TaxTMI 
TaxTMI 
2018 (8) TMI 1554
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion of the payment of Rs. 15,68,69,040/- in respect of the transponder hire charges? 3. Mr.Porus Kaka, learned Senior Counsel appearing for the appellant submitted that a brief factual background may be required for this Court to consider the substantial question of law, which has been framed for consideration. 4 .The appellant is a company registered under the Companies Act and engaged in the business of television broadcasting, formed in the year 1991. The company was managed by one of the Directors, Mr.SK and he was also the President of the company, managing all the affairs of the company till April, 1999. Mr.SK had 50% shareholding and the balance was held by a Non-Resident Indian, viz., Dr.RM. Mr.SK and Dr.RM decided to part ways and an agreement was arrived at between them by which Mr.SK agreed to sell 50% of his shareholding to Dr.RM or his nominees and to renounce his management of the company. As a part of the said agreement, Mr.SK, agreed not to compete with the business of the assessee company for a period of five years for which the company agreed to pay him a sum of Rs. 10.5 Crores during the previous year relevant to the assessment year 2000-01. This amount wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of certain subsequent developments, which have taken place during the pendency of this appeal, which will be dealt in the later part of this judgment. 8. With regard to question no.1, the learned Senior Counsel for the appellant referred to the following decisions:- (i) Firstly, the decision in the case of Empire Jute Co. Ltd., (supra) and submitted that the expenditure incurred by the appellant for the purpose of removing a restriction with a view to increase its profit was revenue in nature and allowable as a deduction and upon payment of the non-compete fee, no new asset was created. As it was part of the cost of operating the profit earning apparatus and was clearly in the nature of revenue expenditure. (ii) Relying on G.D.Naidu (supra), it was emphasised that it was also a case where similar non-compete agreement was subject matter of issue and the restrictive covenant was also for a period of five years and the Hon'ble Division Bench held that payment towards such restrictive covenant was on revenue account and it would not amount to any acquisition of an advantage of an enduring nature. (iii) The decision in the case of Carborandum Univers....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al Limited (supra) and Empire Jute Ltd. (Supra) held that payments made towards restrictive covenant are revenue in nature. Thus, it is the submission of the learned Senior Counsel for the appellant that the payment made to Mr.SK has to be allowed as a revenue expenditure and the question has to be answered in favour of the assessee. 11. Mr. M.Swaminathan, learned Standing Counsel for the Revenue pointed out that the assessee had entered into two non-compete agreements on the same day, i.e., on 03.05.1999. In the first agreement, i.e., Share Capital Purchase Agreement, the assessee agreed to pay a sum of Rs. 6 Crores to M/s.SK Group, so that the said Group, for a period of five years from the date of the agreement, shall not directly or indirectly by themselves or through any of the relatives or associates provide any service, assistance or support of any nature whatsoever related to any business, which may directly or indirectly compete with the business of the assessee. 12. It is pointed out that on the same day, another agreement dated 03.05.1999 was entered into wherein, the recital would clearly show that the payment of Rs. 4.5 Crores was an additional amount in pursuanc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....greement involved a transfer of the B's business to the assessee-company for a consideration of Rs. 1,50,000/- and it cannot be said that the said sum was paid for acquiring the stock-in-trade, as the assessee-company has not only warded off the business rivalry, but also acquired the business of the rival for a period of nine years in a specified area. Referring to the said decision, it is emphasised that when amount is paid to ward off business rivalries, it has to be treated in the capital field. 17.The decision in the case of Hindustan Pilkington Glass Works (supra) was referred to, to support the submission that payment made to eliminate competition was to prevent a person from producing products manufactured by the assessee for five years under an agreement, which was treated as capital in nature. 18. The decision in Pitney Bowes India (P.) Ltd. (supra) was cited to state that when the assessee itself has treated the expenditure as capital in the books of accounts, it cannot be treated to be revenue in nature. 19. Reliance was placed on Sharp Business System (supra), wherein the non-compete fee paid by the assessee to its erstwhile partner as consideration for no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eements. It is submitted that the assessee has not capitalised the expenditure in his account, but has treated the same as deferred Revenue expenditure for a period of five years and such a contention was never raised by the Revenue before the Assessing Officer or the CIT(A) or the Tribunal and therefore, the said contention deserves to be rejected. 