Depreciation not allowable on Non-Compete Fee paid for Acquisition of Going Concern: ITAT [Read Order]

Delhi bench of the Income Tax Appellate Tribunal (ITAT) recently held that the non-compete fee paid for acquisition of going concern is not eligible for depreciation under section 32 of the Income Tax Act, 1961.

The bench comprising R.S. Syal, vice president, and MS Suchitra Kamble, judicial member were held so while deciding the matter in favor of Assessee.

In the instant case, the Assessee engaged in the business of manufacturing specialty chemicals used in oil drilling industry. For the year under consideration, the Assessee made the purchase of going concern called M/s EP Industrial and Agrochemicals Pvt. and allocated Rs.10.72 crore attributed as the non-compete fee, which is a part of the slump sale consideration. The AO has not disputed regarding the bifurcation of slump sale into tangible or intangible assets, including the amount shown as the non-compete fee. He, however, held that the non-compete fee cannot be allowed as a revenue expenditure u/s 37(1). The AO also opinioned that the payment of non-compete fee did not fall in any of the items of intangible assets specified in section 32(1)(ii) and disallowed even the claim of depreciation.

The CIT (A) accepted the stand of AO in so far as the treatment of non-compete fee as a non-revenue expenditure is concerned, however, held such amount to be covered u/s 32(1)(ii) eligible for depreciation @ 25%.

Being aggrieved with the decision of CIT (A) Revenue carried the matter before Appellate Tribunal wherein Ms. Rachna Singh appeared for them, but no appearance from the side of the assessee despite several notices.

The Tribunal relied on the decision of the Delhi High Court in the case of Sharp Business System VS. CIT wherein the Court rejected a similar claim made by the assessee.

In case of non-competition agreement, the Court held that “For the ownership of the intellectual property or know-how or license or franchise, it would be unable to either access the advantage or assert the right and the nature of the right mentioned or spelt-out in the provision as against the world at large or in legal parlance “in rem”. However, in the case of a non-competition agreement or covenant, it was held that the advantage was a restricted one, in point of time. It did not confer any exclusive right to carry-on the primary business activity. The right can be asserted in the present instance only against L&T and in a sense, the right “in personam”.”

Following the above decision, the bench allowed the appeal of the assessee.