2020 (1) TMI 1019 - AT - Income Tax

Disallowance of Non-compete fee - assessee purchased software business of M/s. Fujitsu ICIM Ltd. (FIL) (assessee s holding company) and entered into a non-compete agreement with the said entity for a period of 10 years - total consideration paid by the assessee was Rs. 20 Crores and the accordingly the same was amortized over a period of 120 months being duration of the non-compete agreement - HELD THAT - Upon perusal of documents on record we find that the assessee has entered into 2 separate agreement both dated 31/12/1996 the copies of which have been placed on record. By virtue of agreement for purchase of software business undertaking the assessee has acquired the undertaking for a consideration of Rs. 25 Crores. There is another agreement titled as non-compete agreement which restrict FIL to compete with assessee in development and sale of software for exports market for a period of 10 years. The consideration has been fixed at Rs. 20 Crores payable in the specified manner. Thus there are two separate agreements against which separate payments have been made by the assessee to the transferor. Referring to cases CARBORANDUM UNIVERSAL LTD. 2012 (10) TMI 178 - MADRAS HIGH COURT M/S. EVEREST ADVERTISING PVT. LTD. 2015 (1) TMI 968 - BOMBAY HIGH COURT ASIANET COMMUNICATIONS LTD. 2018 (8) TMI 1554 - MADRAS HIGH COURT unanimous view is that any payment to ward-off rival competition over a certain period of time in furtherance of business interest would be revenue in nature. If the advance consisted 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 indefinite future. We find that fact of the present case to be quite similar and are of the considered opinion that the aforesaid payment made by the assessee to ward off rival competition in a particular business segment in overseas market would be in furtherance of assessee s business interest and would enable the assessee to carry out its business more efficiently and profitably. Therefore we hold that the said expenditure would be deductible revenue expenditure. Deduction being the payment made towards non-compete fees - admission of additional ground as well as additional evidences - HELD THAT - Hon ble Apex Court in Taparia Tools Ltd. V/s JCIT 2015 (3) TMI 853 - SUPREME COURT has held that normally the ordinary rule is to be applied namely revenue expenditure incurred in a particular year is to be allowed in that year. Thus if assessee claims that expenditure in that year the department cannot deny the same. However in those cases when the assessee himself wants to spread the expenditure over a period of ensuing years if can be allowed only if the matching concept is satisfied. We find that it was the assessee s submissions all along that the benefits were perceived over a period of 10 years being the life of restrictive covenants and accordingly the claim was spread over a period of 10 years. Therefore once the assessee himself chose to claim the same in a staggered manner applying the matching principle and when the same has been allowed there could be no occasion for the assessee to be aggrieved on this point. Therefore in view of the stated reasons we decline to entertain the additional ground as well as additional evidences. Accordingly the same stand dismissed. Taxability of Interest Rent - HELD THAT - We find that this issue stood against the assessee by the decision of this Tribunal for AY 2001-02 2010 (12) TMI 850 - ITAT MUMBAI wherein similar income has been held to be assessable under the head income from other sources. Taxability of Misc. Receipts - Computation of deduction u/s 80HHE - HELD THAT - Items represented miscellaneous write-backs recoveries which arose in the course of carrying on business activities. The same could not be said to be an altogether of new stream of income for the assessee and therefore could not be assessed under residuary head viz. Income from other sources. In fact reversal of provision for doubtful debts was similarly treated as income from other sources in AY 2001-02 which was reversed by Ld. CIT(A). Upon further appeal by revenue Tribunal confirmed the stand of Ld. CIT(A) and dismissed this ground 2010 (12) TMI 850 - ITAT MUMBAI . Therefore we direct Ld.AO treat these receipts to be part of business income and accordingly consider the same for the purpose of Sec. 80HHE. Software expenditure - amortization expenses over a period of 36 months - HELD THAT - Assessee purchased software for Rs. 30.34 Lacs during December 1995 to April 1997 and amortized the expenses over a period of 36 months. Accordingly for year under consideration it claimed proportionate expenditure of Rs. 12.22 Lacs which included exchange variation of Rs. 0.75 Lacs. As done in earlier years the exchange variation was not allowed. It was also noted that there was no import of software during the year and thus there would be no question of payment of exchange variation. However Ld. CIT(A) after considering assessee s submissions allowed the same. Upon due consideration of factual matrix we find that no such addition of Rs. 11.67 Lacs as stated in the additional ground has been made while computing assessee s income and therefore this ground is dismissed as infructuous.

Summary

Issues Involved:
1. Disallowance of non-compete fee.
2. Taxability of interest and rent.
3. Taxability of miscellaneous receipts.
4. Additional ground concerning software expenditure.

Issue-wise Detailed Analysis:

Ground No. 1 - Disallowance of Non-compete Fee
The assessee purchased the software business of M/s. Fujitsu ICIM Ltd. (FIL) and entered into a non-compete agreement with FIL for a period of 10 years, effective from 01/10/1996, for a consideration of Rs. 20 Crores. The assessee amortized this amount over 120 months and claimed Rs. 2 Crores as a deduction for the year under consideration. The AO disallowed this deduction, treating the non-compete fee as capital expenditure. The CIT(A) upheld this view, stating that the payment was part of the transfer of the entire software business, thus constituting a capital expenditure. However, the Tribunal found that there were two separate agreements: one for the purchase of the software business and another for the non-compete clause. Citing various judicial precedents, the Tribunal concluded that the non-compete fee was revenue in nature and allowed the deduction of Rs. 2 Crores for the year.

Additional Ground of Appeal
The assessee filed an additional ground requesting the entire non-compete fee of Rs. 20 Crores be allowed as a revenue expenditure in AY 1998-99, citing the merger with FIL effective from 01/04/2000. The Tribunal dismissed this additional ground, noting that the assessee had consistently claimed the expenditure over 10 years and had not raised this issue earlier. The Tribunal found no reason to deviate from the matching principle and declined to entertain the additional ground.

Ground No. 2 - Taxability of Interest and Rent
The AO treated interest and rent income totaling Rs. 64.91 Lacs as "Income from Other Sources," which was upheld by the CIT(A). The Tribunal referred to its earlier decision for AY 2001-02, which held similar income as assessable under "Income from Other Sources." Respectfully following the same, the Tribunal dismissed this ground of appeal.

Ground Nos. 3 & 4 - Taxability of Miscellaneous Receipts
The AO treated miscellaneous receipts totaling Rs. 63.91 Lacs, including provisions written back, miscellaneous recoveries, and royalty recovery, as "Income from Other Sources." The CIT(A) upheld this view. However, the Tribunal found that these receipts arose in the course of business activities and should be treated as business income. The Tribunal directed the AO to consider these receipts as part of business income for the purpose of Sec. 80HHE, allowing these grounds of appeal.

ITA No. 1642/M/03, AY 1999-2000
The Tribunal followed the same reasoning as in AY 1998-99, allowing the deduction of Rs. 2 Crores for non-compete fees and dismissing the ground concerning rent and interest income. The Tribunal also allowed the inclusion of certain items for the purpose of Sec. 80HHE. An additional ground concerning software expenditure was dismissed as infructuous since no such addition was made while computing the assessee's income.

ITA No. 3443/M/04, AY 2000-2001
The Tribunal followed the same reasoning as in AY 1998-99, allowing the deduction of Rs. 2 Crores for non-compete fees and dismissing the ground concerning rent and interest income. The Tribunal also allowed the inclusion of certain items for the purpose of Sec. 80HHE.

Conclusion
All the appeals were partly allowed in terms of the Tribunal's order. The Tribunal pronounced the order in the open court on 02nd January 2020.