2019 (6) TMI 891 - HC - Income Tax

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

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

The High Court upheld the Tribunal's decision in favor of the Assessee, allowing depreciation claim on non-compete fees as intangible assets eligible for ... Depreciation on payment of non-compete fees - as per Revenue, this being an intangible asset, no depreciation u/s 32 was available - HELD THAT:- Similar issue has been considered by the different High Courts and held in favour of the Assessee. A reference can be made to the decision of the Division Bench of the Gujarat High Court in the case of Pr. CIT v. Ferromatice Milacron India (P.) Limited 2018 (10) TMI 1955 - GUJARAT HIGH COURT. It was also the case where the Assessee had incurred expenditure pursuant to the non-compete agreement and claimed depreciation on such asset. Rights acquired by the assessee under the said agreement not only give enduring benefit, protected the assessee's business against competence, that too from a person who had closely worked with the assessee in the same business. The expression 'or any other business or commercial rights of similar nature' used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include the present situation. - decided in favour of assessee. Expenditure incurred for gaining controlling interest of a subsidiary company - Allowable business expenditure - HELD THAT:- This Court in the case of CIT v. Phil Corpn. Limited [2011 (6) TMI 912 - BOMBAY HIGH COURT] held that the Assessee was entitled to deduction of interest on overdraft under Section 36(1)(iii) of the Act when the investment was made by the Assessee in shares of subsidiary of the company to have control over the said company. Madras High Court in the case of CIT v. Shriram Investments (Firm) Moogambika Complex, Chennai [2014 (11) TMI 55 - MADRAS HIGH COURT] has taken similar view - decided in favour of assessee. Disallowance of interest on the borrowed funds given to the sister concern and its directors - assessee failure to prove that each of the loan on which the assessee paid interest in the accounting year was utilized for the purposes of the business - HELD THAT:- Tribunal by the impugned Judgment followed the decision of the Supreme Court in case of S.A. Builders Limited v. CIT [2006 (12) TMI 82 - SUPREME COURT] and held that such expenditure was made for the purpose of business. - decided in favour of assessee. 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 FeesThe 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 FundsThe 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 ConcernRegarding 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 FeesThe 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.