TMI Blog2007 (3) TMI 405X X X X Extracts X X X X X X X X Extracts X X X X ..... iation on the amount paid for non-competition covenant of Rs. 38,47,000 as per the agreement dated 2-4-1998 and amount of Goodwill paid Rs. 5 lakhs. The Assessing Officer disallowed the claim of the assessee against which the assessee filed a petition under section 254 of the Income-tax Act before the CIT who set aside the order of the Assessing Officer wherein the Assessing Officer disallowed the non-competition fees considering the same as Goodwill paid for acquisition of the business. 3. During the course of fresh assessment proceedings the assessee has submitted that it has paid a sum of Rs. 38,47,000 for non-competition covenant for a period of 5 years and a sum of Rs. 5 lakhs was paid for Goodwill. The assessee claimed that the sum of Rs. 38,47,000 be allowed as revenue expenditure in the year of payment or in the alternative the same should be spread over a period of 5 years as non-competition covenant was only for 5 years. The Assessing Officer disallowed the claim of the assessee by holding that the purchase price paid for non-competition covenant is in the nature of Goodwill and cannot be allowed as revenue expenditure. 4. The assessee preferred an appeal before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to clause 18 of the agreement dated 2-4-1996 with the submission that the above clause stipulates that for a period of 5 years, the vendors, i.e. Shaw Wallace Co. Ltd. and Cruickshank Co. Ltd. will not be engaged or involved in any capacity in any business activity in India, which is same or similar to the business acquired by the assessee from the vendors. The said clause will safeguard the assessee from competition only from the vendor companies and that too in India alone. It does not protect the assessee from competition in the same field from other companies and even from the vendor companies outside India. So it cannot be said that object of making the payment was to eliminate competition altogether over any length of time as observed by the CIT(A). By making the payment the assessee did not derive any right to carry on business unfettered so that the advantage can be regarded as of enduring nature. In support of his plea he placed reliance on the judgment of Calcutta High Court in the case of CIT v. Avery India Ltd. [1994] 207 ITR 813 in which it has been held that a benefit that might endure long in assessee business be nonetheless be in the revenue field, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure to avoid competition was dictated by business necessity and commercial expediency and the benefit derived out of it by STL is directly related to enhancing of its profitability and as such the expenditure was of revenue nature and are allowed as business expenditure: ( i ) Empire Jute Co. Ltd. s case ( supra ). ( ii ) Praga Tools Ltd. v. CIT [1980] 123 ITR 773 (AP) (FB). ( iii ) Sarabhai M. Chemicals (P.) Ltd. v. CIT [1981] 127 ITR 74 (Guj.). ( iv ) B.W. Noble Ltd. v. Mitchel 11 Tax Case 372. ( v ) R.S. Radha Kishan Kapoor v. CIT [1963] 47 ITR 938 (All.). 12. The learned counsel for the assessee has also commented on the various judgments relied on by the CIT(A) while confirming the disallowance. The learned counsel for the assessee further urged that the judgment of the Apex Court in the case of CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902 is in fact in favour of the assessee. In that case it has been held that the payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions and from a careful perusal of records we find that the assessee has purchased the shipping business for a consideration of Rs. 43,47,000, comprising of cost of Goodwill at Rs. 5 lakhs and non-competition covenant fees of Rs. 38,47,000. The revenue has claimed that the bifurcation of this cost of shipping business is not proper and major amount was claimed under the head of non-competition covenant fees but this issue was never raised before the lower authorities. The Assessing Officer did not disallow the claim of non-competition covenant fees for these reasons. He has treated these payment/expenditure as a capital expenditure for the reasons that the assessee has acquired enduring benefit by restraining the vendor from doing shipping or similar business. This view was also approved by the CIT(A). Though the CIT(A) has made an observation in his order that the Principal Contracts Property Lease Records and Confidential Information were valued at Re. 1 and the non-competition fees at Rs. 38.47 lakhs but he has not disturbed the bifurcation made by the assessee. The CIT(A) has disallowed the claim of the assessee only for the reasons that the payment was made to carry on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer on the Purchaser a benefit which is no more reasonable than that which is reasonably and necessarily required to protect the goodwill of the Business." 16. From a careful perusal of this clause we find that this clause restrains the vender Shaw Wallace Co. Ltd. and Cruickshank Co. Ltd. from doing any business or activity in India which is same as or similar to the business or any material part of it on the date of this agreement. It has been clarified by this clause that the vendor will not to be engaged or involved directly or indirectly in any form in this type of business for a period of 5 years in India. Through this covenant no condition was to put on the vendor from doing this type of business outside India. It is not the case of revenue that the vendors were only person engaged in shipping business and once the vendors are refrained from carrying on such business the assessee would not face any competition from other business constituents who were engaged in the same business. By this non-competition covenant only the venders are restrained from doing the same business but it does not mean that this payment was made to ward off the competition in the business