2012 (2) TMI 721 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of deferred revenue expenses claimed on account of non-competition compensation.
2. Disallowance of deferred revenue expenditure claimed on account of interest premia for prepayment of term loans.
3. Disallowance of 100% depreciation claimed on waste heat recovery system and DCS for CFB 3 and 4.
4. Deletion of additions of deferred revenue expenditure (R&D expenditure) by the CIT(A).
5. Provision made towards payment on royalty.

Summary:

1. Disallowance of Deferred Revenue Expenses Claimed on Account of Non-Competition Compensation:
The assessee paid Rs.3 crores to the promoters of CPL to prevent them from starting a similar business for three years. The lower authorities treated this payment as capital expenditure, not allowable as revenue expenditure. The Tribunal, following precedents like Dr. Reddy's Lab. Ltd. Vs. ACIT and CIT Vs. Eicher Ltd., held that the non-compete fee was to protect business interests and should be considered revenue expenditure. Alternatively, if considered capital in nature, depreciation should be allowed u/s 32(1) as an intangible asset.

2. Disallowance of Deferred Revenue Expenditure Claimed on Account of Interest Premia for Prepayment of Term Loans:
The assessee paid Rs.5,11,01,671/- as prepayment premium to ICICI Bank to replace high-interest loans with lower-interest loans. The CIT(A) treated this as capital expenditure. However, the Tribunal, following its own decisions in earlier years, allowed the claim as revenue expenditure, stating it was incurred to reduce the interest burden and run the business more profitably.

3. Disallowance of 100% Depreciation Claimed on Waste Heat Recovery System and DCS for CFB 3 and 4:
The assessee claimed 100% depreciation on certain machineries classified as energy-saving devices. The lower authorities disallowed this due to lack of evidence. The Tribunal set aside the issue for fresh consideration, directing the assessee to provide necessary evidence to substantiate the claim. If the assessee fails, the assessing officer could draw adverse inference.

4. Deletion of Additions of Deferred Revenue Expenditure (R&D Expenditure) by the CIT(A):
The CIT(A) allowed the expenditure incurred on seedling development and distribution to farmers as revenue expenditure. The Tribunal, however, held that this expenditure resulted in the creation of stock in trade and should be valued at market price or cost, whichever is lower, and not charged entirely to the P&L account.

5. Provision Made Towards Payment on Royalty:
The CIT(A) allowed the provision made towards payment on royalty despite the matter being sub-judice before the Supreme Court. The Tribunal upheld the CIT(A)'s decision, following its own earlier decisions in favor of the assessee.

Conclusion:
The appeals of the assessee and the Revenue were partly allowed, with specific directions for fresh consideration and adherence to precedents. The Tribunal emphasized the need for proper substantiation of claims and consistency with previous rulings.