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TMI Blog2018 (8) TMI 1803X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure may not have been incurred under any legal obligation but yet it is allowable as business expenditure if it was incurred on the ground of commercial expediency. since on the issue whether the expenditure was of revenue or capital in nature, two opinions were possible, therefore, the view taken by the CIT(A) was upheld. Thus, the Tribunal in the present case of the assessee for the assessment year in question rightly upheld the order passed by the CIT(A) holding the payment of non-compete fee to be allowable as revenue expenditure. - Decided in favour of assessee. - ITA No. 193 of 2013 (O&M) - - - Dated:- 6-8-2018 - Mr. Ajay Kumar Mittal And Mr. Avneesh Jhingan, JJ. Mr. Vivek Sethi, Senior Standing Counsel for the appellant. Mr. Ajay Vohra, Senior Advocate with Mr. Gaurav Jain, Advocate and Mr. Aniket Agrawal, Advocate for respondent. Ajay Kumar Mittal, 1. This order shall dispose of ITA Nos. 193 and 195 of 2013 as according to the learned counsel for the appellant-revenue, the issues involved in both the appeals are identical. However, the facts are being extracted from ITA No. 193 of 2013. 2. ITA No. 193 of 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parties. 5. The issue that arises for consideration in these appeals is whether non compete fee paid by the assessee-company was revenue in nature or could be disallowed being capital expenditure. 6. Adverting to the judgments relied upon by learned counsel for the respondent-assessee, it may be noticed that in Commissioner of Income Tax, West Bengal II vs. Coal Shipments P.Limited, (1971) 82 ITR 902, the assessee was one of the companies which exported coal to Burma before the Second World War. It was held that the payments made by the assessee were not of a capital nature and were allowable under Section 10(2)(xv) of the 1922 Act because the arrangement between the assessee and H.V.Low and Co. was not for any fixed term but could be terminated at any time at the volition of any of the parties and the payments made to the said company were related to the actual shipment of coal in the course of the trading activities of the assessee and were not related to or tied up in any way to any fixed sum agreed to between the parties. The relevant observations read thus:- There are some other tests like those of fixed capital and circulating capital for dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, while neither the assessing officer nor the Tribunal dispute the long association and valuable services rendered by the individuals as well as the importance of retaining these advantages, particularly at the time when it was going public, both officers deny the claim solely based on the fact that the payments results in an enduring benefit. 10. We could do no better than to quote the Supreme Court, in the case of Empire Jute Ltd vs CIT (124 ITR 1) stating as follows: If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. See Bombay Steam Navigation Co. (1953) P.Ltds case (supra). The same test was formulated by Lord Clyde in Robert Addie and Sons' Collieries Ltd.s case (supra) (C Sess) in these words: Is it a part of the company's working expenses?-- is it expenditure laid out as part of the process of profit earning?-- or, on the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question was whether an expenditure on payment to eliminate competition was a capital expenditure or not. It was observed as under:- It is quite clear from the above that to decide whether an expenditure of this nature is a capital expenditure or not would depend on the facts of the case. However, it is necessary to know whether the advantage derived by the payer is of an enduring nature, and for this one of the considerations is the length of time for which the non-compete agreement would operate although that is not decisive. While the length of time for which competition is eliminated may not strictly be decisive in all cases, yet, at the same time, it should not be so brief as to virtually be transitory. In other judgments also relied upon by the learned counsel for the respondent-assessee, it was held that the distinction between revenue or capital expenditure would depend upon the facts of each case. 7. Examining the factual matrix involved in the present appeal, admittedly, the assessee claimed deduction of ₹ 83,35,140/- on account of expenditure representing non-compete fee incurred to have been paid to an employee restraining him f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee was payable by the assessee to safeguard its business interest, as a strategic investor in the various joint ventures of its obligations to the joint ventures companies that neither the assessee nor any of its employees will get into competing business with the joint venture companies. The fact that the assessee s subsidiary entered into non compete agreement and made the payment is of little consequence, considering that the liability ultimately devolved on the assessee, in law, in view of merger of the subsidiary in the assessee. The circumstances in which the payment was made by the subsidiary were also explained in the non compete agreement. Whether expenditure has been incurred for business purposes or not is to be viewed from the point of view of the businessman. The Hon ble Supreme Court in the case of S.A.Builders vs. CIT 288 ITR 1 held that the expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. It was further observed that the expenditure may not have been incurred under any legal obligation, but yet it allowable as business expenditure if it was incurred on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised by the revenue is dismissed. Learned counsel for the appellant-revenue has not been able to point out any error or illegality in the view taken by the Tribunal, warranting interference by this Court. 8. In all fairness to learned counsel for the appellant-revenue, we proceed to analyse the case law relied upon by him. In Commissioner of Income Tax vs. Mandalay Investment P.Limited, (2011) 332 ITR 602 (SC), the question for consideration was whether the amount of ₹ 50 lacs received by the assessee pursuant to non competition agreement entered into by the assessee with the Ranbaxy Lab. Limited was to be treated as capital receipt and not revenue receipt. The Tribunal held that the amount was a capital receipt but the High Court reversed the decision. On appeal before the Apex Court, it was held that prior to April 1, 2003, when Parliament stepped in to specifically tax such receipts, the payment was in the nature of a capital receipt. In CIT vs. Wintac Limited, (2014) 221 TAXMAN 87 (Kar), it was held by the Karnataka High Court that the amount of ₹ 4 crores received by the assessee from M/s R Limited towards non competition fee to discontinu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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