Non-compete fee qualifies for depreciation: Tribunal decision favours assessee in tax appeal

The Tribunal upheld the order of the CIT(A) and dismissed the Revenue's appeal, confirming the assessee's entitlement to depreciation on the non-compete fee paid for the assessment year 2003-04. The decision was based on the acquisition of a commercial right through the non-compete fee, supported by a judgment of the Madras High Court in a similar case. The Tribunal found that the fee resulted in the acquisition of a composite commercial right, in line with previous Tribunal decisions, allowing for depreciation.

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Issues involved:
Depreciation on non-compete fee.

Analysis:
The judgment pertains to an appeal by the Revenue against the order of the Commissioner of Income-tax (Appeals)-I, Chennai, concerning the assessment year 2003-04. The primary issue for consideration was the claim of depreciation on a non-compete fee. The Departmental Representative argued that the fee paid did not confer an exclusive right to carry on the primary activity of the assessee, citing a judgment of the Hon'ble Delhi High Court. On the other hand, the Counsel for the assessee contended that the non-compete fee resulted in the acquisition of a commercial right, making it a capital asset eligible for depreciation. The Counsel relied on an unreported judgment of the Hon'ble Madras High Court in a similar case.

Upon examining the submissions and the relevant material, the Tribunal referred to the judgment of the Hon'ble Madras High Court in a comparable case involving a composite agreement for the transfer of rights and a non-compete clause. The High Court had allowed depreciation on the non-compete fee in that instance. The Tribunal noted that the Assessing Officer had initially concluded that the agreement did not result in any asset, but the CIT(A) allowed the claim based on a Tribunal order and the Madras High Court judgment. The Tribunal agreed that the non-compete fee led to the acquisition of a composite commercial right, as established by the Madras High Court, thus entitling the assessee to depreciation. Previous Tribunal decisions in related cases also supported this view.

Therefore, the Tribunal upheld the order of the CIT(A) and dismissed the appeal of the Revenue, confirming the entitlement of the assessee to depreciation on the non-compete fee paid. The judgment was pronounced in an open court on June 26, 2015, in Chennai.

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