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M/s Six Sigma Gases India Pvt. Ltd. Versus ADCIT 3 (3) , Mumbai-20

2015 (10) TMI 1267 - ITAT MUMBAI

Non-compete fees paid - whether CIT(A) legally erred in not considering the non-compete fees as an intangible asset (capital expenditure) and not allowing the depreciation for the current year as well as consequential effect for the future years u/s.32(1)(ii) ? - Held that:- Applying the proposition of law laid down in the case of Everest Advertising Pvt. Ltd. [2015 (1) TMI 968 - BOMBAY HIGH COURT] and other High Courts/Tribunal, we hold that non-compete fee paid by the assessee did not create a .....

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ed u/s.143(3) of the I.T.Act, wherein following grounds have been taken by the assessee :- 1. On the facts and circumstances of the case the learned CIT(A) legally erred in not considering the non-compete fees paid of ₹ 2,03,60,737/- as an intangible asset (capital expenditure) and thereby further erred in not allowing the depreciation for the current year as well as consequential effect for the future years u/s.32(1)(ii) of the Act. Reliance is placed on the decision in the case of Serum .....

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erused. Facts in brief are that during the previous year under consideration the assessee filed its return of income at a loss of ₹ 2.52 crores. In this year, the assessee company paid non-compete fees amounting to ₹ 2,06,55,000/- to the erstwhile promoters of the company to ward off any competition in the manufacture of gases (in the field of CO2 and organ) from companies manufacturing such gases from the erstwhile promoters in this part of the country. It was claimed that this expe .....

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unt. The AO did not agree with the assessee s contention and disallowed the assessee s claim of revenue expenditure and only allowed the amount of ₹ 2,94,263/- amortised in the profit and loss account. 3. By the impugned order, the CIT(A) confirmed the action of the AO, against which the assessee is in further appeal before us. 4. The additional ground was raised by the assessee to the effect that assessee should be allowed the expenditure as revenue rather than its claim of depreciation. .....

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non-compete agreement with the original promoter of the company the present management paid a sum of ₹ 2,06,55,000/-. In the books of account the same was treated as deferred revenue expenditure, and debited a sum of ₹ 2,94,263/- but in computation of income, the entire sum of ₹ 2,06,55,000/- was claimed as deduction. The non-compete fee was paid for noncompeting with the assessee for a period of five years. The issue under consideration is squarely covered by the decision of .....

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or forever so as to hold that benefit of enduring nature is received from such payment. The Tribunal has recorded a finding that exit of Mr. Kapadia would have immediate impact on the business of the assessee-company and in order to protect the business interest the assessee had paid the said amount to ward off the competition. In our opinion, the decision of the Tribunal is based on finding of facts and therefore, first question cannot be entertained. 6. Similar issue was decided by the Hon bl .....

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. and ld. CIT(A), we find that the assessee had paid non-compete fee to its Ex-Managing Director for restricting him to share his expertise or to join any other company in a similar line of business of chemicals for a period of three years on a consideration of ₹ 154.20 lakhs. Since the agreement for restrictive covenant was only for the period of three years to wardoff a potential threat or completion, we are of the opinion that, there can no question of enduring benefit for a long period .....

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be termed as Capital Expenditure . Relying on the same judgment, the Hon ble Madras High Court in CIT vs. Late G.Naidu & others, 165 ITR 63 (Mad), held that if the restrictive covenant given in the non-compete agreement is for a period of 5 years, then it is on revenue account. This proposition has been retreated by the same High Court in Carborandum Universal Ltd. Vs. JCIT, Tax appeal no. 244 0f 2006, order dated 10.09.2012 in detail after analyzing the aforesaid Supreme Court judgment and .....

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e case of CIT v. Late G. D. Naidu [1987] 165 ITR 63 . The annual report also treated this as deferred revenue expenditure. The Assessing Officer being satisfied allowed only ₹ 20 lakhs and rejected ₹ 80 lakhs in terms of his order. The Appellate Commissioner, on challenge, held in favour of the assessee. The Tribunal would hold against the Revenue in the appeal preferred by the Revenue against the allowance of the entire amount by the appellate authority. From the material on record .....

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to expenditure, then how can they question the remaining ₹ 80 lakhs in terms of the proceedings. The law is the same whether it is ₹ 20 lakhs or ₹ 80 lakhs. In these circumstances, and in the light of the acceptance of ₹ 20 lakhs as expenditure, we deem it proper to answer this question of law in favour of the assessee. 9. Similar view has been taken by the Hon ble Delhi High Court in the case of CIT Vs. Eicher Ltd., 302 ITR 249 (Del) wherein it was held as under:- In ord .....

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