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TMI Blog2012 (11) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... s to whether an expenditure qualifies as one falling or in the capital field - this Court is the opinion that the deduction cannot be claimed as a revenue expenditure, it clearly falls within the capital field - in favour of the Revenue. Whether a non-compete right acquired for seven years amounts to a depreciable intangible asset - Held that:- Each of the species of rights spelt-out in Section 32(1)(ii), i.e. know-how, patent, copyright, trademark, license or franchise as or any other right of a similar kind which confers a business or commercial or any other business or commercial right of similar nature has to be "intangible asset". The nature of these rights mentioned clearly spell-out an element of exclusivity which enures to the assessee as a sequel to the ownership - the 7 years period spelt-out by the non-competing covenant brings the advantage within the public policy embedded in Section 27 of the Contract Act, which enjoins a contract in restraint of trade would otherwise be void. very species of right spelt-out expressly by the Statute - i.e. of the intellectual property right and other advantages such as know-how, franchise, license etc. and even those considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital and ought to be treated as revenue expenditure. The AO, however, disallowed the deduction on account of non-compete fee, by order dated 19.03.2004, as according to him, it conferred a capital advantage of enduring value. The assessee's appeal was rejected by the CIT (Appeal) by order dated 02.09.2004. The CIT (Appeal) also rejected the alternative contention of the assessee, that the payment was for the further purposes of business and, therefore, the assessee could not claim depreciation. 3. Being aggrieved, the assessee appealed to the Tribunal. The Tribunal rejected the claim that the non-competing fee of Rs. 3 crores which was the subject matter of the appeal constituted revenue expenditure and that its treatment as such was justified. The reasoning of the Tribunal is as follows: "The period of 7 years is quite long during which any new company can establish its reputation and a reasonable market share would have been acquired. Therefore, the payment made by the assessee to L and T Ltd. is not to increase the profitability, but to establish itself in the market and acquire market share. By keeping away L and T Ltd. from the same business, the assessee had visualized t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a determinative factor and that in these circumstances what the Court should really see is whether in the commercial sense, the expenditure is capital or revenue. Learned counsel relied upon the decision of the Bombay High Court in CIT v. Excel Industries Ltd. 122 ITR 995 (Bom); Hindustan Times Ltd. v. CIT 1980 (122) ITR 977 and CIT v. Saw Pipes Limited 208 CTR 476 (Del). The appellant next relied upon the decision of the Supreme Court in CIT v. Coal Shipments P. Ltd. 82 ITR 902 (SC) where it was held as follows: "There are some other tests like those of fixed capital and circulating capital for determining the nature of the expenditure. An item of disbursement can be regarded as capital expenditure when it is referable to fixed capital. It is revenue when it can be attributed to circulating capital. It is not the case of any party that this test of fixed and circulating capital can be invoked in this case nor has reference been made to some of the other tests. The case which has been set up on behalf of the revenue is that, as the object of making the payments in question was to eliminate competition of a rival exporter, the benefit which enured to the respondent was of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned counsel emphasized that once the Tribunal concluded that the assessee had acquired an advantage in the capital field, denial of depreciation under Section 32(1) amounted to inconsistent approach and clear error of law. Reliance was placed on the decision of the Supreme Court in Techno Shares Stocks Ltd. v. CIT 2010 (327) ITR 323 (SC). The Supreme Court had ruled in that case that holding a membership card of the Bombay Stock Exchange amounted to acquiring an intangible asset which qualified for depreciation under Section 32(1)(ii). By parity, submitted counsel, the right acquired by the assessee, for itself, after payment of the non-competing fee was akin to license or other similar rights in which depreciation had to be given. Reliance was also placed upon the ruling in CIT v. Hindustan Coco Cola Beverages P. Ltd. v. CIT 2011 331 ITR 192 (Del) where it was held that intangible advantages or assets in the form of know-how, trade-style, goodwill etc. were depreciable assets. 7. In response, learned counsel for the Revenue contended that in order to determine whether a non-competing fee is an expenditure that confers capital advantage, one of the important considerations h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of the advantage which a tax-payer would derive. The test now well-settled is one of ascertaining whether from the commercial angle, the advantage results in a capital field or does the expenditure fall legitimately within the revenue field. The decisions such as Madras Auto Service (P) Ltd. (supra) have no doubt emphasized that the length or duration of the benefit accruing to the assessee may at times be irrelevant. In that case, the Court was concerned with the duration of the lease. At the same time, even while accepting the contentions of the assessee, the Supreme Court had cautioned that if an advantage accrues in a short span of time or is "epheramal", it cannot be considered a capital benefit qualifying as a capital expenditure. Necessarily, therefore, the Court has to adopt a fact-based approach and apply settled proposition. In the present case, the advantage which the assessee/appellant derived on account of its agreement with L T was that the latter, a previous joint-venture partner to the extent of 26% was kept put out of the market for a period of 7 years. In this context, the decision in Blaze and Central (P) Ltd. v. CIT 1979 (120) ITR 33, the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) and Coal Shipments P. Ltd. (supra), this Court is the opinion that the deduction cannot be claimed as a revenue expenditure; it clearly falls within the capital field. The first two questions are, therefore, answered against the assessee and in favour of the Revenue. Q. Nos. 2 and 3 In Tangible Asset - 11. This question arose as a direct sequel to the appellant's alternative submission that if the expenditure is treated as a conferring capital advantage, necessarily they are depreciable. The appellant claims for depreciation of "know-how", "patents", "copyrights", "trademarks", "licenses", "franchises" or other business or commercial rights of similar nature being intangible assets acquired on or after 1st day of April 1998. Arguing by analogy, learned counsel for the appellant relied upon the judgment of the Supreme Court in Techno Shares Stocks Ltd. (supra) where the issue was whether the contention of the assessee that it could claim depreciation on the Bombay Stock Exchange Membership Card held by it on the plea that it was a license or "business or commercial right of similar nature" was upheld. The appellant also relied upon the decision of this Court in Hindustan C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuing membership and right to access Exchange and to participate therein and in that sense it is a license or akin to a license, in terms of Section 32(1)(ii) ." 12. It is, therefore, apparent that the ruling in Techno Shares Stocks Ltd. (supra) was concerned with an extremely limited controversy, i.e. depreciability of stock exchange membership. This Court observes that such nature was held to be akin to a license because it enable the member, for the duration of the membership, to access the Stock Exchange. Undoubtedly, it conferred a business advantage and was an asset which and was clearly an intangible asset. The question here, however, is whether a non-compete right of the kind acquired by the assessee against L T for seven years amounts to a depreciable intangible asset. As discussed earlier, each of the species of rights spelt-out in Section 32(1)(ii), i.e. know-how, patent, copyright, trademark, license or franchise as or any other right of a similar kind which confers a business or commercial or any other business or commercial right of similar nature has to be "intangible asset". The nature of these rights mentioned clearly spell-out an element of exclusivity which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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