Tax Tribunal Decision: Depreciation on Non-Compete Fees, Software Rate, Blending Plant, Bad Debts

Issues involved in the case included depreciation on non-compete fees, applicable rate of depreciation on computer software, claim of additional depreciation on a newly installed in-house blending plant, and disallowance of bad debts written off. The tribunal allowed depreciation on non-compete fees, directing the AO to permit the claim based on the commercial right nature. It also upheld the 60% depreciation rate on standalone software, directed the allowance of additional depreciation on the blending plant costs, and remitted the bad debts issue back to the AO for further review. The tribunal's decision partially allowed the appeal for AY 2011-12 and fully allowed other appeals based on its directives.

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Issues Involved:
1. Depreciation on non-compete fees.
2. Applicable rate of depreciation on computer software.
3. Claim of additional depreciation on newly installed in-house blending plant.
4. Disallowance of bad debts written off.

Issue-Wise Detailed Analysis:

1. Depreciation on Non-Compete Fees:
The assessee purchased a foam division from another entity under a Business Purchase Agreement (BPA) with a non-compete clause, capitalizing Rs.5.50 Crores as non-compete fees and claiming depreciation at 25%. The AO disallowed the depreciation, arguing that non-compete fees do not constitute an asset usable like a license or franchise and only confer a right to sue in case of breach. The CIT(A) upheld this view. However, the tribunal found that the non-compete fees constituted a commercial right eligible for depreciation under Sec.32(1)(ii). The tribunal emphasized the rule of consistency, noting that similar claims were accepted in other years. Citing decisions from higher courts, including the Supreme Court and High Courts, the tribunal concluded that non-compete fees fall under "business or commercial rights of similar nature" and directed the AO to allow the depreciation claim.

2. Applicable Rate of Depreciation on Computer Software:
The assessee claimed 60% depreciation on software, which the AO reduced to 15%, arguing that only software embedded in computer systems qualifies for 60%. The tribunal disagreed, stating that the term "computers including software" implies that standalone software also qualifies for 60% depreciation. The tribunal referenced the Special Bench decision in Amway India Enterprises vs. DCIT and noted that similar depreciation rates were accepted in other years. Thus, the tribunal directed the AO to allow the 60% depreciation rate on software.

3. Claim of Additional Depreciation on Newly Installed In-House Blending Plant:
The AO disallowed additional depreciation on professional fees and additional material costs related to the in-house blending plant, arguing that these costs do not form part of the "actual cost" and termed the claim as a colorable device. The tribunal found that the professional fees were directly related to the installation of the plant and should be included in the actual cost. The tribunal noted that normal depreciation was allowed on these costs, and there was no basis to deny additional depreciation. The tribunal also highlighted that similar claims were accepted in other years. Therefore, the tribunal directed the AO to allow the additional depreciation.

4. Disallowance of Bad Debts Written Off:
The AO disallowed the bad debts claim of Rs.121.11 Lacs, stating that the assessee did not make sufficient efforts to recover the debts. The CIT(A) upheld this disallowance. The tribunal referred to the Supreme Court's decision in TRF Limited v. CIT, which clarified that post-1989, it is sufficient for debts to be written off in the accounts to claim them as bad debts. The tribunal found that the necessary facts to ascertain whether the debts were actually written off were not on record and remitted the issue back to the AO for de novo adjudication.

Conclusion:
The appeal for AY 2011-12 was partly allowed, and all other appeals were allowed as per the tribunal's directives. The tribunal's order was pronounced on 31st January 2023.

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