TaxTMI 
TaxTMI 
2023 (2) TMI 304
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....considered while adjudicating the appeals. Having heard rival submissions and after due consideration of case records, our adjudication would be as under. 2. The lead appeal is for AY 2011-12 which arises out of the order of Ld. Commissioner of Income Tax (Appeals)-13 [CIT(A)] dated 07-05- 2018 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 21-02-2014. The grounds raised by the assessee read as under: - Ground No 1: The learned Commissioner of Income Tax (Appeals) erred in denying depreciation of Rs.1,07,81,250/- on non-compete fee capitalized which represents intangible assets being technical know-how, processes etc., used in the business and hence is entitled to depreciation. The learned CIT (A) ought to have appreciated the fact that the appellant had received technical know-how and special processes from the transferor along with the foam division, which are of the nature of intangible assets and are entitled to depreciation. (CIT vs Smifs Securities Ltd- 348 ITR 302 -SC). Without prejudice, if the amount is held to be as non-compete, the same is allowable as revenue expenditure. (Carborundum ....
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.... resident corporate assessee is stated to be engaged as foam manufacturer. 4. Issue No.1 - Disallowance of depreciation on Non-complete fees paid by the assessee 4.1 The erstwhile assessee M/s Harita Polymer Pvt. Ltd. purchased foam division from another entity i.e., Polyflex India Pvt. Ltd. (PIPL) on a slump-sale basis for total consideration of Rs.47.30 Crores under a 'Business Purchase Agreement' (BPA) dated 10-11-2008. The agreement had non-compete clause wherein PIPL was precluded from establishing the foam business within a period of 2 years from the date of sale of the business to the assessee. Accordingly, a sum of Rs.5.50 Crores was capitalized by the assessee as 'non-compete fees' in the books of accounts and written-off over a period of 2 years. However, in the computation of income, the assessee claimed depreciation on this amount @25% being depreciation rate as applicable to an 'intangible asset'. The same was on the ground that the payment of non-compete fees confers a right on the assessee to enforce the other person not to do a particular commercial activity and hence, it constitutes a commercial right. This clause was incorporated as a negative covena....
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....asis. For the purpose of accounting, the assessee would allocate the consideration towards each assets and liabilities so acquired which would equate to total consideration paid by the assessee under the agreement. It could be seen that the business purchase agreement contain a non-compete clause wherein the seller i.e., PIPL was precluded from establishing the foam business within a period of 2 years from the date of sale of the business to the assessee. The same was with a view to ward-off the competition in the same line of business. The assessee has assigned valuation of Rs.5.5 Crores to this right and accordingly, capitalized the same in the books of accounts and wrote-off the same over a period of two years i.e. over the period during which this right was enforceable. For the purpose of computation of income, the assessee treated the payment so made as 'intangible asset' and claimed applicable depreciation of 25%. This exercise, for the first time, has been done by the assessee in AY 2010-11 which is precisely the argument of Ld. AR. 6. The Ld. AR has submitted that under block of asset concept, once an asset forms block of assets and depreciation is claimed as well as all....
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....f initial year, could not be accepted. The rule of consistency would clearly favor the case of the assessee and the ratio of decision of Hon'ble Supreme Court in the case of Radhasoami Satsang vs. CIT (60 Taxman 248), in our considered opinion, could be applied to the case of the assessee. 8. Proceeding further, the term 'intangible asset' as defined in Sec.32(1)(ii) would mean: - Know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, not being goodwill of a business or profession. The expression 'business or commercial rights of similar nature', in our considered opinion, is sufficient enough to cover the right acquired by the assessee against PIPL precluding it to compete with the assessee in same line of business for 2 years. The assessee, by law, has right to seek exclusion of PIPL from competing in the same line of business for 2 years. This right would possibly enable the assessee to run its business more profitably and would enable it to ward-off at least one of the competitors in the market. The decision of Hon'ble Hi....
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....and patents. Therefore, the view taken by the Commissioner of Income Tax(Appeals) in this regard is acceptable. 23. In the case of Techno Shares & Stocks Ltd. (supra), the assessee therein before the Hon'ble Apex Court claimed depreciation on the membership card held by it with the Bombay Stock Exchange enables it to trade on the floor, is a business or commercial right in the nature of a licence under Section 32(1)(ii) of the Act. 24. The Department on the other hand, pointed out that membership is a personal privilege and that it is not an asset and that it is not owned by the assessee and therefore, the claim of the assessee for depreciation was not admissible under Section 32(1)(ii) of the Act. 25. While answering the question, the Hon'ble Supreme Court considered the rules of the Bombay Stock Exchange and after perusing Rules 5 to 10, it held thus: ".......that the right of nomination is conferred on the member of the exchange; that, the said right shall cease and vest in the exchange when his membership gets forfeited to the exchange; that on such forfeiture the right of membership gets vested in the exchange and on such vesting the....
