2020 (4) TMI 723 - HC - Income Tax

Addition u/s 37(1) - non-competition fee - revenue or capital expenditure - HELD THAT - Tribunal considering the decision in the case of M/s McDowell Co. Ltd. 2002 (2) TMI 302 - ITAT BANGALORE held that the entire payment by the assessee is allowable as revenue expenditure and not merely 1/4th of payment towards non-competition fee as it does not bring in any capital asset and held that the payment is allowable under Section 37(1) of the Income Tax Act and directed the Assessing Officer to give appropriate relief after re-computing the income as per the direction of this Tribunal and modified the order of the Tribunal to the said extent. We find no error in the order passed by the Tribunal. It has followed its earlier order in the case of M/s McDowell Co. Ltd correctly - Substantial question of law is answered against the revenue.

Summary

Issues:
- Appeal against the order passed by the Income-Tax Appellate Tribunal, Bengaluru regarding non-compete fee treatment as revenue expenditure.

Analysis:
1. The appellant, a revenue authority, challenged the Tribunal's order disallowing a portion of the non-compete fee paid by Compaq Computers Pvt. Ltd. to Digital Equipments India Ltd. The Tribunal allowed the entire payment of ?5,00,00,000 as a revenue expenditure, contrary to the initial disallowance of ?3,75,00,000. The key question raised was whether the Tribunal erred in passing the order without considering the issue previously and when the assessee had withdrawn the ground before the Appellate Commissioner.

2. The Tribunal admitted additional grounds raised by the assessee regarding the treatment of the non-compete fee as a revenue expenditure. Although no specific findings were recorded on the additional ground, the Tribunal held that the entire payment of ?5,00,00,000 was allowable as a revenue expenditure under Section 37(1) of the Income Tax Act. This decision was based on the premise that the payment did not result in the acquisition of any capital asset, following the precedent set in the case of M/s McDowell & Co. Ltd.

3. The High Court, after hearing arguments from both parties and examining the Tribunal's orders, found no error in the Tribunal's decision. The Court upheld the Tribunal's ruling, emphasizing that the payment of ?5,00,00,000 was rightly treated as a revenue expenditure, in line with the principles established in the case of M/s McDowell & Co. Ltd. The Court answered the substantial question of law against the revenue authority and in favor of the assessee, ultimately dismissing the appeal filed by the revenue.

In conclusion, the High Court affirmed the Tribunal's decision to allow the entire non-compete fee payment as a revenue expenditure, highlighting that the payment did not lead to the creation of any capital asset and was therefore eligible for deduction under Section 37(1) of the Income Tax Act.