2021 (9) TMI 305 - HC - Income Tax

Depreciation on non compete fee at 25% - Depreciation on intangible assets - Disallowance of claim by revenue as non compete fee paid does not confer upon the assessee any right which could be used in the business - it only restrains the other person from carrying on his business in competition with the assessee's business - Tribunal allowed depreciation - HELD THAT - It is not in dispute that the substantial questions of law which have been framed for considered have been answered against the revenue and in favour of the assessee in the case of Commissioner of Income Tax, LTU, Chennai vs. Areva T D India Ltd. 2021 (4) TMI 32 - MADRAS HIGH COURT - Decided against revenue.

Summary

Issues:
- Appeal filed by revenue challenging order of Income Tax Appellate Tribunal for assessment years 2002-03, 2004-05, and 2005-06.
- Appeal filed by revenue challenging order of Income Tax Appellate Tribunal for assessment year 2003-04.
- Substantial questions of law regarding depreciation on non-compete fee and its treatment as revenue expenditure.

Analysis:

Appeal Against Tribunal's Order:
The revenue filed appeals under Section 260A of the Income Tax Act, 1961 challenging the common order passed by the Income Tax Appellate Tribunal for the assessment years 2002-03, 2004-05, and 2005-06. Another appeal was filed for the assessment year 2003-04. The key issue raised was whether the Tribunal was correct in allowing depreciation on the non-compete fee at 25%. The Tribunal's decision was questioned, arguing that the non-compete fee did not confer any right to the assessee but only restrained others from competing with the assessee's business.

Substantial Questions of Law:
The substantial questions of law in all four appeals revolved around the treatment of non-compete fee for depreciation and its classification as revenue expenditure. The Court referred to a previous decision involving a similar issue where it was held that the payment of a non-compete fee did not result in an enduring benefit to the assessee's business. The Court emphasized the need to determine whether such expenditure added to the capital of the assessee or created a new asset. It was noted that the facts of the case at hand differed significantly from a previous case where a non-compete fee was paid for a specific business setup, highlighting the uniqueness of each situation.

Court's Decision:
Based on the precedent and the distinction in the factual positions between the current case and previous cases, the Court dismissed the tax case appeals. The substantial questions of law were answered against the revenue, affirming that the non-compete fee did not qualify for depreciation and should be treated as revenue expenditure. The Court's decision was influenced by the specific circumstances of the case, emphasizing the importance of analyzing each case individually. No costs were awarded in this matter.

In conclusion, the High Court's judgment upheld the treatment of non-compete fee as revenue expenditure, following a detailed analysis of the legal principles and factual distinctions in previous cases. The decision provided clarity on the classification of such fees and reinforced the need to consider the specific circumstances of each case when determining the tax implications of non-compete agreements.