or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration of Rs. 6 crores. Since the VBC possessed necessary technical knowledge for manufacturing and supply of the aforementioned chemicals, it was a business necessity for the assessee to stop VBC and its founder promoter from again commencing the same business. In the absence of such an agreement VBC could have given competition to the assessee directly or indirectly. So it was out of commercial expediency that assessee agreed to pay a sum of Rs. 6 crores to VBC. The Assessing Officer, however, held that since STL, the assessee, was not doing any business in the same line prior to acquiring VBC s chemical business, non-competition agreement was associated with acquiring a new business. He accordingly held that payment of Rs. 6 crores for non-competition agreement should not be considered to be revenue expendi- ture. The CIT(A) approved the decision of the Assessing Officer. The matter was travelled to the Tribunal. Tribunal found that even though the assessee was not directly engaged in chemical business its Director (SCM) was also Deputy Managing Director of DFPCL which happens to be the largest private sector manufacturer of nitric acid and ammonium nitrate. It was DFPCL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue authorities was not correct. The observations of the Assessing Officer himself are contrary. The Assessing Officer himself has, in first para at page No. 1 of the assessment order, accepted that the assessee-company was engaged in business of manufacturing and trading of weak nitric acid and ammonium nitrate. In the assessment order, the Assessing Officer had taken a plea that the assessee was not carrying on the business of same chemicals, whereas in the remand report he takes a stand that the assessee was not in the manufacturing of nitric acid or ammonium nitrate. In the same breadth, the Assessing Officer has stated to have been admitted that "some trade of chemicals on a small scale in some year does not make the appellant as engaged in chemical business". The CIT(A) on appreciation of facts also admits that the assessee-company as well as DFPCL were under the control of the director, CS and that the assessee was doing some trade business in the chemicals earlier, but according to him, it was not much. In view of above facts and circumstances of the case, one fact, which has been duly accepted by both the authorities is that the assessee was doing at least trade business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irect nexus with the profitability, then this test must fail. (Para 23) If the expenditure is considered in the light of assessee s necessity or commercial expediency, it will be found that it satisfies both the tests because as admitted by the revenue authorities, the non-competition agreement was to enhance the assessee s sales of relevant two chemicals in central and eastern parts of India without any competition. Even otherwise, the benefit to be procured by the assessee for a period of five years could not be said to be of "enduring nature" and since the revenue authorities have rejected the assessee s claim solely on the ground that the benefit procured by the assessee was of "enduring nature", the orders of the revenue authorities cannot be upheld. Even otherwise, the effect of the agreement in question being directly related to the sale-production capacity of two chemicals, which in turn had effect of carrying on assessee s business efficiently and profitably in central and eastern parts of India, the test of enduring nature fails and the expenditure has to be held as revenue expenditure. Empire Jute Co. India Ltd. v. CIT [1980] 17 CTR (SC) 113/[1980] 124 ITR 1 (SC) f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have purchased the plant for Rs. 35 crores instead of Rs. 29 crores. In that case, the assessee would have got depreciation on whole of the amount, i.e., including payment of Rs. 6 crores, and in that situation, nobody was going to question the assessee s bona fide and, therefore, to term the expenditure as of capital nature, only because the assessee has claimed the payments separately was not justified. (Para 28) It is difficult to see as to how the incurrence of the impugned expenditure would add to the profit-making apparatus assumed by the assessee through the sale agreement. It may, by incurring this expenditure, ensure, at least insofar as the vendor is concerned, that the profit-making apparatus continues to yield returns, as envisaged, or in other words, continues to be as effective, and nothing more, i.e., is akin to a maintenance expenditure. Such expenditure, as would be readily agreed, is incurred only to ensure the operational efficiency of the underlying subject or the income-yielding source. In marketing parlance, one may draw comparison (to the extent such comparisons can be validly drawn) to the profit of one s understanding, with the expenditure on ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness environment where various activities are being outsourced and various entities undertake such activities on contract basis or on its own and sell such information and data like any other goods which can be used by other business entities as a raw material or support service to carry out its operation or expand its activities. To further elaborate some entities work like a knowledge centre like L Limited in the present case and derived revenue by selling knowledge to other parties who in turn by purchasing the same attains its objective of becoming bigger fast. Thus the information if we looked upon in an integrated manner is no more than the facilitation of profit earning process. Therefore, the amount paid by the assessee-company to another company for supply of scientific and marketing know-how with a view to expand its market and increase its activities being a payment only for obtaining information regarding clinical data the scientific details and valuable market information, the same is allowable as a revenue expenditure. 