A division bench of the Delhi High Court recently observed that no expenditure can be allowed in respect of non-competent fee since assessee obtained an advantage of an enduring nature as per the non-competent agreement.
Assessee, GKN Driveline India Ltd, paid Rs. 70 lakhs to M/s. Shriram Mobiles Limited and claimed deduction in respect of the same by stating that it amounts to revenue expenditure. However, the assessing Officer disallowed the claim and held that the same is capital in nature. He was of the view that the intention of the Assessee was to keep competitors out of the market thereby increasing sales, the said amount could not be held to be revenue expenditure as it derived long term benefit.
After perusing the non-competent agreements, the bench comprising Justices Prathiba M Singh and Sanjiv Khanna observed that the amount of Rs.70 lakhs is not merely payment towards the noncompete clause but also towards various other obligations which were imposed upon SML and had a direct bearing on the final execution and implementation of the agreement.
“It is clear that the consideration of Rs.70 lakhs was not expressly towards the non-compete obligation, but towards smoothening the process of acquisition of the asset, i.e., the unit of SML in Madras. Approvals that were required from the financial institutions, income tax authorities and other governmental authorities were towards the finalisation and closure of the acquisition process. Other covenants and obligations imposed upon SML, i.e., warranties, confidentiality, etc., added value to the asset being acquired. There is no doubt that in the facts of the present case, the payment of Rs.70 lakhs is a capital expenditure,” the bench said.
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