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2016 (1) TMI 1094 - ITAT MUMBAI

2016 (1) TMI 1094 - ITAT MUMBAI - TMI - Reopening of assessment - receipt of non-compete fee undisclosed - Held that:- From the record we found that during the course of original assessment proceedings u/s 143(3) of the Act, the A.O. has called all the details with regard to the payment of non-compete fee and after examining the same, allowed the assessee’s claim of such non-compete fee as revenue in nature. Thereafter, on the very same set of facts, the A.O. changed his opinion and reopened the .....

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this issue, by following the order of the Tribunal in assessee’s own case in the A.Y. 2004-05 dated 28.02.2011 where non compete fee was treated as capital expenditure.

Claim for depreciation on non compete fee - Held that:- So long as the non compete fee in question is capital expenditure, the same is entitled for deprecation. Accordingly, we direct the AO to allow the claim of depreciation on the amount of non compete fee paid, treating the same as intangible assets. We direct accor .....

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ld. CIT(A) erred in law in holding that the notice issued u/s.147 is bad in law and reassessment made is invalid without appreciating the fact that the AO had not discussed this issue at all in his original assessment order. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of ₹ 2.50 cr. being 1/4th of ₹ 10 cr. paid to M/s Rallies India Ltd as non-compete fees treated by the AO as capital expenditure without appreciatin .....

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assessment. The issue was examined and the assessment was completed by A.O. under scrutiny assessment.. No fresh material is brought on record and reassessment proceedings is only due to change of opinion. After completion of assessment u/s 143(3) of the Act on 31-3-2005, the A.O. issued letter dated 08.11.2007 wherein it was stated that the non-compete fee paid by the assessee is capital in nature which gives enduring benefit hence cannot be allowed. Since the same was claimed as revenue expend .....

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erits of the case, the original assessment was completed treating non compete fee of ₹ 2.5 crores as revenue expenditure. 5. It was submitted before the Learned CIT(A) that the reassessment proceedings were initiated only due to change of opinion on the issue which was examined and concluded earlier. Reliance was placed on following decisions:- (i) CIT vs. Bhanji Lavji 79 ITR 582 (SC) (ii) Sirpur Paper Mills vs. ITO 114 ITR 404 (AP) (iii) CIT vs. Ranjit Kaur 81 TTJ 269 (Chand.) Once, all t .....

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, the assessee relied on various judicial precedents on the issue of reassessment u/s.147 which are listed as under: - (i) Sesa Goa Ltd. vs. JCIT (2007) 294 ITR 101 (ii) German Remedies Ltd. (2006) 285 ITR 26 (Bom) (iii) ITO vs. Lakhmani Mewal Das (1976) 103 ITR 437 (iv) CIT vs. Holck Larsen 85 ITR 467 (Bom) (v) CIT vs. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del.) (vi) N.C. Gupta vs. ACIT (2004) 90 ITD 768 (Del.) (vii) Sanghvi Swiss Refills P. Ltd. vs. ACIT (2006) 300 ITR 276 (Bom.) 6. By th .....

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he notes on transaction pertaining to non compete fee was submitted. In this back ground, it is evident that the AO examined this issue, applied his mind, and allowed the expenditure of non compete fee as revenue expenditure in the original assessment proceedings. In such circumstances reopening the assessment u/s.147 without any fresh material amounts to change of opinion on the same set of facts and such assessment cannot be held valid in accordance with Hon‟ble Supreme Court decision in .....

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#8377; 49 crores which includes non compete fee of ₹ 10 crores. The relevant portion of non compete agreement dated 30.06.2001, between appellant and M/s. Rallis India Ltd. read as - Non-Compete: (i) SELLER agrees and covenants with and undertakes to the PURCHASER that neither SELLER nor any of its Affiliates shall, for a period of 4 (four) years from the closing date, directly or indirectly compete with or engage and/ or participate in the business of promotion, marketing, sale and distri .....

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ithout prior consent of the PURCHASER and the PURCHASER shall have discretionary right to refuse or withhold such permission. (iii) For the purpose of assuring to the PURCHASER the full benefit of the business and goodwill of the said Pharmaceutical business Undertaking, the SELLER shall undertake and agree that they will not at any time after the closing date disclose to any person or themselves use for any purpose and shall use best endeavors to prevent the publication or disclosure of any inf .....

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it gives enduring benefit accordingly it was disallowed. For the first time, such addition was made in AY 2004-05. The addition was made in the subsequent AY 2005-06 also. The assessment for AYs 2002-03 and 2003-04 were reopened. The reassessment of AY 2002-03 was completed u/s 143(3) r.w.s. 147 on 24.12.2007 which is the subject matter of the appeal now. For AY 2004-05, the same issue was adjudicated upon by the CIT(A) vide his order dated 09.10.2007 and appeal was allowed. Relevant portion is .....

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restriction on manufacturing and selling it outside India. It has been stated by the appellant that a substantial business of the appellant is outside India. It has further been stated that this agreement was only for four years, seller would be free after four years and therefore, this did not have enough durability to make it an asset of enduring nature. It has also been pointed out that the products referred to in this agreement was generic in nature and there were many players offering simi .....

