2003 (8) TMI 164 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of disallowance of Rs. 6,50,000 as capital expenditure.
2. Nature of the non-competition fee (capital vs. revenue expenditure).
3. Alternative plea for allowing the expenditure as deferred expenditure over 10 years.

Detailed Analysis:

1. Confirmation of disallowance of Rs. 6,50,000 as capital expenditure:
The assessee appealed against the CIT(A)'s order confirming the disallowance of Rs. 6,50,000 paid as a non-competition fee, treating it as capital expenditure. The payment was made to prevent the erstwhile management from competing with the assessee company for ten years.

2. Nature of the non-competition fee (capital vs. revenue expenditure):
- Arguments by the Assessee:
The assessee argued that the non-competition agreement was not absolute, as it could be relaxed with written approval from the assessee company. Clause 5 of the agreement allowed for modifications to make the restrictions valid and effective. The assessee cited several cases, including CIT v. Coal Shipments (P.) Ltd. and CIT v. G.D. Naidu, to support the claim that the expenditure should be treated as revenue expenditure.

- Arguments by the Revenue:
The Revenue contended that the expenditure was capital in nature, as it provided an enduring advantage by eliminating competition for ten years. The Revenue relied on cases such as Tamil Nadu Dairy Development Corpn. Ltd. v. CIT and Grover Soap (P.) Ltd. v. CIT, arguing that the payment was made to derive a long-term advantage.

- Tribunal's Analysis:
The Tribunal observed that the non-competition agreement effectively prevented the erstwhile management from engaging in competing activities for ten years. The Tribunal found the argument that the agreement was not absolute to be fallacious, as the assessee company would not permit competition without appropriate compensation. Clause 5 was seen as an enabling provision to ensure the agreement's validity, not to dilute its binding nature.

The Tribunal referred to the Supreme Court's decision in Coal Shipments (P.) Ltd., which distinguished between payments for enduring benefits and those for short-term advantages. The Tribunal concluded that the payment provided a benefit of enduring nature by warding off competition for a significant period. The Tribunal also considered the Madras High Court's decision in Chelpark Co. Ltd., which held that payments to eliminate competition over a long period constituted capital expenditure.

3. Alternative plea for allowing the expenditure as deferred expenditure over 10 years:
The assessee alternatively argued that the expenditure should be allowed as deferred expenditure over ten years, relying on the Bombay High Court decision in Taparia Tools Ltd. v. Jt. CIT. The Tribunal rejected this plea, stating that the Taparia Tools decision applied to deferred revenue expenditure, while the current expenditure was capital in nature.

Conclusion:
The Tribunal confirmed the CIT(A)'s order, holding that the payment of Rs. 6,50,000 was capital expenditure and rejecting the plea for treating it as deferred expenditure. The assessee's appeal was dismissed.