete agreement precluded the sellers from engaging in competing activities for four years, thus providing a benefit over a specified period. The Tribunal referenced the Delhi High Court's decision in CIT v. Eicher Ltd., which supported the treatment of such expenses as deferred revenue expenditure. Consequently, the Tribunal directed the AO to allow the non-compete fee as deferred revenue expenditure spread over four years.

3. Depreciation on Non-Compete Fee as Intangible Asset:

The assessee's second alternative argument was that if the non-compete fee was considered as capital expenditure, it should qualify as an intangible asset eligible for depreciation under section 32(1)(ii) of the Act. The assessee cited cases like ITO v. Medicorp Technologies India Ltd. and ACIT v. Real Image Tech [P] Ltd., where similar payments were treated as intangible assets eligible for depreciation.

However, since the Tribunal decided to treat the non-compete fee as deferred revenue expenditure, this argument became redundant and was not adjudicated.

Conclusion:

The Tribunal concluded that the non-compete fee should be treated as deferred revenue expenditure and allowed over the period of four years. The AO was directed to allow the claim of expenses on account of the non-compete fee spread over four years starting from the impugned assessment year. The appeal of the assessee was partly allowed.

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