9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2016 (8) TMI 559 - HC - Income TaxNon-compete fees payment - whether an allowable business expenditure of revenue? - Held that - In the present case, the Non-compete fees paid by the assessee company to the transferor company under an agreement where the transferor company shall not directly or indirectly manage, operate or have an interest in control or participate or compete against the assessee anywhere in the world for five years. Thus, the expenditure incurred primarily and essentially related to the non-competition of the transferor company against the assessee in the same business, which constituted the profit-earning apparatus of the assessee. Therefore, we are in complete agreement with the view taken by the Tribunal and it is held that the Tribunal was right in holding that the payment of ₹ 6 Crores made by the Assessee, as Non-compete fees, to VBC Industries Ltd. and other was an allowable business expenditure of revenue nature incurred by the assessee. The question posed for our consideration is answered in favour of the assessee
Issues Involved:
1. Nature of the non-compete fee: Whether the payment of ?6 Crores made by the Assessee as Non-compete fees to VBC Industries Ltd. was an allowable business expenditure of revenue nature or capital expenditure. Issue-wise Detailed Analysis: Nature of the Non-compete Fee: The primary issue in this case was to determine whether the payment of ?6 Crores made by the Assessee as Non-compete fees to VBC Industries Ltd. was an allowable business expenditure of revenue nature or capital expenditure. The Tribunal had reversed the findings of the CIT (Appeals), which had confirmed the Assessing Officer's disallowance of the expenditure as a revenue expense. The Assessee had entered into a Non-Competition Agreement with VBC Industries Ltd. and its founder, under which the latter agreed not to compete in the same business for five years. The Assessee wrote off 1/5th of the expenditure in its books but claimed the entire amount as revenue expenditure in its income computation. At the time of admitting the appeal, the following question of law was framed: "Whether on the facts and circumstances and in law the ITAT was right in holding that the payment of ?6 Crores made by the Assessee, as Non-compete fees, to VBC Industries Ltd. and other was an allowable business expenditure of revenue nature incurred by the assessee?" The appellant's counsel argued that the Non-Competition Agreement's clauses indicated that the payment was a capital investment, creating an enduring benefit, and thus should be treated as capital expenditure. The appellant relied on the Supreme Court's decision in Guffic Chem P. Ltd. v. Commissioner of Income Tax, which held that compensation received for refraining from carrying on a competitive business was a capital receipt, not taxable under the 1961 Act until the Finance Act, 2002. On the other hand, the respondent's counsel supported the Tribunal's decision, arguing that the Tribunal had correctly held the expenditure as revenue in nature. The Tribunal's decision was based on the Supreme Court's judgment in Empire Jute Co. Ltd. v. Commissioner of Income-Tax, which provided tests for distinguishing between capital and revenue expenditure. The Supreme Court had held that expenditure facilitating the assessee's trading operations or enabling the management and conduct of the business to be carried on more efficiently, while leaving the fixed capital untouched, would be on revenue account. In the present case, the Non-compete fees paid by the Assessee were primarily related to preventing competition from the transferor company, which constituted the profit-earning apparatus of the Assessee. Therefore, the expenditure was considered revenue in nature. Based on the Supreme Court's decision and the Tribunal's observations, the High Court concluded that the Tribunal's view was just and proper. The payment of ?6 Crores as Non-compete fees was held to be an allowable business expenditure of revenue nature incurred by the Assessee. The question posed was answered in favor of the Assessee and against the revenue, and the appeal was dismissed.
|
