2018 (3) TMI 1655 - AT - Income Tax

Depreciation on non compete fee - Treatment of non-compete fee as an intangible asset - eligible for depreciation @ 25% - Held that - For the ownership of the intellectual property or know-how or license or franchise, it would be unable to either access the advantage or assert the right and the nature of the right mentioned or spelt-out in the provision as against the world at large or in legal parlance in rem . However, in the case of a non-competition agreement or covenant, it was held that the advantage was a restricted one, in point of time. It did not confer any exclusive right to carry-on the primary business activity. The right can be asserted in the present instance only against L&T and in a sense, the right in personam . Every species of right spelt-out expressly by the Statute i.e. of the intellectual property right and other advantages such as know-how, franchise, license etc. and even those considered by the Courts, such as goodwill can be said to be alienable. Such was not the case with an agreement not to compete which is purely personal. As a consequence, it is held that the contentions of the assessee are without merit. It is further pertinent to note that the Hon ble Delhi High Court in Sharp Business System VS. CIT (2012 (11) TMI 324 - DELHI HIGH COURT) while deciding this issue against the assessee, has also considered in Techno Shares & Stocks Ltd. VS. CIT 2010 (9) TMI 6 - SUPREME COURT OF INDIA which was the foundation of the CIT(A) s decision. CIT(A) was not justified in granting depreciation on the amount of non-compete fee. The impugned order is, therefore, overturned and the action of the AO is restored. - decided against assessee.

Summary

Issues:
Treatment of non-compete fee as an intangible asset eligible for depreciation at 25%.

Analysis:
The appeal pertains to the treatment of a non-compete fee as an intangible asset eligible for depreciation at 25%. The assessee, engaged in manufacturing speciality chemicals, acquired a business as a going concern in a slump sale, allocating a specific amount as non-compete fee. The Assessing Officer disallowed the claim of depreciation on the non-compete fee, stating it did not fall under specified intangible assets for depreciation. The CIT(A) agreed that the fee was not a revenue expenditure but allowed depreciation at 25%. The Tribunal noted the absence of the assessee and proceeded ex parte. It acknowledged the allocation of the fee as an intangible asset and the finality of the non-deductibility as revenue expenditure. The CIT(A) considered the fee eligible for depreciation under section 32(1)(ii) amended in 1998, citing relevant case law. However, the Tribunal referred to a High Court decision that non-compete fees do not qualify as intangible assets for depreciation due to the lack of exclusivity akin to patents or trademarks, overturning the CIT(A)'s decision and restoring the AO's action.

The key issue revolved around whether a non-compete fee could be treated as an intangible asset eligible for depreciation. The Tribunal highlighted the specific provisions under section 32(1)(ii) amended in 1998, allowing depreciation on certain intangible assets. The CIT(A) relied on case law and interpreted the fee as falling under the specified category for depreciation. However, the Tribunal referenced a High Court decision emphasizing the exclusivity element required for assets to qualify for depreciation, distinguishing non-compete fees from traditional intangible assets like patents or copyrights. This distinction formed the basis for overturning the CIT(A)'s decision and upholding the AO's stance on disallowing depreciation on the non-compete fee.

In conclusion, the Tribunal ruled in favor of the Revenue, disallowing depreciation on the non-compete fee and overturning the CIT(A)'s decision. The judgment emphasized the necessity of exclusivity for assets to qualify for depreciation, citing a High Court decision that clarified the distinction between non-compete fees and traditional intangible assets. The appeal was allowed, and the AO's action was restored, highlighting the importance of aligning the nature of assets with statutory provisions for depreciation eligibility.