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TMI Blog2014 (6) TMI 934X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 lakhs as non-compete fees paid to Mr.S.K.Sawhney and a sum of Rs. 43.55 lakhs paid to him for the purchase of patents. The consideration paid to DETPL also included a sum of Rs. 1.8 crores as "Separation costs" paid to those employees of DETPL whose services had been terminated. Further Mr. S.K.Sawhney was also appointed as Vice President and Company Head through a Contract of Employment. Out of the total consideration of Rs. 11.71 crores, non- compete fees and patents have been shown as assets in the books and the remaining of Rs. 10 crores has been shown as goodwill. The payment of non-compete fees was treated as revenue expenditure in the computation of total income as per the Income-Tax Act, while in the books of accounts it was treated as an asset by the assessee. The assessee had also claimed depreciation on the patents under the Income Tax Act, but no depreciation has been claimed on goodwill under Sec. 32. The Assessing Officer completed the assessment and passed an order. The Assessing Authority, held that non-compete fees is capital in nature and therefore he disallowed it as a revenue expenditure. Aggrieved by the said order, the assessee preferred an appeal to the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Sec. 32(1)(ii) of the Act? 6. This provision has been the subject matter of interpretation by various courts. The Delhi High Court in the case of Commissioner of Income Tax Vs. Hindustan Coco Cola Beverages Pvt. Ltd. reported in (2011) 331 ITR 192 (Delhi) dealing with the question of claim of depreciation under Section 32 of the Income Tax Act, 1961, after referring to various judgment has held in para No.21 as under:- "It is worth noting, the scope of section 32 has been widened by the Finance (No.2) Act, 1998 whereby depreciation is now allowed on intangible assets acquired on or after 1st April, 1998. As per section 32(1)(ii), depreciation is allowable in respect of know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature being intangible assets. Scanning the anatomy of the section, it can safely be stated that the provision allows depreciation on both tangible and intangible assets and clause (ii), as has been indicated hereinbefore, enumerates the intangible assets on which depreciation is allowable. The assets which are included in the definition of "intangible assets" includes, along with other things, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghts" cannot be restricted to only the aforesaid six categories of assets, viz., know-how, patents, trade marks, copyrights, licences or franchises. The nature of "business or commercial rights" can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in the case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and know-how, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a licence to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.4.4.3 as under:- "4.4.3 The rival submissions have carefully been examined by me. After carefully analyzing the facts and circumstances of the appellant's case, I find that the intangible assets enumerated in s.32 of the IT Act effectively confer a right upon an assessee for carrying on a business more efficiently by utilizing an available knowledge or by carrying on a business more efficiently by utilizing an available knowledge or by carrying on a business to the exclusion of another assessee. I concur with the views of the learned Authorized Representative that a copyright holder or a trademark holder is able to restrain any other person from using the said copyright or tradermark and is thereby able to carry on his business more effectively. I find that the object of the acquiring a know- how, patent, copyright, trademark, licence or franchise is to pursue business against the rivals in the same business in a more efficient manner. The object of entering into a non- compete agreement is found to be almost identical, i.e., carrying on business in a more efficient manner by getting rid of competition at least for a limited period of time. Therefore, through payment of non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are intangible assets, the law recognizes through various enactments that specific intellectual property rights flow from them. Licenses are derivative and often are the means of conferring such intellectual property rights. The enjoyment of such intellectual property right implies exclusion of others, who do not own or have license to such rights from using them in any manner whatsoever. Similarly, in the matter of franchises and know-how, the primary brand or intellectual process owner owns the exclusive right to produce, retail and distribute the products and the advantages flowing from such brand or intellectual process owner, but for the grant of such know-how rights or franchises. In other words, out of these species of intellectual property like rights or advantages lead to the definitive assertion of a right in rem. The decisions of this Court in Hindustan Coco Cola Beverages P. Ltd. (supra) and that of the Kerala High Court in B. Ravindran Pillai (supra) underlined that goodwill is also a species of depreciable right which can claim the benefit of Section 32. Those decisions were based on the ruling of the Supreme Court in CIT v. B.C. Srinivasa Setty 1981 (128) ITR 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It does not necessarily - and not in the facts of this case, confer any exclusive right to carry-on the primary business activity. The right can be asserted in the present instance only against L&T and in a sense, the right "in personam". Indeed, 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. Another way of looking at the issue is whether such rights can be treated or transferred - a proposition fully supported by the controlling object clause, i.e. intangible asset. Every 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 by the Courts, such as goodwill can be said to be alienable. Such is not the case with an agreement not to compete which is purely personal. As a consequence, it is held that the contentions of the assessee are without merit; this question too is answered against the appellant and in favour of the Revenue." Section 32 (1) of the Income Tax Act, 1961 deals w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the words of similar description, shall in all respects be the same. If it did, these words would be unnecessary. 8. Therefore what is to be seen is, what are the nature of intangible assets which would constitute business or commercial rights to be eligible for depreciation. In this regard, it is necessary to notice that the intangible assets enumerated in Sec.32 of the Act effectively confer a right upon an assessee for carrying on a business more efficiently by utilizing an available knowledge or by carrying on a business to the exclusion of another assessee. A non-compete right encompasses a right under which one person is prohibited from competing in business with another for a stipulated period. It would be the right of the person to carry on a business in competition but for such agreement of non-compete. Therefore the right acquired under a non-compete agreement is a right for which a valuable consideration is paid. This right is acquired so as to ensure that the recipient of the non-compete fee does not compete in any manner with the business in which he was earlier associated. The object of acquiring a know-how, patents, copyrights, trade marks, licences, franchises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore that right which the assessee acquires on payment of non-compete fee confers in him a commercial or a business right which is held to be similar in nature to know-how, patents, copyrights, trade marks, licences, franchises. Therefore the commercial right thus acquired by the assessee unambiguously falls in the category of an 'intangible asset'. Their right to carry on business without competition has an economic interest and money value. The term 'or any other business or commercial rights of similar nature' has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl.(b) of Expln.3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which inturn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec.32(1)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision ie., precisely what the Tribunal has held. 9. Th ..... 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