|DATE:||(Date of pronouncement)|
|DATE:||December 26, 2011 (Date of publication)|
|Click here to download the judgement (pitney_non_compete_capital_expenditure.pdf)|
Amount paid for non-compete rights while acquiring business is capital expenditure
The assessee acquired the mailing business of Kilburn Office as a going concern on a slump sale basis pursuant to a Business Transfer Agreement. The consideration for the transfer was Rs. 18.92 crores which included Rs. 5.94 Crores by way of non-compete fee for a period of 5 years. In the accounts, the expenditure was treated as a capital payment though a deduction was claimed in the computation u/s 37(1). The AO disallowed the claim though the CIT (A) allowed it as deferred revenue expenditure. On appeal by the department, the Tribunal reversed the CIT (A) following Tecumesh India 132 TTJ 129 (Del) (SB) though it directed the AO to consider whether the payment was an “intangible asset” for purposes of depreciation. On appeal by the assessee, HELD dismissing the appeal:
In the books, the assessee treated the non-compete expenditure as capital in nature. Warding off competition in business even to a rival dealer will constitute capital expenditure. It is not necessary that the non-compete fee has to be paid to create monopoly rights. The non-compete agreement was to last for 5 years, which period is sufficient to give enduring benefit (Tecumesh India 132 TTJ 129 (Del) (SB) approved; Eicher Ltd 302 ITR 249 (Del) distinguished; Q whether depreciation is eligible left for determination by AO).