2019 (7) TMI 1153 - HC - Income Tax

Depreciation on software license acquired - @60% or 25% - AO of the view that assessee were only licenses, which are intangible and depreciation allowable @25% -Tribunal held that the software license acquired by the assessee are in the nature of software application and eligible to claim depreciation at 60% ? - HELD THAT - If a particular article would fall within the description by the force of the words used, it is impermissible to ignore the word 'description' and going by the usage of the equipment purchased by the assessee, a decision has to be arrived at. We find that there is no error in the decision arrived at by the Tribunal by taking note of the specific entry in contra distinction with the general entry. Therefore, the first substantial question of law has to be necessarily answered against the Revenue. Nature of expenditure - payment for non compete fee - revenue expenditure or capital expenditure - AO alleged that assessee derived any enduring benefit - HELD THAT - Tribunal accepted the case of the assessee by interpreting the non compete clause in the agreement, which has been reproduced in paragraph 25 of the impugned order. After analyzing the same, the Tribunal held that the tenor of the agreement was only 18 months and it could not be stated that the assessee derived any enduring benefit due to the payment effected by it for obtaining certain commitments from one Mr.V.Shankar and restricting himself from indulging in any competition with the business of the assessee or from weaning way the employees. The Tribunal took note of the decision a Division Bench of this Court in the case of M/s.Asianet Communications Ltd. Vs. CIT 2018 (8) TMI 1554 - MADRAS HIGH COURT to which, one of us (TSSJ) was a party, wherein this Court considered a similar condition imposed in a non compete agreement. Therefore, we find that the Tribunal, on appreciation of the factual position, rightly held that a non compete fee has to be treated as a revenue expenditure. Hence, the second substantial question of law is to be necessarily answered against the Revenue.

Summary

Issues:
1. Entitlement to claim depreciation at 60% for software licenses.
2. Treatment of non-compete fee as revenue expenditure.

Analysis:
1. The first issue revolves around the eligibility of the assessee to claim depreciation at 60% for software or software applications. The Revenue contended that the acquired licenses were intangible assets falling under Part B of New Appendix I, allowing only 25% depreciation. However, the Tribunal ruled in favor of the assessee, stating that the software licenses qualified for 60% depreciation under Entry 5 of Part A of New Appendix I, supported by Note 7 defining 'computer software.' The Tribunal highlighted that the specific entry prevailed over the general entry in Part B, emphasizing the nature of the acquired software and the relevant provisions.

2. The second issue pertains to the treatment of the non-compete fee paid by the assessee for the assessment year 2014-15. The Tribunal analyzed the agreement clause and duration, concluding that the fee did not result in enduring benefits for the assessee. Citing a previous decision, the Tribunal deemed the non-compete fee as a revenue expenditure, emphasizing the factual evaluation and the absence of long-term advantages for the assessee. The Tribunal's decision was based on a detailed interpretation of the agreement and relevant legal precedents.

3. The judgment referenced a previous decision involving a similar issue regarding the interpretation of entries in a taxing statute, emphasizing the importance of giving full effect to the words used in the statute. By applying established rules of interpretation, the Court upheld the Tribunal's decision on the depreciation issue, reinforcing the significance of specific entries over general ones. The detailed analysis provided clarity on the legal interpretation and application of relevant provisions in the context of the case.

4. Ultimately, the Court dismissed the tax case appeals, ruling against the Revenue on both substantial questions of law. The decision was based on the Tribunal's correct interpretation of the provisions and factual assessment, leading to the rejection of the Revenue's arguments. The judgment concluded by dismissing the appeals and connected CMPs, highlighting the resolution of the issues in favor of the assessee based on the legal and factual analysis presented during the proceedings.