TMI Blog2018 (8) TMI 1554X X X X Extracts X X X X X X X X Extracts X X X X ..... t of non-compete fee. Apart from that the stand taken by the Revenue that the petitioner had amortised expenditure spread over for the period of five years has been found to be factually incorrect, as the assessee has not capitalised the same in their accounts, but treated it as deferred revenue expenditure for a period of five years. That apart, such issue was never raised by the Revenue before any of the lower authorities, as the Tribunal has recorded that there is no dispute regarding the facts.- Decided in favour of the assessee and against the Revenue. Disallowance of claim for deduction of the payment - disallowance under Section 40(a)(i) - Held that:- The transponder hire charges made by the appellant on which no tax has been deducted does not come under the purview of either Royalty or Technical Fees on which tax has to be deducted. Accordingly, no disallowance under Section 40(a)(i) is warranted on those payments. Therefore, the CIT(A) held that the TDS payment claim made by the assessee to the extent of ₹ 15,68,69,040/- is prima facie not an allowable expenditure, when the assessee is not required to deduct any TDS on payment of transponder charges and so the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of ₹ 10.5 Crores during the previous year relevant to the assessment year 2000-01. This amount was paid to Mr.SK in respect of a non-compete covenant, which was claimed as a business expenditure in computing the income for the same year. 5.The Assessing Officer, by order dated 31.03.2003, disallowed the claim and computed the assessee's income stating that the payment is of capital nature and is not allowable under Section 37(1) of the Income Tax Act, 1961. The Assessing Officer held that the decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Coal Shipments Pvt. Ltd., reported in (1971) 82 ITR 902 was not applicable to the facts of the case and distinguished the said decision on the ground that the compensation paid therein was paid for an uncertain period, whereas in the assessee's case, the restrictive covenant was restricted for a period of five years. The decision of this Court in the case of Commissioner of Income Tax vs. Late G.D.Naidu and Others reported in (1987) 168 ITR 63 and the decision of the Hon'ble Supreme Court of India in Empire Jute Co. Ltd. vs. Commissioner of Income Tax reported in (1980) 124 ITR 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advantage of an enduring nature. (iii) The decision in the case of Carborandum Universal Ltd. vs. Joint Commissioner of Income-tax reported in (2012) 26 taxmann.com 268 was relied on and it was submitted that the Hon'ble Division Bench of this Court took into consideration all the decisions on the point including the decision in the case of Chelpark Co. Ltd. vs. Commissioner of Income Tax reported in (1991) 191 ITR 249 and held that the assessee therein entered into a non-compete agreement with one U.Mohanrao for a period of five years and paid a sum of ₹ 50,00,000/- as a non-compete fee and claimed the same as revenue expenditure and such payment was in respect of performing of business of the assessee and those expenditure was revenue account and not on capital account. (iv) Reliance was also placed on the decision of Delhi High Court in the case of Commissioner of Income-tax vs. Eicher Ltd. reported in (2008) 302 ITR 249 (Delhi) and it is pointed out that in the said case though the period for which the restrictive covenant was to operate was neither permanent nor ephemeral yet the payment was held to be revenue in character. This decision of the Delhi High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of ₹ 4.5 Crores was an additional amount in pursuance of and in consideration of the Share Purchase Agreement. Therefore, the amount of ₹ 4.5 Crores paid under the said agreement should be treated as acquisition of business or business purchase and therefore, to be treated as capital in nature. 13.Furthermore, the learned counsel stressed that the need for entering into two non-compete agreements on the same day itself is an indicator to show that it contemplates purchase, which is in addition to the consideration paid under the Share Capital Purchase Agreement. Further, it is submitted that the assessee in the books of accounts has amortised the payment for a period of five years and they themselves treated the same as capital expenditure, which is impermissible to treat the same in the Revenue field. 14.The learned Standing Counsel referred to the following decisions:- (i) Neel Kamal Talkies vs. Commissioner of Income-tax reported in [1973] 87 ITR 691 (Allahabad); (ii) Blaze Central (P.) Ltd. vs. Commissioner of Income-tax reported in [1979] 1 Taxman 546 (Madras) / [1979] ITR 33 (Madras); (iii) Commissioner of Income-tax vs. Hindustan Pilkington G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tner as consideration for not setting up any business of selling, marketing and trade of electronic office products for a period of seven years amounted to capital expenditure and thus, the same was not allowable under Section 37(1) of the Income Tax Act, 1961. Therefore, it is submitted that the facts clearly show that the assessee themselves treated the same in their books of accounts as capital expenditure. 20.By way of alternate submission, it is submitted that the amount of ₹ 4.5 Crores paid under the second non-compete agreement dated 03.05.1999 being a payment in addition to the Share Capital Purchase Agreement, should be treated as capital expenditure or in other words, as a share purchase price. On the above submissions, the learned Standing Counsel sought for rejecting the appeal. 