2021 (10) TMI 242 - HC - Income Tax

Claim of depreciation - Payment of non-compete fee - Whether non-compete fees is an intangible asset of any other business or commercial rights of similar nature as per section 32 (1) (ii)? - HELD THAT - The Division Bench of this Court in Piramal Glass Limited, 2019 (6) TMI 891 - BOMBAY HIGH COURT has held that the payment of non-compete fee would fall under the expression or any other business or commercial rights of similar nature used in explanation 3 to Sub Section 32 (1) (ii). Also decided in Ferromatice Milacron India (P.) Limited 2018 (10) TMI 615 - GUJARAT HIGH COURT rights acquired by the assessee under the said agreement not only give enduring benefit, protected the assessee's business against competence, that too from a person who had closely worked with the assessee in the same business. The expression or any other business or commercial rights of similar nature used in Explanation 3 to subsection 32(1)(ii) is wide enough to include the present situation - Decided in favour of assessee.

Summary

Issues:
1. Characterization of non-compete fee as revenue or capital expenditure for assessment under the Income Tax Act, 1961.
2. Eligibility of non-compete fee as an intangible asset for depreciation under Section 32 (1) (ii) of the Income Tax Act, 1961.

Issue 1: Characterization of non-compete fee

The respondent, engaged in manufacturing and trading life-saving devices, claimed an expenditure of ?4,73,00,000 on non-compete fees to three directors of a company. The Assessing Officer treated this payment as capital expenditure, adding it to the total income of the respondent under Section 143(3) of the Income Tax Act, 1961. The CIT (A) acknowledged the business necessity behind the payment but agreed with the Assessing Officer that the expenditure was capital in nature. The ITAT partially allowed the appeal, stating that the non-compete fee could be considered an intangible asset, allowing for depreciation. The High Court referred to a previous judgment where it was held that non-compete fees fall under "any other business or commercial rights of similar nature" as per the Act. The Court found no substantial question of law and dismissed the appeal, emphasizing that the Tribunal had correctly analyzed the facts and applied the appropriate legal principles.

Issue 2: Eligibility of non-compete fee as an intangible asset

The High Court referred to a previous case where the Tribunal granted depreciation on non-compete fees, despite the Revenue's argument that such fees did not qualify as intangible assets under Section 32 of the Income Tax Act, 1961. The Court highlighted a Gujarat High Court decision supporting the Assessee's claim for depreciation on non-compete fees, emphasizing that the rights acquired through such agreements provided enduring benefits and fell under the category of intangible assets. The Court cited precedents where various types of intangible assets were recognized for depreciation, concluding that the wide interpretation of "any other business or commercial rights of similar nature" encompassed situations like the present case. The Court found no substantial question of law in this regard and upheld the Tribunal's decision to allow depreciation on the non-compete fee. Consequently, the appeal was dismissed, and no costs were awarded.

This detailed analysis of the judgment showcases the court's interpretation of the legal issues involved and the application of relevant provisions of the Income Tax Act, 1961 to determine the treatment of non-compete fees and their eligibility for depreciation as intangible assets.