19. In the case of Peerless Securities Ltd. ( supra ), the Tribunal has laid down certain general principles for determining whether an expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of removal of any restriction or obstruction or disability, would be on revenue account, provided the expenditure does not acquire any capital asset. The expression once and for all is used to denote an expenditure which is made once and for all for procuring an enduring benefit to business as distinguished from a recurring expenditure in the nature of operational expenses. If the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on, or for extension of the business that is going on, or for a substantial replacement of an existing business asset, it would be capital expenditure. If, on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage, is for running of the business or for working out that asset with a view to produce profit, it would he revenue expenditure. If the outgoing is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process or operation, and not for the acquisition of an asset of a permanent character, the possession of whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld still be capital expenditure. Although payment made to ward off competition in business to rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same has to be put an end at any time. How long the period of contemplated advantage should be in order to constitute an enduring benefit would depend upon the circumstances and the fact of each individual case. The payment made to H were related to actual shipment of coal in the course of the trading activities of the assessee and had no relation to the capital value of the assets. The payments were not related to or tied up in any way to any fixed sum agreed to between the parties. Their Lordship accordingly considered the payment made by the assessee was a revenue expenditure. 21. Likewise the judgment of the Calcutta High Court in the case of Imperial Chemicals Industries (India) Ltd., In re [1935] 3 ITR 21 was wrongly interpreted by the CIT(A). In that case, it has been held that it is not possible to lay down any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure would be a revenue expenditure. 23. Having gone through the aforesaid judgments referred to, we are of the view that in order to determine the nature of expenditure one has to examine the facts of the each case independently. No hard and fast rule can be laid down to determine the nature of expenditure. If the assessee acquires any capital asset or enduring benefit for a longer period, the expenditure may be called to be a capital expenditure. Turning to the facts of the case, we find that assessee has purchased the shipping business from Shaw Wallace Co. Ltd. and Cruik Sana Co. Ltd. against a lumpsum consideration of Rs. 43,47,000 comprising of cost of goodwill of Rs. 5 lakhs and Rs. 38,47,000 for non-competition covenant fees for a period of 5 years. The main dispute raised before us about the nature of payment of non-competition covenant fees. According to the revenue it was a capital expenditure as the assessee is acquired enduring benefit of carrying on shipping business. From a careful perusal of clause 18 relating to non-competition, we find that in lieu of receipt of a non-competition fees, the vendor was debarred from carrying on the same business f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry, it has to face the competition from the vendors also. Meaning thereby, this covenant was not executed for a permanent elimination of the competition from the sellers. From any angle if the facts of the case are viewed, one would only find that the benefit was derived for a limited period of 5 years and that to only in Indian territory. Keeping in view of the various principles laid down through the aforesaid judicial pronouncements, we are of the considered opinion that the expenditure incurred in the instant case, cannot be termed to be a capital expenditure as held by the revenue. This covenant was executed on account of business necessity and commercial expediencies in order to settle down the assessee in a new acquired business of shipping and benefit derived out of it was only to enhance its profitability, as such, the expenditure incurred by the assessee is a revenue expenditure and the same be allowed as a business expenditure. 24. Now the question comes whether this entire expenditure be allowed in one year or over a period of 5 years. Besides an alternative plea for its allowance for a period of 5 years is also raised by the assessee. The assessee has also made a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities or before us, we find no infirmity in the order of the CIT(A) who has confirmed the disallowance for want of proper evidence. We, therefore, find no infirmity therein. ITA Nos. 2445 and 2446/Mum./2004 29. The assessee has raised two more grounds one with regard to the reopening of the assessment and the other with regard to the disallowance at 5 per cent of the expenses claimed under the head "Other Expenses". With regard to the reopening of the assessment, no argument was raised on behalf of the assessee. We, however, carefully examined the order of the lower authorities in this regard and we find no infirmity therein. We, therefore, uphold the reopening of the assessment in these two appeals. 30. With regard to the disallowance of 5 per cent of expenses, the Assessing Officer did not pointed out a specific defect in the disallowance of these expenditure claimed at Rs. 34.86 lakhs, but, he has made the ad hoc disallowance which is not permissible under the law. We, therefore, find no merit in the disallowance. Accordingly, we delete the same. 31. In the result, ITA Nos. 2443, 2445 and 2446/Mum./2004 are allowed and ITA No. 2444/Mum./2004 is partly allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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