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2012 (12) TMI 290 - AT - Income TaxDisallowance of Non-Compete Compensation - held that - Expenditure incurred in warding off competition in the business even to rival dealer will constitute capital expenditure and to hold it as capital expenditure, it is not necessary that non-compete fee be paid to create monopoly rights. Thus, Amount paid for non-compete fees is considered as capital outlay, the same cannot be allowed as the revenue expenditure u/s 37(1). Moreover since the amount is not in the nature of revenue expenditure, a part of it cannot be considered as deferred revenue expenditure so as to allow over period of non-compete agreement. In view of this, assessee s contention cannot be accepted - ground raised by assessee is dismissed and confirm the action of AO in this regard - In the result, appeal filed by assessee is dismissed. Amount paid as non-compete fee being capital out lay, can not be allowed as revenue expenditure Decision in Tecumseh India Pvt. Ltd. Versus Addl. CIT 2010 (7) TMI 685 - ITAT, DELHI followed.
Issues Involved:
1. Disallowance of Non-Compete Compensation as Business Expenditure. 2. Allowance of Non-Compete Compensation on Deferred Basis. Issue-wise Detailed Analysis: 1. Disallowance of Non-Compete Compensation as Business Expenditure: The primary issue raised by the assessee was the disallowance of Non-Compete Compensation of Rs. 4,00,00,000/- paid to National Radio & Electronics Co. Ltd (NELCO) as business expenditure. The assessee contended that the payment did not result in a capital advantage or enduring benefit and thus should be considered as revenue expenditure. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT (A)] held that the expenditure was capital in nature and could not be allowed as revenue expenditure. This decision was based on the precedent set by the Special Bench of the ITAT in the case of Tecumseh India (P) Ltd. v. Addl. CIT, which held that expenditure to ward off competition is capital expenditure. Consequently, Ground No. 1 was dismissed. 2. Allowance of Non-Compete Compensation on Deferred Basis: The assessee also raised an additional ground, arguing that if the expenditure was not allowed as a revenue expenditure, it should be allowed on a deferred basis over the term of the related agreement. The assessee cited the Chennai Bench of the ITAT in the case of Orchid Chemicals & Pharmaceuticals Ltd v. Asstt. CIT, which allowed such expenditure over a period of four years. However, the CIT (DR) countered that since the expenditure was capital in nature, it could not be amortized under section 37(1) or section 35D of the Income Tax Act. The Tribunal examined the provisions of section 37(1) and concluded that capital expenditure cannot be allowed as a deduction. The Tribunal also noted that the Special Bench judgment in Tecumseh India (P) Ltd. was binding and took precedence over the Coordinate Bench decision in Orchid Chemicals & Pharmaceuticals Ltd. The Tribunal further analyzed the case law cited by the assessee, including the judgments of the Hon'ble Delhi High Court in Pitney Bowes India (P) Ltd v. CIT and the Hon'ble Punjab & Haryana High Court in Punjab Alkalies & Chemicals Ltd. v. CIT. These cases did not support the assessee's contention, as they upheld the treatment of non-compete fees as capital expenditure. The Tribunal also referred to the decision in Sharp Business Systems (India) Ltd. v. Dy. CIT, which held that non-compete fees, being capital in nature, could not be spread over multiple years. In conclusion, the Tribunal held that the non-compete fee, being capital outlay, could not be allowed as revenue expenditure or deferred revenue expenditure. The additional ground raised by the assessee was dismissed, and the action of the AO was confirmed. Judgment: The appeal filed by the assessee was dismissed.
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