TaxTMI 
TaxTMI 
2025 (12) TMI 1235
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....Yashwant Sanjenbam, Adv., M/S. K J John And Co, AOR, Mr. S. Dwarakanath, A.S.G., Mr. Rupesh Kumar, Sr. Adv., Mr. Raj Bahadur Yadav, AOR, Mr. Prashant Singh Ii, Adv., Mr. Siddharth Sinha, Adv., Ms. Sonali Jain, Adv., Mr. Sarthak Karol, Adv., Mr. Rajat Vaishnaw, Adv., Mr. Mudit Bansal, Adv., Mr. S.Vijay Adithya, Adv., Ms. Aditi Dani, Adv., Mr. Prabhakar Yadav, Adv., Mr. Abhyudey Kabra, Adv., Mr. M. Upadhyay, Adv./AOR. JUDGMENT UJJAL BHUYAN, J. 1. Delay in filing SLP(C) Diary No. 22308/2022 is condoned. 2. I.A. No. 114870/2022 is allowed. 3. Leave granted in SLP(C) No. 16277/2014, SLP(C) No. 24756/2014, SLP(C) No. 719/2020 and SLP(C) No. /2025 (arising out of Diary No. 22308/2022). 4. Civil Appeal No. 4072/2014 is directed against the judgment and order dated 05.11.2012 passed by the High Court of Delhi (briefly 'the Delhi High Court' hereinafter) dismissing Income Tax Appeal No. 492/2012 (Sharp Business System Vs. Commissioner of Income Tax - III) filed by the assessee for the assessment year 2001-02. 4.1. SLP(C) No. 16277/2014 takes exception to the judgment and order dated 20.11.2013 passed by the High Court of Judicature at Madras (briefly 'the Madras High Cou....
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....2000 as a joint venture of M/s. Sharp Corporation, Japan and M/s. Larsen and Toubro Limited ('L&T' for short). L&T is in the business of developing, manufacturing, marketing, distributing and selling, amongst other things, electronic equipments in India. In this connection, it has a well established country-wide sales network. M/s. Sharp Corporation was engaged in the business of designing, developing, manufacturing, marketing, distributing and selling various audio/visual products, household electronic appliances, electronic office products, computers, etc. and other related products on a worldwide basis. 7.1. During the assessment year 2001-02, assessee paid a sum of Rs. 3 crores to L&T as consideration for the latter not setting up or undertaking or assisting in the setting up of or undertaking any business in India of selling, marketing and trading in electronic office products for 7 years. The said amount of Rs. 3 crores was claimed as a deductible revenue expenditure in the return of income filed by the assessee on 31.10.2001 for the assessment year 2001-02 as non-compete fee paid to L&T. Initially, the return was processed under Section 143(1) of the Act. Thereafter, the ....
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.... to L&T had eliminated competition for a period of 7 years which is a duration long enough to establish its reputation and a reasonable market share would have been acquired by the assessee. Payment made by the assessee to L&T was not to increase its profitability. Thus, the non-compete fee could not be treated as revenue expenditure but it was in the nature of a capital expenditure. Further, ITAT held that the non-compete fee would not create intangible asset eligible for depreciation under the provisions of Section 32(1)(ii) of the Act. Thus, depreciation was not allowable on the expenditure made by the assessee as non-compete fee. ITAT held that just as the right to trade freely or to compete in the market is not an asset, similarly a right arising out of a non-compete agreement would not constitute a commercial right falling within the ambit of intangible asset under Section 32(1)(ii) of the Act. ITAT found no infirmity in the order passed by the CIT(A) and dismissed the appeal of the assessee. 7.7. It was thereafter that assessee filed Income Tax Appeal No. 492/2012 before the Delhi High Court. Vide the judgment and order dated 05.11.2012, Delhi High Court dismissed the app....
