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TMI Blog2012 (12) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 - I.P. Bansal And B. Ramakotaiah, JJ. D.P. Bapat and Devdatta Mainkar for the Appellant. A.P. Singh for the Respondent. ORDER B. Ramakotaiah, Accountant Member - This is an assessee's appeal against the order of the CIT (A)-VII, Mumbai dated 19.11.2008. Assessee raised the ground as under: "1. The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Non-Compete Compensation of Rs. 4,00,00,000/- paid to the National Radio Electronics Co. Ltd (NELCO) as business expenditure". In the course of the appellate proceedings, assessee raised an additional ground as under: "Without prejudice to the primary grievance stated in the Ground of Appeal No. 1, the impugned expenditure, being non-compete compensation, should be allowed on deferred basis over the term of the related agreement". It prayed for admission of the additional ground on the following considerations: (i) The claim for the deductibility of the expenditure on deferred basis was made in the original return of income as evidenced by the observation made by AO in the assessment order passed in the first round (PB Pages 35/36). (ii) The expenditure is amortised on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was held that "it is well settled that expenditure incurred in warding off competition in the business even to rival dealer will constitute capital expenditure and to hold it as capital expenditure, it is not necessary that non-compete fee be paid to create monopoly rights". Respectfully following the principles laid down above decision, as conceded by the learned Counsel that this issue is covered by the Special Bench of the ITAT, we dismiss Ground No.1. 5. The additional ground is the claim that the amount of non-compete compensation should be allowed on deferred basis over the term of the agreement. It was the contention of the learned Counsel that similar issue was considered by the Chennai Bench of the ITAT in the case of Orchid Chemicals Pharmaceuticals Ltd v. Asstt. CIT [2011] 131 ITD 385 wherein it was held that outgo should be treated as revenue in nature and hence allowable over a period of 4 years pro-rata. It was further relied on the Hon'ble Delhi High Court in the case of Pitney Bowes India (P) Ltd v. CIT for the proposition that the Hon'ble High Court decided the issue on the reason that in the books of account assessee treated the same as capital expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une, 2010, whereas the Special bench judgment has been pronounced on 30th July, 2010. In view of this, the Coordinate Bench decision cannot be followed as later decision by the Special Bench is binding on the other Division Benches. In view of this, we are not inclined to agree with the learned Counsel's submission that the Coordinate Bench decision allows the expenditure to be claimed over a period of 10 years. This contention is therefore rejected. With reference to the reliance on the decision of the Punjab Haryana High Court in the case of Punjab Alkalies Chemicals Ltd. (supra), the issue is with reference to the expenditure on replacement of membrane which has a life of three years and eight years. On the facts of the case the Hon'ble High Court held that the expenditure to the extent of one-third could be revenue expenditure and remaining expenditure could not be treated as revenue expenditure and allowed under section 37 of the Income Tax Act as permissible expenditure. There was a claim of replacement of an 'asset' used in the business and on the facts of the case it is noticed that the life of the membrane was for three years. Therefore, expenditure was allowed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 12. Thus, the assessee itself treated the expenditure as capital in the books of accounts. However, at the same time, it was maintained that since it was paid for loss of business that KOAL would suffer for non-compete fee, the same was treated as revenue in nature. Likewise, in Schedule 2 to the balance sheet disclosing "fixed assets", payment of non-compete fee is treated as "intangible assets". This also shows that the assessee treats this as asset acquired, which is intangible in nature. The issue regarding forwarding of payment was discussed by the Special Bench of the Tribunal in M/s Tecumseh India Pvt. Ltd. (supra) in greater details and after applying the ratio of various judgments of different High Courts including jurisdictional Court as well as the Supreme Court, the Tribunal summarized in the following terms: "129. According to above observations it can be seen that warding off competition in business even to a rival dealer will constitute capital expenditure and to hold them capital expenditure it is not necessary that non-compete fee is paid to create monopoly rights. 130. The assessee also cannot get any help from the decision of Hon'ble Delhi High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made by the assessee. We following the decision of Special Bench, Delhi in the case of Tecumseh India (P.) Ltd. (supra) have held that payment of non-compete fee is capital expenditure. In Madras Industrial Investment Corporation Ltd. the assessee issued debentures in December, 1966 at a discount. The total discount on issue of Rs. 1.5 crores amounted to Rs. 3 lakhs. For assessment year 1968-69 the assessee wrote off Rs. 12,500/- out of the total discount of Rs. 3 lakhs being the proportionate amount of discount for the period of six months ending with June 30th, 1967, taking into account the period of 12 years which was the period of redemption and dividing the discount of Rs. 3 lakhs over the period of 12 years. The assessing officer disallowed the claim but the AAC allowed deduction of Rs. 12,500/-. On further appeal the Tribunal held that the entire expenditure of Rs. 3 lakhs was allowable as expenditure incurred for the purpose of the business. On reference the High Court noted that out of the total discount of Rs. 3 lakhs an amount of Rs. 12,500/- had been allowed which the Department had not challenged. Hence the High Court was concerned only with the balance amount of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure cannot be entertained. Accordingly, this ground of appeal raised by the assessee is also dismissed". 10. In view of the above since the amount paid for non-compete fees is considered as capital outlay, the same cannot be allowed as the revenue expenditure under section 37(1). Moreover since the amount is not in the nature of revenue expenditure, a part of it cannot be considered as deferred revenue expenditure so as to allow over period of non-compete agreement. In view of this, assessee's contention cannot be accepted. 11. The learned DR relied on the Bombay High Court in the case of Bhor Industries Ltd. (supra) and Taparia Tools Ltd. (supra) to submit that revenue expenditure can only be considered for deferred revenue expenditure. The facts in the above two cases are that the claims are of revenue expenditure but allowed on deferred revenue basis. Expenditure claim in Bhor Industries Ltd. (supra) pertains to expenses incurred on voluntary retirement scheme claimed as revenue expenditure, whereas in the case of Taparia Tools Ltd. (supra) the claim is for the payment of interest on non-convertible debentures. Therefore, on the facts of the case the revenue expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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