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TMI Blog2012 (2) TMI 721X X X X Extracts X X X X X X X X Extracts X X X X ..... ee company purchased the business of CPL. As per the agreement with the promoters of CPL they were prevented from starting a similar business activity for a period of 3 years. The contention of the assessee before the lower authorities is that this amount has been paid towards consideration of restraint; an amount of Rs.3 crores is paid as compensation. Further, it was contended before the lower authorities that the expenditure is incurred whole and exclusively for the purpose of business of the assessee and it is to be allowed. However, the lower authorities have given finding that the CPL is a company which ran into substantial losses and the profit loss account as on 31.3.2000 shows a loss of Rs.10.75 crores. Since the company was not doing well it was sold to the assessee company by the promoters. Further, the promoters do not possess any technical patented information which is detrimental to the business interests of the assessee company. The quantum paid to the promoters is in consideration of acquiring a business unit by the assessee company. The amount paid to the promoters is directly relevant to the acquisition of business advantage of an enduring nature. The payment he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to the outgoing directors for restraining them from competing with the assessee for a certain period considered as a revenue expenditure. According to AR the facts of the case of Dr. Reddy s Laboratories Ltd. are identical to the case under consideration. 7. Further, he placed reliance on the judgment of Hon ble Delhi High Court in the case of CIT Vs. Eicher Ltd. (2008) 302 ITR 249(Del.), wherein the assessee company was engaged in the business of two wheelers. A full time employee of the assessee, viz., V had acquired during the course of his employment, specialised knowledge of technology in the two wheeler industry as well as of managing the dealership of the market place and other specialised knowledge relating to the two wheeler business. V had entered into an agreement with a company called CCPL to the effect that he would promote VCPL and collaborate with it to set up manufacturing facilities for two wheelers upon his retirement from the assessee company. On being aware of this fact, the assessee entered into a non compete agreement with VCPL and V whereby the assessee paid a sum of Rs.4 crores to VCPL so that VCPL and V would not try out any business activity with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.21 lakhs which shall be payable by the second party in cash as per time schedule to be mutually agreed upon and in any case not beyond 12 months from the date of this agreement. 3. The first party shall not carry on the business of computer software development and marketing and other related business for the above mentioned period in consideration of having received cash to the extent mentioned above. 4. The restrictive covenant hereby agreed between the parties shall be in force not only in the territory of India but also in other countries of the world. He submitted that the Tribunal while deciding the case in favour of the assessee held as follows: The Learned CIT(A) further drew an inference from the written note filed on behalf of the assessee that the restrictive covenants were only negative agreements in the sense that the 4 experts were prevented for working for others in the field of software for a period of 5 years. Such negative agreement did not bring into existence any assets for the assessee, not to speak of any asset of enduring advantage that justifies treatment of expenditure in question as capital expenditure. The 4 recipients were under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Corporation Ltd. Vs. CIT (1997) 91 Taxman 340 (SC) 88) 10. He also placed reliance on judgment of Chennai Bench of Tribunal in the case of Orchid Chemicals and Pharmaceuticals Ltd. Vs. ACIT 9 Taxman.com 44 (Chennai ITAT) wherein Tribunal placed reliance on the decision of the Hon ble Supreme Court in the case of Madras Industrial Investment Corpn Ltd. (supra) wherein the issue was with respect to allowability of non compete fee paid, where the non compete stipulation was for a period of 4 years, it was held that the said non compete fee to be allowed as revenue expenses over the period of 4 years. 11. He also placed reliance on order of the Tribunal in the case of Adsteam Agency India Ltd. Vs. DCIT (2007) 16 SOT 414 (Mum) wherein it was held: The said case the assessee company purchased the shipping agency business from a vendor/seller through certain agreement. It purchased the said shipping business for a consideration of Rs.43,47,000/- comprising of cost of goodwill at Rs.5 lakhs and non competition covenant fees of Rs.38,47,000/-. The assessee claimed that it had paid the non competition covenant fees to the vendor for a period of 5 years and the same was to be al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following judicial pronouncements: (a) ACIT Vs. Real Image Tech (P) Ltd. (1997) 120 TTJ 983 (Chennai) In the given case the assessee entered into a non compete arrangement for a period of 5 years and paid non compete fee under the said arrangement. In this case the Hon ble Tribunal held the payment of non compete fee gave rise to an intangible asset, being business/commercial rights and allowed depreciation on the same. (b) ITO-Vs. Medicorp Technologies India Ltd. (2009) 21 DTR 69 (Chennai). In the said case, the Hon ble Tribunal held the payment of non compete fee gave rise to an intangible asset, being business/commercial rights and allowed depreciation on the same. He further submitted that if the payment of non compete fee is not allowable entirely in the year under consideration or on a deferred basis over a period of 3 years, it is to be to granted depreciation as per provision of section 32(1) of the Act. 12. The learned DR strongly supported the order of the CIT(A) and also relied on the decision in the case of Guffic Chem Pvt. Ltd. Vs. CIT (332 ITR 602 SC) wherein held that it is in the field of capital in nature. and also relied on judgment in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 129. According to above observations it can be seen that warding off competition in business even to a rival dealer will constitute capital expenditure and to hold them capital expenditure it is not necessary that noncompete fee is paid to create monopoly rights. 