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.... 180 crores as non- compete fee during acquisition of software development and training division of M/s. Pentamedia Graphics Limited. In these proceedings, we are not concerned with the claim of depreciation on intangible assets like intellectual property rights. 8.4. CIT(A) in the order dated 30.11.2006 held that non- compete fee is nothing but a license. Non-compete fee paid to M/s. Pentamedia Graphics Limited restrained it from using the brand name 'Pentasoft', further restraining it from undertaking any development of software. Assessee could therefore exclusively carry on the business of software development, training and export of such technologies by restraining M/s. Pentamedia Graphics Limited from carrying out the same activities. This commercial right acquired by payment of non- compete fee was held to be an intangible asset entitled to depreciation under Section 32(1)(ii) of the Act. Accordingly, direction was issued to the assessing officer. 8.5. Aggrieved by the aforesaid order of CIT(A), revenue preferred appeal before the ITAT, Chennai particularly the finding of CIT(A) that non-compete fee is eligible for depreciation under Section 32(1)(ii) of the Act. 8.6....
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....ties. Assessee had acquired commercial right to conduct training programmes with the use of the trademark 'Pentasoft' and engaged in software development and export of various software products. According to CIT(A), accounting standard 26 of the Institute of Chartered Accountants of India, non-compete fee is classifiable as intangible asset since it satisfies the criteria of being: (i) identifiable, (ii) controllable, and (iii) economic benefits flowed out to the enterprise. Since the three criteria were satisfied and the assets were unconditionally transferred by M/s. Pentamedia Graphics Limited, CIT(A) held that the assessee had acquired the absolute right to enjoy, utilize and exploit such commercial right. Therefore, it was an intangible asset entitled to depreciation under Section 32(1)(ii) of the Act. 9.4. Both revenue and assessee preferred separate appeals before the ITAT, Chennai. In the order dated 06.02.2008, ITAT held that non-compete fee was not an asset which the assessee could use like a license or franchise in its business. Non-compete fee was a payment made to ward off a competitor for a specified number of years. It only conferred a r....
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.... passed by the assessing officer under Section 143(3) of the Act the claim of depreciation on non-compete fee was disallowed by following the earlier order of assessment in the case of the assessee itself for the assessment year 1999-2000 holding that the expenditure was in no way connected with the acquisition of various assets. The disallowance in this regard was worked out at Rs. 12,18,37,337.00. 10.5. Assessee preferred appeal before CIT(A) who, however, in his appellate order dated 02.09.2004 upheld the decision of the assessing officer disallowing depreciation on non-compete fee. 10.6. Aggrieved thereby, assessee preferred further appeal before ITAT, 'B' Bench, Mumbai. Cross appeal was also filed by the revenue in respect of other issues. Vide its order dated 02.03.2016, ITAT held that so long as non-compete fee in question is capital expenditure, the same would be entitled for depreciation. ITAT, therefore, directed the assessing officer to allow the claim of depreciation on the amount of non-compete fee paid treating the same as intangible asset. 10.7. Assailing the aforesaid finding of the ITAT, revenue preferred appeal before the Bombay High Court being Income Ta....
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....or acquisition of its software development and training division. 11.5. CIT(A) in its order dated 30.11.2006 held that non- compete fee is nothing but a license. Assessee could exclusively carry on the business of software development, training and export of technologies by restraining M/s. Pentamedia Graphics Limited from carrying out the same activities. Thus, payment of non-compete fee was held to be an intangible asset entitled to depreciation under Section 32(1)(ii) of the Act. 11.6. Revenue preferred appeal before ITAT, Chennai challenging the decision of the CIT(A) holding that non-compete fee is an intangible asset eligible for depreciation. Cross appeal was also filed by the assessee on other grounds. 11.7. ITAT vide the order dated 14.03.2008 held that non- compete fee is an intangible asset entitled to depreciation under Section 32(1)(ii) of the Act. 11.8. This finding of the ITAT came to be challenged before the Madras High Court by the revenue in Tax Case (Appeal) No. 600 of 2010. Madras High Court followed its earlier decision in the case of the assessee itself for the assessment year 2002-03 and dismissed the appeal filed by the revenue upholding the deci....
