2011 (6) TMI 507 - AT - Income Tax

Non compete fees paid to HUF - Capital or revenue expenditure - Held that - Assessee company entered into separate agreements effective from 01.09.1996 with the proprietors of two sister concerns which were engaged in trading of chemicals in earlier years for a long period. It may be seen that in clear terms the proprietary concerns have undertaken not to compete with the assessee company in any way for a period of 15 years & that the assessee company would also get the benefit of the exclusive use of trademarks as also the tenanted premises which are inseparable part of the proprietary business as a going concern. Thus since the payment was composite payment at the time of acquiring the business even though payable over a period of 15 years in monthly installments the amount has to be treated as capital expenditure - bifurcating the amount towards use of trade name and use of non-compete clause are not relevant for considering the items as eligible for deduction. It is also on record that assessee acquired the business as a going concern including its right to use trade mark and this agreement entered in as early as 01.09.1996 was interpreted and the payments were considered as capital expenditure - against assessee. Claim of depreciation - Held that - Section 32(1) (ii) allowed depreciation on intangible assets acquired on or after 1st of April 1998. Since the assets / so called intangible assets were acquired before the aforesaid date provisions of section 32(1)(ii) are not applicable to the facts of the case . Thus the grounds on allowance of depreciation on the non compete fees also stand dismissed - appeal decided against assessee.

Issues Involved:

1. Disallowance of payments treating them as capital in nature.
2. Non-consideration of supplementary and clarificatory deeds.
3. Principle of apportionment of payments.
4. Claim for depreciation on non-compete covenant treated as capital expenditure.

Detailed Analysis:

1. Disallowance of Payments Treating Them as Capital in Nature:

The assessee contested the disallowance of payments made to Mr. M.G. Saraf and M/s. M.G. Saraf (HUF), which were treated as capital in nature by the CIT(A). The payments were made under agreements for the transfer and assignment of business as a going concern and included non-compete obligations. The Tribunal upheld the CIT(A)'s decision, referencing earlier ITAT orders that classified these payments as capital expenditure. The Tribunal emphasized that the payments were for acquiring the business as a going concern, including non-compete clauses, and thus were capital in nature.

2. Non-Consideration of Supplementary and Clarificatory Deeds:

The assessee argued that the CIT(A) erred in not considering supplementary and clarificatory deeds dated 01.04.2002, which apportioned payments between the right to use trade names and non-compete fees. The Tribunal found that these supplementary agreements did not alter the original nature of the payments, which had been previously adjudicated as capital expenditure. The Tribunal noted that the supplementary deeds were seen as an afterthought and a sham transaction intended to evade tax, and thus upheld the CIT(A)'s rejection of these deeds.

3. Principle of Apportionment of Payments:

The assessee submitted that the payments should be apportioned between the right to use trade names and non-compete fees, with the former being treated as revenue expenditure. The Tribunal rejected this argument, citing the original agreements which treated the entire payment as a composite sum for acquiring the business and non-compete obligations. The Tribunal referenced the Supreme Court's judgment in Continental Construction Ltd. v. CIT, which supported the view that the nature of payments should not be altered based on subsequent agreements or labels given by the parties.

4. Claim for Depreciation on Non-Compete Covenant Treated as Capital Expenditure:

The assessee filed additional grounds seeking depreciation under Section 32 of the Income Tax Act on the non-compete covenant treated as capital expenditure. The Tribunal referred to the Special Bench decision in Tecumseh India P. Ltd. vs. ACIT, which held that non-compete fees are capital in nature and not eligible for depreciation if acquired before 01.04.1998. Since the assessee's agreements were effective from 01.09.1996, the Tribunal concluded that the provisions of Section 32(1)(ii) did not apply, and thus, the claim for depreciation was disallowed.

Conclusion:

The Tribunal dismissed all the appeals, upholding the CIT(A)'s orders that treated the payments as capital expenditure and rejecting the assessee's claims for revenue treatment and depreciation. The Tribunal emphasized the composite nature of the original agreements and the lack of legitimacy in the supplementary deeds.

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