2023 (8) TMI 827 - HC - Income Tax

Nature of expenses - payment made for premature termination of Advertising Sale Agreement - revenue or capital expenditure - HELDT HAT - Apex Court in Commissioner of Income Tax V/s. Ashok Leyland Ltd. 1972 (10) TMI 1 - SUPREME COURT held that a payment made for termination of contract by way of compensation would be an allowable deduction in computing the total income of assessee. By terminating the services, assessee not only saved the expense that it would have had to incur in the relevant previous year but also for few more years to come. Therefore, it will not be correct to say that by avoiding certain business expenditure, the company can be said to have acquired enduring benefits or acquired any income yielding asset. In the case at hand also, by paying the compensation under ASTA, assessee not only saved the expense that it would have had to incur in the relevant previous year but also for few more years to come. Therefore, CIT(A) as well as the ITAT, in our view, was correct in allowing this amount paid on account of termination of agreement to SIPL as revenue expenditure. Amount paid under RCA - Tribunal upholding the decision of CIT(A) that the amount being paid under RCA was in the nature of capital expenditure and intangible asset entitling assessee to claim depreciation - HELD THAT - As decided in Piramal Glass Ltd. 2019 (6) TMI 891 - BOMBAY HIGH COURT rights acquired by the assessee under the said agreement not only give enduring benefit, protected the assessee's business against competence, that too from a person who had closely worked with the assessee in the same business. The expression or any other business or commercial rights of similar nature used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include the present situation Thus by paying the amount as non-compete fees under the RCA, the rights acquired by assessee was not only giving it enduring benefit but also protected assessee's business against competition, that too from a person who had closely worked with assessee. Tribunal has not committed any perversity or applied incorrect principles to the given facts. We do not think that the questions as proposed raised any substantial question of law.

Summary

Issues involved:
The issues involved in this judgment are the treatment of compensation paid for termination of agreements as revenue or capital expenditure and the entitlement to claim depreciation on non-compete fees.

Issue 1 - Compensation for Termination of Agreements:
The respondent filed a return of income declaring a total loss, including amounts treated as revenue expenditure. The Assessing Officer disallowed certain amounts, including compensation paid for termination of agreements. The Commissioner of Income Tax (Appeals) partly allowed the appeal, deleting one amount and upholding the treatment of another as capital expenditure. Both parties appealed to the Income Tax Appellate Tribunal (ITAT), which dismissed the appeals. The dispute arose from the termination of an agreement with Star India Pvt. Ltd. (SIPL), resulting in compensation payments. The CIT(A) concluded that the compensation for premature termination should be treated as revenue expenditure, not capital, based on the original agreement terms and commercial expediency. The ITAT concurred with this view.

Issue 2 - Depreciation on Non-Compete Fees:
The respondent paid non-compete fees to SIPL, which the Assessing Officer treated as capital expenditure. The CIT(A) held that the payment was capital in nature and entitled the assessee to claim depreciation as an intangible asset. The ITAT upheld this decision, citing a Supreme Court judgment and other High Court decisions supporting the depreciation claim on similar expenses. The High Court affirmed that the non-compete fees provided enduring benefits and protected the respondent's business against competition, justifying the claim for depreciation under Section 32(1)(ii) of the Income Tax Act.

Separate Judgment:
The High Court, in its ruling, dismissed the appeal, stating that the Tribunal did not commit any perversity or apply incorrect principles in the given facts. The Court found no substantial question of law in the proposed questions raised by the appellant. The appeal was therefore dismissed, with no order as to costs.