TaxTMI 
TaxTMI 
2012 (12) TMI 290
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....considerations: (i) The claim for the deductibility of the expenditure on deferred basis was made in the original return of income as evidenced by the observation made by AO in the assessment order passed in the first round (PB Pages 35/36). (ii) The expenditure is amortised on deferred basis in the accounts of the company. (PB pages 73, 83, 89 & 90). (iii) The additional ground is a component of the main ground of appeal which seeks to raise only a legal issue based on the facts of the records. 2. We have considered the issue and admit the additional ground. At the outset both the parties agreed that the ground No.1 is held against assessee i.e. held as capital outlay and cannot be allowed as revenue expenditure by the Special Bench of the ITAT in the case of Tecumseh India (P) Ltd. v. Addl. CIT [2010] 127 ITD 1 (Delhi). 3. The facts related to the above claim are as under. Assessee has debited an amount of Rs. 25,75,343/- by way of non-compete compensation written off with the other expenses in schedule-4 to the Profit & Loss A/c. It has been mentioned that non-compete compensation has been amortised over a period of 10 years on pro-rata basis and....
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....llowable over a period of 4 years pro-rata. It was further relied on the Hon'ble Delhi High Court in the case of Pitney Bowes India (P) Ltd v. CIT for the proposition that the Hon'ble High Court decided the issue on the reason that in the books of account assessee treated the same as capital expenditure it was held as capital expenditure, whereas assessee in the books of account treated as deferred revenue expenditure, therefore, the same should be treated as revenue expenditure. It was further contended that the Hon'ble Punjab & Haryana High Court in the case of Punjab Alkalies & Chemicals Ltd. v. CIT [2011] 338 ITR 86 considered that one-third of the expenditure incurred on assets could be revenue expenditure. Therefore, following the same principles, assessee claims the non-compete fee paid as deferred revenue expenditure. 6. The learned CIT (DR) in reply submitted that having held that expenditure is capital in nature, the amount cannot be allowed under section 37(1) and the case law relied upon by assessee are not applicable to facts of the case. Even under section 35D only revenue expenditure could be amortised and since the expenditure is capital in nature, this cannot be....
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....ted as revenue expenditure and allowed under section 37 of the Income Tax Act as permissible expenditure. There was a claim of replacement of an 'asset' used in the business and on the facts of the case it is noticed that the life of the membrane was for three years. Therefore, expenditure was allowed to the extent of one-third. However, balance of the expenditure was held to be not revenue expenditure so that the provisions of section 37(1) cannot be considered for allowing that expenditure. In fact the principles laid down by the above judgment are in favour of the Revenue. Moreover, no asset was created by paying non-compete fee. Provisions of Sec 32 with reference to 'Intangible assets' does not apply as the provision was introduced much later and not applicable to the year under consideration. 8. In the case of Pitney Bowes India (P) Ltd. (supra), the Hon'ble High Court of Delhi in fact upheld the decision of the Special Bench in the case of Tecumseh India (P) Ltd. (supra) and treated the expenditure as capital in nature. In arriving at the decision the Hon'ble High Court also considered that assessee treated the expenditure as capital in the books of account. Just because ....
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....e seen that warding off competition in business even to a rival dealer will constitute capital expenditure and to hold them capital expenditure it is not necessary that non-compete fee is paid to create monopoly rights. 130. The assessee also cannot get any help from the decision of Hon'ble Delhi High Court in the case of CIT v. Eicher Company Ltd. (supra) as in that case their Lordships have clearly found from the record that it was not clear that how long the restrictive covenant was to last and what the assessee had done was that it eliminated the competition in the two-wheeler business for a while. Their Lordships have also found that the benefit received by the assessee in that case was neither permanent nor ephemeral. Therefore, the said decision is not applicable to the facts of the present case as in the case of assessee the non-compete agreement is applicable for 5 years, which period has been considered to be sufficient to give enduring benefit in the case of Assam Bengal (supra). 131. With these observations we hold that the expenditure of Rs. 2.65 crore claimed by the assessee in pursuance of non-compete agreement dated 10th July, 1997 are capital expenditure, the de....
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....of Rs. 3 lakhs was allowable as expenditure incurred for the purpose of the business. On reference the High Court noted that out of the total discount of Rs. 3 lakhs an amount of Rs. 12,500/- had been allowed which the Department had not challenged. Hence the High Court was concerned only with the balance amount of Rs. 2,87,500/- which the High Court held, could not be considered as expenditure. On further appeal to the Hon'ble Supreme Court it was held that liability to pay the discounted amount over and above the amount received for the debentures was a liability incurred by the company for the purpose of its business in order to generate funds for its business activities. It was, therefore, expenditure. The assessee had in its return correctly claimed a deduction only in respect of proportionate part of the discount of Rs. 12,500/ - over the relevant accounting period in question. This was also in conformity with the accounting practice of showing the discount in the "discount on debenture account" which was written off over the period of debentures. The assessee was entitled to deduct a sum of Rs. 12,500/- out of discount of Rs. 3 lakhs in the relevant assessment year. Hon'ble ....