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PCIT vs. Piramal Glass Limited (Bombay High Court)

COURT:
CORAM: ,
SECTION(S):
GENRE:
CATCH WORDS: ,
COUNSEL: ,
DATE: June 11, 2019 (Date of pronouncement)
DATE: June 20, 2019 (Date of publication)
AY: -
FILE: Click here to download the file in pdf format
CITATION:
S. 32(1)(ii) Depreciation on Intangible asset: Rights acquired under a non-compete agreement gives enduring benefit & protects the assessee's business against competition. The expression "or any other business or commercial rights of similar nature" used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include non-compete rights (Ferromatice Milacron India 99 TM.com 154 (Guj) followed)

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 556 OF 2017

Pr.Commisisoner of Income Tax – 7 … Appellant
Versus
Piramal Glass Limited … Respondent

Mr. Suresh Kumar for the Appellant.
Mr. Mehul Agarwal i/b. Mr. Atul Jasani for the Respondent.

CORAM : AKIL KURESHI &

S.J. KATHAWALLA, JJ.

DATE : 11TH JUNE, 2019
P.C.:

1. This Appeal filed by the Revenue to challenge the Judgment of the Income
Tax Appellate Tribunal (‘the Tribunal’ for short). Following questions of law are
presented for our consideration :

“(a) Whether on the facts and in the circumstances of the case
and in law, the ITAT is right in deleting the disallowance of
depreciation claim on the non-compete fees paid when it is
clear that it does not represent any intangible asset qualified
for the depreciation as per Section 32 of the I.T. Act, 1961 ?

(b) Whether on the facts and in the circumstances of the case
and in law, the ITAT is right in deleting the disallowance of
interest on the borrowed funds when the Assessee had not
demonstrated whether the purpose for which advance were
made is covered by the principle of commercial expediency
and also the investment was made for acquiring the
controlling interest in the associate concern ?

(c) Whether on the facts and in the circumstances of the case
and in law, the ITAT is right in deleting the disallowance of
interest on the borrowed funds given to the sister concern and
its directors when it is for the assessee to prove that each of
the loan on which the assessee paid interest in the accounting
year was utilized for the purposes of the business ?”

2. We notice that before the Tribunal there was Cross Appeal filed by the
Revenue. From the Revenue’s Appeal disposed of by the Tribunal, following two
additional questions are framed in this Appeal :

“(i) Whether on the facts and in the circumstances
of the case and in law, the ITAT was justified in
deleting the ground raised by the revenue on write of
of non compete fees of Rs.18 Crores over a period of
18 years without discussing the issue on merits ?

(ii) Whether on the facts and in the circumstances of
the case and in law, non-compete fee of Rs.18 Crores
paid by the assessee can be written of in 18 years in a
manner granted by the CIT(A) ? ”

3. Question No. (a) noted above pertains to the decision of the Tribunal to
grant depreciation on the Assessee’s payment of non-compete fees. According to the
Revenue, this being an intangible asset, no depreciation under Section 32 of the
Income Tax Act, 1961 (‘the Act’ for short) was available.

4. We however notice that similar issue has been considered by the diferent High Courts and held in favour of the Assessee. A reference can be made to the
decision of the Division Bench of the Gujarat High Court in the case of Principal
Commissioner of Income Tax v. Ferromatice Milacron India (P.) Limited 1 . It
was also the case where the Assessee had incurred expenditure pursuant to the noncompete
agreement and claimed depreciation on such asset. While dismissing the
Revenue’s Appeal against the Judgment of the Tribunal, following observations were
made :

“We may recall the Assessing Officer does not dispute that
the expenditure was capital in nature since by making such
expenditure, the assessee had acquired certain enduring
benefits. He was, however, of the opinion that to claim
depreciation, the assessee must satisfy the requirement of
Section 32(1)(ii) of the Act, in which Explanation 3 provides
that for the purpose of the said sub-section the expression
“assets” would mean ( as per clause (b) ) intangible assets,
being known-how, patents, copyrights, trade marks, licenses,
franchises or any other business or commercial rights of
similar nature. In the opinion of the Assessing Officer, the
non-compete fee would not satisfy this discrimination.

