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.
Cases Discussed:
- Expire Jute Co. Ltd Vs. CIT, 124 ITR 1 (SC)
- Modipon Ltd. Vs. IAC, 52 TTJ 477 (Delhi)
- Smartchem Technologies Ltd. Versus ITO, ITA No.3955/Ahd/2003
- Sharp Business System Versus Commissioner of Income Tax, [2025] 181 taxmann.com 657
- Commissioner of Income Tax Versus Dawoodi Bohra Jamat, [2014] 364 ITR 31 (SC)
- Alembic Chemical Works Co. Ltd Versus Commissioner of Income tax, [1989] 177 ITR 377 (SC)
- Atherton V. British Insulated and Helsby Cables Ltd., (1925) 10 TC 155
- John Smith and Son v. Moore, (1921) 12 TC 266
- Assam Bengal Cement Company Ltd v. CIT, [1995] 27 ITR 34 (SC)
- Empire Jute Co. Ltd. V. CIT, [1980] 124 ITR 1 (SC)
- Shree Digvijay Wollen Mills Ltd. Versus Commissioner of Income Tax, [1994] 77 Taxman 30 (Gujarat)
- Deputy Commissioner of Income-tax Versus Gujarat Narmada Velley Fertilizers Co. Ltd., [2015] 57 taxmann.com 250 (Gujarat)
- Dy. CIT (Asstt.) Versus Gujarat Narmada Velly Fertilizers Co. Ltd., Tax Appeal No.447 of 2000 and other allied Appeals
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Heard learned advocate Mr. Manish J. Shah assisted by learned advocate Mr. Jimi Patel for the appellant and learned Senior Standing Counsel Mr. Rutvij R. Patel for the respondent.
2. This Appeal was admitted vide order dated 23rd March, 2009 for consideration of the following substantial questions of law:
“(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs.80,00,000/ which the assessee paid to M/s. Chemcrown (India) Ltd. for non- compete agreement is a capital expenditure and not allowable revenue expenditure ?”
(ii)Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs.34,10,824/ for acquiring the use of technology for manufacturing Chloro benzene, which the assessee was already producing from the Asst. Year 199192 was capital expenditure and not allowable revenue expenditure?”
3. The brief facts of the case regarding substantial questions of law are as under:
3.1. The assessee entered into the agreement with one M/s. Chemcrown (India) Ltd. for purchase of goodwill and brand name with non-compete clause by the said company for not to engage in the business or manufacture or sale of the products and to run any consultancy or advice to any other company engaged in similar business. The said agreement dated 26th March, 1996 was made for a consideration of Rs.80 Lakhs by the assessee.
3.2. Initially the assessee claimed 1/5th of total consideration or Rs.16 Lakhs paid to be written off over a period of five years relying upon the decisions of the Hon’ble Supreme Court in cases of Expire Jute Co. Ltd Vs. CIT reported in 124 ITR 1 (SC) and Modipon Ltd. Vs. IAC reported in 52 TTJ 477 (Delhi) claiming it to be revenue expenditure and was allowable as business expenditure.
3.3. The Assessing Officer, however, did not accept the claim of the assessee and held that expenditure was made to acquire goodwill and brand names which were having enduring benefits and hence, expenditure was capital in nature as it was an arrangement to bring into existence assets or advantage of enduring nature.
3.4. Being aggrieved, the assessee preferred an Appeal before the CIT (Appeals), where the assessee raised a ground that though the Assessing Officer has disallowed the amount of amortization of Rs.16 Lakhs, the entire amount of Rs.80 Lakhs is admissible as revenue expenditure. The CIT (Appeals) however, dismissed the Appeal of the assessee.
3.5. Being aggrieved, the assessee preferred an Appeal before the Tribunal.
3.6. Before the Tribunal, the assessee submitted that the entire amount of Rs.80 Lakhs was made for avoiding the competition and for this purpose, agreement was made to acquire goodwill and for some restrictive covenants.
