2011 (11) TMI 372 - HC - Income Tax

Non-compete fees - capital expenditure or revenue expenditure assessee contending it to be revenue expenditure in tax return and at same time treating it as capital expenditure ( Intangible assets ) in books of account question of whether depreciation is available if treated as capital expenditure remitted to A.O. by Tribunal Held that - In view of decision in case of Tecumseh India Pvt. Ltd. (2010 (7) TMI 685 - ITAT, DELHI ) holding that warding off competition in business will constitute capital expenditure, Tribunal rightly held that the expenditure was capital in nature. Though the AO would not have to consider the nature of expenditure, as that has been determined by the Tribunal, at the same time, whether depreciation thereupon is to be allowed or not u/s 32(1)(ii) of the Act has to be decided. Thus, no fault is found in the order of the Tribunal remitting the case back on this aspect to the AO. - Decided against the assessee.

Issues Involved:
1. Whether the non-compete fee paid by the assessee is to be treated as capital or revenue expenditure.
2. Whether the Income Tax Appellate Tribunal was justified in remanding the issue of depreciation allowance under Section 32(1)(ii) of the Income Tax Act to the Assessing Officer.

Issue-wise Detailed Analysis:

1. Non-compete fee: Capital or Revenue Expenditure

The appellant, a wholly owned subsidiary of Pitney Bowes Inc., USA, acquired the mailing business from KOAL on a slump sale basis for Rs. 18.92 Crores, which included a non-compete fee of Rs. 5.94 Crores for a period of five years. The appellant claimed this non-compete fee as a business/revenue expenditure in the computation of income. However, the Assessing Officer (AO) disallowed the claim, treating the non-compete fee as a capital outlay non-allowable under Section 37 of the Act.

The CIT (A) partially allowed the claim by treating the expenditure on a deferred revenue basis, allowing 1/5th of the total amount each year. The Tribunal, however, held that the non-compete fee was capital in nature and disallowed the claim entirely. The Tribunal also remitted the issue of depreciation allowance under Section 32(1)(ii) to the AO for further decision.

The appellant argued that the non-compete fee was incurred to eliminate competition for a limited period and should be treated as revenue expenditure. They cited judgments from CIT v. Coal Shipments (P) Ltd. and CIT v. Eicher Ltd. to support their claim. The appellant contended that the benefit derived from the non-compete agreement was temporary and aimed at increasing revenue profits, making it a revenue expenditure.

The Revenue countered by referring to the Tribunal's decision in Tecumseh India (P.) Ltd. v. Addl. CIT, where non-compete fees were treated as capital expenditure. The Tribunal had observed that warding off competition in business constitutes capital expenditure and does not necessarily create monopoly rights.

The Court agreed with the Tribunal's view that the expenditure was capital in nature, as the non-compete agreement provided an enduring benefit for five years. The Court noted that the appellant itself had treated the expenditure as capital in its books of accounts and balance sheet, classifying it as an intangible asset. Therefore, the Court held that the Tribunal was correct in disallowing the claim of non-compete fee as revenue expenditure.

2. Remanding the Issue of Depreciation Allowance

The appellant's alternate submission was that if the expenditure was treated as capital in nature, depreciation should be allowed under Section 32 of the Act. The AO had previously allowed 1/5th of the fee as deferred revenue expenditure, but the appellant argued that once the expenditure was deemed capital, it should not be treated as deferred revenue expenditure, and depreciation should be allowed.

The Tribunal remitted the issue back to the AO for a fresh decision on the depreciation allowance, as the alternate plea had not been decided by the AO or the CIT (A). The Court found no fault in the Tribunal's decision to remit the case back to the AO for determining whether depreciation could be allowed under Section 32(1)(ii) of the Act.

The Court noted that the nature of the expenditure had already been determined by the Tribunal, and the AO would only need to decide on the applicability of depreciation. The Court also referenced the judgment of the Kerala High Court in B. Raveendran Pillai v. CIT, which discussed the allowance of depreciation on intangible assets not specifically mentioned in Section 32(1)(ii).

In conclusion, the Court dismissed the appeal, affirming the Tribunal's decision to treat the non-compete fee as capital expenditure and remanding the issue of depreciation allowance to the AO.

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