ITAT Chennai: Non-compete Fees Eligible for Depreciation

The Appellate Tribunal ITAT Chennai upheld the Commissioner of Income Tax (Appeals) decision allowing 25% depreciation on non-compete fees for the assessment years 2002-2003, 2004-2005, and 2005-2006. Relying on the precedent established by the Jurisdictional High Court, the Tribunal considered non-compete fees as intangible assets falling under section 32(1)(ii) of the Act, making them eligible for depreciation. The appeals by the Revenue were dismissed, affirming the allowance of depreciation on non-compete fees as capital assets.

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Issues Involved:
- Depreciation on non-compete fee

Analysis:

Issue: Depreciation on non-compete fee
The appeals by Revenue were against different orders of the Commissioner of Income Tax (Appeals) for the assessment years 2002-2003, 2004-2005, and 2005-2006, all related to the common issue of allowing 25% depreciation on non-compete fee. The Assessing Officer had disallowed the depreciation initially, stating that non-compete fee does not qualify for depreciation. However, the Commissioner of Income Tax (Appeals) allowed the appeal of the assessee based on the order of the Jurisdictional High Court in the case of Pentasoft Technologies Ltd (2014) (41 taxmann.com 120), which considered assets like trademarks, patents, and other rights as intangible assets falling under section 32(1)(ii) of the Act, making them eligible for depreciation. The Revenue, aggrieved by this decision, appealed before the Appellate Tribunal ITAT Chennai.

The Appellate Tribunal ITAT Chennai, after hearing both parties and examining the material on record, referred to the decision of the Jurisdictional High Court in the case of Pentasoft Technologies Ltd vs. DCIT 222 Taxman 2009 (Mad) where it was established that assets like trademarks, patents, and similar rights are intangible assets qualifying for depreciation under section 32(1)(ii) of the Act as capital assets. Relying on the precedent set by the Jurisdictional High Court, the Appellate Tribunal upheld the order of the Commissioner of Income Tax (Appeals) and dismissed the appeals filed by the Department in the ITA Nos. 467, 468 & 469/Mds/2015. The judgment was pronounced on Wednesday, the 8th of April, 2015, at Chennai.

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