2018 (7) TMI 1563 - HC - Income Tax

Payment made by the assessee towards non compete fees - Held that - In the present case, the non-compete fee was paid to the Companies and/or its Directors / shareholders in consideration of noncompeting with the respondent for the period of one year. Thus, this payment does not get any enduring benefit to the respondent-assessee but the benefit is in the very short-term and thus allowable as revenue expenditure. The test applied is the length of benefit on account of payment of non-compete fee and if the benefit is for a short term such as one year in this case, it is Revenue in nature. The Revenue has not even attempted to point out why the above test is not correct. Disallowance of foreign exchange loss - Held that - Issue stands concluded against the revenue and in favour of the respondent-assessee by the decision of the Supreme Court in the case of CIT vs. Woodward Governor India Pvt Ltd 2009 (4) TMI 4 - SUPREME COURT Disallowance of Vanda Loss - whether the said loss is speculative in nature as per section 73? - Held that - We find that both the CIT(A) as well as Tribunal have come to a concurrent finding of fact that, the loss on account of Vanda incurred by the respondent-assessee is not on account of carrying out transactions on its own account, but is an incident of its business as share broker. Thus, the activity which has resulted in loss is only to ensure that it is not disqualified from carrying on activities as a share broker by the Stock Exchange. It needs no explanation that when a person is in the business of broking, situation would arise where the clients/principal for whom the broker is acting, may not fulfill the demand which the broker has to fulfill at its own cost, to maintain his credibility. It is this activity that results in loss. Therefore, it is an integral part of carrying on business as a stock broker. Appeal admitted on substantial question of law at (3) - Whether VSAT is a part of computer and eligible for depreciation @ 60% or @25% only?

Summary

Issues Involved:
1. Treatment of non-compete fees as revenue expenditure
2. Disallowance of foreign exchange loss
3. Depreciation on VSAT
4. Treatment of Vanda Loss as speculative in nature
5. Depreciation on non-compete fees

Analysis:

1. Treatment of non-compete fees as revenue expenditure:
The respondent-assessee acquired customer rights/assets and paid non-compete fees to restrain competing parties. The Assessing Officer initially disallowed the fees as capital expenditure, but the Tribunal allowed the appeal, citing a previous court decision. The court found that the short-term benefit of the non-compete fees did not provide enduring benefits, making it allowable as revenue expenditure. The court upheld the Tribunal's decision based on factual findings and precedent, dismissing the appeal.

2. Disallowance of foreign exchange loss:
The appellant argued that the issue was settled in favor of the respondent-assessee by a Supreme Court decision. The court found no substantial question of law, thus not entertaining the appeal on this issue.

3. Depreciation on VSAT:
The Tribunal allowed depreciation on VSAT at 60%, considering it part of a computer system. The appellant argued that VSAT should be eligible for 25% depreciation. The court found no substantial question of law, thus not entertaining the appeal on this issue.

4. Treatment of Vanda Loss as speculative in nature:
The respondent claimed Vanda Loss incurred in share trading as a business expense. The Assessing Officer disallowed the claim as speculative loss, but the CIT(A) and Tribunal allowed it, considering it part of the respondent's business activities. The court upheld the findings, stating that the loss was integral to the respondent's role as a stockbroker, not speculative in nature.

5. Depreciation on non-compete fees:
The court did not entertain this question as it was deemed infructuous due to the non-entertainment of Question (1) related to the treatment of non-compete fees as revenue expenditure.

The appeal was admitted on the substantial question of law related to the treatment of non-compete fees as revenue expenditure. The court directed the registry to inform the Tribunal for further proceedings. The respondent waived service, and the case was to be heard along with another income tax appeal.

This detailed analysis covers all the issues involved in the judgment, providing a comprehensive overview of the court's decision on each matter.