17.
Pr CIT-3 vs. Six Sigma Gases India Pvt. Ltd [ ITA no 1259 of 2016 Dated:
28th January, 2019 (Bombay High Court)].
[Six Sigma Gases India Pvt. Ltd vs..
ACIT-3(3); dated 09/09/2015 ; AY:
2006-07 ITA. No 3441/Mum/2012,
Bench : E ; Mum. ITAT ]
Section 37(1) : Business
expenditure–Capital or revenue-Non-compete fee –Allowable as revenue
expenditure
The assessee is a Private Limited
Company. During the year the assessee had entered into a non-compete agreement
with the original promoter of the Company under which in lieu of payment of
Rs.2.06 crore (rounded off), the promoter would not engage himself in the same
business for a period of five years. Incidentally, the business of the company
was of manufacture of oxygen gases.
The A.O did not
allow the entire expenditure as claimed by the assessee but treated it as
differed revenue expenditure to be spanned over five years period. By the
impugned order, the CIT(A) confirmed the action of the AO.
Being aggrieved
with the CIT (A) order, the assessee filed an appeal to the Tribunal. The
Tribunal by the impugned judgment held in favour of the assessee relying upon
and referring to the decision of this Court in the case of The CIT-1,
Mumbai vs. Everest Advertising Pvt. Ltd., Mumbai dated 14th December, 2012
rendered in Income Tax Appeal No. 6539 of 2010 wherein the Hon’ble
High Court has held that “…..the object of making payment was to derive an
advantage by eliminating the competition over a period of three years and the
said period cannot be considered as sufficiently long period so as to ward off
competition from Mr. Kapadia for a long time in future or forever so as to hold
that benefit of enduring nature is received from such payment. The Tribunal has
recorded a finding that exit of Mr. Kapadia would have immediate impact on the
business of the assessee-company and in order to protect the business interest
the assessee had paid the said amount to ward off the competition…..”
The Revenue
argued that, under the agreement, the assessee would avoid competition from the
erstwhile promoter for a period of five years. The assessee thus acquired an
enduring benefit. The expenditure should have been treated as a capital
expenditure.
The assessee submitted that, the
assessee did not receive any enduring benefit out of the agreement. Under the
non-compete agreement, the asssessee had received a immediate benefit by
avoiding the possible competition from the original promoters of the Company.
Being aggrieved with the ITAT order,
the revenue filed an appeal to the High Court. The Court find that the Madras
High Court in the case of Asianet Communications Ltd. vs. CIT, Chennai
reported in 257 Taxman 473 also treated the expenditure as revenue in
nature in a case where the non compete agreement was for a period of five yers
holding that the same did not result into any enduring benefit to the assessee.
Similar view was expressed by the same Court in the case of Carborandum
Universal Ltd. vs. Joint Commissioner of Income-tax, Special Range-I, Chennai,
reported in [2012] 26 taxmann.com 268. It can thus be seen that, looking to
the nature of non-compete agreement, as also the duration thereof, the Courts
have recognised such expenditure as Revenue expenditure. In the present case,
the assessee had subject agreement with the promoter of the Company to avoid
immediate competition. The business of the assessee company continue. No new
business was acquired. The benefit therefore was held by the Tribunal
instantaneous.
Accordingly appeal of revenue was
dismissed.
