2021 (11) TMI 1220 - HC - Income Tax

Non-compete fee from UK company treated as capital receipt under Section 2(24), depreciation on UPS allowed at 60%

T.V. Sundaram Iyengar & Sons Ltd. Versus The Commissioner of Income tax Madurai.

T.V. Sundaram Iyengar & Sons Ltd. Versus The Commissioner of Income tax Madurai. - TMI 1. ISSUES PRESENTED and CONSIDEREDThe Court considered the following core legal questions:1. Whether the non-compete fee received by the assessee company from the UK company for refraining from entering the insurance business constitutes a capital receipt or a revenue receipt.2. Whether the Tribunal was justified in disregarding material evidence and holding that the receipt was not a non-compete fee but a revenue receipt for utilization of business advantages of the assessee, and whether such conclusion was supported by material evidence.3. Whether the assessee is entitled to depreciation at 100% on UPS and Voltage Stabilizer or only 25% as held by the revenue authorities.2. ISSUE-WISE DETAILED ANALYSISIssues 1 and 2: Nature of Non-Compete Fee - Capital or Revenue ReceiptRelevant Legal Framework and Precedents: The interpretation of receipts as capital or revenue is governed by principles relating to the nature of the transaction and the character of the payment. The Hon'ble Supreme Court decision in Guffic Chem (P) Ltd. v. Commissioner of Income Tax, which held that payments received as non-competition fees under a negative covenant are to be treated as capital receipts till assessment year 2003-04, was cited as authoritative.Court's Interpretation and Reasoning: The Court analyzed the 'Letter of Intent' dated 5th April 2000, which contained a restrictive covenant whereby the assessee agreed to restrain itself from entering the insurance business and interfering with other parties, in consideration of a lump sum payment of lb2.4 million from the UK company. The Court rejected the assessing officer's contention that the covenant was not restrictive because the assessee was not previously engaged in insurance business. It emphasized the commercial context: the Government of India had recently permitted foreign insurance companies to operate in India, and the UK company prudently sought to prevent the assessee from entering the insurance sector or associating with other foreign insurers.Hence, the covenant was a genuine restrictive covenant, and the payment was rightly characterized as a non-compete fee.Key Evidence and Findings: The payment was received on 23.10.2000 and immediately invested in shares of the company within the same assessment year (2001-02). The amount was credited to the capital receipt account in the balance sheet for the year ending 31.03.2001. The Tribunal had disregarded this evidence and held the receipt to be revenue in nature without material basis.Application of Law to Facts: The Court held that the payment was a capital receipt as it arose from a restrictive covenant and was invested in equity shares, reflecting a capital nature. The Tribunal's conclusion was contrary to the facts and the legal principles.Treatment of Competing Arguments: The revenue argued that the payment was a capital subsidy or revenue receipt and that the factual finding that the payment was received before commencement of business was unfavorable to the assessee. The Court rejected these arguments, observing that the covenant preceded the investment and that the payment did not fall within the inclusive definition of income under Section 2(24).Conclusions: The Court restored the order of the CIT(A) which held the receipt as capital in nature and set aside the Tribunal's order. The substantial questions of law on issues 1 and 2 were answered in favor of the assessee.Issue 3: Depreciation Rate on UPS and Voltage StabilizerRelevant Legal Framework and Precedents: The rate of depreciation is governed by the Income Tax Rules and relevant judicial pronouncements. The Court referred to the earlier decision of the Chennai Tribunal and the Delhi High Court in CIT v. Oriental Ceramics and Industries Ltd., which held that UPS and similar equipment are eligible for depreciation at 60%. The Court also cited CIT v. Cactus Imaging India (P) Ltd., which allowed 60% depreciation on printers, drawing an analogy.Court's Interpretation and Reasoning: The Court observed that UPS devices are designed to supply uninterrupted power to specific equipment and do not have independent usage apart from their integral role in the computer system. The revenue failed to produce material to prove that UPS or voltage stabilizers could function independently. Therefore, the depreciation rate of 60% was appropriate and justified.Key Evidence and Findings: There was no material to establish independent usage of UPS or routers. The Court noted that the assessing officer's reliance on 25% depreciation was not supported by evidence.Application of Law to Facts: The Court applied the principles from precedent cases and technical understanding of UPS and stabilizers to conclude that the assessee was entitled to 60% depreciation.Treatment of Competing Arguments: The assessee agreed to the 60% depreciation rate instead of the claimed 100%. The revenue had no serious objection to this concession.Conclusions: The Court rejected the revenue's assessment of 25% depreciation and allowed 60% depreciation on UPS and voltage stabilizer.3. SIGNIFICANT HOLDINGS'The condition is clear and lucid and it is to be treated as a 'restrictive covenant' and merely because the assessee was not in the insurance business is not a ground to read down the condition.''The amount received by the assessee was a capital receipt and was right in deleting the addition made by the assessing officer.''Payment received as non-competition fee under a negative covenant has to be treated as a capital receipt till the Assessment Year 2003-04.''An UPS which is capable of giving uninterrupted power supply for a computer of a stipulated period has not been established to have an independent usage by placing any material. ... Similarly, Routers also are to be considered as an integral part of computer.''The assessee is entitled to depreciation at 60% as against 25% assessed by the respondent / revenue.'The Court conclusively held that the non-compete fee received under the restrictive covenant is a capital receipt, reversing the Tribunal's contrary finding. It also held that the depreciation on UPS and voltage stabilizer should be allowed at 60%, overruling the revenue's assessment of 25%. The appeal was allowed accordingly, with no costs.