ACIT v. Real Image Tech. (P) Ltd.
ITA No. 201 (Mad.) of 2007
A.Y. : 2001-02. Dated : 15-2-2008
S. 32 of the Income-tax Act, 1961 — Commercial right comes
into existence whenever the assessee makes payment of non-compete fee and such
non compete right is an intangible asset eligible for depreciation.
During the relevant assessment year, the non-compete fees
paid by the assessee in pursuance of non-compete agreements entered into by it
with certain companies was claimed as revenue expenditure and the claim was
disallowed by the Assessing Officer. Under an application to the Joint CIT
u/s.144A, the assessee made an alternate plea for treating such fees as
capital expenditure — it should be treated as an intangible asset u/s.32 and
depreciation be allowed accordingly. The Jt. CIT did not allow the same,
holding that the payment was capital in nature i.e. neither a revenue
expenditure nor a capital expenditure. The CIT(A) allowed the assessee’s
claim.
The Tribunal, relying on the decisions in the following
cases, allowed the assessee’s claim for depreciation :
(b) ACIT v. Radaan Media Works India Ltd., ITA No.
2241 (Mad.) of 2006 dated 14-12-2007
(c) Techno Shares & Stocks Ltd. v. ITO, (2006) 101
TTJ 349 (Mum.)
The Tribunal noted as under :
(1) When a businessman pays money to another businessman
for restraining the other businessman from competing with the assessee, he
gets a vested right which can be enforced under law and without that the
other businessman can compete with the first businessman.
(2) When by payment of non-compete fee, the businessman
gets his right what he is practically getting is kind of monopoly to run his
business without bothering about the competition.
(3) Generally, non-compete fee is paid for a definite
period which in this case is five years. The idea is that by that time the
business would stand firmly on its own footing and can sustain later on.
This clearly shows that a commercial right comes into existence whenever the
assessee makes payment for non-compete fee.
(4) The term ‘or any other business or commercial rights
of similar nature’ has to be interpreted in such a way that it would have
some similarities as other assets mentioned in clause (b) of Expln. 3. The
other assets mentioned are know-how, patents, copyrights, trade marks,
licences, franchises, etc. In all these cases no physical asset comes into
possession of the assessee. What comes in is only a right to carry on the
business smoothly and successfully and, therefore, even the right obtained
by way of non-compete fee would also be covered by the term ‘or any other
business or commercial rights of similar nature’ because after obtaining
non-compete right, the assessee can develop and run his business without
bothering about the competition. The right acquired by payment of
non-compete fee is definitely an intangible asset.
(5) This right (asset) will evaporate over a period of
time (of five years in this case) because after that the protection of
non-competition will not be available to the assessee. This right is subject
to wear and tear by the passage of time, in the sense that after the lapse
of a definite period of five years, this asset will not be available to the
assessee and, therefore, this asset must be held to be subject to
depreciation.
