2008 (2) TMI 490 - AT - Income Tax

Non-compete fees recognized as intangible assets for depreciation; Tribunal supports assessment reopening as justified.

Assistant Commissioner Of Income-Tax. Versus Real Image Technologies (P.) Limited.

The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection. It confirmed that non-compete fees qualify as intangible assets ... Depreciation on Non-compete fee considered as intangible assets u/s 32? - Doctrine of ejusdem generis - Reopening of the assessment Depreciation on non-compete fee - Nature of intangible asset listed u/s 32 namely know-how, copyrights, patents - construed as commercial right of similar nature or not - Doctrine of ejusdem generis - HELD THAT:- When by payment of non-compete fee, the businessman gets his right what he is practically getting is kind of monopoly to run his business without bothering about the competition. It is just like separating big plant from other plants affecting the growth of the big plant. Generally, non-compete fee is paid for a definite period which in this case is five years. The idea is that by that time, the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee makes payment for non-compete fee. Here, the doctrine of ejusdem generis would come into operation. The term 'or any other business or commercial rights of similar nature' has to be interpreted in such a way that it would have same similarities as other assets mentioned in cl. (b) of Expln. 3. The other assets mentioned are know-how, patents, copyrights, trademarks, licences, franchises, licence, etc. In all these cases no physical asset comes into possession of the assessee. What comes in is only a right to carry on the business smoothly and successfully and in our view even the right obtained by way of non-compete fee would also be covered by the term 'or any other business or commercial rights of similar nature' because after obtaining non-compete right, the assessee can develop and run his business without bothering about the competition. Tribunal has already held in the case of Radaan Media Works India Ltd. that the assessee would be entitled to depreciation even in respect of non-compete fee which was held to be in the nature of intangible asset. Therefore, we find nothing wrong with the order of the CIT(A) on this issue and accordingly confirm the same. The appeal of the Revenue is dismissed. Reopening of the assessment and confirmation of disallowance of payment towards non-compete fee as capital expenditure - HELD THAT:- In the case before us the original return was processed under s. 143(1)(a) and therefore in view of the decision of the Hon'ble Supreme Court n the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. [2007 (5) TMI 197 - SUPREME COURT], the same is available for reassessment. Thus, we find nothing wrong with the order of the learned CIT(A) and accordingly confirm the same. As far as the other issue is concerned, we find that this issue is also squarely covered against the assessee by the decision of Hon'ble High Court in the case of Chelpark Co. Ltd. vs. CIT[1990 (12) TMI 292 - MADRAS HIGH COURT]. Therefore, we decide this issue against the assessee. In the result, both the appeal filed by the Revenue as well as the cross-objection filed by the assessee are dismissed. Issues Involved:1. Depreciation on non-compete fee.2. Reopening of the assessment.3. Confirmation of disallowance of payment towards non-compete fee as capital expenditure.Detailed Analysis:1. Depreciation on Non-Compete Fee:The primary issue was whether the non-compete fee qualifies as an intangible asset under Section 32 of the Income Tax Act, 1961, thereby making it eligible for depreciation. The Revenue contended that non-compete fees do not create a positive asset and thus should not be eligible for depreciation. They argued that non-compete fees are payments made to directors who continue to hold substantial shares in the company, implying these payments are not bona fide but collusive in nature.The CIT(A) observed that non-compete fees create a right for the payer, similar to other intangible assets like know-how, patents, copyrights, trademarks, licenses, or franchises. This right helps the business operate more efficiently by avoiding competition. The CIT(A) concluded that such non-compete rights qualify as 'business or commercial rights of similar nature' under Section 32(1)(ii) and are thus eligible for depreciation.The Tribunal upheld the CIT(A)'s decision, noting that non-compete fees create a commercial right, similar to other intangible assets listed in Section 32(1)(ii). They referred to the doctrine of ejusdem generis, which implies that non-compete rights, like other intangible assets, do not involve physical possession but confer a right to conduct business more effectively. The Tribunal also referenced the case of Radaan Media Works India Ltd., where a similar decision was made, affirming that non-compete fees are intangible assets subject to depreciation.2. Reopening of the Assessment:The assessee challenged the reopening of the assessment, arguing it was not justified. The Tribunal referred to the Supreme Court's decision in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd., which clarified that the AO has the jurisdiction to issue a notice under Section 148 for reassessment even if the original return was processed under Section 143(1)(a). The Tribunal found that since the original assessment in this case was completed under Section 143(1), the AO was within his rights to reopen the assessment.3. Confirmation of Disallowance of Payment Towards Non-Compete Fee as Capital Expenditure:The assessee also contested the confirmation of disallowance of the non-compete fee as capital expenditure. The Tribunal referred to the jurisdictional High Court's decision in Chelpark Co. Ltd. vs. CIT, which supported the view that non-compete fees are capital expenditures. Consequently, the Tribunal upheld the CIT(A)'s decision to treat the non-compete fee as capital expenditure.Conclusion:The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection. It confirmed the CIT(A)'s decision that non-compete fees qualify as intangible assets eligible for depreciation under Section 32(1)(ii). It also upheld the reopening of the assessment and the treatment of non-compete fees as capital expenditure.