3.7. The Tribunal after considering the submissions made by both the sides, held as under:
“5.We have heard rival submissions and perused material available on record as also case laws cited at bard follows from the Couse of events that assessee initially wanted to purchase entire plant of “CIL” situated at Athipattu (T.N.). For some reasons or other, assessee did not fulfill this contract and “CIL” filed a suit in Calcutta High Court mentioned above, which was ultimately settled out of court by the parties and payment of Rs.80 lakhs proposed to be paid over a period of time by the assessee for purchase of goodwill, brand names and attached benefits in perpetuity in “CIL”. Relevant parts of the agreement are reproduced above. A plain reading of these clauses goes to show that the payment made was for purchase of goodwill and brand names from “CIL” in perpetuity Clause-2 of the agreement, which is on the terms of goodwill itself includes brand name and rights of the assessee, debarring “CIL” in further to grant, use or license of brand name to any other persons. In fine, agreement is for purchase of goodwill and brand names in perpetuity, which includes restriction on “CIL” not to part with or use intrinsic knowledge in this behalf to any other parties in perpetuity. In our considered opinion, what assessee claims to be restrictive covenant is nothing but a consequential action for selling goodwill and brand names of the business of “CIL” to itself. It is clear that purchase of goodwill and brand name in perpetuity was with a package of “dos and don’ts” and these arrangements of such assignment cannot be conveniently called an agreement for restrictive covenant to claim them as revenue expenses. In consideration of agreement and terms and conditions thereto, we are of view that agreement predominantly envisages purchase of goodwill and brand names of “CIL” by the assessee for a sum of Rs.80 lakhs with package of rights enjoyed by larger use of goodwill and brand names in perpetuity to the exclusion of others. We are unable to agree with proposition of learned counsel that the agreement is necessary a non- compete agreement. In view of those facts and observations, we hold that agreement is nothing but for purchase of goodwill and brand name in perpetuity entitling the assessee and forbidding “CIL” in respect of certain nights and obligations, In view thereof, we hold that consideration for this agreement for purchase of goodwill and brand names in perpetuity is clearly capital expenditure. Our view is fortified by the above mentioned judgments relied on by CIT(A).”
3.8. The Tribunal thereafter, distinguished the decision in case of Smartchem Technologies Ltd. Versus ITO in ITA No.3955/Ahd/2003, referred to and relied upon by the assessee for securing non-compete agreement allowable as revenue expenditure on the ground that if the purchase of goodwill and brand name would be for the perpetuity coupled with the restrictive covenants would result into capital expenditure. The Tribunal therefore dismissed the claim of the assessee for entire amount of Rs.80 Lakhs to be claimed as revenue expenditure for the year under consideration.
3.9. The assessee also claimed Rs.34,10,824/- for acquiring the use of technology for manufacturing Chlorobenzene as revenue expenditure. The Assessing Officer, after considering the facts of the case that the assessee has explore the possibility of extending its business activity of manufacture and sale of Chlorobenzene, sought access to advance technology used by the leading manufacturer of Chlorobenzene based in USA via Dupont and entered into an agreement with Dupont and it was agreed between the parties to hand over the assessee company its plant and machinery situated in USA on as is where is basis, along with technical documentation to the extent available covering operations controlled as well as drawings of plant and machinery. Various agreements were entered into, to execute sale agreement, Dawn Stream Product agreement, distributor agreement and technology agreement in this regard with Dupont by the assessee. However, eventually, the said agreements could not be executed and the entire scheme was aborted and for this purpose, the expenditure of Rs.34,10,823/- comprising of Rs.28,99,128.40/- towards Legal and
Professional expenses, Rs.20,855/- for General expenses, Rs.4,02,214/- for Foreign Tour, Rs.90,444.60/- for Travelling and Rs.2,181.60/- for Postage was incurred by the assessee. However, the Assessing Officer, disallowed the said expenditure on the ground that the entire expenditure was incurred for the acquisition of the capital asset and therefore, the same was required to be capitalised by the assessee.
3.10. The CIT (Appeals) also rejected the claim of the assessee holding the same to be capital in nature, as the sum total of all the expenses was towards understanding the feasibility of implementing the entire project and if the project had been completed, then all the expenses would have been covered with the feasibility expenditure being recommencement in nature.
3.11. The Tribunal also upheld the reasoning of the CIT (Appeals) by observing as under:
“8.We have heard rival submissions and perused material available on record. As the facts emerge, it is clear that though the assessee was in same line of business, nevertheless, the expenditure in question was incurred for acquiring a capital asset, coupled with the fact that, expenditure incurred was for an aborted project, as the pursuit was given up. In view thereof. expenditure in question is undoubtedly incurred for aborted project, which was capital in nature. In our view, ratio of Hon’ble Gujarat High Court and Bombay High Court in the decisions cited (supra) is applicable to assessee’s case. In the case of United Phosphorous (supra) assessee acquired new business, whereas in the assesseee’s case, project has been aborted, which draws a clear line of distinction in the facts of assessee’s case. In view thereof, we uphold the order of lower authorities treating the expenditure on aborted Dupont project as capital in nature.”