24. Further, it is submitted that the method of accounting is totally irrelevant, and to support this argument, the learned Standing Counsel referred to the decision in the case of Taparia Tools Ltd. vs. Joint Commissioner of Income-tax reported in [2015] 55 taxmann.com 361 (SC). Thus, the learned counsel concluded by submitting that on account of the payment of the non-compete fee, the company does not acquire any business, the profit making apparatus remains the same and the assessee used to run the business remains the same and there is no new business or new source of income and therefore, the expenditure has to be treated as revenue. 25. After elaborately hearing the learned counsels for the parties and carefully perusing the materials placed on record, we are in agreement with the submissions made by the learned Senior Couns....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Revenue does not merit acceptance. 31. The third contention advanced by the Revenue was based upon the decisions in Neel Kamal Talkies (supra), Blaze & Central (P.) Ltd. (supra), Commissioner of Income-tax (supra), Pitney Bowes India (P.) Ltd. (supra) and Sharp Business System (supra). 32. So far as Neel Kamal Talkies (supra) is concerned, this decision was rendered prior to Empire Jute Co. Ltd. (supra), which has laid down principle and broadened the field of interpretation to ascertain the real nature of the advantage, which the taxpayer would derive. Therefore, we are of the view that after the decision in the case of Empire Jute Co. Ltd., the Revenue would be precluded by referring to the decision in Neel Kamal Talkies (supra). So far as Blaze & Central (P.) Ltd. is concerned, this decision was distinguished in G.D.Naidu. At this juncture, it would be relevant to take note of the findings rendered by the Division Bench in G.D.Naidu, which read as follows:- "26........... It may be also mentioned that in the present case, it is not a new business of the assessee, though the new partners have come in for the first time. The old business of the outgoing partners was....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... So far as the decision in Pitney Bowes India (P.) Ltd. (supra) is concerned, we find that the decision was rendered on a concession made by the learned counsels on either side. This is evident from paragraphs 10 & 13 of the judgment, wherein both the assessee as well as the Revenue treated the expenditure as capital expenditure. Thus, the said decision does not render any support to the stand taken by the Revenue. 36. So far as the decision in Sharp Business System (supra) is concerned, as pointed out earlier, in paragraph 5 of the judgment, it has referred to the decision of this Court in G.D.Naidu. The discussion is in paragraph 9 and the conclusion is in paragraph 10. 37. In paragraph 9 of the judgment, the Court has not discussed the decision of G.D.Naidu, though it has referred to it in paragraph 5 of the judgment. This is pointed out because, the Court has discussed the decision in Blaze & Central (P.) Ltd. (supra), which was distinguished in G.D.Naidu. We find that in paragraph 9 of the judgment, the Court after referring to Empire Jute Co. Ltd. (supra) and Alembic Chemical Works Co. Ltd. (supra), has pointed out that the single test, that is, whether the payment resu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the decision in Sharp Business System (supra) is not applicable to the facts of the case apart from the reservation expressed by us above. 41. In Carborandum Universal Limited, one of the questions framed for consideration was whether the Tribunal was right in holding that non-compete fee paid to Shri U.Mohan Rao was capital expenditure, without appreciating that such expenditure has not resulted in an enduring benefit. To be noted that in the said case there were three agreements entered into with the said U.Mohan Rao all pertaining to non-compete and that there were different sets of parties. The expenditure so incurred was held to be revenue and the decision applies with full force to the assessee's case. 42. In the case of Hindustan Pilkington Glass Works (supra), the Division Bench referred to the decision in Empire Jute Co. Ltd (supra) and pointed out that the test of enduring benefit could not be applied blindly with regard to the facts and circumstances that arise in the given case. It was pointed out that the conclusion of the Tribunal that the payment has enduring benefit and is capital in nature does not take into account the commercial benefit raised by the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....id to the party who is kept out of competing business during the term of the contract. 47. The non-compete compensation, from the stand point of the payee of such compensation, is so paid in anticipation that absence of a competition from the other party to the contract may secure a benefit to the party paying the compensation. There is no certainty that such benefit would accrue. In other words, inspite of the fact that a competitor is kept out of the competition, one may still suffer loss. If it were to be a capital expenditure whether or not, an assessee makes a business profit, the character and value of the capital assets will, subject to depreciation, remain unaltered. 48. Thus, the facts clearly disclose that on account of the payment of non-compete fee, the assessee has not acquired any new business, profit making apparatus has remained the same, the assets used to run the business remained the same and there is no new business or no new source of income, which accrue to the assessee on account of the payment of non-compete fee. Apart from that the stand taken by the Revenue that the petitioner had amortised expenditure spread over for the period of five years has bee....