2022 (8) TMI 1298 - AT - Income Tax

Tribunal grants depreciation for Non-Compete Fee, following precedents

The Tribunal allowed the additional grounds of appeal raised by the assessee, holding that the assessee is eligible for depreciation on Non-Compete Fee ... Depreciation under Section 32 of the Income-tax Act, 1961 - non-compete fee as an intangible asset - admission of additional grounds of appeal - binding effect of a jurisdictional High Court decisionAdmission of additional grounds of appeal - Additional grounds of appeal seeking depreciation on non-compete fee were admitted for adjudication by the Tribunal. - HELD THAT: - The Tribunal found that the question raised by the additional grounds was a pure question of law and did not require any fresh evidence, as the relevant facts were already on record. Having considered the procedural history and the materials placed before it, the Tribunal admitted the additional grounds and proceeded to decide them on merits. [Paras 8]Additional grounds admitted and decided.Depreciation under Section 32 of the Income-tax Act, 1961 - non-compete fee as an intangible asset - binding effect of a jurisdictional High Court decision - Assessee is entitled to claim depreciation under Section 32 on the non-compete fee paid, the non-compete right qualifying as an intangible asset. - HELD THAT: - The Tribunal examined the nature of the payment made for the non-compete agreement and observed that the payment conferred enduring benefits and commercial rights of a nature contemplated by Explanation 3 to Section 32(1)(ii). The Tribunal noted that the CIT(A) had not had the benefit of the subsequent decision of the jurisdictional High Court in PCIT v. Piramal Glass Ltd., which upheld depreciation on non-compete fees and relied on earlier High Court and Tribunal precedents interpreting the phrase 'business or commercial rights of similar nature' to include such rights. In light of the authoritative decision of the Bombay High Court and applying those principles to the facts where the non-compete arrangement protected the assessee's business and conferred lasting commercial benefit, the Tribunal held that the non-compete fee is an intangible asset eligible for depreciation under Section 32 and allowed the additional ground accordingly. [Paras 9, 11, 12]Claim for depreciation on non-compete fee allowed.Final Conclusion: Additional grounds raising a legal question on depreciation of the non-compete fee were admitted; applying the jurisdictional High Court's decision, the Tribunal held that the non-compete fee constituted an intangible asset and allowed depreciation under Section 32 for Assessment Year 2011-12. Issues Involved:1. Admissibility of depreciation on Non-Compete Fee under Section 32 of the Income Tax Act, 1961.2. Treatment of Non-Compete Fee as deferred revenue expenditure.Detailed Analysis:1. Admissibility of Depreciation on Non-Compete Fee under Section 32 of the Income Tax Act, 1961:The assessee raised additional grounds of appeal seeking depreciation on Non-Compete Fee under Section 32 of the Income Tax Act, 1961. The Tribunal had previously dismissed the Revenue's appeal challenging the allowance of Non-Compete Fee as deferred revenue expenditure. The assessee claimed depreciation on the Non-Compete Fee paid as part of a Business Transfer Agreement with Piramal Healthcare Limited, which was capitalized in the books of accounts.The Tribunal noted that the issue of depreciation on Non-Compete Fee had been addressed in various judicial precedents, including the decisions of the Hon'ble Bombay High Court in the case of Piramal Glass Ltd., and other High Courts such as Gujarat, Karnataka, and Madras. These courts had held that Non-Compete Fee qualifies as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Act.The Tribunal observed that the First Appellate Authority (CIT(A)) had not considered the decision of the Hon'ble Bombay High Court in the case of Piramal Glass Ltd., which was rendered subsequent to the CIT(A)'s order. The Tribunal emphasized that non-consideration of a jurisdictional High Court's judgment constitutes a mistake apparent from the record.In light of the Hon'ble Bombay High Court's decision, which upheld the Tribunal's findings in allowing depreciation on Non-Compete Fee, the Tribunal concluded that the assessee is eligible for depreciation under Section 32 of the Act on the Non-Compete Fee paid. The additional grounds of appeal raised by the assessee were thus allowed.2. Treatment of Non-Compete Fee as Deferred Revenue Expenditure:The assessee had initially raised an alternate ground before the CIT(A) to treat the Non-Compete Fee as deferred revenue expenditure, which was allowed by the CIT(A). The Revenue challenged this finding before the Tribunal, which upheld the CIT(A)'s decision. The Tribunal noted that the issue of Non-Compete Fee as deferred revenue expenditure was inextricably linked with the claim of depreciation on Non-Compete Fee.The Tribunal reiterated that the payment of Non-Compete Fee was in accordance with the terms of the agreement between the assessee and Piramal Healthcare Limited. The Tribunal held that the Non-Compete Fee provided enduring benefits and protected the assessee's business, qualifying it as an intangible asset eligible for depreciation under Section 32 of the Act.Conclusion:The Tribunal allowed the additional grounds of appeal raised by the assessee, holding that the assessee is eligible for depreciation on Non-Compete Fee under Section 32 of the Income Tax Act, 1961, as it qualifies as an intangible asset. The Tribunal's decision was based on judicial precedents, including the Hon'ble Bombay High Court's ruling in the case of Piramal Glass Ltd. The Tribunal also upheld the treatment of Non-Compete Fee as deferred revenue expenditure as directed by the CIT(A).