2005 (7) TMI 280 - AT - Income Tax

Deduction of an expenditure - Capital Or Revenue Expenditure - non-compete fees - purchased VBC's plant for manufacturing nitric acid and ammonium nitrate - employees' contribution to PF after due dates - Enduring benefit - agreement for non-competition - whether for appreciating the fact that the non-compete agreement was to enhance the assessee's profitability, was it necessary for the assessee carrying on of the same business and that too on large scale - HELD THAT - We are of the opinion that carrying on of the same business prior to entering into a non-compete agreement is not necessary to appreciate as to whether the non-compete agreement is to enhance the assessee's profitability or not, because the stage when increase in profitability is to be seen has to be subsequent to entering into such an agreement and not before that. In our opinion, what is relevant, for appreciating that such an agreement has been entered for keeping in view that assessee's profitability will increase, is the carrying on of business with respect to which the agreement has been arrived at in future. Increase in profitability may not happen from the very first day. It is to happen only after the agreement in question has been acted upon and, therefore, even if a person, while starting absolutely a new business, comprehends that another known person may compete him in future and, therefore, to avoid such a competition in the assessee's line of business to be carried on, he enters into a non-competition agreement with such person, then the agreement, in our opinion, is certainly for increasing the assessee's profitability-it is so because the assessee will be able to carry on the business definitely without any competition and may be with enhanced profitability which he otherwise may have not done during the persistence of competition. We are, therefore, of the opinion that the Revenue authorities were not justified in holding that the decisions relied upon by the assessee were not applicable because the assessee was not carrying on the business in chemicals prior to entering into a non-competition agreement, as carrying on of the same business is not relevant. One fact, which has been duly accepted by both the authorities is that the assessee was doing at least trade business in the chemicals under reference. Here, we would like to raise a question that had the assessee been carrying on the trading business of that very chemicals on large scale, then where was the necessity for him to incur any expenditure for non-competition. Such an expenditure has to be incurred only when assessee's business is not so much and he wants to enhance the same. Thus, we are of the opinion that in view of factum that the assessee was, prior to entering into this agreement, carrying on the trading business in the same chemicals, the findings of Revenue authorities that he was not carrying on such business get dismantled and, consequently, the very basis for rejecting the assessee's claim that the non-competition agreement was for the purpose of enhancement of his profitability ceased to exist, meaning thereby that if this reason is omitted, then assessee's claim stands accepted. We are of the opinion that the assessee's claim that the expenditure in question was of revenue expenditure is allowable on the basis of aforesaid discussion only. The Revenue authority's stand that assessee was not carrying on same business prior to entering into an agreement having ceased to exist, their findings that decisions relied upon by the assessee were not applicable also got refuted/reversed, meaning thereby that decisions relied upon by the assessee, wherein it has been held that such type of expenditure, if results in enhancement of assessee's profitability, will be revenue expenditure, are fully applicable. If we consider the expenditure in the light of assessee's necessity or commercial expediency, it will be found that it satisfies both the tests because as admitted by the Revenue authorities, the non-competition agreement was to enhance the assessee's sales of relevant two chemicals in central and eastern parts of India without any competition. Even otherwise, we are of the opinion that the benefit to be procured by the assessee for a period of five years could not be said to be o f enduring nature , as explained hereinafter and since the Revenue authorities have rejected the assessee's claim solely on the ground that the benefit procured by the assessee was of enduring nature , the orders of the Revenue authorities cannot be upheld. We, after respectfully following the various decisions including the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. 1980 (5) TMI 1 - SUPREME COURT , are of the opinion that the expenditure incurred by the assessee by entering into a non-compete agreement with VBC and its founder, Shri M.V.V.S. Murthy, was of revenue nature and, hence, an allowable deduction. Whether the assessee carried on the same business or not or was it necessary for claiming that expenditure incurred by the assessee in consequence upon entering into a non-competition agreement was of revenue nature - the assessee was to sell these two chemicals in central and eastern parts of India where VBC and its founder, Shri M.V.V.S. Murthy, had been selling the chemicals, though not under any special brand, for the last 8-10 years and had definitely earned a good rapport, relationship and name with the consumers of these chemicals, consequently, they could be a potential threat by entering into the trading of same chemicals of other manufacturers. By entering into this agreement, the assessee had not only prevented the potential threat but had derived a benefit/right as a result of which prospects of assessee's sale/profitability of these two chemicals, which were not branded, was bound to increase. we are unable to subscribe to this theory, firstly, because the authorities have not pointed out as to how the installation of such a plant was to take five or more years and, secondly, the authorities have not considered the fact that agreement was with two parties, namely, VBC as well as its founder, Shri M.V.V.S. Murthy, in his individual capacity and was for both manufacturing and trading activities. Since, not only these two chemicals, but all such type of chemicals are normally sold without any brand because manufacturing of these chemicals does not require any secret formula or secret know-how and even if, sold under a brand, then also, it is not of such importance because in case of goods whose quality is dependent on secret formula or secret skill or secret know-how, it is the 'brand' which matters. For example, nitric acid is always sold as nitric acid-it has neither secret formula nor secret know-how. Similarly, ammonium nitrate is always sold as ammonium nitrate-again does not require any secret formula or 'secret know-how, and, since there were other manufacturers (manufacturing on large scale) of these two chemicals in the field, namely, Steel Authority of India Ltd. at Rourkela and Food Corporation of India at Sindhri, there was an existing cut-throat competition from these manufacturers and since VBC as well as its founder, Shri M.V.V.S. Murthy had been in this business for the last 8-10 years, they were definitely a potential/substantial threat in marketing of these two chemicals by the assessee. They could easily get trading rights for sale of these two chemicals from the aforesaid two manufacturers. we are of the opinion that findings of the Revenue authorities were only on the basis of fictional thinking without there being any cogent material on record, whereas assessee's apprehension of future threat was real and supported by facts already existing. M/s VBC and founder, Shri M.V.V.S. Murthy, both being well in a position financially, as well as otherwise, to compete the assessee even after a period of five years, the threat which was perceived at the time of agreement still subsists and liable to reoccur at the expiry of period of five years in the present case, could not be said to be 'enduring nature' and, therefore, Revenue's plea that expenditure in question was of 'capital nature' because benefits derived were of 'enduring nature' fails. We, after following the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd., are of the opinion that benefit to be derived by the assessee in consequence upon incurring the expenditure of Rs. 6 crores by entering into a non-competition agreement with VBC and Mr. M.V.V.S. Murthy was directly related to the enhancement of the assessee's profitability in the business of manufacturing and trading of these two chemicals under reference and, therefore, the same is held to be of revenue nature and is allowed as business expenditure. In the result, group 'A' is allowed.