Going
by his opinion, no matter what the rights acquired by the
assessee through such non-compete agreement, the same
would never qualify for depreciation in section 32(1)(ii) of the
Act as being depreciable intangible asset. This view was
plainly opposed to the well settled principles. In case of
Techno Shares & Stocks Limited (supra) the Supreme Court
1 (2018) 99 taxmann.com 154 (Gujarat)
held that payment for acquiring membership card of Bombay
Stock Exchange was intangible assets on which the
depreciation can be claimed. It was observed that the right of
such membership included right of nomination as a license
which was one of the items which would fall under Section
32(1)(ii). The right to participate in the market had an
economic and money value. The expenses incurred by the
assessee which satisfied the test of being a license or any
other business or commercial right of similar nature

In case of Areva T & D India Limited (supra) Division Bench
of Delhi High Court had an occasion to interpret the meaning
of intangible assets in context of section 32(1)(ii) of the Act. It
was observed that on perusal of the meaning of the categories
of specific intangible assets referred to in section 32(1)(ii) of
the Act preceding the term “business or commercial rights of
similar nature” it is seen that intangible assets are not of the
same kind and are clearly distinct from one another.

The
legislature thus did not intend to provide for depreciation only
in respect of the specified intangible assets but also to other
categories of intangible assets which may not be possible to
exhaustively enumerate. It was concluded that the assessee
who had acquired commercial rights to sell products under
the trade name and through the network created by the seller
for sale in India were entitled to deprecation.

In the present case, Mr.Patel was erstwhile partner of the
assessee. The assessee had made payments to him to ward of
competence and to protect its existing business. Mr.Patel, in
turn, had agreed not to solicit contract or seek business from
or to a person whose business relationship is with the
assessee. Mr. Patel would not solicit directly or indirectly any
employee of the assessee. He would not disclose any
confidential information which would include the past and
current plan, operation of the existing business, trade secretes
lists etc.

It can thus be seen that the rights acquired by the assessee
under the said agreement not only give enduring benefit,
protected the assessee’s business against competence, that too
from a person who had closely worked with the assessee in
the same business. The expression “or any other business or
commercial rights of similar nature” used in Explanation 3 to
sub-section 32(1)(ii) is wide enough to include the present
situation.”

5. No question of law in this respect therefore arises.

6. Question No. b arises in following manner :
Assessee had borrowed funds and invested the same for purchase of shares
of subsidiary company. On the borrowing, the Assessee had paid interest of Rs.38.22
Crores and claimed it as business expenditure. Assessing Officer was of the opinion
that such expenditure shall not allowable. The Tribunal by the impugned Judgment
held that the expenditure incurred for gaining controlling interest of a subsidiary
company is a business expenditure.

We notice that this Court in the case of Commissioner of Income Tax,
Panaji Goa v. Phil Corpn. Limited 2 held that the Assessee was entitled to deduction
2 202 Taxmann 368 (Bombay)
of interest on overdraft under Section 36(1)(iii) of the Act when the investment was
made by the Assessee in shares of subsidiary of the company to have control over the
said company. Madras High Court in the case of Commissioner of Income Tax,
Chennai v. Shriram Investments (Firm) Moogambika Complex, Chennai 3 has
taken similar view. Similar opinion is expressed by Calcutta High Court in CIT v.
Rajeeva Lochan Kanoria 4. Similar view was also expressed by Delhi High Court in
case of Eicher Gooderarth Limited v. Commissioner of Income Tax 5. Under the
circumstances, no question arises in this respect.

7. Question No. c pertains to the interest free advances made by the Assessee
to the sister concern out of borrowed funds. In this case, the Tribunal by the impugned
Judgment followed the decision of the Supreme Court in case of S.A. Builders
Limited v. Commissioner of Income Tax (Appeals) Chandigarh 6 and held that
such expenditure was made for the purpose of business. No question of law therefore
arises.

8. Question Nos. (i) and (ii) proposed by the Revenue arising out of its Cross
Appeal before the Tribunal become infructious in view of our decision in Question
No. (a). In the result, Appeal is dismissed.
( S.J.KATHAWALLA, J. ) ( AKIL KURESHI, J.)
3 229 Taxman 179 (Madras)
4 (1994) 208 ITR 616 (1995) 80 Taxmann 572 (Cal.)
5 233 Taxmann 285 (Delhi)
6 (2007) 156 Taxman 74 (SC)
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