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for four years, which in the circumstances of the appellant‟s balance sheet may help in augmenting the profit but cannot eliminate the competition, altogether. In fact, Rallis was free to pass on this right to any other competitor after 4 years. It cannot be said that benefit will be for more than 4 years. The appellant has rightly spread this in four years. The arrangement only helped in augmenting domestic profit for four years and M/s. Rallis coming back to restart the businesses was ne .....

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ue expenditure. 9. Against the above order of CIT(A), Revenue is in appeal before us. 10. The ld. D.R. contended that non-compete fee was paid by the assessee has wrongly been allowed by the A.O. as revenue expenditure while framing assessment u/s 143(3) of the Income Tax Act, 1961. However, subsequently, it came to the notice of the A.O. that non-compete fee was capital in nature, therefore, by allowing the claim of the same as revenue expenditure would arose escapement of income. Accordingly, .....

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ounsel relied on the decision of Hon ble jurisdictional High Court in the case of Dynacraft Air Controls vs. Smt. Sheha Joshi & Ors in Writ Petition (L) No. 55 of 2013, 168 of 2013 & 57 of 2013 dated 8th February, 2013 wherein after relying on the decision of Hon ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd. held that mere change of opinion is not sufficient for reopening the assessment and reopening was held to be invalid. Further reliance was placed on the decision .....

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the reassessment proceedings could not be initiated on the ground that the A.O. was legally wrong and had misapplied and wrongly understood the law/legal position. 12. Reliance was also placed on the decision of Hon ble Bombay High Court in the case of Mrs. Parveen P. Bharucha vs. Vs. DCIT/Union of India in Writ Petition No. 10447 of 2011 dated 27th June, 2012 wherein the Hon ble Court observed that a fresh application of mind on the same set of facts amounts to a change of opinion and does not .....

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ssment proceedings was held to be not justified. 14. We have considered the rival contentions and carefully gone through the orders of the authorities below. We have also deliberated upon the judicial pronouncements referred by the lower authorities and also cited by the ld. A.R. and ld. D.R. during the course of hearing before us, in the context of factual matrix of the case. From the record we found that during the course of original assessment proceedings u/s 143(3) of the Act, the A.O. has c .....

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egard to the facts on record to the effect that there is a change of opinion. In the case of Kelvinator of India Ltd. (supra) it was held by the Hon ble Supreme Court that reopening on the basis of change of opinion is not sustainable in law. We also found that to check the assessee s contention regarding change of opinion, the ld. CIT(A) called for assessment records and details were also called from the assessee vide letter dated 25-2-2005 where the notes on transaction pertaining to non-compe .....

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on ble Supreme Court in the case of Kelvinator reported in 34 DTR 49 wherein it was held that mere change of opinion per se can not be a reason to reopen the assessment and A.O. has no power to review the assessment. 15. The Hon ble Delhi High Court in the case of BLS Ltd. (supra) exactly on similar set of facts quashed the reassessment proceedings. In this case also, the A.O. has allowed the assessee s claim for non-compete fee as revenue expenditure in the original assessment u/s 143(3) of the .....

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eassessment proceedings on the ground of change of opinion. 17. With regard to claim of revenue expenditure in respect of non compete fee of ₹ 2.5 crores, we found that as per non compete agreement, it was paid for a period of four years. The assessee claimed 1/4th of it amounting to ₹ 2.5 crores in each of four years commencing from assessment years 2002-03 to 2005-06. The AO held that non compete fee is capital in nature as it gives enduring benefit. Accordingly, assessee s claim o .....

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filed by Revenue in the assessment year 2004-05, allowing claim of revenue expenditure by CIT(A), the Tribunal reversed the order of the CIT(A) treating the non compete fee as capital expenditure. 18. So far as assessee s claim of revenue expenditure is concerned, we set aside the order of the Ld. CIT(A) on this issue, by following the order of the Tribunal in assessee s own case in the A.Y. 2004-05 dated 28.02.2011 where non compete fee was treated as capital expenditure. 19. Now coming to the .....

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his case is four years. The idea is that by that time, the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee makes payment for non-compete fee. Now, the second question is whether such right can be termed as "or any other business or commercial rights of similar nature" for construing the same as "intangible asset". Here, the doctrine of ejusdem generis would come in .....

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right obtained by way of non-compete fee would also be covered by the term "or any other business or commercial rights of similar nature" because after obtaining non-compete right, the assessee can develop and run his business without bothering about the competition. The right acquired by payment of non-compete fee is definitely intangible asset. Moreover, this right (asset) will evaporate over a period of time of four years in this case because after that the protection of non-compet .....

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. (120 TTJ 983) has been held that payment made under a non-compete agreement was capital expenditure and entitled to depreciation as in intangible asset. The bench applied the decision of the Mumbai Tribunal in the case of Techno Shares and Stocks Ltd. (101 TTJ 349) (Bom) (depreciation on stock exchange membership card) which was confirmed by the Hon ble Supreme Court in 327 ITR 323. Recently Hon ble Supreme Court in case of Simfs Securities Ltd. held that even goodwill which is a commercial ri .....

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