2021 (8) TMI 185 - HC - Income Tax

Rectification of mistake u/s 254 - Depreciation on the non-compete fee denied - CIT(A) allowed the claim - ITAT rejected the claim - Whether AO has accepted the claim of the assessee - HELD THAT - AO did not go into the question as to whether the noncompete fee can be treated as an intangible asset , whereby the appellant would be entitled to claim of depreciation under Section 32(1)(ii) of the Act, or not. The claim of the appellant of depreciation was in fact rejected by the Assessing Officer. Therefore, there was no occasion for the respondent to have challenged the said order. In appeal, the CIT(A) went ahead and directed the Assessing Officer to allow the claim of depreciation on the non-compete fee treating the same to be an intangible asset . It therefore, cannot be said that the issue of claim of depreciation on non-compete fee stood concluded before the Assessing Officer and/or the learned ITAT has exceeded its jurisdiction in considering the same. As decided in SHARP BUSINESS SYSTEM VERSUS COMMISSIONER OF INCOME-TAX - III 2012 (11) TMI 324 - DELHI HIGH COURT every species of right spelt-out expressly by the Statute - i.e. of the intellectual property right and other advantages such as know-how, franchise, license etc. and even those considered by the Courts, such as goodwill can be said to be alienable. Such is not the case with an agreement not to compete which is purely personal. As a consequence, it is held that the contentions of the assessee are without merit; this question too is answered against the appellant and in favour of the Revenue.For the above reasons, this Court is of the opinion that the words similar business or commercial rights have to necessarily result in an intangible asset against the entire world which can be asserted as such to qualify for depreciation under Section 32(1)(ii) Merely because another appeal raising similar questions has been admitted by this Court, also does not persuade us to admit the present appeal as well only on this ground. - Decided in favour of revenue.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Depreciation claim on non-compete fee as an intangible asset under Section 32(1)(ii) of the Income Tax Act, 1961.
3. Jurisdiction of the ITAT in reopening issues not disputed by the respondent.
4. Applicability of Section 40(a)(ia) regarding non-deduction of TDS on non-compete fee.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appellant sought condonation of delay in filing the appeal, claiming the certified copy of the impugned order dated 30.08.2019 was received on 27.09.2019. An application under Section 254(2) of the Income Tax Act, 1961 was filed on 26.02.2020 and dismissed on 15.12.2020, with the copy received on 25.01.2021. The appellant also cited the Supreme Court's orders in Suo Motu Writ Petition (Civil) No. 3 of 2020, extending the period of limitation. The court allowed the application and condoned the delay.

2. Depreciation Claim on Non-Compete Fee:
The appellant entered into a Business Transfer Agreement with Wockhardt Hospitals Ltd. on 24.08.2009, paying a non-compete fee of ?15.50 crores, which was capitalized in the books of accounts. The return of income for AY 2010-11 claimed depreciation of ?1,93,75,000/- on the non-compete fee as an intangible asset under Section 32(1)(ii). The Assessing Officer disallowed the claim, citing non-deduction of TDS under Section 40(a)(ia). The CIT(A) partially allowed the appeal, directing the AO to allow depreciation, stating Section 194L ceased to operate from 01.06.2000. The ITAT, relying on the judgment in Sharp Business System v. Income-tax – III, held that the non-compete fee is not an intangible asset and disallowed the depreciation claim.

3. Jurisdiction of the ITAT:
The appellant argued that the ITAT exceeded its jurisdiction by delving into issues accepted by the AO, who disallowed the depreciation claim solely on non-deduction of TDS. The CIT(A) directed the AO to allow depreciation, and the respondent did not challenge this. The ITAT, however, reopened the issue, leading to the appellant's contention that the ITAT lacked jurisdiction. The court found no merit in this argument, stating the AO did not address whether the non-compete fee is an intangible asset, and the CIT(A)'s direction was challenged by the respondent.

4. Applicability of Section 40(a)(ia):
The AO disallowed the non-compete fee under Section 40(a)(ia) due to non-deduction of TDS, considering it compensation. The CIT(A) noted Section 194L ceased to operate from 01.06.2000, thus no TDS was required, and directed allowing depreciation. The ITAT upheld the disallowance, referencing Sharp Business Systems, which held non-compete fees are not intangible assets and cannot claim depreciation under Section 32(1)(ii).

Conclusion:
The court dismissed the appeal, upholding the ITAT's decision that non-compete fees do not qualify as intangible assets for depreciation under Section 32(1)(ii). The court found the ITAT within its jurisdiction to address the issue and followed the precedent set in Sharp Business Systems. The appellant's arguments did not merit a different conclusion, and the appeal was dismissed with no order as to costs.