130. The assessee also cannot get any help from the decision of Honble Delhi High Court in the case of CIT vs. Eicher Company Ltd. (supra) as in that case their Lordships have clearly found from the record that it was not clear that how long the restrictive covenant was to last and what the assessee had done was that it eliminated the competition in the two-wheeler business for a while. Their Lordships have also found that the benefit received by the assessee in that case was neither permanent nor ephemeral. Therefore, the said decision is not applicable to the facts of the present case as in the case of assessee the non compete agreement is applicable for 5 years, which period has been considered to be sufficient to give enduring benefit in the case of Assam Bengal (supra). 131. With these observations we hold that the expenditure of Rs.2.65 crore claimed by the assessee in pursuance of non-compete agreement da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure. At the same time, it is still a moot question as to whether depreciation can be allowed thereupon under Section 31(1)(ii) of the Act or not. We may note here that the learned counsel for the Department had referred to the judgment of the Kerala High Court in the case of B. Raveendran Pillai Vs. CIT, 332 ITR 531 (Ker.), on the basis of which, argument was raised that goodwill is not specifically mentioned in Section 32(1)(ii) of the Act and depreciation is allowable, apart from tangible assets, on such intangible assets, which are specifically enumerated in the said Clause. Though the AO would not have to consider the nature of expenditure, as that has been determined by the Tribunal, at the same time, whether depreciation thereupon is to be allowed or not under Section 32(1)(ii) of the Act has to be decided. 17. We, thus, find no fault in the order of the Tribunal remitting the case back on this aspect to the AO. As a result, question No.(2) is decided in the affirmative, consequence would be to dismiss this appeal. 13. We have heard both the parties and perused the material on record. The point to be decided is with regard to the treatment to be given in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowable expenditure in the return of income. In the books of accounts such premium was considered as deferred revenue expenditure. 16. The learned Authorised Representative submitted that during the year under consideration the CPL was acquired by the assessee and subsequently merged with the assessee. The substitution of the high interesting bearing loan with a lower interesting bearing loan was effected subsequent to the appointed date of merger of CPL with the assessee. The objective to replace the high interesting bearing loan with a lower interesting bearing loan was to run the business more profitably. Thus, the prepayment premium paid to give effect to the same is revenue expenditure incurred wholly and exclusively for the purpose of the business of the assessee and hence should be fully allowable in the year under consideration. According to Learned Authorised Representative, the CIT(A) has grossly erred in considering the expenditure incurred by the assessee as integrally connected with the acquisition of the business of CPL and thus holding the same as capital in nature. The CIT(A) without considering the facts of the case has passed the order on the basis of conjectu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recovery system and DCS for CFB 3 and 4 amounting to Rs.36,05,778/-. 21. Brief facts of the issue are that during the year under consideration, the assessee purchased and installed following machineries for which it claimed 100% depreciation as per Income Tax Rules 1962 (Rules) under energy saving devices: a) Waste hear recovery system (Rs.38,70,869/0) classifiable as Recuperators and air pre heaters under the Rules. b) DCS for CFB 3 4 (Rs.13,57,662/-) classifiable High efficiency boilers (thermal efficiency higher that 75% in case of coal fired and 80% in case of oil/gas fired boilers) under the rules. The assessee filed its reply before the Assessing Officer vide letter dated 19 March 2004. The assessee also produced copy of the invoices before the CIT(A) of the aforesaid machineries purchased and the depreciation was denied by the lower authorities. Against this, the assessee is in appeal before us. 22. The learned Authorised Representative submitted that during the course of assessment proceedings and CIT(A) proceedings, the assessee duly submitted all the details as asked by the respective authorities. However, the relevant details have been completely ign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure under a particular provision, the onus would be on the department to prove that the conditions for disallowance are satisfied. 23. On the other hand, the learned departmental representative submitted that there are discrepancies between the invoice and discrepancies mentioned in the chartered engineer s certificate and also there is no reference of these machineries in the annual report as Energy Saving Devices/Waste Heat Recovery Equipments. Further, the assessee not furnished necessary evidence in support of its claim. He relied on the orders of the lower authorities. 24. We have heard both the parties and perused the material on record. The assessing officer called upon the assessee to furnish the necessary evidence with regard to claim of enhanced rate of depreciation in respect of Water Heat Recovery System and Waste Heat Recovery Equipment. The assessee only produced the invoice for acquisition of these assets wherein mentioned that these assets has heat controller and heat exchangers. The assessee failed to adduce evidence to show that the assets acquired are waste heat recovery system entered for depreciation at higher rate. In the absence of the necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative submitted that accounting entries given in the books of account are not conclusive to decide the allowability of expenditure. He relied on the following decisions- (a) Kedarnath Jute Mfg Company Ltd. V/s.CIT(82 ITR 363)-SC (b) Sutlej Cotton Mills Ltd. V/.s. CIT (116 ITR 1)-SC (c) Tuticorin Alkali Chemicals and Fertilisers Ltd. V/s. CIT(227 ITR 172)-SC He also relied on the order of the Tribunal in assessee s own case for the assessment year 1987-88 in ITA No.136/H/91 dated 31.12.1991, wherein the Tribunal held that accounting entries in the books of account do not determine the allowability of the expenditure under the Income-tax Act. 29. We heard both the parties. We find force in the argument of the learned departmental representative. In our opinion, the expenditure on plantation has resulted in creation of stock in trade, and it is being current asset, it is to be valued at market price or cost whichever is lower and it cannot be considered as business expenditure to be charged to P L Account in its entirety. Hence, we direct the assessing officer to consider the expenditure incurred on plantation as incurred towards procurement of stock in trade an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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