2022 (11) TMI 8 - AT - Income Tax

Tribunal allows non-compete fee depreciation, clarifies foreign exchange loss treatment

The Tribunal allowed the cross objections by the assessee, permitting depreciation on 'non-compete fees' as an intangible asset and dismissed the ... Nature of expenditure - treat “non-compete fees” as deferred revenue expenditure - HELD THAT:- We notice that the Tribunal has accepted the payment of noncompete fee as an intangible asset in AY 2011-12, by following the decision rendered by the jurisdictional Hon’ble Bombay High Court in the case of Piramal Glass Ltd [2019 (6) TMI 891 - BOMBAY HIGH COURT] Accordingly, the Tribunal has held that the assessee is eligible for depreciation u/s 32 of the Act on Non-compete fees paid, being an intangible asset. When the original claim is allowed, as rightly pointed out by Ld A.R, there is no necessity to render decision on the alternative claim of allowing the non-compete fee as deferred revenue expenditure. We allow the cross objections filed by the assessee in all the three years under consideration and hold that the assessee is eligible for depreciation on non-compete fee, as the same would fall under the category of intangible asset. We order accordingly. Hence the decision rendered by Ld CIT(A) in all the three years are reversed. Even though the decision rendered by the Ld CIT(A) has been reversed, since the cross objections filed by the assessee are allowed, the appeals filed by the revenue are also liable to be rejected as infructuous. Treatment of foreign exchange loss arising on account of revaluation of amount payable in respect of acquisition of business from M/s Pirmal Health care Ltd. - assessee has challenged the decision of Ld CIT(A) on the ground that the enhanced depreciation should have been allowed under the principle of consistency - HELD THAT:- We are unable to understand as to how the assessee could press upon the Principle of Consistency, when it has not accepted the decision taken by AO in AY 2011-12 [2020 (3) TMI 416 - ITAT MUMBAI] We notice that both the AO and the assessee has taken stands to suit their convenience in each of the years. Be that as it may, we notice that this issue has been examined by the co-ordinate bench in AY 2011-12 and this issue has been restored back to the file of Ld CIT(A) as held that CIT(A) has not considered all aspect of the reasoning given by the Assessing Officer for making the addition, we deem it appropriate to remit this issue to the file of learned CIT(A) to consider them afresh and pass a speaking order on this issue. Issues:1. Treatment of 'non-compete fees' as deferred revenue expenditure.2. Treatment of foreign exchange loss arising from revaluation of amount payable in business acquisition.Issue 1: Treatment of 'non-compete fees' as deferred revenue expenditure:The case involved appeals by the revenue for AY 2014-15 to 2016-17 and cross objections by the assessee. The revenue contested the direction of the Ld CIT(A) to treat 'non-compete fees' as deferred revenue expenditure. The AO disallowed depreciation on the non-compete fees, considering it not eligible as an intangible right. However, the Ld CIT(A) allowed the fees as deferred revenue expenditure over the agreement period. The Tribunal, in a related case, upheld the view that the non-compete fee is an intangible asset eligible for depreciation. The Tribunal reversed the Ld CIT(A)'s decision, allowing the cross objections by the assessee for depreciation on the non-compete fee, considering it an intangible asset.Issue 2: Treatment of foreign exchange loss from revaluation:In AY 2011-12, a foreign exchange gain resulted from revaluation, which was adjusted by the AO under sec.43A, reducing depreciation. In AY 2014-15 and 2015-16, foreign exchange losses occurred from revaluation. The assessee claimed enhanced depreciation by adding the loss to the value of capital assets. The AO rejected the claim on various grounds. The Ld CIT(A) held that sec.43A was not applicable and rejected the enhanced depreciation claim. The Tribunal noted inconsistency in the assessee's arguments and restored the issue to the Ld CIT(A) for fresh consideration in line with observations from a related case. The appeals by the revenue were dismissed, and cross objections by the assessee were allowed.In conclusion, the Tribunal's judgment addressed the treatment of non-compete fees and foreign exchange losses in a comprehensive manner, considering legal precedents and the specific circumstances of the case. The decision provided clarity on the eligibility of non-compete fees for depreciation and the applicability of sec.43A in foreign exchange loss cases, ensuring a fair and consistent application of tax laws.