2018 (1) TMI 385 - AT - Income Tax

Nature of expenditure - expenditure incurred on non-compete fee - revenue or capital expenditure - Held that - In this case non compete fee sounds a negative. However, so far as the seller is concerned, he is selling his business right. Business right implies right to carry on any business in the market place. This is a recognized right. We note that the amendment to section 55(2)(a) by the Finance Act, 2002 with effect from AY 2003-04 also recognized the right to carry on business as capital asset under the head capital gains. The seller in this agreement is voluntarily selling this right to the buyer. As a consequence of this agreement the seller has forfeited his right to conduct business in the territory for a period of 30 months. Therefore, the assessee in effect has acquired a right of the seller. Therefore, this particular payment as per the agreement falls within section 32(1)(ii) as a result, the assessee is entitled for depreciation on the non-compete fee paid to the seller. Hence, Ld. CIT(A) was right in directing the AO to calculate the depreciation accordingly, which does not need any interference on our part, hence, we uphold the action of the Ld. CIT(A) on the issue in dispute and reject the grounds raised by the Revenue as well as by the Assessee in their respective Appeal and Cross Objection.

Summary

Issues Involved:
1. Allowance of depreciation on non-compete covenant fee paid by the assessee.
2. Treatment of non-compete fee as revenue expenditure under section 37(1) of the Income Tax Act, 1961.

Analysis:

Issue 1: Allowance of depreciation on non-compete covenant fee
The appeal by the Revenue and cross objection by the Assessee were directed against the assessment order related to the assessment year 2004-05. The Revenue contended that the CIT(A) erred in directing the AO to allow depreciation on the non-compete covenant fee paid by the assessee without appreciating the provisions of section 32(1)(ii) of the Income Tax Act, 1961. On the other hand, the Assessee argued that the non-compete fee should be treated as a revenue expenditure under section 37(1) of the Act. The ITAT, after considering relevant precedents, observed that the non-compete fee paid by the assessee was in exchange for the seller forfeiting their right to conduct business in a specific territory for a limited period. This right acquired by the assessee was akin to a capital asset under section 32(1)(ii) of the Act. Therefore, the ITAT upheld the CIT(A)'s decision to allow depreciation on the non-compete fee paid by the assessee. The ITAT rejected the grounds raised by both the Revenue and the Assessee, affirming the CIT(A)'s directive on the issue in dispute.

Issue 2: Treatment of non-compete fee as revenue expenditure
The assessee had also contended that the non-compete fee should be treated as a revenue expenditure under section 37(1) of the Income Tax Act. However, the ITAT's analysis focused on the nature of the payment and its characterization as a capital asset eligible for depreciation under section 32(1)(ii) rather than a revenue expenditure under section 37(1). The ITAT's decision to allow depreciation on the non-compete fee implicitly rejected the assessee's argument regarding the treatment of the expenditure as revenue. Consequently, the ITAT dismissed the cross objection filed by the Assessee on this ground.

In conclusion, the ITAT upheld the CIT(A)'s decision to allow depreciation on the non-compete fee paid by the assessee, considering it as a capital asset under section 32(1)(ii) of the Income Tax Act. The ITAT dismissed the appeal by the Revenue and the cross objection by the Assessee, affirming the CIT(A)'s order regarding the treatment of the non-compete fee for the assessment year 2004-05.