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TMI Blog2003 (8) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... rstwhile management to compete with the assessee company for a period of 10 years. There were certain other restrictions also placed on the erstwhile management. The aforesaid payment of Rs. 6.5 lakh was treated as capital expenditure by the Assessing Officer and the Assessing Officer's finding has been confirmed by the ld. CIT(A). Aggrieved by this, the assessee is in appeal before us. 3. In the backdrop of the abovementioned facts, the ld. counsel for the assessee invited our attention to clause 2 of the agreement which stipulates that certain activities shall not be carried on by MWL and WIEIL over a period of 10 years without the written approval of the assessee company. It is submitted that the condition of abstaining from carrying on the same business is not absolute, but, it can be relaxed on the written approval of the assessee company. The Ld. counsel has also invited our attention to clause 5 of the agreement which is reproduced below: "It is hereby provided that whilst the restriction in the aforesaid clauses is considered to be reasonable in the circumstances as at the relevant date, it is hereby agreed that if any of such restrictions shall be adjudged invalid beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee company to ward off competition for a period of 10 years. The relevant clause 2 of the agreement may be reproduced below: "The firm and each of the partners (each being a Covenanter) hereby separately covenants with the Company and (as a separate covenant) with each of MWL and WIEIL that none of them will either alone or jointly with others at any time during the period commencing on the Relevant Date and ending on the expiry of the tenth anniversary thereof without the written approval of the Company, MWL and WIEIL either on his own account or in conjunction with or on behalf of any person, firm or company (other than the company) within West and South Asia (being the Indian sub-continent and any Gulf country) directly or indirectly - (a) carry on or be engaged, concerned or interested in carrying on any business carried on at the Relevant Date by the Company and which the Company then continues to so carry on ('the Business'); (b) offer to employ or endeavour to entice away from the Company any person who is at the Relevant Date employed by the Company; (c) canvas or solicit or endeavour to solicit business in competition with any of the Business from any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm but could be terminated at any time at the volition of any of the parties; (ii) the payments made to H.V. Low Co. 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. Payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage of eliminating the competition over some length of time; the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be, in order to constitute enduring benefit, would depend on the circumstances and the facts of each individual case. Although an enduring benefit need not be of an everlasting character it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties." From the above, it is clear that in the case which came up before the Hon'ble Apex Court, the agreement was not for a fixed term and was terminable at any time at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permits which were capital assets and hence the payments were not revenue expenditure and not allowable as a deduction. In the case of the assessee and his son, the ITO held that the compensation received should be treated as revenue in character. The Tribunal held that the compensation paid by the firms should for the three components, viz., (a) share in the assets, (b) share in the goodwill, and (c) share in the restricted covenant in terms of section 36(2) of the Partnership Act and the payments in respect of (a) and (b) would not be deductible in the hands of the firm because these were only payments to retiring partners but the contribution attributable to item (c) was deductible. The Tribunal thereafter held that the payments to the retiring partners to the extent of the amounts in the capital accounts would relate to the first component and the value of the goodwill in the case of the firms was estimated and the balance would represent the compensation paid for the restrictive covenants. In the case of the recipients, the Tribunal held that (a) the compensation attributable to the relinquishment of the shares of the retiring partners and the share of the goodwill which they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view, assist the assessee. Amongst others, payments were made for a restrictive covenant and the Tribunal found that, by securing that covenant, no asset or advantage of enduring nature was acquired and that finding was accepted and on that footing, it was held that there was no acquisition of any business by payment of the amounts referable to the restrictive covenant and there was not benefit of any enduring nature acquired and, therefore, the payment should be regarded as a revenue outgoing. That decision cannot have any application whatever on the facts and circumstances of this case where we have held that the assessee did acquire an enduring benefit or advantage." The Honb'le Madras High Court, in the case of Chelpark Co. Ltd. held that payment made to Ex-Managing Director to eliminate competition and not to carry on any competitive business over five years was capital expenditure. The ld. counsel for the assessee has also referred to ITAT, Bombay Bench decision in the case of Pathare Dhru Co. In this case, the assessee was a law firm and certain amount was paid to the retiring partner as premium on the understanding that he would not render professional service for a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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