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....of aforesaid decision is applicable to the case of the assessee and favors the claim so made. 9. Similar is the decision of Hon'ble High Court of Delhi in Areva T & D India Ltd. (345 ITR 421). The Hon'ble Court, elaborating on the concept of 'business or commercial rights of similar nature' held as under: - 12. In the present case, it is seen that the assessee vide slump sale agreement dated 30th June, 2004, acquired, as a going concern, the transmission and distribution business of the transferor Company w.e.f. 1st April, 2004. As a result thereof, the running business of transmission and distribution was acquired by the transferee lock, stock and barrel minus the trademark of the transferor which was retained by the transferor, for lump sum consideration of Rs.44.7 Crores. It is further seen that the book value of the net tangible assets (assets minus liabilities) acquired was recorded in the balance sheet of the transferor as on the date of transfer as Rs.28.11 Crores. The said assets and liabilities were recorded in the books of transferee at the same value as appeared in the books of the transferor. The balance payment of Rs.16,58,76,000/- over and above the book v....
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....) of the Act preceding the term "business or commercial rights of similar nature", it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of "business or commercial rights" cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises. The nature of "business or commercial rights" can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business claims; business information; b....
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....All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. 10. This decision has subsequently been followed by Hon'ble High Court of Madras in the case of the same assessee for AY 2006-07 which is reported as 129 Taxmann.com 55. In this decision, Hon'ble Court has distinguished the decision of Hon'ble Delhi High Court in Sharp Business System vs. CIT (27 Taxmann.com 50) as under: - 11. The second question is as to whether the non compete fee is an asset in the nature of patents, copyrights, trademark, licence, franchises or any other business or commercial right of similar nature and as to whether the assessee is eligible to claim depreciation under section 32 of the Act. 12. The Tribunal took note of the decision of the High Court of Delhi in the assessee's own case for the Areva T & D India Ltd. v. Dy. CIT [2012] 20 taxmann.com 29/208 Taxman 252/345 ITR 421 and allowed the appeal filed by the assessee thereby reversing the findings of the CIT(A). 13. Mrs. R. Hemalatha, learned Senior Standing Counsel appearing for the appellant/Revenue has placed relianc....
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....l view, applied the test, which does not flow from the test laid down in Empire Jute Co. Ltd. (supra) by observing that the test is one of ascertaining whether from commercial angle and the advantage results in a capital field or it is the expenditure falls legitimately within the revenue field. Ultimately, the Court held that the arrangement for a period of 7 years is an enduring benefit. This in our respectful view, does not fulfil the test laid down by Empire Jute Co. Ltd. (supra) and in fact, the Court itself had pointed out that is not the conclusive test to determine whether expenditure is in capital field or revenue. Thus, for the above reasons, we are not in respectful agreement with the reasoning given by the Hon'ble Division Bench in Sharp Business System (supra). 39. It would be relevant to note that, in the case of Sharp Business System (supra), the Joint-venture company was incorporated in the assessment year 2001-02 and in the first year of business, with a view to warding off competition, it entered into agreement by paying a non-compete fee of Rs. 73 Crores to L & T Ltd., of setting-up or undertaking or assisting in the setting-up or undertaking any bus....
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....bstantial question of law No. 2 is answered against the Revenue. Thus, the case law of Sharp Business System vs. CIT (27 Taxmann.com 50), as referred to by revenue, has been distinguished and held to be not applicable. 11. Considering the facts and circumstances of the case and respectfully following the binding judicial precedents, we would uphold the claim of the assessee. The Ld. AO is directed to grant depreciation to the assessee as claimed in computation of income for all the years. The corresponding grounds raised in all the four years stand allowed. 12. Issue No.2 - Disallowance of depreciation on software 12.1 The assessee claimed depreciation @ 60% on 'Software'. The Ld. AO held that as per depreciation schedule Rule 5, such depreciation @ 60% is allowed on 'computers including software'. The word 'including' implies that only computer systems having inbuilt software i.e., computer systems sold along with incorporated/embedded software is eligible for depreciation @ 60%. However, the assessee has purchased software independent of the computer/hardware which would be eligible for normal depreciation of 15% as applicable to Plant and Mach....
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....ess support and engineering support was capitalized towards acquisition of in-house blending unit which was a colorable device to claim additional depreciation not on plant and machinery per se but on services of professional nature. Similarly, the additional material in respect of fabrication unit was supplied by the assessee vide tax invoice dated 31.03.2011 to the Polyol Blending Shop for Rs.16.13 Lacs which would show that the capital goods forming spare part of the "in house blending unit' has been dispatched only on 31.03.2011. It would follow that the said plant and machinery namely 'in house blending unit' had not been installed which would disentitle the assessee to claim additional depreciation. Finally, the additional depreciation of Rs.32.49 Lacs as claimed by the assessee was disallowed and added back to its income. The Ld. CIT(A) confirmed the disallowance against which the assessee is in further appeal before us. 13.2 From the fact it emerges that the assessee has claimed normal depreciation as well as additional depreciation on 'in house blending unit'. This unit has been installed at assessee's premises under a contract with MEFCO Engineers Private Ltd. The asse....