4.1. Learned advocate Mr. Manish J. Shah for the appellant-assessee submitted that though there are concurrent findings of fact recorded by the Tribunal, this Court may consider the clauses of the agreement dated 26th March, 1996 entered between the assessee and M/s.Chemcrown (India) Ltd. to find out as to whether the Tribunal has committed an error in holding that the payment of Rs.80 Lakhs was made only for acquiring the goodwill and trade name or the same would also cover the non-compete fees, which would otherwise be revenue expenditure in view of the decision of the Hon’ble Apex Court in case of Sharp Business System Versus Commissioner of Income Tax reported in [2025] 181 taxmann.com 657 or not.
4.2. Reliance was also placed on the decision of the Hon’ble Supreme Court in case of Commissioner of Income Tax Versus Dawoodi Bohra Jamat reported in [2014] 364 ITR 31 (SC) in support of his submissions that the Appellate Courts may examine that whether the question involves merely a finding of fact or the legal effect of such proven facts and documents in Appeal.
4.3. It was therefore submitted that considering the clauses 1 to 4 of the agreement dated 26th March, 1996, the amount of Rs.80 Lakhs was to be paid by the assessee to M/s.Chemcrown (India) whereas, clause 1 with regard to assignment and transfer of the goodwill and business would be in nature of to be protected by the non- compete covenant in clauses 2 and 3. It was therefore submitted that the Tribunal has misinterpreted the clauses by taking into consideration that Rs.80 Lakhs was agreed to be paid by the assessee for acquiring goodwill and trade name, whereas, as per the assesssee, the said amount was agreed to be paid for non-compete fees, so as to give effect to the assignment and transfer of the goodwill of the business carried on by M/s.Chemcrown (India) Ltd. of manufacture, distribution and sale of its products along with trade name, etc.
4.4. It was further submitted that there was a supplementary agreement between M/s.Chemcrown (India) Ltd. and the assessee for consideration of Rs.80 Lakhs after the main agreement was entered into on 26th March, 1996 and accordingly, the assessee has claimed 1/5th of the entire consideration agreed to be paid for the year under consideration in the Return of Income, however, the entire amount of Rs.80 Lakhs was claimed by the assessee in the Appeal filed before the CIT (Appeals).
4.5. It was therefore submitted that in this context, both the CIT (Appeals) and the Tribunal held that the entire amount of Rs.80 Lakhs agreed to be paid by the assessee could be of capital nature by ignoring the clauses 2 and 3 of the agreement for which, the amount of Rs.80 Lakhs was agreed to be paid, so as to see that M/s.Chemcrown (India) Ltd assigns the goodwill and trade name to the assesse as stated in clause 1 of the agreement.
4.6. It was submitted that the Hon’ble Apex Court in case of Sharp Business System (Supra), after considering the entire case law on the issue of the non-compete revenue expenditure or capital expenditure, has held that length of time for which the enduring advantage may endure to the payer is not determinative of nature of expenditure. It was therefore submitted that the Assessing Officer, the CIT (Appeals) and the Tribunal have committed an error by considering the amount agreed to be paid by the assesse for non-compete fees for assignment of goodwill and trade name as capital expenditure.
4.7. Learned advocate Mr. Manish J. Shah, under instructions, further submitted that if the entire amount of Rs.80 Lakhs may not be considered as a revenue expenditure for the year under consideration, but what was claimed by the assesses in the Return of Income of amortization of the entire amount to be spread over five years, i.e. Rs.16 Lakhs, may be considered as a revenue expenditure for the year under consideration, so as to enable the assessee to claim Rs.16 Lakhs as revenue expenditure for a period of five years.
4.8. Regarding the question No.2, It was submitted by learned advocate Mr. Manish Shah that it is not in dispute that the project of acquiring the plant and machinery from Dupont for manufacture of Benzene was abundant by the assessee and hence, the expenditure incurred by the assesse for legal and professional fees, traveling, etc was claimed as revenue expenditure and the same cannot be considered as capital expenditure as no capital asset was acquired by the assessee.
4.9. In support of his submissions, reliance was placed on the decision of this Court in case of Dy. CIT (Asstt.) Versus Gujarat Narmada Velly Fertilizers Co. Ltd. in Tax Appeal No.447 of 2000 and other allied Appeals, which was followed in Tax Appeal No.516 of 2012.
