2015 (10) TMI 1267 - AT - Income Tax

Non-compete fees paid - whether CIT(A) legally erred in not considering the non-compete fees as an intangible asset (capital expenditure) and not allowing the depreciation for the current year as well as consequential effect for the future years u/s.32(1)(ii) ? - Held that - Applying the proposition of law laid down in the case of Everest Advertising Pvt. Ltd. 2015 (1) TMI 968 - BOMBAY HIGH COURT and other High Courts/Tribunal, we hold that non-compete fee paid by the assessee did not create any capital assets, the same was revenue in nature. Accordingly, the AO is directed to allow the same as revenue expenditure. - Decided in favour of assessee.

Summary

Issues:
1. Treatment of non-compete fees as intangible asset or revenue expenditure.
2. Disposal of ground relating to penalty proceedings u/s.271(1)(c) of the Act.

Issue 1: Treatment of Non-compete Fees

The appeal concerned the treatment of non-compete fees paid by the assessee as either an intangible asset or revenue expenditure. The assessee claimed the fees as deferred revenue expenditure, while the AO disallowed the claim and only allowed a portion amortized in the profit and loss account. The CIT(A) confirmed the AO's action, leading to the appeal before the ITAT. The assessee argued that the non-compete fees were paid to ward off competition and increase profitability, thus constituting revenue expenditure. The ITAT analyzed the facts and legal precedents, including the decision of the Hon'ble Bombay High Court in a similar case, and concluded that the non-compete fee did not create any capital assets and was revenue in nature. The ITAT relied on various judgments, such as those of the Madras High Court and Karnataka High Court, to support its decision that the non-compete fee was revenue expenditure. Consequently, the ITAT directed the AO to allow the non-compete fee as revenue expenditure, and the appeal of the assessee was allowed.

Issue 2: Disposal of Penalty Proceedings

The assessee raised a ground regarding the initiation of penalty proceedings u/s.271(1)(c) of the Act, which the CIT(A) did not dispose of. The ITAT admitted this additional ground for consideration based on the decision of the Hon'ble Supreme Court. However, the judgment did not provide further details or a specific outcome regarding the disposal of the penalty proceedings ground.

In conclusion, the ITAT Mumbai, in the cited judgment, addressed the issues related to the treatment of non-compete fees as revenue expenditure and the disposal of penalty proceedings. The ITAT determined that the non-compete fees were revenue in nature based on legal precedents and directed the AO to allow them as revenue expenditure. The judgment did not provide a detailed resolution regarding the disposal of the penalty proceedings ground, apart from admitting it for consideration.