The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that a non-compete agreement is an intangible asset and depreciation is allowable on the same.
M/s.Pentasoft Technologies Ltd, the assessee company is engaged in the business of software development & services and is exporting software and services from Software Technology Park and claimed deduction u/s.10A of the Income Tax Act. The assessee has filed its return of income for the AY 2004-05 on 01.11.2004 declaring a loss of Rs.26,62,56,653/-.
The AO has disallowed depreciation on a non-compete fee on the ground that the non-compete feegoodwilll is not a depreciable asset, eligible for depreciation u/s.32(i)(ii) of the Act, nor the expenditure on acquisition of goodwill is the eligibleitem for deduction u/s.35D(2) of the Act. The CIT(A) allowed depreciation on non-compete fees, by following the decision of ITAT in the assessee’s case for the earlier assessment years.
The CIT(A) allowed depreciation on non-compete fee by following the decision of ITAT in the assessee’s case for the AYs 2001-02 & 2002-03, where the Tribunal held that non-compete fee is an intangible asset eligible for depreciation u/s.32(1)(ii) of the Act.
The Assessing Officer, after taking note of the opinion of the Chartered Accountant of the assessee held that the opinion was not based on any scientific valuation and it is not a proper professional approach and accordingly, the capitalization of the goodwill, i.e. Intellectual Property Rights and the non-compete fee was rejected and the claim for depreciation was disallowed.
After taking note of the AS26 issued by ICAI, that IPRs and non-compete fees are classifiable as intangible assets as in the assessee’s case it satisfies the criteria, viz., it was identifiable; it was controllable and economic benefits flowed out to the enterprise. Since the three criteria were satisfied and the assets were unconditionally transferred by PMGL, the First Appellate Authority held that the assessee had acquired absolute rights to enjoy, utilize and exploit such exclusive rights.
High Court of Madrasin the case of Pentasoft Technology Ltd. (supra) held that a non-compete fee is likean intangible asset in terms of sec. u/s.32(1)(ii) of the Act, and would be a capital asset entitled to depreciation.
A Coram comprising of Shri V Durga Rao, Judicial Member and Shri G Manjunatha, Accountant Member viewed that under the composite agreement, the transferor had transferred all its rights, copyrights, and trademarks in respect of the word ‘pentasoft’ as well as the training and development division exclusively to be exploited by the assessee.
The assessee contended that the non-compete is in effect as an indirect licence. In light ofthe decision of the jurisdictional High Court of Madras in Pentasoft Technology Ltd. (supra), the Tribunal held that the assessee is entitled to depreciation on the non-compete fee and directed the AO to allow depreciation on the non-compete fee as claimed by the assessee.
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