The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) recently ruled that the payment of non-competition fee for business purpose is considered as revenue expenditure.
The Assessee company/s Mahindra Holidays & Resorts Ltd engaged in the vacation ownership business, filed its Income Tax Return for the Assessment Year 2009-10, declaring a total income of Rs. 112,97,47,884/-.
The return underwent scrutiny assessment and the assessed income was determined at Rs. 302,04,55,046/- with an addition of Rs. 189,07,07,163/-. The assessment was later reopened under Section 147 of the Income Tax Act, citing excess depreciation claim on Electrical Fitting Capitalized and treating non-compete fee as an intangible asset.
The assessee objected, stating that all necessary information had been submitted during the scrutiny assessment and the Assessing Officer had previously accepted the claimed depreciation rates. However, the objections were not accepted by the Assessing Officer, and disallowances of Rs. 23,88,822/- for excess depreciation claim and Rs. 50,00,000/- for depreciation on non-compete fee were confirmed. The assessee appealed to the CIT(A), but the appeal was unsuccessful.
The counsel representing the assessee argued that the Assessing Officer had thoroughly examined the issues raised for reopening during the assessment proceedings under Section 143(3) of the Income Tax Act. The Assessee Company had provided all the requested details, including the statement of total income, depreciation statement, tax audit report, and financial statements such as the P&L Account and Balance Sheet.
The counsel contended that the Assessing Officer had already considered and assessed the information provided, leaving no new material or grounds to conclude that any income had escaped assessment. Therefore, there was no valid basis to invoke the provisions of Section 147 of the Income Tax Act.
The appellant challenged the order of the CIT (A) on various grounds. Firstly, the disallowance under Section 40(a)(i) of the Income Tax Act for non-deduction of TDS on payments made to non-residents for room facilities and amenities at the resort.
Secondly, the Commissioner of Income Tax (Appeals) disallowed the expenditure incurred during construction pending allocation, treating it as repairs/renovation expenses. The appellant contends that the expenditure relates to the expansion of the same business and should be allowed as a deductible expense.
The counsel for the Assessee Vijayaraghavan, further argued that the expenditure incurred should be treated as revenue expenditure rather than capital expenditure since it was incurred for the business and not disputed by the revenue. They relied on the judgment in the case of Carborandum Universal Ltd and Asianet Communications, where it was held that non-compete fees paid for business purposes should be treated as revenue expenditure if they do not entail enduring benefits.
He submitted that if the expenditure is treated as revenue expenditure instead of capital expenditure, the income offered for tax in the Income Tax Return would be lower than the assessed income. They argued that this situation falls under the provisions of Section 152(2) of the Income Tax Act, which allows for the assessment to be made at a lower sum than the original assessment. Therefore, they requested that the proceedings under Section 147 of the Income Tax Act be dropped.
Counsel for the revenue argued that the allowance of depreciation on the non-compete fee paid by the Assessee, should not be treated as an intangible asset. The counsel representing revenue Senthil Kumaran, contended that based on the mentioned agreement and the legal precedents, the non-compete fee cannot be treated as an asset, and no depreciation should be allowed on it.
He further mentioned that the Commissioner of Income Tax (Appeals) had already disallowed the depreciation on the non-compete fee after considering relevant judicial pronouncements.
Therefore, the counsel requested that the disallowance made by the Assessing Officer and upheld by the Commissioner of Income Tax (Appeals) should be sustained.
The bench, consisting of two members, Vice President Mahavir Singh and Accountant Member Arun Khodpia, observed that, “we are of the considered opinion that the depreciation on non-compete fee which was disallowed by the Assessing Officer and upheld by the CIT(A) was an erroneous application of law and bad finding, therefore the same deserves to be reversed and we do so the appeal of the assessee was allowed”.
The next issue pertains to the deduction of the non-compete fee paid by the Assessee to prevent competition and safeguard its business. However, since the issue concerning the depreciation on the non-compete fee has already been decided in favor of the Assessee, this issue becomes irrelevant and does not require separate consideration or adjudication.
In result, appeal of the assessee partly allowed for statistical purposes.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