5.1. On the other hand, learned Senior Standing Counsel Mr. Rutvij Patel for the respondent relied upon the order passed by the Tribunal and the concurrent findings of fact recorded by the Tribunal, after consideration of the clauses of the agreement dated 26th March, 1996, to hold that the assessee has acquired the goodwill and trade name for Rs.80 Lakhs and a consequence thereof, the non-compete clauses were agreed upon by the parties so as to see that there is an assignment of goodwill and trade name in favor of the assessee by M/s.Chemcrown (India) Ltd.
5.2. It was therefore submitted that in view of the concurrent findings of fact arrived at by the Tribunal, when it is held that an amount of Rs.80 Lakhs was agreed to be paid by the assesse for acquiring the goodwill and trade name, the same would be of capital nature and cannot partake the character of non-compete fees, as tried to be contended on behalf of the assessee. It was therefore submitted that the entire expenditure having been considered as capital expenditure, no interference is called for in the impugned order of the Tribunal.
5.3. With regard to question No.2, it was submitted by learned advocate Mr.Rutvij Patel that it is emerging from the record that the agreement was entered into between the assessee and Dupont for transfer of the plant and machinery, which was subsequently abandoned and therefore, in view of the concurrent findings of fact arrived at by the Assessing Officer, the CIT (Appeal) and the Tribunal, no interference is called for in the impugned order of the Tribunal.
5.4. In support of his submissions, reliance was placed on the decision of this Court in case of Shree Digvijay Wollen Mills Ltd. Versus Commissioner of Income Tax reported in [1994] 77 Taxman 30 (Gujarat) wherein, it is held that expenditure incurred in boring tubewell was capital expenditure, notwithstanding that tubewell turned out to be useless.
6.Having heard the learned advocates for the respective parties and considering the facts of the case, the undisputed fact emerging from the record is that there was an agreement between the assesses and M/s.Chemcrown (India) Ltd. The relevant clauses of the agreement reads as under: “1.CHEMCROWN as beneficial owner shall assign and transfer to DEEPAK the goodwill of the business carried on by CHECROWN of manufacture, distribution and sale of the said products with the exclusive rights to the said name or style in which the said business was carried on and the said brand name/s of the said products with all the rights and benefits belonging thereto forever and to hold the same in perpetuity.
2. CHEMCROWN hereby represents and warrants DEEPAK that (i) it has full right and absolute authority to assign the goodwill and the said Brand name/s with all rights appurtenant thereto;
(ii) that it ha snot assigned or agreed to assign the same or to grant and shall not grant any license to use the said brand name/s and goodwill of the business hereafter in favour of any other person or created and/or shall create any encumbrance thereon; (iii) DEEPAK will be entitled to use the said brand name/s and goodwill of the business of CHEMCROWN’s said division and to use the said Brand Name/s in respect of the said products Manufactured or to be manufactured or sold by DEEPAK without any objection or interruption by CHEMCROWN or any person claiming under it; and (iv) CHEMCROWN will at the request and costs of DEEPAK: at any time execute any document and or wring as may be required by DEEPAK for better and more perfectly assuring the use of the said Brand Name/s and goodwill by DEEPAK.
3. CHEMCROWN hereby further covenant with DEEPAK that CHEMCROWN shall not carry on any business in India of manufacturing or distributing or selling the said products or in any manner dealing with the said Products either by itself or through its Sonil Division or through anybody else in whatsoever manner and competing with the business of DEEPAK in perpetuity and further s covenant with DEEPAK that CHEMCROWN shall not sale, dispose of, give or lease or permit any person to use the Plant and/or Machinery of the said Sonil Division in whatsoever manner to manufacture the said Products hereafter. CHEMCROWN hereby further covenants with DEEPAK that CHEMCROWN shall not render any consultancy or advise to any other company engaged in a similar business or permit any other Company or person to use the said plant/factory/machinery in perpetuity.
4. In consideration of the negative covenant and the undertaking given by CHEMCROWN in clauses 2 and 3 above, DEEPAK shall pay to CHEMCROWN a sum of Rs.80,00,000/- (Rupees Eighty Lacs only) as follows:-
a. Rs.5,00,000/- (Rupees Five Lacs only) upon execution of this agreement.
b. Rs.30,00,000/- (Rupees Thirty Lacs only) payable on the date when CHEMCROWN unconditionally withdraws the Suit No.363 of 1994 pending in the High Court at Calcutta (hereinafter referred to as “Withdrawal date”) for the purpose of brevity).
c. Rs.25,00,000/- (Rupees Twenty Five lacs only) upon completion of 15 (fifteen) months from the aforesaid withdrawal date.
d. Rs.20,00,000/- (Rupees Twenty lacs only) upon completion of 33 (thirty-three) months from the aforesaid withdrawal date.” Payment of (c) and (d) will he made within 10 days from the date of applicable for the payment.”