21.In reply, Mr.Porus Kaka, learned Senior Counsel, submitted that the decision of the Delhi High Court in the case of Sharp Business System (supra) does not lay down the correct legal position. Though in paragraph 9 of the said judgment, the Court had referred to the decision in Empire Jute Co. Ltd. (supra) and the decision in Alembic Chemical Works Co. Ltd. (supra), but had applied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the learned Senior Counsel for the assessee. We support such conclusion with the following reasons:- 26.The first argument of the Revenue is that there were two agreements on the same day and the purpose of entering into two non-compete agreements has not been properly explained and the recital in the second non-compete agreement whereby payment of ₹ 4.5 Crores was made would clearly indicate that it is in addition to the consideration payable under the Share Purchase Agreement and therefore, it is a capital expenditure. This contention has not been raised by the Revenue at an earlier point of time, viz., before the Assessing Officer or before the CIT(A). 27.Before the Tribunal, both the Revenue as well as the assessee stated that there is no dispute about the facts. It was so recorded in the order passed by the Tribunal. In paragraph 3, the ITAT has observed that undoubtedly it was laid out and expended for the purpose of business . Thus, such a factual point having not been canvassed before any of the authorities, it would be too late for the Revenue to raise it before us in an appeal under Section 260A of the Income Tax Act. Therefore, the submission made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he outgoing partners was being carried on by the new partners and we have already pointed out that even the Income-tax Officer has registered the firm under the Income-tax Act for the subsequent years also. 27. In Blaze and Central (P.) Ltd. v. CIT , the facts were these. The assessee which was carrying on business of arranging exhibition of advertisement and film shorts in licensed public cinema theatres in the four Southern States of Madras, Andhra, Kerala and Mysore, entered into an agreement with one Saraswathi Publicities who was also carrying on similar business on behalf of two companies in the four States. Under the said agreement, Saraswathi Publicities agreed to part with its business in the four States for period of 9 years in consideration of the assessee paying a sum of ₹ 1,50,000. This court held that the assessee had taken over the business carried on by Saraswathi Publicities for a consideration of ₹ 1,50,000 though it was for a period of 9 years. It was further held that the assessee not only derived an advantage by eliminating competition and also acquired a business which generated income. It is in those circumstances, this court held that the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, whether the payment results in an enduring benefit cannot be conclusive in a decision as to whether an expenditure qualifies as one falling or in the capital field and that the decisions have emphasized the need to shift from a narrower field to a broader one, to ascertain the real nature of the advantage, which the taxpayer would derive. 38.Thus, the test to be applied following Empire Jute Co. Ltd. (supra) is to see as to whether it added to the capital of the assessee, whether a new asset was created and whether there was an addition or expansion of the profit making apparatus of the assessee and whether the assessee acquired source of profit or income when such investment was made. However, the Court in our respectful view, applied the test, which does not flow from the test laid down in Empire Jute Co. Ltd. (supra) by observing that the test is one of ascertaining whether from commercial angle and the advantage results in a capital field or it is the expenditure falls legitimately within the revenue field. Ultimately, the Court held that the arrangement for a period of 7 years is an enduring benefit. This in our respectful view, does not fulfil the test laid down by Em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial benefit raised by the company and that the Tribunal appears to have guided solely by an earlier decision rendered by it in the case of Asianet (the case on hand). 43.Further, it was pointed out that the advantage of restraining individuals from engaging any competition is in the field of facilitating its own business and rendering much more profit in the capital field. In the said case, the Directors, to whom the non-compete fee was paid was with a view to remain with the company. While analysing this factual aspect, the Division Bench pointed out that though there was no actual or limited threat of the Directors so far they are ties with their company or starting a new venture always remains and prudence dictates that the company protects itself as against such a probability. Thus, the payment made as non-compete fee to the directors was held to constitute revenue expenditure in the hands of the assessee. 44.In Tamilnadu Magnesite Ltd., (supra), we had decided some what similar issue and applied the decision of the Hon'ble Supreme Court in Empire Jute Co. Ltd. (supra) and held in favour of the assessee. 45.Even as the doctrine of enduring benefit is on the wane, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars has been found to be factually incorrect, as the assessee has not capitalised the same in their accounts, but treated it as deferred revenue expenditure for a period of five years. That apart, such issue was never raised by the Revenue before any of the lower authorities, as the Tribunal has recorded that there is no dispute regarding the facts. 49.Accordingly, the first substantial question of law is answered in favour of the assessee and against the Revenue. 50.This leaves us with question no.2 for decision. As pointed out earlier, this pertains to disallowance of claim for deduction of the payment of ₹ 15,68,69,040/-. The disallowance was confirmed by the CIT(A) by order dated 27.01.2004, for the reason that in the assessment year 1995-96, the assessee's company succeeded in their case and the payments to Mr.Menon U.K.Limited as transponder hire charges are not hit by the purview of the provisions of Section 40(a)(i) of the Income Tax Act and the learned CIT(A), vide order in I.T.A.No.27/2002-03 dated 29.07.2002, held that the transponder hire charges made by the appellant on which no tax has been deducted does not come under the purview of either Royalty or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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