Consideration paid for Acquisition of Shares does not come under Revenue Deduction: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Pune has ruled that, Consideration paid for the acquisition of shares does not come under revenue deduction.

The appellant, M/s. Adler Mediequip Pvt. Ltd is a company incorporated under the provisions of the Companies Act, 1956. The return of income for the assessment year 2017-18 was filed disclosing Rs. Nil income. The appellant had entered into a consultancy agreement with Mr. Ajay Pitre in terms of which the non-compete fee of Rs.21.55 crores was payable to Mr. Ajay Pitre over the period of 3 years. The said amount was shown as “intangible assets” in the financial statements of the appellant company and 1/3rd cost of the entire consideration of Rs.21.55 crores was amortized in the books of accounts, which was added back in the computation of total income. However, the claim of 1/3rd of the same is made as revenue expenditure while computing the income under the head “business” in the return of income.

The Assessing Officer was of the opinion that the said expenditure cannot be allowed as revenue expenditure for the reason that it is a capital in nature as the expenditure was incurred only towards smoothening the process of acquisition of the ongoing business/unit of Shri Ajay Pitre including the intellectual rights and not of revenue nature in view of the fact that the said case is clearly is on capital account not of revenue nature.

On due consideration of the objections of the assessee company, the DRP gave a finding that when the assessee was following mercantile system of accounting, the expenditure can be allowed as deduction only in the year in which the liability of expenses had crystallized i.e. in the year 2014-15 and theexpenditure was incurred only in relation to the acquisition of shares from erstwhile shareholders, therefore, it is part and parcel of the consideration paid for the acquisition of shares which is capital in nature. Accordingly, the ld. DRP confirmed the findings of the Assessing Officer.

On receipt of the direction from the ld. DRP, the Assessing Officer had passed the final assessment order dated 04.01.2022 passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act after making the addition on account of disallowance of non-compete fee of Rs.8,26,31,590/.

The bench consisting ofInturi Rama Rao, Accountant Member and S. S. Viswanethra Ravi, Judicial Member held that “The assessee company had also failed to satisfy the conditions precedent to claim as revenue expenditure, as the expenditure was incurred during the previous year relevant to the assessment year under consideration, therefore, the claim made by the assessee cannot beallowed as deduction.”

To Read the full text of the Order CLICK HERE

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