2018 (1) TMI 448 - AT - Income Tax

Disallowance of depreciation u/s 32 - intangible assets - amount paid for non compete fees - AO denied the claim holding that the business is of specialize nature and there are no chances that other parties can enter into the business due to its complexity - Held that - This issue squarely is covered against the assessee in view of the decision of the Hon ble Delhi High Court in case of Sharp Business Systems Vs CIT 2012 (11) TMI 324 - DELHI HIGH COURT has decided this issue against the assessee that non compete fee is not an eligible intangible asset as the words similar business or commercial rights have to necessary result in an intangible asset against the entire word which can be asserted as such to qualify for depreciation u/s 32(1)(ii) of the Act which non compete fees lacks. In the present case though goodwill of 57.30 million was paid but that is not the issue in dispute. In view of the decision of the Hon ble Jurisdictional High Court we reverse the finding of the ld CIT(A) in granting deprecation to the assessee on non compete fees and restored the order of ld Assessing Officer. In the result, the solitary ground of the appeal of the revenue is allowed.

Summary

Issues:
- Disallowance of depreciation on non-compete fees claimed as intangible asset

Analysis:
The appeal was filed by the Revenue against the order of the ld CIT(A) regarding the disallowance of depreciation on non-compete fees claimed as an intangible asset. The assessee, a wholesale trading company, acquired a running business and paid non-compete fees, claiming depreciation under section 32 of the Act. The ld AO disallowed the depreciation, stating that the business was specialized, making it unlikely for other players to enter the market due to its complexity. The ld CIT(A) allowed the claim, leading to the Revenue's appeal.

The ld Departmental Representative argued that the issue was unfavorable to the assessee based on a decision by the Hon'ble Delhi High Court. Conversely, the ld AR supported the ld CIT(A)'s order, asserting that non-compete fees qualified as an intangible asset eligible for depreciation. The AR referenced the amendment from the Assessment Year 1999-2000 and the decision of the Hon'ble Supreme Court in a related case. The AR also pointed out various clauses in the business transfer agreement to support the claim.

Upon careful consideration, the Tribunal noted that the assessee had acquired the business as a going concern and paid non-compete fees, claiming it as an intangible asset for depreciation. The ld CIT(A) had ruled in favor of the assessee, citing the amendment to the income tax act and defining intangible assets eligible for depreciation. However, the Tribunal found that the issue was decisively settled against the assessee by the Hon'ble Delhi High Court's judgment in a similar case. The Tribunal emphasized that non-compete fees did not qualify as an intangible asset for depreciation under section 32(1)(ii) of the Act. Despite the assessee's reliance on other court decisions, the Tribunal upheld the decision of the Hon'ble Delhi High Court, reversing the ld CIT(A)'s order and restoring the ld Assessing Officer's decision to disallow depreciation on non-compete fees.

In conclusion, the Tribunal allowed the Revenue's appeal, upholding the disallowance of depreciation on non-compete fees claimed as an intangible asset by the assessee.