7.On perusal of the above clauses, it is clear that the goodwill and the business of the M/s.Chemcrown (India) Ltd. of manufacture and distribution of the sale of its product was assigned to the assesse along with the trade names and brand names and to give effect to such agreement, negative covenants were prescribed in clauses 2 and 3 of the agreement for which, the consideration of Rs.80 Lakhs was agreed to be paid by the assessee to M/s.Chemcrown (India) Ltd.
8.It is therefore not possible to bifurcate the amount consideration of Rs.80 Lakhs between acquisition of goodwill and trade name or brand name and non-compete fees, as the same is of composite nature. However, the fact remains that the assesse was in the same line of business of manufacture of the products and it has acquired the business of the M/s.Chemcrown (India) Ltd. and as a result, M/s.Chemcrown (India) Ltd. was prohibited from use of its brand name and goodwill in any manner whatsoever and composite lumpsum amount of Rs.80 Lakhs was agreed to be paid as a consideration by the assesse to M/s.Chemcrown (India) Ltd. Therefore, the question arises as to what would be the nature of such payment by the assessee, and whether the same would be capital in nature or revenue in nature.
9.The Tribunal, after considering the aforesaid clauses has concurred with the findings arrived at by the Assessing Officer and the CIT (Appeals) that the nature of payment of Rs.80 Lakhs was for the purpose of acquiring goodwill and brand name of M/s.Chemcrown (India) Ltd. by the assessee and such payment would be capital in nature. The Tribunal has also considered that in absence of such agreement, M/s.Chemcrown (India) Ltd. would have the liberty of manufacture of goods and/or resale acknowledging other manufactures, which would have entailed the competition which the assessee wanted to avoid, as the entire business was taken over by the assessee and composite price was paid.
10.The Tribunal, however, did not consider such aspect while interpreting the clauses of the agreement between assessee and M/s.Chemcrown (India) Ltd. and has committed an error in holding that the plain reading of the clauses goes to show that payment made was for purchase of goodwill and brand name of M/s.Chemcrown (India) Ltd. in perpetuating the assessee by ignoring the fact that without negative covenants, the assessee would not have been able to utilize the brand name and goodwill of the M/s.Chemcrown (India) Ltd.
11.Thus, in essence, the agreement between the assessee and M/s.Chemcrown (India) Ltd. is in nature of non-compete fees paid by the assessee for assignment of the goodwill and brand name of M/s.Chemcrown (India) Ltd.
12.The Tribunal has also further erred in law in interpreting the clauses of the agreement by singling out the clause No.1 of the agreement and ignoring the clause Nos.2 and 3, which pertain to negative covenants, for which the reference is made in clause 4 that consideration is paid for negative covenants mentioned in clause nos. 2 and 3 and therefore, on reading the agreement between the assessee and the M/s.Chemcrown (India) Ltd. as a whole, it appears that it was a composite agreement for assignment of goodwill and brand name of M/s.Chemcrown (India) Ltd. with negative covenants, for which consideration of Rs.80 Lakhs was agreed to be paid by the assesse.
13. The Hon’ble Apex Court in case of Sharp Business System (Supra), after considering the entire case law on the issue of as to whether the non-compete fees would be capital in nature or revenue in nature, has held as under:
“25. Having adverted to the relevant case laws, we may now examine the nature and character of non-compete fee; whether payment of non-compete fee is revenue expenditure or capital expenditure. Non-compete fee is paid by one party to another to restrain the latter from competing with the payer in the same line of business. It may be by way of a written agreement or by an oral understanding. The restriction may be limited to a specified territory or otherwise; similarly, it can be for a specified period or otherwise. Purpose of non-compete payment is to give a head start to the business of the payer. It can also be for the purpose of protecting the business of the payer or for enhancing the profitability of the business of the payer by insulating the payer from competition.
26. Thus non-compete fee only seeks to protect or enhance the profitability of the business, thereby facilitating the carrying on of the business more efficiently and profitably. Such payment neither results in creation of any new asset nor accretion to the profit earning apparatus of the payer. The enduring advantage, if any, by restricting a competitor in business, is not in the capital field.