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....fitably and efficiently. 12.4. Applying the tests laid down by this Court in the case of Empire Jute (supra), learned senior counsel submits that non- compete fee only seeks to protect and enhance the business of the assessee thereby facilitating the carrying on of the business more efficiently and profitably. According to him, such payment does not result in creation of a new asset or any accretion to the business apparatus. The benefit, though of enduring advantage, is due to restriction of a competitor or potential competitor in business. Therefore, such a benefit even if of an enduring nature is not in the capital field. 12.5. Continuing with his submissions, Mr. Vohra has alluded to a judgment of this Court in Commissioner of Income Tax Vs. Madras Auto Services (P) Limited (1998) 233 ITR 468. Relying on the aforesaid decision, Mr. Vohra submits that the period or length of time over which the enduring advantage may spread over is not determinative of the nature of expenditure where the advantage merely facilitates in carrying on the business more efficiently and profitably, leaving the fixed assets untouched. 12.6. Mr. Vohra next refers to another decision of this Cou....
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....h an expenditure is construed to be a capital expenditure, depreciation cannot be denied. Section 32(1)(ii) of the Act provides that in respect of depreciation of know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature being intangible assets acquired on or after the first day of April, 1998, not being goodwill of a business or profession, owned wholly or partly by the assessee, and used for the purposes of the business or profession, the deductions as provided thereunder shall be allowed. Explanation 3 to sub-section (1) of Section 32 explains the meaning of the word 'assets' to mean (a) tangible assets, being buildings, machinery, plant or furniture; and (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, not being goodwill of a business or profession. Mr. Vohra submits that the crucial expression to be noticed in this provision is 'any other business or commercial rights of similar nature'. According to him, it would be too simplistic to apply the doctrine of ejusdem generis to say that the aforesaid express....
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....ible assets' is in similar terms as is referred to in Section 32(1)(ii) of the Act. He then refers to the definition of 'block of assets' as provided in Section 2(11) of the Act, clearly bifurcating assets into tangible assets and intangible assets. Intangible assets include 'or any other business or commercial rights of similar nature'. In this connection, Mr. Datar has also referred to the old Appendix I of the Income Tax Rules, 1962 (briefly 'the Rules' hereinafter) and submits that the said provision would be applicable in the present appeal since the assessment year under consideration is 2001-02. The said Appendix I has two parts: Part A dealing with tangible assets and Part B dealing with intangible assets. 13.2. Mr. Datar submits that the expression 'any other business or commercial rights of similar nature' appearing in Section 32(1)(ii) of the Act should take the meaning of or refer to intangible assets and not the species of intangible assets, such as, know-how, patents, copyrights, trade marks, licences and franchises. Thus, the submission is that under intangible assets the abovestated intellectual property rights are the first category; and 'other business or comme....
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....pecifically enumerated. The scope of this expression cannot be restricted or read down by carving out an exception for so-called negative rights. 13.7. Positive or negative rights are just one of the nine species of rights. As set out in Chapter VII of Salmond on Jurisprudence, the classification of rights into positive or negative rights, vested or tangible rights etc. is only for the purpose of characterization of such rights in the context of co- related duties. Such classification cannot be relied upon to interpret the scope of the expression 'any other business or commercial rights of similar nature' appearing in Section 32(1)(ii) of the Act. That apart, emphasis on such a classification may lead to absurd consequences because rights are not only divided into positive and negative rights. Rights can also be partially positive and partially negative. In such a case, it will be absurd to suggest that depreciation will be granted only on prorata basis by the assessing officer. 13.8. Mr. Datar submits that by the Finance Act, 2002, legislature has inserted clause (va) to Section 28 of the Act to tax such receipts. There is no distinction or test stating that only if it is a ....
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.... pay non-compete fee if he is not going to get a return. 13.12. Summing up his arguments, Mr. Datar, learned senior counsel, submits that the view taken by the Delhi High Court is wholly erroneous. Non-compete fee is a capital expenditure and is entitled to depreciation in terms of Section 32(1)(ii) of the Act. 14. Appearing on behalf of the revenue, Mr. S. Dwarakanath, learned Additional Solicitor General of India, at the outset, submits that the issue which arises for adjudication in the present matters is whether payment of non-compete fee is in the nature of revenue expenditure or capital expenditure? Corollary to the above is, if such payment is construed to be of capital nature, then whether depreciation under Section 32(1) of the Act is allowable on such payment? 14.1. Supporting the judgment of the Delhi High Court in Sharp Business System, Mr. Dwarakanath submits that payment of non-compete fee is not in the nature of revenue expenditure. Delhi High Court has rightly held that such payment constitutes capital expenditure in the hands of the payer, having been incurred for acquiring an enduring benefit of an ephemeral nature. In this connection, learned counsel has....
