The ITAT, Delhi bench has held that the depreciation under section 32 of the Income Tax Act, 1961 is not allowable on non-compete fee.
The assessee, a resident-companyits return of income on 29.11.2014 declaring loss of Rs.23,12,53,397. In course of assessment proceedings, assessing officer, noticed that the assessee has claimed deduction of Rs.1,94,33,166, being depreciation on none complete fee. Being of the view that depreciation on non complete fee is not in the nature of an intangible asset as per Section 32(1)(ii) and explanation to the said section, the assessing officer disallowed the same.
After considering the facts and arguments from both the sides, the Tribunal bench comprising Shri Saktijit Dey, Judicial Member and Dr. Brr Kumar, Accountant Member observed that by virtue of an agreement entered in June 2011, assessee acquired a restaurant in the name and style of Sagar Ratna. As per the terms of the agreement, the transferor had transferred all its rights, copyrights, trademarks etc. in respect of the restaurant Sagar Ratna. It appears from record,assessee treated the payment made towards non compete fee to the transferor as capital expenditure in the year of acquisition and assessee’s claim of depreciation on such expenditure in assessment years 2012-13 and 2013-14 was allowed.
The bench further noted that at the time of allowing depreciation in assessment years 2012-13 and 2013-14, the departmental authoritiesdid not have the benefit of the ratio laid down by the Hon’ble jurisdictional High Court in case of Sharp Business System Vs. CIT (supra). In the aforesaid decision, the Hon’ble jurisdictional High Court, while dealing with identical dispute relating to allowability of depreciation on non compete fee, has held that non compete fee though is an intangible asset, however, it is not similar to know how, patent, copy right, their trademark, licenses, franchises or any other business or commercial right of similar nature.
“The reasoning of the Hon’ble jurisdictional High Court for coming to such conclusion is, unlike the rights mentioned in Section 32(1)(ii) which an owner can exercise against the world at large and can be traded or transferred, in case of non compete fee, the advantage is restricted only against the seller. Therefore, it is not a right in rem but in personem. We are conscious of the fact that some other non-jurisdictional High Courts have held that non compete fee is an intangible asset coming within the ambit of Section 32(1)(ii) of the Act and have allowed depreciation. However, since, we are bound by the decision of the Hon’ble jurisdictional High Court rendered in case of Sharp Business System Vs. CIT(supra), respectfully, following the ratio laid down incase of Sharp Business System (supra), we hold that assessee’s claim of depreciation on non compete fee is unacceptable,” the Tribunal concluded.
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