By 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 absence of a compensation from the other party to the
contract may secure a benefit to the party paying the compensation. There is no
certainty that such benefit would accrue. In other words, in spite of the fact
that a competitor is kept out of the competition, on may still suffer loss.
ii) The facts clearly disclose
that on account of the payment of non-compete fee, the assessee had not
acquired any new business, the profit making apparatus had remained the same,
the assets used to run the business remained the same and there was no new
business or new source of income, which accrued to the assessee on account of
the payment of the non-compete fee.
iii) The stand taken by the Revenue that the
assessee had ammortised expenditure spread over for the period of five years
had been found to be factually incorrect, as the assessee had not capitalised
it in its accounts, but treated it as differed revenue expenditure for a period
of five years. That apart, that issue was never raised by the Revenue before
any of the lower authorities. The amount paid under the non-compete covenant
was deductible.”
