2021 (10) TMI 242 - HC - Income Tax

Court allows depreciation on non-compete fees as intangible assets under tax law

The High Court upheld the Tribunal's decision to allow depreciation on non-compete fees, considering them as intangible assets under Section 32 of the ... Non-compete fee as an intangible asset - depreciation under Section 32(1)(ii) of the Income Tax Act, 1961 - any other business or commercial rights of similar nature - acquisition of enduring business benefitNon-compete fee as an intangible asset - depreciation under Section 32(1)(ii) of the Income Tax Act, 1961 - any other business or commercial rights of similar nature - Payment of non-compete fee is an intangible asset falling within the expression 'any other business or commercial rights of similar nature' in Explanation 3 to section 32(1)(ii) and is eligible for depreciation. - HELD THAT: - The Court held that the question is no longer res integra in view of earlier Division Bench authority which construed Explanation 3 to section 32(1)(ii) broadly to include rights acquired by payment to prevent competition. The appellate authorities referred to by the Court (including precedents of other High Courts) recognise that where expenditure creates an enduring benefit - here the commercial right to prevent ex-employees/associates from competing and to protect the business - such rights fall within the category of intangible assets contemplated by section 32(1)(ii). Applying that principle to the facts, the Tribunal's conclusion that the assessee acquired an intangible asset in the nature of a business or commercial right and was therefore entitled to depreciation was not perverse or legally incorrect. The Court found no substantial question of law and accepted the Tribunal's direction to allow depreciation at the admissible rate on the non-compete fee. [Paras 3, 4, 5]The tribunal's allowance of depreciation on the non-compete fee is upheld and the payment is held to be a depreciable intangible asset under section 32(1)(ii).Final Conclusion: Revenue's appeal is dismissed; the Tribunal's order permitting depreciation on the non-compete fee is upheld with no order as to costs. Issues:1. Characterization of non-compete fee as revenue or capital expenditure for assessment under the Income Tax Act, 1961.2. Eligibility of non-compete fee as an intangible asset for depreciation under Section 32 (1) (ii) of the Income Tax Act, 1961.Issue 1: Characterization of non-compete feeThe respondent, engaged in manufacturing and trading life-saving devices, claimed an expenditure of Rs. 4,73,00,000 on non-compete fees to three directors of a company. The Assessing Officer treated this payment as capital expenditure, adding it to the total income of the respondent under Section 143(3) of the Income Tax Act, 1961. The CIT (A) acknowledged the business necessity behind the payment but agreed with the Assessing Officer that the expenditure was capital in nature. The ITAT partially allowed the appeal, stating that the non-compete fee could be considered an intangible asset, allowing for depreciation. The High Court referred to a previous judgment where it was held that non-compete fees fall under 'any other business or commercial rights of similar nature' as per the Act. The Court found no substantial question of law and dismissed the appeal, emphasizing that the Tribunal had correctly analyzed the facts and applied the appropriate legal principles.Issue 2: Eligibility of non-compete fee as an intangible assetThe High Court referred to a previous case where the Tribunal granted depreciation on non-compete fees, despite the Revenue's argument that such fees did not qualify as intangible assets under Section 32 of the Income Tax Act, 1961. The Court highlighted a Gujarat High Court decision supporting the Assessee's claim for depreciation on non-compete fees, emphasizing that the rights acquired through such agreements provided enduring benefits and fell under the category of intangible assets. The Court cited precedents where various types of intangible assets were recognized for depreciation, concluding that the wide interpretation of 'any other business or commercial rights of similar nature' encompassed situations like the present case. The Court found no substantial question of law in this regard and upheld the Tribunal's decision to allow depreciation on the non-compete fee. Consequently, the appeal was dismissed, and no costs were awarded.This detailed analysis of the judgment showcases the court's interpretation of the legal issues involved and the application of relevant provisions of the Income Tax Act, 1961 to determine the treatment of non-compete fees and their eligibility for depreciation as intangible assets.