2015 (8) TMI 750 - AT - Income Tax

Non-compete payment qualifies for depreciation: Tribunal overturns lower authorities' decisions

The Tribunal allowed the appeals of the assessee against the rejection of the claim of depreciation on non-compete rights for assessment years 2002-03, ... Depreciation on the non-compete rights - Held that:- No merit in the action of lower authorities declining the claim of depreciation on non-compete payment made for acquiring non-compete right which is an intangible asset eligible for claim for depreciation u/s 32(1)(ii) of the Act. See Commissioner of Income-tax, Bangalore Versus Ingersoll Rand International Ind. Ltd. [2013 (11) TMI 1057 - MADRAS HIGH COURT ] wherein held the commercial right comes into existence whenever the assessee makes payment for non-compete fee - that right which the assessee acquires on payment of non-compete fee confers in him a commercial or a business right which is held to be similar in nature to know-how, patents, copyrights, trademarks, licences, franchises - Therefore the commercial right thus acquired by the assessee unambiguously falls in the category of an 'intangible asset'. - Decided in favour of assessee. Issues:Appeals against orders passed by ld. CIT(A) for assessment years 2002-03, 2003-04 & 2004-05 regarding the decline of claim of depreciation on non-compete rights.Analysis:The assessee appealed against the rejection of the claim of depreciation on non-compete rights for the mentioned assessment years. The company had entered into a non-compete agreement with an individual to prevent competition in India and also employed him to promote its business. The AO rejected the claim, stating that non-compete fee cannot be considered an intangible asset for depreciation. The CIT(A) upheld this decision, leading to the appeal. The Tribunal examined the facts and found that the company paid a substantial amount to prevent competition and enhance its business rights. The Tribunal referred to the decision of the Karnataka High Court, emphasizing that a non-compete right is a valuable commercial asset that confers the right to conduct business without competition. The Tribunal also cited the Madras High Court's decision, supporting the view that a non-compete clause strengthens commercial rights transferred to the assessee. Additionally, a previous Tribunal decision was referenced, affirming that a non-compete right is an intangible asset under the Income Tax Act.The Tribunal concluded that the lower authorities erred in rejecting the depreciation claim on the non-compete payment, as it constitutes an intangible asset eligible for depreciation under section 32(1)(ii) of the Act. Therefore, the appeals of the assessee were allowed, and the claim for depreciation on non-compete rights was upheld. The judgment was delivered on 24th April 2015.