2018 (8) TMI 1554 - HC - Income Tax

Allowable deduction in computing the income - consideration paid by the appellant to Mr.SK for the non-competing covenant - Held that - The non-compete compensation, from the stand point of the payee of such compensation, is so paid in anticipation that absence of a competition from the other party to the contract may secure a benefit to the party paying the compensation. There is no certainty that such benefit would accrue. Inspite of the fact that a competitor is kept out of the competition, one may still suffer loss. If it were to be a capital expenditure whether or not, an assessee makes a business profit, the character and value of the capital assets will, subject to depreciation, remain unaltered. Thus, the facts clearly disclose that on account of the payment of non-compete fee, the assessee has not acquired any new business, profit making apparatus has remained the same, the assets used to run the business remained the same and there is no new business or no new source of income, which accrue to the assessee on account of the payment of non-compete fee. Apart from that the stand taken by the Revenue that the petitioner had amortised expenditure spread over for the period of five years has been found to be factually incorrect, as the assessee has not capitalised the same in their accounts, but treated it as deferred revenue expenditure for a period of five years. That apart, such issue was never raised by the Revenue before any of the lower authorities, as the Tribunal has recorded that there is no dispute regarding the facts.- Decided in favour of the assessee and against the Revenue. Disallowance of claim for deduction of the payment - disallowance under Section 40(a)(i) - Held that - The transponder hire charges made by the appellant on which no tax has been deducted does not come under the purview of either Royalty or Technical Fees on which tax has to be deducted. Accordingly, no disallowance under Section 40(a)(i) is warranted on those payments. Therefore, the CIT(A) held that the TDS payment claim made by the assessee to the extent of ₹ 15,68,69,040/- is prima facie not an allowable expenditure, when the assessee is not required to deduct any TDS on payment of transponder charges and so the payment itself is not covered by Section 40(i)(a) of the Income Tax Act. Thus, the assessee s claim for TDS payment for the year 2000-01 was held to be not permissible and the same was disallowed. The reason for disallowing this deduction was as a result of the decision in the assessee s own case for the assessment year 1995-96.

Summary

Issues Involved:
1. Allowability of non-compete covenant payment as a deduction.
2. Disallowance of transponder hire charges deduction.

Issue-wise Detailed Analysis:

1. Allowability of Non-Compete Covenant Payment as a Deduction:

The primary issue was whether the payment of ?10.5 Crores to Mr. SK for a non-compete covenant could be considered a deductible business expenditure. The appellant argued that this payment should be treated as revenue expenditure, citing several precedents where similar payments were allowed as deductions. The appellant relied on cases such as Empire Jute Co. Ltd., G.D. Naidu, Carborandum Universal Ltd., and Eicher Ltd., which established that payments made to remove competition or restrictive covenants were revenue in nature and did not create new assets or enduring benefits.

The Revenue contended that the payment was capital expenditure, arguing that the non-compete agreement provided an enduring benefit to the appellant. The Revenue also pointed out that the appellant had entered into two non-compete agreements on the same day, suggesting that the payments were part of a business acquisition, thus capital in nature. Additionally, the Revenue noted that the appellant had amortized the payment over five years in their books, which indicated capital expenditure.

The court, however, agreed with the appellant, noting that the payment did not result in the acquisition of a new business, asset, or profit-making apparatus. The court emphasized that the payment was made to ward off competition temporarily and did not provide an enduring benefit. The court also rejected the Revenue's argument about the two agreements, as it was not raised before lower authorities and the facts were undisputed. The court concluded that the non-compete payment was revenue expenditure, referencing the Supreme Court's decision in Taparia Tools Ltd., which stated that entries in books of accounts are not determinative of the nature of expenditure.

2. Disallowance of Transponder Hire Charges Deduction:

The second issue concerned the disallowance of ?15,68,69,040/- claimed as transponder hire charges. The CIT(A) had disallowed this deduction based on an earlier decision for the assessment year 1995-96, where it was held that no TDS was required on such payments, thus not covered under Section 40(a)(i) of the Income Tax Act. However, during the pendency of this appeal, the ITAT allowed the Revenue's appeal for the assessment year 1995-96, upholding the disallowance. The appellant accepted this decision and paid the taxes.

In light of these developments, the court remanded the matter to the Assessing Officer to reconsider the disallowance of the transponder hire charges deduction, taking into account the subsequent acceptance of the ITAT's decision by the appellant.

Conclusion:

The court allowed the appeal, answering the first substantial question of law in favor of the assessee, holding that the non-compete payment was revenue expenditure. The second substantial question of law was remanded to the Assessing Officer for fresh consideration in light of the subsequent developments. The court directed the Assessing Officer to give effect to the order in accordance with the law.