2010 (7) TMI 685 - AT - Income Tax

Disallowance - Capital or revenue expenditure - non-compete fee, Professional fees paid to architect, fee paid to Registrar of Companies - assessee is wholly owned subsidy of Tecumseh Product Company Michigan, USA -The non-compete agreement was part and parcel of the whole transaction and cannot be treated to be a separate transaction - It was not a part of the working of the business, but went to appreciate the whole of the capital asset and make it more profit yielding - it can be seen that warding off competition in business even to a rival dealer will constitute capital expenditure and to hold them capital expenditure it is not necessary that non-compete fee is paid to create monopoly rights Held that expenditure of ₹ 2.65 crore claimed by the assessee in pursuance of non-compete agreement dated 10th July, 1997 are capital expenditure, the deduction of which cannot be granted to the assessee as revenue expenditure The assessee has increased its authorized share capital and for that purpose it has incurred an expenditure of ₹ 39,90,120/- being on account of fee paid to Registrar of Companies - The contention of the assessee is that the increase in the share capital was to meet the needs for working capital - C.I.T.(A) has observed in his order that for the assessment year 1990-91 a similar issue had arisen and the claim for deduction of the assessee was disallowed Appeal is allowed by way of remand to AO Since that payment was made to an Architect, the same was held to be capital expenditure and accordingly added to the income of the assessee - Ld. AR also did not submit any details before us as the same was specifically asked for and in the absence of such details, after hearing both the parties on this issue we decline to interfere in the findings of the CIT (A) vide which such addition has been upheld and benefit of depreciation is denied Decided against the assessee

Summary

Issues Involved:
1. Disallowance of non-compete fee paid to M/s Whirlpool of India Ltd.
2. Addition of fee paid to Registrar of Companies.
3. Disallowance of professional fee paid to the Architect.

Issue-wise Detailed Analysis:

1. Disallowance of Non-Compete Fee Paid to M/s Whirlpool of India Ltd.:
The primary issue was whether the non-compete fee of Rs. 2,65,00,000 paid to M/s Whirlpool of India Ltd. was of a capital or revenue nature. The Tribunal examined the Memorandum of Understanding (MOU) dated 4th November 1996, the agreement dated 2nd July 1997, and the non-compete agreement dated 10th July 1997. The MOU outlined a total purchase price of Rs. 52.5 crores for the Compressor Division assets and the Ballabgarh land and building, which included the non-compete fee. The Tribunal concluded that the non-compete agreement was an integral part of the entire transaction, which was for the acquisition of a business concern in India. The expenditure was considered to be for the initial outlay of the business, bringing an enduring benefit, and thus, was capital in nature. The Tribunal relied on the principles laid down in the case of Assam Bengal Cement Co. Ltd. vs. CIT, where protection fees paid to ward off competition were held to be capital expenditure. The Tribunal held that the non-compete fee provided an enduring benefit and was part of the initial outlay, making it a capital expenditure.

2. Addition of Fee Paid to Registrar of Companies:
The second issue was the disallowance of Rs. 39,90,120 paid to the Registrar of Companies for increasing the authorized share capital. The Tribunal upheld the disallowance, relying on the Supreme Court decisions in Punjab State Industrial Development Corporation Ltd. vs. CIT and Brook Bond India Ltd. vs. CIT, which held that such fees are capital expenditure as they are directly related to the expansion of the capital base of the company.

3. Disallowance of Professional Fee Paid to the Architect:
The third issue involved the disallowance of Rs. 20,00,000 paid to an architect. The Tribunal noted that the expenditure was for architectural services, which are capital in nature. The assessee's claim for depreciation on this amount was also denied due to the absence of details. The Tribunal upheld the disallowance, affirming that the expenditure was capital in nature and that the assessee failed to provide necessary details to claim depreciation.

Conclusion:
The Tribunal dismissed the appeal, holding that the non-compete fee was capital expenditure, the fee paid to the Registrar of Companies was also capital expenditure, and the professional fee paid to the architect was capital expenditure without sufficient details to allow depreciation. The cases of the interveners were restored to the Division Bench for a detailed examination of facts and application of the principles laid down in this judgment.