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TMI Blog2017 (4) TMI 1387X X X X Extracts X X X X X X X X Extracts X X X X ..... dentally point out that a copy of this decision was not circulated and hence reliance by the Tribunal on this decision is in itself incorrect. He would urge us to consider, as an alternate submission, the remand of the matter to the tribunal in order that he meet and distinguish this decision in full. The advantage of restraining the individuals from engaging in competition is in the field of facilitating its own business and rendering it more profitable. Since there is no increase in fixed capital, the payment does not encroach in the capital field. Though there was no actual or impending threat of the Directors severing their ties with the company or starting competing businesses, the possibility was always real and prudence dictate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... litate growth and expansion in business. The individuals had nurtured the business from inception and continued their association with the entity over the years. Intellectual property had been developed by them and the brand name 'ARUN' had been transferred by Mr.R.G.Chandramogan to the Appellant in April 1987. The individuals were highly experienced in the business of dairy based frozen food products. The Appellant thus wanted to ensure that the association with the individuals continued both in the public eye as well as in its own interests, seeing that the appellant had benefitted greatly from their services over the years. 2. Accordingly, it entered into agreements dated 20.7.1995 for non- compete with the two individuals res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 1996-97. The Assessing Authority was of the view that the benefit obtained under the agreement was an enduring one, and consequently held the same to be capital, liable to be disallowed. 4. The Commissioner of Income Tax (Appeals) before whom an Appeal was filed, reversed the order of assessment. The Commissioner of Income Tax (Appeals) held that the restriction placed on the directors resulted in a business advantage and the payments were thus revenue in nature. The Tribunal, in an appeal filed by the Income Tax Department, reversed the order of the CIT(A) restoring that of the Assessing Officer. The assessee is in appeal against the aforesaid order of the Tribunal dated 27.2.2015, raising the following two substantial questions of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in the case of Alembic Chemical Works Co. Ltd vs CIT (177 ITR 377) and CIT vs Coal Shipment Private Limited (82 ITR 902) and a decision of the Madras High Court in the case of Chelpark Company Limted vs. CIT (191 ITR 249). The assessee, on the other hand, would rely on a decision of this Court in the case of Carborandum Universal Limited vs. Joint Commissioner of Income Tax, Special Range -1, Chennai (2012) 26 taxmann.com 268. 9. The question before us is the categorization of expenditure of non- compete fee as either capital or revenue. The distinction is fine. Courts have, over time, evolved various tests to determine such categorization, but there is no straightjacket method and the application of the tests would var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit earning. It was, to use Lord Sumner's words, an outlay of a business in order to carry it on and to earn a profit out of this expense as an expense of carrying it on . [John Smith and Son v. Moore [1921] 12 TC 266 (HL)]. It was part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure. there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. ... What is material to consider is the nature of the advantage in a commercial sense and it is only wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... croach in the capital field. 13. The payments made towards restrictive covenants ensured the continued presence and support of the individuals in its business operations. Equally importantly, it also ensured credibility in public perception and reassured potential investors that the performance of the company would remain optimum through this continued association. Though there was no actual or impending threat of the Directors severing their ties with the company or starting competing businesses, the possibility was always real and prudence dictates that the company protect itself against such a probability. This assumed particular significance at a time when the company was proposing to go public and it thus becomes vital that the publ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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