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TMI Blog2017 (8) TMI 1474X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to Kapil Chit Funds (P) Ltd is revenue expenditure as without the said payment, the assessee could not have carried on its business more efficiently and profitably. Thus the payment is in the nature of revenue expenditure and is an allowable deduction u/s 37(1)- Decided in favour of assessee - ITA No.159/Hyd/2016 - - - Dated:- 3-8-2017 - Smt. P. Madhavi Devi, Judicial Member AND Shri S.Rifaur Rahman, Accountant Member For the Appellant : Shri S. Rama Rao For the Respondent : Smt. Suman Malik, DR ORDER Per Smt. P. Madhavi Devi, J.M. This is assessee s appeal for the A.Y 2012-13 against the order of the CIT (A)-3, Hyderabad, dated 13.11.2015 confirming the additions of ₹ 5,48,59,475 made by the AO on the ground that the said expenditure incurred by the assessee represented capital expenditure and is not allowable as revenue expenditure. 2. Brief facts of the case are that the assessee company filed its return of income for the A.Y 2012-13 on 26.09.2012 admitting income of ₹ 9,25,37,600. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the assessee has debited an amount of ₹ 5,48,59,475 towards non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not carry out the operations in the areas allocated to each of them. The consideration to be paid by the assessee to its holding company for such restriction on its activities is at 1% of the annual turnover. It is the case of the assessee that though the resolutions passed by the Board of Directors of Kapil Chit Funds (P) Ltd was that the non-compete fee agreement is valid till 31.12.2060, the agreement was for a fixed period of 5 years only and the agreement was also liable to be terminated at any time with a notice of 10 months by either parties. Thus, according to the learned Counsel for the assessee, the benefit acquired by M/s. Kapil Chit Funds (P) Ltd by virtue of the agreement is not of enduring nature and in such circumstances, the payment made was clearly revenue in nature. Further, he also submitted that the assessee has availed various other services under the agreement and the payment for such services was included in the noncompete fee . Therefore, according to him, the payment is not for acquiring of capital asset but was for earning of income and hence is allowable u/s 37(1) of the Act. 5. The first argument of the assessee was that, the holding company has offe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acter of the payment can be determined by looking at what is the true nature of the asset which has been acquired and not by the fact whether it is a payment in lump sum or by installments. The Hon'ble Supreme Court held that the asset which the company had acquired in the said case was in the nature of a capital asset as the right to carry on its business was unfettered by any competition from outsiders within the area and it was a protection acquired by the company for its business as a whole and not a part of the working of the business but went on to appreciate the whole of the capital asset and make it more yielding. In these circumstances, the Hon'ble Supreme Court held that the expenditure incurred by the company in acquiring such advantage certainly has an enduring advantage and is not in the nature of capital expenditure and was not allowable as a deduction. The facts of this case are slightly different from the facts of the case before us. In the case of Assam Bengal Cement Co. Ltd (Cited Supra), the agreement was between a company and the State Govt. and was to prevent the competition from all the competitors for a period of 20 years and for a further term of 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee so that they would not carry out any business activity with regard to two wheelers and the assessee claimed this amount as a business expenditure. The Hon'ble High Court, after considering the decision of the Hon'ble Supreme Court in the case of CIT vs. Madras Auto Service (P) Ltd reported in (1998) 233 ITR 468 (S.C), has held that the assessee did not acquire any capital asset by entering into a non compete agreement and therefore, payment of non-compete fee made by the assessee pursuant to the restrictive covenant was revenue expenditure and not a capital expenditure. The Delhi High Court had considered the decision of the Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd (cited Supra) before coming to the above conclusion. e) Orchid Chemicals Pharmaceuticals Ltd vs. ACIT reported in (2011) 7 ITR 0601 (Trib.) wherein it was held that the non compete fee paid by the assessee on acquisition of pharmaceutical business which constitute a new line of product is not allowable as a revenue expenditure in one-go but was to be treated as a deferred revenue expenditure and is allowable over a period of 4 years pro rata, starting from the relevant year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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