2018 (10) TMI 1223 - AT - Income Tax

Tax Appeal Order Challenged: Non-Compete Fees Excluded from Depreciation

The appeal challenged the order under Section 263 of the Income Tax Act, contesting the justification of revision proceedings. The Commissioner of Income ... Revision u/s 263 - depreciation on non-compete fees - order erroneous and prejudicial to the revenue - Held that:- During the course of assessment proceedings, u/s 143(3) the AO vide questionnaire issued along with notice dated 26.06.2013 had called for explanation of the assessee to justify its claim of depreciation on non-compete fees. In reply to it, the assessee vide written submission dated 15.01.2014 had explained the basis on which it had claimed depreciation on non-compete fees. It is found that the AO had made adequate inquiry while allowing depreciation of ₹ 5,50,29,78,040/- out of the claim of ₹ 6,75,23,77,744/- made by the assessee-company in its revised return of income. The same is evident from para 9 of the assessment order dated 21.03.2014 made by the AO. We find that the assessee had filed a copy of (i) computation of depreciation admissible u/s 32(1)(ii) and (ii) details of licensing rights under the head “Intangible Assets”. Thus in the instant case the AO had made sufficient inquiries while allowing depreciation on non-compete fees. In the case of Ingersoll Rand International Ind. Ltd. [2014 (6) TMI 934 - KARNATAKA HIGH COURT] has held that whenever assessee makes payment of non-compete fee, commercial right comes into existence and therefore, that right which 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 knowhow, patents, copyrights, trade marks, licences, franchises and the commercial right so acquired by assessee unambiguously falls in category of an ‘intangible asset’ and, consequently, depreciation provided u/s 32(1)(ii) is to be allowed. In the case of Max India Ltd.[2007 (11) TMI 12 - SUPREME COURT OF INDIA] it is held that if two views were possible on the disputed issue on the day when the Commissioner passes the order, then the order u/s 263 is not tenable. AO had made necessary inquiries before allowing depreciation on non-compete fees and also the ground that two views were inherently possible on the same issue on the day when the Commissioner passed his order u/s 263, we are inclined to set aside the impugned order. - decided in favour of assessee. Issues:1. Justification of revision proceedings under Section 263 of the Income Tax Act.2. Eligibility of non-compete fee for depreciation under Section 32(1)(ii).3. Condonation of delay in filing appeal before the Tribunal.Issue 1: Justification of revision proceedings under Section 263:The appeal challenged the order under Section 263 of the Income Tax Act, arguing that the revision proceedings were unjustified. The appellant contended that specific responses on the singular issue covered by the revision notice were duly furnished during the assessment proceedings. However, the Commissioner of Income Tax (Large Taxpayer Unit) found the explanations insufficient and referred to the judgment of the Hon'ble Delhi High Court regarding non-compete fees. The CIT held that the order passed by the Assessing Officer was prejudicial to the interest of revenue, leading to the direction to modify the assessment order.Issue 2: Eligibility of non-compete fee for depreciation under Section 32(1)(ii):The core contention revolved around whether non-compete fees paid by the taxpayer could be capitalized and claimed for depreciation. The CIT relied on the judgment of the Hon'ble Delhi High Court, stating that such fees were capital in nature and not eligible for depreciation as they conferred a restrictive and personal right. On the other hand, the appellant argued that the expenditure incurred for acquiring the non-compete right should be considered as a capital asset entitled to depreciation under Section 32(1)(ii). Various High Court decisions were cited to support both viewpoints, leading to a debate on the nature of non-compete fees as intangible assets.Issue 3: Condonation of delay in filing appeal before the Tribunal:The appellant sought condonation for a delay of 35 days in filing the appeal before the Tribunal. The delay was attributed to an inadvertent error where the order passed by the CIT was misplaced, leading to a misunderstanding that the submissions were accepted. The Tribunal, after considering the circumstances and the arguments presented, decided to condone the delay, emphasizing that the delay was minimal and the facts warranted leniency in this regard.This detailed analysis of the judgment highlights the key issues involved, the arguments presented by the parties, the legal interpretations applied, and the final decision rendered by the Tribunal.