Summary

Issues Involved:
1. Deduction of non-compete fees.
2. Delayed payment of employees' contribution to PF.
3. Claim of depreciation @ 100% on certain assets.
4. Validity of proceedings under Section 154.
5. Permissible adjustments under Section 143(1).
6. Levy of interest under Sections 234B and 234D.

Detailed Analysis:

1. Deduction of Non-Compete Fees:
The assessee claimed a deduction of Rs. 6 crores paid as non-compete fees to VBC Industries Ltd. and its founder. The AO disallowed the claim, treating it as capital expenditure, not revenue expenditure. The CIT(A) upheld the AO's decision, stating that the payment resulted in an enduring benefit. The Tribunal, however, reversed this decision, holding that the expenditure was revenue in nature. The Tribunal emphasized that the non-compete agreement was to enhance the assessee's profitability and not to create an asset of enduring nature. The Tribunal relied on the Supreme Court's decision in Empire Jute Co. Ltd. vs. CIT, which held that an expenditure facilitating trading operations or enabling the business to be carried on more efficiently or profitably, while leaving the fixed capital untouched, would be on revenue account.

2. Delayed Payment of Employees' Contribution to PF:
The AO disallowed the deduction of Rs. 1,50,766 and Rs. 1,66,657 under Sections 36(1)(va) and 43B, respectively, due to delayed payment of employees' and employer's contributions to PF. The CIT(A) upheld the disallowance. The Tribunal, however, allowed the deduction, following the decision in Addl. CIT vs. Vestas RRB India Ltd., which held that the omission of the second proviso to Section 43B is retrospective, allowing deductions if payments are made before the due date for filing the return.

3. Claim of Depreciation @ 100% on Certain Assets:
The assessee claimed depreciation @ 100% on certain assets for the first time before the CIT(A). The CIT(A) rejected the claim, stating it required verification of facts. The Tribunal remanded the issue back to the AO, directing to allow 100% depreciation on assets entitled to such depreciation, noting that the details of assets were already on record and the claim was not new.

4. Validity of Proceedings under Section 154:
The AO initiated proceedings under Section 154 to rectify the intimation issued under Section 143(1), based on the CIT(A)'s order for the earlier assessment year. The CIT(A) upheld the AO's action. The Tribunal directed the AO to recompute the unabsorbed depreciation to be carried forward, considering the relief granted in the earlier assessment year.

5. Permissible Adjustments under Section 143(1):
The Tribunal noted that the adjustments made by the AO under Section 154 were not permissible under Section 143(1) as amended by the Finance Act, 1999. The Tribunal emphasized that adjustments under Section 143(1) should be based on the documents available at the time of passing the intimation.

6. Levy of Interest under Sections 234B and 234D:
The CIT(A) confirmed the levy of interest under Sections 234B and 234D. The Tribunal did not specifically address this issue separately, implying the interest would be consequential to the adjustments in the assessed income.

Conclusion:
The Tribunal allowed the assessee's appeal on the major issues, holding the non-compete fees as revenue expenditure, allowing the delayed PF contributions as deductions, and remanding the issue of 100% depreciation back to the AO. The Tribunal also directed the AO to recompute the unabsorbed depreciation for the subsequent assessment year, considering the relief granted.