ACIT vs. GE Plastics India Ltd (ITAT Ahmedabad)

Non-Compete rights are an “intangible asset” eligible for depreciation

The assessee paid Rs. 4.55 crores to obtain a non-compete covenant from another company for a period of 10 years and claimed that the expenditure had resulted in an “intangible asset” u/s 32(1)(ii) on which depreciation was allowable. The AO rejected the claim though the CIT (A) allowed it. Before the Tribunal, the department relied on Srivatsan Surveyors (P) Ltd. vs. ITO 125 TTJ 286 (Chennai) where it was held that a non-compete right is a ‘right in persona’ and not a ‘right in rem’ and so depreciation was not allowable. HELD by the Tribunal dismissing the appeal:

The AO’s objection that a non-compete right is not an “intangible asset” u/s. 32(1)(ii) on the ground that (a) it is not “any other business or commercial right of a similar nature” and (b) it is not capable of transfer like other intangible assets is not acceptable because (i) the right of absence of competition or the ‘non-compete right’ is an asset which is capable of being transferred and is of a similar nature as the other items referred to. This is shown by the fact that the right was transferred by the assessee at the time of its amalgamation and (ii) the expenditure resulted in the acquisition of an unrivaled and non-competed business territory for 10 years which brought advantages in the capital field. Though in Srivatsan Surveyors 125 TTJ 286 (Chennai), it was held that a restrictive covenant is a “right in persona” and not a “right in rem”, a contrary view was taken in ITO vs. Medicorp Technologies India Ltd 30 SOT 506 (Chennai). When two views are possible, the view favourable to the assessee should be followed held in CIT vs. Vegetable Products Ltd. 88 ITR 192 (SC).