2012 (11) TMI 324 - DELHI HIGH COURT

Non-compete fee - Revenue v/s Capital - Held that:- The appellant is in a joint-venture between M/s. Sharp & L&T. Apparently, the agreement entered into with the L&T in view of the changed relationship ensures that the latter does not enter into the same business. Although it is contended that the advantage is only by way of facilitation of the appellant's business and ensuring greater efficiency as well as profitability, on the other side, what can be seen is that the arrangement is to endure for a substantial period, i.e. 7 years. Coupled with the fact that the L&T has its own presence in consumer goods sector and would be, if it chooses - able to put up an effective competition for business engaged in by the assessee, there is no doubt that the amount is to ensure a certain position in the market by keeping-out L&T. Applying the test indicated in the Empire Jute Company Limited Versus Commissioner of Income-Tax (1980 (5) TMI 1 - SUPREME COURT) have emphasized that a single test, i.e. whether the payment results in an enduring benefit cannot be conclusive in a decision as to whether an expenditure qualifies as one falling or in the capital field - this Court is the opinion that the deduction cannot be claimed as a revenue expenditure, it clearly falls within the capital field - in favour of the Revenue.

Whether a non-compete right acquired for seven years amounts to a depreciable intangible asset - Held that:- Each of the species of rights spelt-out in Section 32(1)(ii), i.e. know-how, patent, copyright, trademark, license or franchise as or any other right of a similar kind which confers a business or commercial or any other business or commercial right of similar nature has to be "intangible asset". The nature of these rights mentioned clearly spell-out an element of exclusivity which enures to the assessee as a sequel to the ownership - the 7 years period spelt-out by the non-competing covenant brings the advantage within the public policy embedded in Section 27 of the Contract Act, which enjoins a contract in restraint of trade would otherwise be void.

very species of right spelt-out expressly by the Statute - i.e. of the intellectual property right and other advantages such as know-how, franchise, license etc. and even those considered by the Courts, such as goodwill can be said to be alienable. Such is not the case with an agreement not to compete which is purely personal. - Thus it is to concluded that the words "similar business or commercial rights" have to necessarily result in an intangible asset against the entire world asserted to qualify for depreciation under Section 32(1)(ii) - depreciation not allowed - in favour of the Revenue.