TMI Blog2021 (10) TMI 615X X X X Extracts X X X X X X X X Extracts X X X X ..... - As gone through reasons given by the AO, but could not subscribe to reasons given by the AO for the simple reason that, once having accepted the fact that cars were given to staff who are working for R D unit, then the AO is erred in denial of deduction only for the reason that log book was not filed to prove use of vehicle exclusively for R D purpose, because it is irrelevant whether vehicles are exclusively used for R D purpose or other than R D purpose, but as long as the staff are working for R D unit, then it is as good as expenditure was incurred for R D purpose. Therefore, we are of the considered view that the AO as well as the ld.CIT(A) were erred in denying deduction claimed u/s.35 of the Act, towards motor cars provided to staff and hence, we direct the AO to delete addition made towards disallowance of depreciation. Deemed dividend addition u/s.2(22)(e) - assessee has received loan from its sister concern - HELD THAT:- In this case, loan was subsistence at the end of the financial year and further, the sister company s accumulated profits was over and above the amount of loan given to the assessee. Therefore, we are of the considered view that amount received by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction. 3. For that the Commissioner of Income Tax (Appeals) erred in concluding that the non-compete fee in the facts and circumstances of the case, is not eligible for depreciation. 4. For that the Commissioner of Income Tax (Appeals) erred in concluding that non-compete fees would be eligible for depreciation only if it is paid in conjunction with transfer of a division. 5. For that the Commissioner of Income Tax (Appeals) erred in disallowing the claim of weighted deduction u/s. 35 without appreciating the fact that the vehicles were exclusively used by the staff of Research and Development unit. 6. For that the Commissioner of Income Tax (Appeals) erred in treating the loan taken from the sister concern as deemed dividend without appreciating the fact that the said company was amalgamated with the appellant company. 7. For that the Commissioner of Income Tax (Appeals) erred in disallowing 5% of exempt income u/s. 14A of the Income Tax Act towards expenditure incurred in earning the exempt income. 3. The brief facts of the case are that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment a sum of ₹ 3 crores has been assigned for non-compete trade agreement. In pursuance to above two MoUs the assessee entered into a non-compete agreement dated 26.05.2004 and as per said agreement, the seller of Ruchi trademark was prevented from doing any business for a period of 10 years for which a consideration of ₹ 3 crores has been paid. The assessee has treated consideration paid in terms of non-compete agreement as an intangible asset falls under any other business or commercial rights of similar nature as envisaged u/s. 32(1)(ii) of Act and claimed depreciation @ 25%. The AO has disallowed depreciation claimed on non-compete fee u/s. 32(1)(ii) of the Act on the ground that non-compete fees paid does not confer upon the assessee any right which would be used for the business, but it only restrains other person from carrying on his business in competition with the assessee business. Therefore, he observed that non-compete agreement between the parties restraining the other party in engaging in a competing business, does not in anyway result in any right which could be treated as an asset. The intangible asset defined in the depreciation table contemplates o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Therefore, she submitted that this negative right cannot be construed either as the license or as a commercial right to be eligible for deduction u/s. 32(1)(ii) of the Act, 1961. She further referring to decision of the Hon ble Delhi High Court in the case of Sharp Business System vs CIT in ITA No. 492/12 dated 05.11.2012 submitted that intangibles spelt out in section 32(1)(ii) i.e., know-how, patents, copyright, trademark license/franchise as any other right of a similar kind it confers business or commercial or any other business or commercial right of a similar nature has to be intangible asset. The nature of this rights mentioned clearly spell out an element of exclusivity which ensures to the assessee as a sequel to the ownership. However, in the case of non-compete agreement, the advantage is a restricted one, in point of time and it does not necessarily confer any exclusive right to carry on the primary business activity. Therefore, said negative right cannot be construed as any other business or commercial right of similar nature which qualifies for depreciation u/s. 32(1)(ii) of the Act. 7. We have heard both the parties, perused the materials available on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, because the payee is in a position where