2022 (8) TMI 1298 - AT - Income Tax

Depreciation on non-compete fees u/s 32 - assessee claimed depreciation on Non-compete Fee being an intangible asset - HELD THAT - In the present case payment of non-compete fee in accordance with terms of agreement between the assessee and Piramal Healthcare Ltd. is not disputed by the Revenue. Ergo, in light of the facts of case and the decision by Hon'ble Bombay High Court 2019 (6) TMI 891 - BOMBAY HIGH COURT we hold that the assessee is eligible for depreciation u/s. 32 of the Act on Non-compete Fees paid being an intangible asset. The additional grounds of appeal raised by the assessee are thus, allowed.

Summary

Issues Involved:

1. Admissibility of depreciation on Non-Compete Fee under Section 32 of the Income Tax Act, 1961.
2. Treatment of Non-Compete Fee as deferred revenue expenditure.

Detailed Analysis:

1. Admissibility of Depreciation on Non-Compete Fee under Section 32 of the Income Tax Act, 1961:

The assessee raised additional grounds of appeal seeking depreciation on Non-Compete Fee under Section 32 of the Income Tax Act, 1961. The Tribunal had previously dismissed the Revenue's appeal challenging the allowance of Non-Compete Fee as deferred revenue expenditure. The assessee claimed depreciation on the Non-Compete Fee paid as part of a Business Transfer Agreement with Piramal Healthcare Limited, which was capitalized in the books of accounts.

The Tribunal noted that the issue of depreciation on Non-Compete Fee had been addressed in various judicial precedents, including the decisions of the Hon'ble Bombay High Court in the case of Piramal Glass Ltd., and other High Courts such as Gujarat, Karnataka, and Madras. These courts had held that Non-Compete Fee qualifies as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Act.

The Tribunal observed that the First Appellate Authority (CIT(A)) had not considered the decision of the Hon'ble Bombay High Court in the case of Piramal Glass Ltd., which was rendered subsequent to the CIT(A)'s order. The Tribunal emphasized that non-consideration of a jurisdictional High Court's judgment constitutes a mistake apparent from the record.

In light of the Hon'ble Bombay High Court's decision, which upheld the Tribunal's findings in allowing depreciation on Non-Compete Fee, the Tribunal concluded that the assessee is eligible for depreciation under Section 32 of the Act on the Non-Compete Fee paid. The additional grounds of appeal raised by the assessee were thus allowed.

2. Treatment of Non-Compete Fee as Deferred Revenue Expenditure:

The assessee had initially raised an alternate ground before the CIT(A) to treat the Non-Compete Fee as deferred revenue expenditure, which was allowed by the CIT(A). The Revenue challenged this finding before the Tribunal, which upheld the CIT(A)'s decision. The Tribunal noted that the issue of Non-Compete Fee as deferred revenue expenditure was inextricably linked with the claim of depreciation on Non-Compete Fee.

The Tribunal reiterated that the payment of Non-Compete Fee was in accordance with the terms of the agreement between the assessee and Piramal Healthcare Limited. The Tribunal held that the Non-Compete Fee provided enduring benefits and protected the assessee's business, qualifying it as an intangible asset eligible for depreciation under Section 32 of the Act.

Conclusion:

The Tribunal allowed the additional grounds of appeal raised by the assessee, holding that the assessee is eligible for depreciation on Non-Compete Fee under Section 32 of the Income Tax Act, 1961, as it qualifies as an intangible asset. The Tribunal's decision was based on judicial precedents, including the Hon'ble Bombay High Court's ruling in the case of Piramal Glass Ltd. The Tribunal also upheld the treatment of Non-Compete Fee as deferred revenue expenditure as directed by the CIT(A).