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....ejusdem generis signifies a principle of construction whereby the words in a statute which are otherwise wide but are associated in the text with more limited words are, by implication, given a restricted operation and are limited to matters of the same class or genus as preceding them. That apart, in the absence of a comma, after the word franchises, either in Section 32(1)(ii) of the Act or in the Explanation thereto or in Section 2(11) of the same defining block of assets, the legislative intent becomes quite clear: the expression 'any other business or commercial rights of similar nature' does not constitute a separate category but is to be read alongwith the preceding categories. In support of this contention, learned Additional Solicitor General has placed reliance on the following decisions: (i) Sree Durga Distributors Vs. State of Karnataka (2007) 4 SCC 476; (ii) Mohd. Shabir Vs. State of Maharashtra (1979) 1 SCC 568; 14.7. Applying the above principle to the issue in hand, it is submitted that the specific words 'know-how, patents, copyrights, trade marks, licenses and franchises' constitute a distinct class or category of positive rights that are capa....
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....4.11. By way of analogy, learned Additional Solicitor General has referred to Section 66E(e) of the Finance Act, 1994 which deals with the concept of negative covenant/non-compete fee qua declared services, relevant portion of which reads thus: S.66E. Declared Services: ... Explanation (II) ... (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; ... 14.12. In the context of the Act, more particularly Section 32 thereof, there is no similar provision which specifically lays down that a right which is not capable of being put to use like the right acquired on payment of non-compete fee is nonetheless eligible for depreciation. 14.13. Summing up his arguments, Mr. Dwarakanath asserts that firstly, non-compete fee is not a revenue expenditure but a capital expenditure. Secondly, even though it is a capital expenditure leading to accrual of intangible asset, it is not eligible for deduction because it is not 'owned' and 'used' by the assessee for the purpose of its business. 15. Submissions made by learned counsel for the parties have received the due consideration of....
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....acious and serve as useful servants but as masters they tend to be over-exacting. 18. There is a classical test laid down by Lord Cave L.C. in Atherton Vs. British Insulated and Helsby Cables Ltd. (1925) 10 TC 155, where it was held: When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. 19. There is another test of contemporary vintage. This test is based on the distinction between fixed and circulating capital and was propounded by Lord Haldane in John Smith and Son Vs. Moore (1921) 12 TC 266. This test was explained in the following manner: Fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit of by parting with it and letting it change masters. 20. In Assam Bengal Cement Company Ltd. (supra), this Court opined that if the expenditure is made for acquiring or bringing into existen....
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.... expenditure. 21.2. On appeal, the appellate authority i.e. Appellate Assistant Commissioner upheld the order of the Income Tax Officer. 21.3. On further appeal before the ITAT, it was held that the impugned payments were made to carry on the trade in a more facile and profitable manner. According to the ITAT, the arrangement that was arrived at verbally between the parties was a temporary measure liable to be terminated at will. Coal Shipments Pvt. Ltd. did not derive any advantage of an enduring character by such payments. The expenditure in question were attributable to revenue and not to capital. Accordingly, those were held to be permissible expenditure under Section 10(2)(xv) of the Indian Income Tax Act, 1922 (corresponding to Section 37 of the Act). 21.4. On reference before the High Court, it was held that such expenditure did not create any monopoly or bring about any capital advantage to the assessee. Such arrangement was not likely to have an enduring beneficial effect. It was held that Coal Shipments Pvt. Ltd. was entitled to claim deduction of such expenditure. 21.5. This Court after adverting to the facts noted that the controversy between the parties was....
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.... 10(2)(xv) of the Indian Income Tax Act, 1922. 22.1. Reversing the decision of the High Court, this Court opined that whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. This Court observed that there may be cases where expenditure even if incurred for obtaining an advantage of enduring benefit, may nonetheless be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the ambit of capital expenditure. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of the test of enduring benefit. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indef....
