Deepak Nitrite Limited Vs DCIT (Gujarat High Court)
Summary: The Gujarat High Court considered two substantial questions of law arising from an appeal admitted on 23rd March, 2009: whether Rs.80,00,000/- paid by the assessee to M/s. Chemcrown (India) Ltd. under a non-compete agreement was capital expenditure or allowable revenue expenditure, and whether Rs.34,10,824/- incurred for acquiring use of technology for manufacturing Chlorobenzene was capital expenditure or allowable revenue expenditure. The assessee had entered into an agreement dated 26th March, 1996 with M/s. Chemcrown (India) Ltd. for assignment and transfer of goodwill, business, trade name and brand names, accompanied by negative covenants. The Tribunal had treated the entire Rs.80 Lakhs as capital expenditure on the basis that it represented acquisition of goodwill and brand names in perpetuity. Before the High Court, the assessee submitted that the amount was composite consideration including non-compete fees and relied upon Sharp Business System Versus Commissioner of Income Tax [2025] 181 taxmann.com 657 and other decisions. The High Court examined the agreement as a whole and held that the Rs.80 Lakhs represented composite consideration for assignment of goodwill and brand name with negative covenants and was in the nature of non-compete fees. Applying the principle stated in Sharp Business System, the Court held that the assessee was entitled to claim 1/5th of Rs.80 Lakhs, i.e. Rs.16 Lakhs, as revenue expenditure for the year under consideration, with the remaining amount equally claimed in the subsequent four years. The Tribunal’s order was modified accordingly. On the second issue, the assessee had incurred Rs.34,10,823/- towards Legal and Professional expenses, General expenses, Foreign Tour, Travelling and Postage in connection with an aborted project involving acquisition of plant and machinery and technology from Dupont USA. The High Court found that no capital asset had come into existence and held that the Assessing Officer, CIT(A) and Tribunal were not justified in treating the expenditure as capital in nature. Following Deputy Commissioner of Income-tax Versus Gujarat Narmada Velley Fertilizers Co. Ltd. [2015] 57 taxmann.com 250 (Gujarat), and noting its subsequent following in Tax Appeal No.516 of 2012, the Court answered question No.2 in favour of the assessee and against the Revenue. The appeal was accordingly disposed of.
