2013 (11) TMI 1057 - HC - Income Tax

Depreciation on Non-compete Fee Held that - Non-compete is a commercial right because that right is relatable to the transfer of trade mark, copy rights and patents The view taken by the Commissioner of Income Tax(Appeals) in this regard is acceptable - The transfer of the trade mark, patents and other rights in favour of the assessee was undoubtedly the transfer of intangible assets, which in terms of section 32(1)(ii) of the Act would be a capital asset entitled to depreciation Decided in favour of the assessee.

Summary

Issues Involved:
1. Entitlement to depreciation on non-compete fee as an intangible asset under Section 32(1)(ii) of the Income Tax Act, 1961.
2. Entitlement to claim deduction of the non-compete fee as Revenue expenditure under Section 37 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Entitlement to Depreciation on Non-Compete Fee as an Intangible Asset:

The assessee, a public limited company, engaged in software development and other activities, filed its return of income for the assessment year 2002-03, claiming a loss after deductions under Section 10A of the Income Tax Act, 1961. The Assessing Officer (AO) computed the total income differently, leading to a dispute on the disallowance of depreciation on the value of the non-compete fee.

The assessee had entered into an agreement with another company (PMGL) for acquiring Intellectual Property Rights (IPRs) and non-compete fee, claiming depreciation on these amounts. The AO rejected this claim, but the First Appellate Authority allowed it for IPRs while disallowing it for the non-compete fee. The Tribunal upheld the First Appellate Authority's decision on IPRs but reversed it regarding the non-compete fee.

The assessee argued that the non-compete fee should be considered an intangible asset under Section 32(1)(ii) of the Act, as it conferred a commercial right. The Revenue countered that the non-compete fee was not a commercial right of similar nature to patents, copyrights, trademarks, etc., and thus not eligible for depreciation.

The Court analyzed the agreement, noting it was a composite agreement transferring all rights, including trademarks and copyrights, to the assessee. The non-compete clause was seen as supporting these rights, strengthening the commercial rights transferred. The Court concluded that the non-compete fee should be considered a commercial right and thus eligible for depreciation under Section 32(1)(ii) of the Act.

2. Entitlement to Claim Deduction of Non-Compete Fee as Revenue Expenditure:

The alternative argument by the assessee was that if the non-compete fee was not considered an intangible asset, it should be allowed as Revenue expenditure under Section 37 of the Act, as it enabled the assessee to carry on its business smoothly without competition from the transferor.

Given the Court's decision to treat the non-compete fee as a commercial right eligible for depreciation, it found no necessity to consider this alternative submission.

Conclusion:

The Court set aside the Tribunal's order, ruling in favor of the assessee, allowing depreciation on the non-compete fee as an intangible asset under Section 32(1)(ii) of the Income Tax Act, 1961. Consequently, the appeal was allowed without costs.