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TMI Blog2016 (1) TMI 1094X X X X Extracts X X X X X X X X Extracts X X X X ..... capital expenditure. Claim for depreciation on non compete fee - Held that:- So long as the non compete fee in question is capital expenditure, the same is entitled for deprecation. Accordingly, we direct the AO to allow the claim of depreciation on the amount of non compete fee paid, treating the same as intangible assets. We direct accordingly. - ITA No.7071/Mum/2010 - - - Dated:- 14-1-2016 - SHRI R.C.SHARMA, AM SHRI SANDEEP GOSAIN, JM For the Revenue : Shri Rajneesh K. Arvind (DR) For the Assessee by : Shri Satish R Mody O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the Revenue against the order of CIT(A), for the assessment year 2002-03, in the matter of order passed u/s.143(3) r.w.s. 147-13A of the I.T. Act. 2. Following grounds taken by the Revenue :- 1. On the facts and in the circumstances of the case, the ld. CIT(A) erred in law in holding that the notice issued u/s.147 is bad in law and reassessment made is invalid without appreciating the fact that the AO had not discussed this issue at all in his original assessment order. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of change of opinion as held in the case of J.P. Bajpai (HUF) vs. CIT 140 TM 34 (Allahabad). That, there is no failure or omission on the part of the assessee to disclose truly and wholly all material facts. Suo-moto, the assessee disclosed all the relevant details pertaining to non compete fee. Further, the assessee relied on various judicial precedents on the issue of reassessment u/s.147 which are listed as under: - (i) Sesa Goa Ltd. vs. JCIT (2007) 294 ITR 101 (ii) German Remedies Ltd. (2006) 285 ITR 26 (Bom) (iii) ITO vs. Lakhmani Mewal Das (1976) 103 ITR 437 (iv) CIT vs. Holck Larsen 85 ITR 467 (Bom) (v) CIT vs. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del.) (vi) N.C. Gupta vs. ACIT (2004) 90 ITD 768 (Del.) (vii) Sanghvi Swiss Refills P. Ltd. vs. ACIT (2006) 300 ITR 276 (Bom.) 6. By the impugned order, the CIT(A) held the reopening as invalid by observing that there was mere change of opinion. Precise observation of ld. CIT(A) was as under:- The information on record is carefully examined. The crux of the matter is whether the issue of non compete fee was examined by the AO during the original assessment proceedings or not? In order to verify this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss Undertaking, the SELLER shall undertake and agree that they will not at any time after the closing date disclose to any person or themselves use for any purpose and shall use best endeavors to prevent the publication or disclosure of any information concerning the business, accounts or business or affairs pertaining to the said Pharmaceutical Business Undertaking of the said SELLER or any of its clients or customers transactions or affairs of which they have knowledge. The non compete agreement is valid for a period of 4 years accordingly the assessee claimed non compete fee of ₹ 2.5 crores each in AYs 2002-03, 2003-04, 2004-05 and 2005-06. The AO held that such non compete fees of ₹ 2.5 Crores is capital in nature, as it gives enduring benefit accordingly it was disallowed. For the first time, such addition was made in AY 2004-05. The addition was made in the subsequent AY 2005-06 also. The assessment for AYs 2002-03 and 2003-04 were reopened. The reassessment of AY 2002-03 was completed u/s 143(3) r.w.s. 147 on 24.12.2007 which is the subject matter of the appeal now. For AY 2004-05, the same issue was adjudicated upon by the CIT(A) vide his order dated 09.10.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following the principle of consistency, the appeal is allowed and the A.O is directed to allow the claim of non compete fee of ₹ 2.5 crores as Revenue expenditure. 9. Against the above order of CIT(A), Revenue is in appeal before us. 10. The ld. D.R. contended that non-compete fee was paid by the assessee has wrongly been allowed by the A.O. as revenue expenditure while framing assessment u/s 143(3) of the Income Tax Act, 1961. However, subsequently, it came to the notice of the A.O. that non-compete fee was capital in nature, therefore, by allowing the claim of the same as revenue expenditure would arose escapement of income. Accordingly, the A.O. was justified in reopening the assessment. On merit, he contended that the Tribunal in earlier assessment year has held that non-compete fee was capital in nature. 11. On the other hand, the ld. Counsel for the assessee contented that full information was supplied to the A.O. during the course of scrutiny assessment framed u/s 143(3) of the Act and after discussing the issue in detail, the A.O. has passed the order. Thus, reopening was merely on the basis of change of opinion. The ld. Counsel relied on the decision of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal assessment proceedings u/s 143(3) of the Act, the A.O. has called all the details with regard to the payment of non-compete fee and after examining the same, allowed the assessee s claim of such non-compete fee as revenue in nature. Thereafter, on the very same set of facts, the A.O. changed his opinion and reopened the assessment stating that non-compete fee paid by the assessee is capital in nature which gives enduring benefit to the assessee, hence, cannot be allowed. By the impugned order, the ld. CIT(A) has dealt with all the relevant details with regard to the facts on record to the effect that there is a change of opinion. In the case of Kelvinator of India Ltd. (supra) it was held by the Hon ble Supreme Court that reopening on the basis of change of opinion is not sustainable in law. We also found that to check the assessee s contention regarding change of opinion, the ld. CIT(A) called for assessment records and details were also called from the assessee vide letter dated 25-2-2005 where the notes on transaction pertaining to non-compete fee was submitted. After taking all these documents on record, the ld. CIT(A) reached to the conclusion that the A.O. has examined th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2004-05, allowing claim of revenue expenditure by CIT(A), the Tribunal reversed the order of the CIT(A) treating the non compete fee as capital expenditure. 18. So far as assessee s claim of revenue expenditure is concerned, we set aside the order of the Ld. CIT(A) on this issue, by following the order of the Tribunal in assessee s own case in the A.Y. 2004-05 dated 28.02.2011 where non compete fee was treated as capital expenditure. 19. Now coming to the claim for depreciation on non compete fee, we found that after paying the non compete fee the assessee has acquired commercial rights. Commercial right comes into existence whenever the assessee makes payment for non compete fee and after obtaining non compete right, the assessee can develop and run his business without bothering about the competition and therefore non compete right is intangible asset eligible for depreciation. Generally, non-compete fee is paid for a definite period which in this case is four years. The idea is that by that time, the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompete fee paid to a transferor under a composite agreement for restraining him from entering a similar business for ten years was eligible for depreciation. 22. Recently, the Mumbai Bench of the Income-tax Appellate Tribunal in the case of Ind. Global Corporate Finance Pvt. Ltd. held that the non compete fee is not a deductible expenditure since it is capital in nature. However, the non compete right is an intangible asset eligible for depreciation under the Income-tax Act, 1961. Further, the decision of Real Image Tech (P) Ltd. has been followed by the Mumbai Tribunal in the case of Schott Glass India Pvt. Ltd. and therefore, the depreciation claim is allowed on non compete fees. 23. In view of the above discussion, we conclude that so long as the non compete fee in question is capital expenditure, the same is entitled for deprecation. Accordingly, we direct the AO to allow the claim of depreciation on the amount of non compete fee paid, treating the same as intangible assets. We direct accordingly. 24. In the result, the ground of reopening is decided in favour of assessee, whereas ground of treating the non compete fee as revenue expenditure is decided in favour of R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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