S. 32(1)(ii): Non-Compete Fee not eligible for depreciation or amortisation

Gujarat Glass Private Limited vs. ACIT (ITAT Mumbai)

The assessee acquired the business of manufacture of glass from Piramal Enterprises Ltd. It also entered into a non-compete agreement with Piramal Enterprises whereby it agreed to pay Rs. 18 crores for the seller agreeing not to carry on a competing business for a period of 18 years. The assessee claimed the said payment as a revenue deduction and in the alternate as a depreciable asset. The AO rejected both claims. The CIT(A) held that though the non-compete fee was not a depreciable asset, the amount paid for it was entitled to be amortized over the period of the agreement. The assessee filed an appeal before the Tribunal challenging the non-grant of depreciation while the department filed an appeal challenging the grant of amortization. In the first round, the Tribunal rejected the assessee’s plea by relying on the Third Member verdict in Paper Products. However, as this verdict was not put to the assessee, the matter was reposted for hearing. In the second round, the assessee relied on Smifs Securities 348 ITR 302 (SC) where goodwill was held to be eligible for depreciation and several other judgements. HELD by the Tribunal rejecting the plea:

The expression, “any other business or commercial rights of similar nature” in the definition of “intangible asset” in s. 32 (1)(ii) shows that the initial part, i.e. know how, patents, copyrights, trademarks, license, franchises, has been disjointed by the conjunction ‘or. The use of the disjunction ‘or’ has a very relevant role, because, the legislature accepts the difference and distinction of intangibles and rights. The legislature has used ‘or’ in the provision for explaining the distinction of application of like nature with that of the unlike nature, which is an accepted principle i.e. doctrine of ejusdem generis. Taking note of the word ‘or’, used as a disjunction is essential to carve out a meaningful genus. The argument whether non compete rights constitute is a right in rem or a right in personam is a matter to be decided by an appropriate higher judicial forum. The judgement of the Supreme Court in Smifs Securities 348 ITR 302 (SC) that goodwill is an intangible asset eligible for depreciation is not applicable to a non-compete right. Non-compete fee does not fall within the ambit of any other commercial or business rights. As regards the claim of amortization, since the payment of Rs. 18 crores is a capital expenditure, it cannot be allowed as an expense and also can(not) be amortized (Sharp Business System 254 CTR 233(Del) followed. Real Image Tech 120 TTJ 983)(Che), Medicorp Technologies 30 SOT 506 (Che), Bunge Agribusiness 132 lTD 549 (Mum), Serum Institute 135 ITD 69 (Pune) treated as not good law).

Note: In Sharp Business System 254 CTR 233(Del), Smifs Securities 348 ITR 302 (SC) was not considered. In GE Plastics 137 ITD 309 (Ahd) it was held that as there were two view on the subject, the view in favour of the assessee has to be followed