Section 32 — Claim for depreciation on amount paid for acquisition of the non-compete right — Whether allowable — Held, Yes.

Whether the CIT(A) was right in allowing depreciation on non-compete fee of Rs.4.55 crore by treating the same as intangible asset u/s.32(1)(ii). According to the AO, the fees paid for obtaining non-compete right from the vendor was not an intangible asset u/s.32(1)(ii) for the following two reasons:

(a) It is not covered under the phrase ‘any other business or rights of similar nature’ used in the provisions; and

 (b) It is not capable of and transfer like other intangible assets of know-how. Before the Tribunal, the Revenue relied on the order of the AO and placed reliance on the following decisions:

• R. Keshvani v. ACIT, (2009) 116 ITD 133 (Mumbai);
• Srivatsan Surveyors (P) Ltd. v. ITO, (2009) 125 TTJ 286 (Chennai);
• CIT v. Hoogly Mills Co. Ltd., (2006) 157 Taxman 347 (SC); and
• Bharatbhai J. Vyas v. ITO, (2006) 97 ITD 248 (Ahd.).

The Tribunal agreed with the views of the CIT(A) that the acquisition of the non-compete right by the assessee from the vendor for a period of 10 years is a right in the nature of an intangible capital asset which is capable of being transferred. According to it, it was further proved by the fact that this right had been further transferred by the assessee at the time of its amalgamation with another company. As regards the reliance placed by the Revenue on various judicial decisions, the Tribunal noted that, except one judgment of the Tribunal rendered in the case of Srivatsan Surveyors (P) Ltd., the other judgments cited by the Revenue are not regarding the allowability of depreciation on non-compete fees. As regards the Tribunal decision rendered in the case Srivatsan Surveyors (P) Ltd., the Tribunal noted that the issue was decided against the assessee on the basis that the depreciation on restrictive covenant is ‘a right in persona’ and not a ‘right in rem’ and hence, the depreciation was not allowed.

However, the Tribunal noted that in a subsequent decision of the Chennai Tribunal in the case of ITO v. Medicorp Technologies India Ltd., (2009) 30 SOT 506 on the similar issue, the case was decided in favour of the assessee. As held by the Apex Court in the case of CIT v. Vegetable Products Ltd., (1073) 88 ITR 192 (SC), the Tribunal observed that in cases where there are two views possible, the view favourable to the assessee should be followed. Accordingly, the issue was decided in favour of the assessee by following the Tribunal decision rendered in the case of ITO v. Medicorp Technologies India Ltd.