2022 (4) TMI 1263 - AT - Income Tax

Depreciation on non compete fee - Depreciation on intangible asset as per Section 32(1)(ii) - HELD THAT - To justify its claim of depreciation, in course of proceedings before the departmental authorities, assessee has submitted that since depreciation was allowed in preceding assessment years, the same cannot be disallowed in the impugned assessment year as Rule of Consistency would apply. However, we are unable to agree with the aforesaid submission made by the assessee before the departmental authorities. It appears, at the time of allowing depreciation in assessment years 2012-13 and 2013-14, the departmental authorities did not have the benefit of the ratio laid down by the Hon'ble jurisdictional High Court in case of Sharp Business System 2012 (11) TMI 324 - DELHI HIGH COURT The reasoning of the Hon'ble jurisdictional High Court for coming to such conclusion is, unlike the rights mentioned in Section 32(1)(ii) which an owner can exercise against the world at large and can be traded or transferred, in case of non compete fee, the advantage is restricted only against the seller. Therefore, it is not a right in rem but in personem. We are conscious of the fact that some other non-jurisdictional High Courts have held that non compete fee is an intangible asset coming within the ambit of Section 32(1)(ii) of the Act and have allowed depreciation. However, since, we are bound by the decision of the Hon'ble jurisdictional High Court rendered in case of Sharp Business System Vs. CIT(supra), respectfully, following the ratio laid down in case of Sharp Business System (supra), we hold that assessee s claim of depreciation on non compete fee is unacceptable. Accordingly, we uphold the decision of Commissioner (Appeals) by dismissing the grounds raised.

Summary

Issues:
Appeal against the order of Commissioner of Income-Tax for assessment year 2014-15. Disallowance of depreciation claimed on non complete fee. Applicability of Rule of Consistency. Interpretation of non compete fee as an intangible asset under Section 32(1)(ii).

Analysis:

1. Appeal against Commissioner's Order:
The judgment deals with an appeal by the assessee against the order of the Commissioner of Income-Tax for the assessment year 2014-15. The assessee had declared a loss of &8377; 23,12,53,397 and claimed depreciation of &8377; 1,94,33,166 on non complete fee. However, the assessing officer disallowed the claim of depreciation, which was upheld by the Commissioner (Appeals).

2. Non Complete Fee Disallowance:
The assessing officer disallowed the claim of depreciation on non complete fee, stating that it is not in the nature of an intangible asset as per Section 32(1)(ii) of the Income Tax Act. The Commissioner (Appeals) upheld this disallowance based on the decision of the Hon'ble Delhi High Court in a similar case. The Tribunal, following the High Court's decision, held that non compete fee is not similar to know how, patent, copyright, trademark, licenses, franchises, or any other business or commercial right of similar nature. The Tribunal concluded that the claim of depreciation on non compete fee is unacceptable.

3. Rule of Consistency:
The assessee argued that the Rule of Consistency should apply as depreciation on non compete fee was allowed in preceding assessment years. However, the Tribunal disagreed, stating that the departmental authorities did not have the benefit of the High Court's decision at that time. The Tribunal emphasized that it is bound by the decision of the Hon'ble jurisdictional High Court and upheld the disallowance of depreciation on non compete fee for the current assessment year.

4. Interpretation of Non Compete Fee as Intangible Asset:
The Tribunal analyzed the nature of the non compete fee acquired by the assessee through an agreement and its treatment as capital expenditure. Despite some non-jurisdictional High Courts allowing depreciation on non compete fee as an intangible asset, the Tribunal followed the decision of the Hon'ble jurisdictional High Court. The Tribunal distinguished non compete fee as a right in personem, limited to the seller, and not a right in rem against the world at large. Consequently, the Tribunal dismissed the appeal and upheld the decision of the Commissioner (Appeals).

In conclusion, the Tribunal dismissed the appeal against the Commissioner's order, upholding the disallowance of depreciation claimed on non compete fee based on the interpretation of the non compete fee as not falling under the category of intangible assets specified in Section 32(1)(ii) of the Income Tax Act. The Tribunal emphasized the binding nature of the decision of the Hon'ble jurisdictional High Court and rejected the application of the Rule of Consistency in this case.