TaxTMI 
TaxTMI 
2016 (2) TMI 187
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....ly notice u/s. 143(2) was issued to the assessee on 25-11-2004. During the course of assessment proceedings, the Assessing Officer disallowed the claim of depreciation on goodwill and non-compete fees u/s. 32(1)(ii) of the Act. During the year the assessee had incurred expenditure of Rs. 30,19,500/- towards filing fees and stamp duty paid to the Registrar of Companies (ROC) for increase in the Authorized Share Capital. Out of this expenditure, the assessee had claimed deduction of Rs. 6,03,900/- u/s. 35D of the Act. The Assessing Officer disallowed the same by placing reliance on the decision of Hon'ble Supreme Court of India in the case of Punjab State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax reported as 225 ITR 792 (SC): 93 Taxman 5 (SC). Aggrieved by the assessment order dated 28-02-2005, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) rejected the appeal of the assessee on account of claim of depreciation on goodwill and non-compete fees and confirmed the addition on both the counts. However, in respect of disallowance of Rs. 6,03,900/- the Commissioner of Income Tax ....
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....ration Ltd. Vs. Commissioner of Income Tax (supra) while adjudicating this issue has held as under: "7. We do not consider it necessary to examine all the decisions in extensor because we are of the opinion that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit making, it still retains the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. We are, therefore, of the opinion that the view taken by the different High Courts in favour of the Revenue in this behalf is the preferable view as compared to the view based on the decision of the Madras High Court in Kisenchand Chellaram's case [1981] 130 ITR 385. We, therefore, answer the question raised for our determination in the affirmative, i.e., in favour of the Revenue and against the assessee." 7. The Hon'ble Supreme Court of India later on in the case of Brooke Bond India Ltd. Vs. Commissioner of Income Tax reported as 225 ITR ....
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....f Income Tax (Appeals) has erred in allowing deduction claimed by the assessee on expenditure for increasing the authorized share capital of the assessee. The findings of the Commissioner of Income Tax (Appeals) on this issue are reverse and the appeal of the Revenue is allowed. ITA No. 7547/PN/2010 (Appeal by the Assessee) 8. The assessee in appeal has raised six grounds. In ground Nos. 1 to 3 the assessee has challenged the findings of Commissioner of Income Tax (Appeals) in disallowing depreciation claimed on payment of non-compete fees. In ground Nos. 4 to 6 the assessee has assailed the findings of Commissioner of Income Tax (Appeals) in disallowing depreciation claimed on goodwill u/s. 32(1)(ii). 9. The ld. AR submitted that during the period relevant to the assessment year under appeal the assessee had purchased catalyst business from M/s. ICI India Ltd. As part of takeover, the assessee paid a sum of Rs. 10,73,30,000/- on account of goodwill and Rs. 3,51,00,000/- towards non-compete agreement entered into with M/s. ICI India Ltd. The assessee claimed depreciation of Rs. 1,78,03,790/- against the above said intangible assets @ 25 for halfyear. The payment towards no....
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....nd. Ltd. (supra). The decision of Hon'ble Delhi High Court in the case of CIT Vs. Hindustan Coca Cola Beverages P. Ltd. reported as 331 ITR 192 (Del) on which the Chennai Bench of Tribunal has placed reliance is on different set of facts. Therefore, the case laws on which the ld. DR has placed reliance will have no application. 12. We have heard the submissions made by the representatives of rival sides and have perused the orders of authorities below. We have also perused the decisions on which the rival sides have placed reliance. The first issue in the appeal of the assessee is disallowance of claim of depreciation on non-compete payment. The Hon'ble Karnataka High Court in the case of Commissioner of Income Tax Vs. Ingersoll Rand International Ind. Ltd. (supra) had occasion to decide this issue. The question before Hon'ble High Court was: "Whether the Tribunal was correct in holding that non-compete fee being in the nature of capital expenditure, depreciation is to be allowed on the non-compete fee as it constitutes a commercial or a business right under Sec. 32(1)(ii) of the Act?" 13. The Hon'ble High Court after considering and discussing variou....
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....on a business in competition but for such agreement of noncompete. Therefore the right acquired under a non-compete agreement is a right for which a valuable consideration is paid. This right is acquired so as to ensure that the recipient of the non-compete fee does not compete in any manner with the business in which he was earlier associated. The object of acquiring a know-how, patents, copyrights, trade marks, licences, franchises is to carry on business against rivals in the same business in a more efficient manner or to put it differently in a best possible manner. The object of entering into a non-compete agreement is also the same ie., to carry on business in a more efficient manner by avoiding competition, atleast for a limited period of time. On payment of non-compete, the payer acquires a bundle of rights such as restricting receiver directly or indirectly participating in a business which is similar to the business being acquired, from directly or indirectly soliciting or influencing clients or customers of the existing business or any other person either not to do business with the person who has acquired the business and paid the non-compete fee or to do business with ....
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....ght in the assessee to carry on business without competition which in turn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec.32(1)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision i.e., precisely what the Tribunal has held." [Emphasis applied by us] In view of the above judgment of Hon'ble High Court it is unambiguously clear that non-compete payment is capital in nature and falls in the category of an intangible asset. Thus, non-compete payment is eligible for depreciation u/s. 32(1)(ii) of the Act. Accordingly, ground nos. 1 to 3 raised in the appeal of the assessee are allowed. 14. The next issue raised in the appeal of the assessee is with regard to disallowance of depreciation claimed on goodwill u/s. 32(1)(ii) of the Act. In the case of Commissioner of Income Tax Vs. Smifs Securities Ltd. (supra) one of the question before the Hon'ble Apex Court for adjudication was: "Whether goodwill is an asset within the meaning of section 32 of the Income Tax....
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....the circumstances, we are of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) [`CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assesseeCompany in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal [`ITAT', for short]. We see no reason to interfere with the factual finding. One more aspect which needs to be mentioned is that, aga....