TMI Blog2012 (10) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by the assessee was for the purpose of getting the technical knowhow by the assessee on manufacturing and processing of goods. Going by the provisions of Section 35AB and the Explanation on technical knowhow no hesitation in holding that the assessee is entitled to the relief under Section 35AB only, and not to the claim of depreciation under Section 32 relying on decision in case Godrej Soaps Limited, Escorts And Another Versus Union of India And Others [1992 (10) TMI 1 - SUPREME COURT] - against assessee. Non-compete fee paid to Sri.U.Mohan Rao - revenue expenditure v/s capital expenditure - Held that:- It is not denied by the Revenue that U.Mohanrao was the Chairman and Managing Director of some of the companies which got merged with the assessee company. The said U.Mohanrao had access to all information starting from manufacturing process, knowhow to the clientele and the products, including the pricing of the products. By a process of amalgamation, the assessee had acquired the business of the amalgamating companies. However, for the fruitful exercise of its business as a business proposition, the assessee thought it fit to enter into a non-compete agreement with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reported in [2007] 293 ITR 108 (Commissioner of Income Tax vs. Shiva Distilleries Limited) and [2008] 297 ITR 107 (CIT vs. Ashok Leyland Ltd.) in favour of the assessee. Consequently, the question has to be held against the revenue and the order of the Tribunal, to that extent, is incorrect. 3. As far as the second question regarding the includability of the gross interest or the net interest as per Explanation (baa) to Section 80HHC is concerned, the same has to be answered in favour of the assessee, following the decision reported in [2012] 343 ITR 89 (ACG Associates Capsules Pvt. Ltd. vs. CIT) that only after netting, the interest for the 90% includability has to be considered for the purpose of computing the deduction under Section 80HHC. 4. As far as the fourth question as to whether the assessee was entitled to depreciation or deduction under Section 35AB is concerned, it is seen from the documents placed before this Court that the expenditure incurred by the assessee was for the purpose of getting the technical knowhow by the assessee on manufacturing and processing of goods. Going by the provisions of Section 35AB and the Explanation on technical knowhow, we have no hes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either directly or indirectly, any competitor or any other person in either establishing, managing, promoting or developing the business of the said products or any product similar thereto; he shall not act as a Consultant or use any knowhow, design or drawings directly or indirectly and refrain from disclosing or divulging any information relating to the knowhow, trade practices, etc. The agreement was to be effective for a period of five years from the date of the agreement. 7. On 29.04.1996, yet another agreement was entered into between the assessee and the said U.Mohanrao, former Chairman and Managing Director of Cutfast Abrasive Tools Limited, as by way of a non-compete agreement that the said U.Mohanrao shall not, in any manner, assist any third party, or sell or render advise or act as a Consultant in respect of the products, namely, coated and bonded abrasives, current range of products of the Electrominerals Division of CATL and cloth processing for coated abrasives. In consideration of the said agreement, the said U.Mohanrao was paid a sum of Rs.1,75,00,000/- towards non-compete fee. On 14.10.1996, there was a supplementary agreement between the assessee and the said U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd (S.C.), [1980] 124 ITR 1 (Empire Jute Co. Ltd. vs. Commissioner of Income Tax (S.C.) and [1989] 177 ITR 377 (Alembic Chemical Works Co. Ltd. and pointed out to the guiding factor in the matter of considering the claim as to whether the expenditure would fall under the capital or revenue head. Making particular emphasis on the fact that the expenditure incurred was more in the field of indefinite income earning operation and not in the context of strengthening the income earning structure, he submitted that the Tribunal and the Authorities below committed a serious error in looking at the enduring benefit concept for the purpose of rejecting the assessee's case. 10. Referring to the decision reported in [1980] 124 ITR 1 (Empire Jute Co. Ltd. vs. Commissioner of Income Tax (S.C.), he submitted that the expenditure incurred was for the exploitation of a commercial asset; hence was revenue in character. Even where an expenditure is incurred by obtaining an advantage of enduring benefit, it may, nonetheless, be on revenue account and the test of enduring benefit may break down. He further submitted that what is material herein is to consider the nature of advantage in a commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular facts and circumstances of a given case. In a transaction of transfer of allotment of loom hours, on the question as to whether it is a revenue expenditure or a capital expenditure, the Apex Court pointed out that a payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa. Thus whether an expenditure is capital or revenue has to be determined with regard to the nature of the transaction and other relevant factors. Referring to the decision reported in [1965] 58 ITR 241 (PC) (Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.), the Apex Court pointed out that "there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. ... 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 this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a capital or revenue, as held by the Apex Court, is to find out the aim and object of the expenditure and the commercial necessities of making such an expenditure. The question has to be considered in the background of the facts of each case, that "the idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions f "capital" or "revenue" a judicial fetish. " - [1989] 177 ITR 377 (Alembic Chemical Works Co. Ltd.). 18. Going by the above-said principle, if one looks at the decision reported in [1991] 191 ITR 249 (Chelpark Company Ltd. vs. Commissioner of Income Tax), one may find that the decision that the expenditure was a capital expenditure and hence not deductible, rested in the context of the peculiar facts of the case; the partnership with which the assessee had the non-compete agreement got dissolved immediately after the payment of the non-compete fee and the potential competitor had vanished. On these facts, this Court observed that, whatever the assessee had paid for was of permanent or enduring quality, in the sense that competition had been totally eliminated and protection had been acquired ..... X X X X Extracts X X X X X X X X Extracts X X X X
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