January 2019

Section 37 of the Act and Rule 9A of IT Rules, 1962 Business expenditure capital or revenue expenditure Expenditure incurred on account of abandoned teleserial Revenue expenditure

K. B. Bhujle
Advocate

31.  Asianet Communications Ltd. vs. CIT; 407 ITR 706 (Mad); Date of order: 26th June, 2017 A. Y. 2001-02

 

Section 37 Business expenditure Capital or revenue Amount paid as non-compete fees No new source of income Amount deductible as business expenditure

 

The assessee was a company engaged in the business of television broadcasting, formed in the year 1991. The assessee was managed by one of the directors, SK and he was also the president of the company, managing all the affairs of the company till April 1999. SK had 50% share holding and the balance was held by a non-resident Indian, RM. SK and RM decided to part ways and an agreement was arrived at between them by which SK agreed to sell 50% of his shareholding to RM or to his nominees and to renounce his management of the company. As a part of the agreement SK agreed not to compete with the business of the assesee for a period of five years for which the company agreed to pay him a sum of Rs. 10.5 crore during the previous year relevant to  the A. Y. 2000-2001. This amount was paid to SK in respect of a non-compete covenant, which was claimed as business expenditure in computing the income for the same year. The claim was rejected by the Assessing Officer.

 

The Commissioner (Appeals) and the Tribunal confirmed the order of the Assessing Officer.

 

On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held as under:

 

i)    Any contractual term that imposes restraint on a contracting party from engaging in any business for a reasonable term must be backed by consideration. Therefore, the non-compete compensation is but a consideration paid to the party who is kept out of competing business during the term of the contract. The non-compete compensation from the stand point of the payee of such compensation, is paid in anticipation that abs

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