2017 (8) TMI 662 - HC - Income Tax

Payment of non-compete fee - allowable business expenditure - ingenuity of expenditure - Held that - In order to ascertain the legal nature of a transaction, one has to look at the entire transaction as a whole and cannot adopt a dissecting approach. The burden on the assessee to establish that the transaction is bonafide and genuine has not been discharged, particularly in the light of the admitted facts set out by the assessing officer relating to the continued control exercised by the assessee in the business. - Decided against assessee. Brand equity intangible asset eligible for depreciation in terms of Section 32(1)(ii) - Held that - Decided in favour of the assessee and against the Revenue holding that brand equity constitutes an intangible asset in terms of Section 32(1)(ii) of the Act upon which depreciation is liable to be granted.

Summary

Issues Involved:
1. Taxability of the sum of ?75 lakhs received by the individual as non-compete fee.
2. Eligibility to depreciation on brand equity in the hands of the company.

Issue-Wise Detailed Analysis:

1. Taxability of the Sum of ?75 Lakhs Received by the Individual as Non-Compete Fee:

The primary contention revolves around whether the ?75 lakhs received by the individual as a non-compete fee is a capital receipt or revenue receipt. The individual, an artist and film director, entered into an agreement with a company for her exclusive services and agreed not to compete with the company. The Assessing Officer viewed this payment as remuneration for loss of business, treating it as a revenue receipt. However, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) held it as a capital receipt, referencing the case of G.D. Naidu, where compensation for a restrictive covenant was deemed a capital receipt.

The High Court, however, disagreed with the ITAT's decision. It emphasized that despite the non-compete agreement, the individual retained control over the business and continued to be involved in its operations. The Court cited the Madras High Court's decision in K. Ramasamy vs. Commissioner of Income Tax, which allowed piercing the corporate veil to determine the true nature of the transaction. The Court concluded that the non-compete agreement was a colorable device, as the individual continued to control the business and the arrangement did not genuinely restrict her business activities. Consequently, the ?75 lakhs was deemed a revenue receipt, and the substantial questions of law were answered in favor of the Revenue.

2. Eligibility to Depreciation on Brand Equity in the Hands of the Company:

The second issue pertains to whether brand equity qualifies as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act. The company claimed depreciation on brand equity valued at ?75 lakhs. The Assessing Officer disallowed this claim, but the Commissioner of Income Tax (Appeals) and the ITAT upheld it, recognizing brand equity as an intangible asset.

The High Court examined the definition of intangible assets under Section 32(1)(ii), which includes "know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature." The Court noted that the Department's standing counsel conceded that brand equity falls within the ambit of "business or commercial rights of a similar nature." The Court also referenced supportive judgments from the High Courts of Madras and Delhi in Penta Media Graphics and Sharp Business Systems Vs. Commissioner of Income Tax, respectively. Consequently, the Court held that brand equity constitutes an intangible asset eligible for depreciation, deciding the substantial questions of law in favor of the assessee.

Conclusion:

The High Court allowed TC(A) 1365/2007, ruling that the ?75 lakhs received as non-compete fee is a revenue receipt and not a capital receipt. Conversely, TC(A) 1175/2008 was dismissed, affirming that brand equity is an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act. Both appeals concluded with no order as to costs.