Court allows depreciation on non-compete fees, affirms interest deductibility for subsidiary & sister concern

Pr. Commisisoner of Income Tax – 7 Versus  Piramal Glass Limited

Pr. Commisisoner of Income Tax – 7 Versus  Piramal Glass Limited - TMI Issues:
1. Disallowance of depreciation claim on non-compete fees paid.
2. Disallowance of interest on borrowed funds.
3. Disallowance of interest on borrowed funds given to sister concern.
4. Write-off of non-compete fees over 18 years.
5. Justification of non-compete fee write-off in 18 years.

Analysis:

Issue 1: Disallowance of Depreciation on Non-compete Fees
The primary question under this issue was whether the non-compete fees paid by the Assessee qualified for depreciation under Section 32 of the Income Tax Act, 1961. The Revenue contended that non-compete fees did not represent an intangible asset eligible for depreciation. However, the Tribunal, in line with previous High Court decisions, ruled in favor of the Assessee. The Gujarat High Court's decision in a similar case was cited, emphasizing that the rights acquired through the non-compete agreement provided enduring benefits, thus falling under the category of intangible assets eligible for depreciation. The Court highlighted that the expression "business or commercial rights of similar nature" in Explanation 3 of Section 32(1)(ii) was broad enough to cover the rights acquired by the Assessee in this case, protecting its business against competition.

Issue 2: Disallowance of Interest on Borrowed Funds
The second issue revolved around the disallowance of interest on borrowed funds utilized for purchasing shares of a subsidiary company. The Assessing Officer questioned the allowability of this expenditure, but the Tribunal held that such expenses incurred for gaining controlling interest in a subsidiary company constituted a business expenditure. The Court referred to various High Court decisions supporting this view, where interest on borrowed funds for investments leading to control over a company was deemed deductible under the Income Tax Act. Therefore, the Court concluded that no legal question arose in this regard.

Issue 3: Disallowance of Interest on Borrowed Funds to Sister Concern
Regarding the interest-free advances made by the Assessee to a sister concern from borrowed funds, the Tribunal relied on the Supreme Court's decision to affirm that such expenditures were made for business purposes. Consequently, the Court determined that no legal question of law arose in this context.

Issue 4 and 5: Write-off of Non-compete Fees
The Cross Appeal by the Revenue raised questions about the write-off of non-compete fees over 18 years without discussing the matter on merits. However, since the Court had already decided in favor of allowing depreciation on non-compete fees, these questions became irrelevant, leading to the dismissal of the Appeal.

In conclusion, the High Court dismissed the Revenue's Appeal challenging the Tribunal's decision, as the issues raised were either adequately addressed by previous judicial interpretations or did not present any legal ambiguity.