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THE COMMISSIONER OF INCOME TAX 1 Versus ANDHRA FUELS PVT LTD

Non-competition fee paid - whether was revenue expenditure or capital expenditure? - Held that:- The non-competition agreement entered into by the assessee with M/s KHPL was to prevent K.Raghu Ramakrishna Raju from establishing a power plant in Andhra Pradesh for a period of three years. The agreement, in the present case, prevented Sri K.Raghu Ramakrishna Raju from establishing a power plant only for a period of three years from the date of the agreement. The restrictive covenant was neither pe .....

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PRASAD (SC FOR INCOME TAX) ORDER: (per Hon ble Sri Justice Ramesh Ranganathan) This appeal, under Section 260-A of the Income Tax Act, 1961 (for brevity, the Act ), is preferred by the Revenue aggrieved by the order passed by the ITAT, Hyderabad Bench in I.T.A.No.1228/Hyd/2005 dated 08.06.2012 for the assessment year 2002-03. The respondent-claimant claimed deduction of ₹ 3.25 Crores paid by them, to M/s Kannumuri Holdings Private Limited (for brevity, KHPL ), as consideration for their no .....

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were coming up in the State of Andhra Pradesh; in such a situation there was no basis for the assessee to pay any substantial amount to one person; keeping one person away from the project would not enable the assessee to stop competition in their business; Sri K.Raghu Ramakrishna Raju was setting up a project in Tamilnadu and was associated with an existing power project in Andhra Pradesh established by M/s R.K.Energies Private Limited; and that expenditure incurred by the assessee was capital .....

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pital expenditure; the facts relevant to decide the issue were: the assessee was initially promoted by three companies including M/s KHPL and associates, represented by Sri K.Raghu Ramakrishna Raju; because of certain disputes, among the Directors, it was decided that Sri K.Raghu Ramakrishna Raju would exit from the company and set up his own power project; Sri K.Raghu Ramakrishna Raju was already setting up a power project in Tamilnadu under the banner of his group company M/s R.K.Energies Limi .....

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agreement was only for a limited period of three years to ward off competition in the territory of Andhra Pradesh. The Commissioner held that payment was made by the assessee to a rival company to ward off competition in business; by making this payment, the assessee had not derived any advantage of an enduring nature to hold the expenditure as capital in nature; the agreement was only for a limited period of three years; the main object was to stall the immediate potential threat on the parting .....

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he acquisition of an asset or a right of permanent character or an advantage of enduring nature; such expenditure could not, therefore, be held to be capital expenditure; and, since payment was made wholly and exclusively for the purposes of the business, the same had to be allowed as revenue expenditure in terms of provisions of Section 37 (1) of the Act. The Commissioner held that non-competition fee of ₹ 3.25 Crores paid by the assessee was allowable as revenue expenditure of the busine .....

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e is that, as the object of making the payments in question was to eliminate competition of a rival exporter, the benefit which ensured to the respondent was of an enduring nature and, as such, the payment should be treated as capital expenditure. We find ourselves unable to accede to this contention because we find that the arrangement between the respondent and M/s H.V.Lowe & Co.Ltd., not for any fixed term but could be terminated at any time at the volition of any of the parties. Although .....

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made in pursuance of that arrangement would still be capital expenditure….. . In Eicher Limited 302 ITR 249 the Delhi High Court, after referring to several judgments, including the judgment of the Supreme Court in Coal Shipments Private Limited 82 ITR 902, held that the assessee could not said to have acquired any capital asset by making payment of a noncompeting fee; it merely eliminated competition in its business for a while; from the record it was not clear how long the restrictive .....

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ition for a while, for which it had paid the amount; and, on a cumulative appreciation of the facts, they were of the opinion that the Commissioner of Income Tax (Appeals) was justified in allowing the appeal. The order of the Commissioner was confirmed, and the appeal of the Revenue was dismissed. Sri J.V.Prasad, learned Seniior Standing Counsel for the Income Tax Department, would draw attention of this Court to the findings recorded by the assessing authority in support of his submission that .....

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