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....iter of the culture-medium. With a view to increase the yield of penicillin, assessee negotiated with M/S Meiji Seika Kaisha Ltd. of Japan. The negotiations ended in an agreement whereby and whereunder, M/S Meiji agreed to supply the technical know-how to increase production of penicillin to more than 10000 units for a consideration of 'once for all' payment of 50,000 US dollars. In the assessment proceedings, assessee claimed this expenditure as revenue expenditure. The Income Tax Officer, on the other hand, took the view that the expenditure was incurred for the acquisition of an asset or advantage of an enduring benefit. Holding such expenditure to be capital in nature, the Income Tax Officer declined the deduction. This view of the Income Tax Officer was affirmed by the first appellate authority i.e. Appellate Assistant Commissioner. The further appeal of the assessee was also dismissed by the ITAT. At the instance of the assessee, a reference was made to the High Court which was, however, decided in the negative against the assessee. It was thereafter that the matter travelled to this Court. 23.1. This Court after alluding to the judicial pronouncements on this point, obser....
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....evenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the assessee in the present case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure. * * * * * Right from inception, the building was of the ownership of the lessor. Therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of view, therefore, the assessee got the benefit of reduced rent. The High Court has, therefore, rightly considered this as obtaining a business advantage. The expenditure is, therefore, to be treated as revenue expenditure. * * * * * All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did ....
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....ould be an allowable business expenditure, irrespective of the period over which the advantage may accrue to the payer (assessee) by incurring of such expenditure. 28. The non-compete compensation from the stand point of the payer of such compensation is so paid in anticipation that absence of a competition from the other party may secure a benefit to the party paying the compensation. However, there is no certainty that such benefit would accrue. Notwithstanding such an arrangement, the payer (assesee) may still not achieve the desired result. In so far the present case is concerned, on account of payment of non-compete fee, the assessee had not acquired any new business and there is no addition to the profit making apparatus of the assessee. The assets remained the same. The expenditure incurred was essentially to keep a potential competitor out of the same business. Further, there is no complete elimination of competition. Such payment made by the appellant to L&T did not create a monopoly of the appellant over the business of electronic products/ equipments. Payment was made to L&T only to ensure that the appellant operated the business more efficiently and profitably. Such ....
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....g to the Assessing Officer, interest on money borrowed for investment can be allowed against income from investment. But if the shares are acquired, not as an investment for earning income but to acquire controlling interest in a company, it would not be entitled to deduction of interest on borrowing. If the dominant purpose of expenditure was not for earning profit but to acquire controlling interest, it could not be allowed as a deduction. As a result, interest @ 13% in investment made in the subsidiary company was not allowed as a deduction. The total disallowance out of interest payment was worked out at Rs. 3,36,32,300.00. 35.1. The Assessing Officer also noted that an amount of Rs. 3,00,000.00 was outstanding from a director of the assessee company and an amount of Rs. 346.43 lakhs was due from companies where directors of the assessee were interested as directors. After considering the explanation of the assessee, the Assessing Officer made disallowance of an amount of Rs.99,49,264.00. Assessing Officer held that assessee's claim for deduction of interest paid on loan, utilized for giving interest free loan/ advances to sister concern, was not in accordance with law. The ....
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....de for acquiring the controlling interest in the associate concern. In fact, it was clearly mentioned by the assessee that it had made investment of Rs. 2587.10 lakhs in the subsidiary company viz, M/S Ceylon Glass Company Ltd. Dividend income from a foreign company like the subsidiary company is taxable and not exempt under Section 10(33) of the Act. 36.1. Assessing Officer had recorded that shares of the subsidiary company were acquired not for earning profit but for acquiring controlling assets. Where the Assessing Officer himself recorded the finding that investment in the subsidiary company was made for acquiring controlling interest, revenue was not justified in contending that assessee had not established that the investment was made for earning income. The fact that the assessee had made investment for acquiring controlling interest in the subsidiary company is itself sufficient for claiming deduction of interest under Section 36(1)(iii) of the Act. Investment made in the subsidiary company was in the line of the existing business of the assessee and was for the business of the assessee. In such circumstances, deduction is allowable under Section 36(1)(iii) of the Act. ....
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.... of the case. This Court held thus: 34. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 35. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allow....