he can, if he so desires, create a hostile environment for the payer s business either starting a competing business in the same field or by helping the growth of the payer s competitor to ensure that such person does not indulge in such competing behavior, and to ensuring that the payer can carry on business without bothering about the competition. Further, non-compete agreement are generally for specific periods and after an expiry of the period, the advantage in the non-compete agreement disappears since the payee is no longer bound by it. Hence, we are of the considered view that non-compete fee paid in pursuant to any agreement for transfer of patents, know-how, copy rights or trademark is in the nature of any other business or commercial rights of similar nature, being intangible asset, which is eligible for depreciation u/s. 32(1)(ii) of the Act. The fact that non-compete fee has not been specifically mentioned in section 32(1)(ii) would not result in a negative right inference that depreciation is not allowable on non-compete fee, because of the presence of the phrase or any other business of commercial rights of similar nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of any other kind of similar nature as mentioned in section 32(1)(ii). Although divergent views are expressed by two different High Courts, but because the Hob ble Jurisdictional High Court of Madras has taken a view in favour of the assessee in the case of Pentasoft Technologies Ltd vs DCIT, we prefer to follow the Jurisdictional High Court decision which is binding in nature. 7.2 In this view of the matter and considering the ratio of various case laws, we are of the considered view that noncompete fee paid by the assessee in terms of Memorandum of Understanding for acquiring trademark is nothing but an intangible asset in the nature of any other business or commercial rights of similar nature which qualifies for depreciation u/s. 32(1)(ii) of the Act. Hence, we direct the AO to delete the additions made towards disallowance of depreciation claimed on non-compete fee. 8. The next issue that came up for our consideration from Ground No.5 of assessee appeal is disallowance of deduction claimed u/s.35 of the Act, towards expenditure incurred for Research Development (R D) purpose. The assessee has claimed 100% deduction towards two motor cars purchased and given to tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee appeal is addition made towards deemed dividend u/s.2(22)(e) of the Act. The fact with regard to the impugned dispute are that the assessee has received sum of ₹ 50 lakhs loan from its sister concern M/s. Cavin Plastics and Chemicals P. Ltd. The AO has treated loan received from sister concern as deemed dividend u/s.2(22)(e) of the Act, in the hands of the assessee. 9.1 The ld.AR for the assessee submitted that the ld.CIT(A) has erred in sustaining addition made towards deemed dividend u/s.2(22)(e) of the Act, without appreciating fact that loan received from sister concern was in pursuant to commercial expediency because subsequent to the date of loan, the assessee and sister concern were merged by an order of High Court and thus, loan received from sister concern becomes money of the assessee, which was not intended to repay. Therefore, once amount received from sister concern looses the character of loan, then same cannot be considered as deemed dividend u/s.2(22)(e) of the Act. 9.2 The ld.DR on the other hand supporting order of the ld.CIT(A) submitted that there is no dispute with regard to the fact that loan received from sister concern and condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue that came up for our consideration from Ground No.7 of assessee appeal is disallowance of expenditure relatable to exempt income. The assessee has earned exempt income by way of dividend from mutual funds to the tune of ₹ 11,31,040/-, but did not made any disallowance of expenditure relatable to exempt income. Therefore, the AO has determined disallowance of expenditure relatable to exempt income by disallowing 5% of exempt income as expenditure relatable to exempt income. 10.1 The ld.AR for the assessee submitted that the ld.CIT(A) has erred in sustaining addition made by the AO towards disallowance of expenditure relatable to exempt income u/s.14A of the Act, @ 5% of exempt income without appreciating the fact that disallowance made by the AO is excessive. In this regard, he relied upon the decision of ITAT, Chennai in the case of TIL Healthcare Pvt. Ltd., vs. DCIT, ITA No.1808/Mds/2014. 10.2 The ld.DR on the other hand supporting order of the ld.CIT(A) submitted that when assessee is not maintaining separate books of accounts for investment activity, the AO has to determine expenditure relatable to exempt income on estimation basis and thus, there is no error ..... X X X X Extracts X X X X X X X X Extracts X X X X
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