2012 (8) TMI 116 - AT - Income Tax

Tribunal decisions on Revenue's appeal: depreciation, sales tax, doubtful debts

The Tribunal dismissed the Revenue's appeal challenging depreciation on a non-compete fee, exclusion of sales tax from total turnover for Section 80HHC ... Depreciation on non-compete fee - treating the same as intangible asset u/s 32(1)(ii) – Held that:- Non-compete Right is clearly in the nature of a business or commercial right and since it is capable of being owned and transferred, it is 'of similar nature' as know how, patents, copyrights etc. as contained in clause (ii) of sub section (1) of sec. 32 of the Act - claim of depreciation allowed - decision in the case of Medicorp Technologies India Ltd. (2009 (1) TMI 332 - ITAT MADRAS-A) followed. Deduction u/s.80HHC – whether sales-tax is to be excluded from total turnover for purpose of computing deduction under section 80HHC – Held that:- Total turnover in clause (ba) of the Explanation below section 80HHC, excluding only freight & insurance up to the customs station Issues Involved:1. Depreciation on Non-Compete Fee.2. Exclusion of Sales Tax from Total Turnover for Section 80HHC Deduction.3. Disallowance of Expenses Paid to Consultants and Lawyers.4. Deduction of Non-Compete Fees as Revenue Expenditure.5. Computation of Section 80HHC Deduction after Setting Off Unabsorbed Depreciation.6. Addition of Provision for Doubtful Debts to Book Profits under Section 115JB.Detailed Analysis:1. Depreciation on Non-Compete Fee:The Revenue challenged the CIT(A)'s decision to allow depreciation on a non-compete fee of Rs. 4,55,40,000 by treating it as an intangible asset under Section 32(1)(ii). The CIT(A) held that the non-compete right is a capital asset capable of being transferred, thus qualifying for depreciation. The Tribunal noted conflicting judgments on this issue but favored the assessee, citing the principle that when two views are possible, the one favorable to the assessee should be followed. Consequently, the Tribunal dismissed the Revenue's ground.2. Exclusion of Sales Tax from Total Turnover for Section 80HHC Deduction:The Revenue contested the exclusion of sales tax from the total turnover for computing the deduction under Section 80HHC. The CIT(A) had directed the exclusion, and the Tribunal upheld this decision, referencing the Supreme Court's judgment in CIT v. Lakshmi Machine Works, which supported the exclusion of sales tax from total turnover. Thus, this ground was rejected.3. Disallowance of Expenses Paid to Consultants and Lawyers:The assessee argued that expenses of Rs. 24,54,480 paid for due diligence and compliance checks should be treated as revenue expenditure. The CIT(A) classified these expenses as capital in nature since they were incurred for acquiring the extrusion business. The Tribunal upheld this view but remanded the case to the CIT(A) to determine if the newly acquired business had commenced operations, which would affect the depreciation claim. This ground was allowed for statistical purposes.4. Deduction of Non-Compete Fees as Revenue Expenditure:The assessee sought to deduct the non-compete fee of Rs. 4,63,58,160 as revenue expenditure under Section 37. The Tribunal, following the Special Bench decision in Tecumseh India (P) Ltd. v. Addl. CIT, rejected this claim, confirming that the non-compete fee is not deductible as revenue expenditure. Both the original and additional grounds on this issue were dismissed.5. Computation of Section 80HHC Deduction after Setting Off Unabsorbed Depreciation:The assessee contended that the deduction under Section 80HHC should be computed without setting off unabsorbed depreciation of Rs. 21,35,96,830. The Tribunal, referencing the Supreme Court's decision in CIT v. Shirke Construction Equipment Ltd., ruled against the assessee, thereby rejecting this ground.6. Addition of Provision for Doubtful Debts to Book Profits under Section 115JB:The assessee challenged the addition of Rs. 13,52,896 for provision for doubtful debts to book profits under Section 115JB. The Tribunal noted the retrospective amendment to Section 115JB by the Finance (No. 2) Act, 2009, which mandated the addition of such provisions to book profits. Consequently, this ground was also rejected.Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing a detailed rationale for each issue based on relevant legal precedents and statutory provisions.