27. Following the judicial trend, it can be safely inferred that the length of time over which the enduring advantage may ensure to the payer is not determinative of the nature of expenditure. As long as the enduring advantage is not in the capital field, where the advantage merely facilitates in carrying on the business more efficiently and profitably, leaving the fixed assets untouched, the payment made to secure such advantage would be an allowable business expenditure, irrespective of the period over which the advantage may accrue to the payer (assessee) by incurring of such expenditure.
28. The non-compete compensation from the stand point of the payer of such compensation is so paid in anticipation that absence of a competition from the other party may secure a benefit to the party paying the compensation. However, there is no certainty that such benefit would accrue. Notwithstanding such an arrangement, the payer (assesee) may still not achieve the desired result. In so far the present case is concerned, on account of payment of non-compete fee, the assessee had not acquired any new business and there is no addition to the profit making apparatus of the assessee. The assets remained the same. The expenditure incurred was essentially to keep a potential competitor out of the same business. Further, there is no complete elimination of competition. Such payment made by the appellant to L&T did not create a monopoly of the appellant over the business of electronic products/equipments. Payment was made to L&T only to ensure that the appellant operated the business more efficiently and profitably. Such payment made to L&T cannot, therefore, be considered to be for acquisition of any capital asset or towards bringing into existence a new profit earning apparatus.”
14.It would be pertinent to note that before arriving at the above conclusion, the Hon’ble Apex Court, on the issue as to whether such expenditure would be allowable as a revenue expenditure under Section 37(1) of the Act or not, in paragraph No.16, has analyzed the provisions of Section 37 of the Act as under:
“16. Let us advert to Section 37 of the Act at the outset. It is a residuary provision. Sub-section (1) of Section 37 reads as follows:
(1) Any expenditure not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘profits and gains of business or profession’.
16.1. This provision contemplates that any expenditure incurred wholly and exclusively for the purposes of the business shall be allowed in computing the income chargeable under the head ‘profits and gains of business or profession.’ For such an expenditure to be allowed, it should fulfill the following criteria:
(i) it should not be an expenditure described in Sections 30 to 36;
(ii) it should not be in the nature of capital expenditure or personal expenses of the assessee.
16.2. It is axiomatic that such expenditure should be incurred during the previous year relevant to the assessment year under consideration.
15.In order to analyse further, the Hon’ble Apex Court has referred to and relied upon the decision in case of Alembic Chemical Works Co. Ltd Versus Commissioner of Income tax reported in [1989] 177 ITR 377 (SC) wherein, it is explained that in computing the income chargeable under the head profit and gains of the business or profession, Section 37 of the Act enables the deduction of any expenditure laid out or expended wholly and exclusively for the purpose of business or profession, as the case may be and has held as under:
“17. This provision was examined by this Court in Alembic Chemical Works Co. Ltd. (supra). It has been explained that in computing the income chargeable under the head ‘profits and gains of business or profession’, Section 37 of the Act enables the deduction of any expenditure laid out or expended wholly and exclusively for the purposes of business or profession, as the case may be. The fact that an item of expenditure is wholly and exclusively laid out for the purpose of business by itself is not sufficient to entitle its allowance in computing the income chargeable to tax. In addition, the expenditure should not be in the nature of a capital expenditure. In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue expenditure arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants but as masters they tend to be over- exacting.”
16.Reference was also made to decision in case of Atherton V. British Insulated and Helsby Cables Ltd. reported in (1925) 10 TC 155 wherein, the classical test laid down by Lord Cave L.C. was referred to as under:
“18. There is a classical test laid down by Lord Cave L.C. in Atherton Vs. British Insulated and Helsby Cables Ltd.16, where it was held: When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.”
17.The Hon’ble Apex Court also referred to the decision of Lord Haldane in case of John Smith and Son v. Moore reported in (1921) 12 TC 266, which pertains to test of contemporary vintage based on distinction between fixed and circulating capital and was propounded and explained as under:
“Fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit of by parting with it and letting it change masters.”
18.Considering the above decisions, Hon’ble Apex Court referred to the decisions in cases of Assam Bengal Cement Company Ltd v. CIT reported in [1995] 27 ITR 34 (SC) and Empire Jute Co. Ltd. V. CIT reported in [1980] 124 ITR 1 (SC) to arrive at the above dictum of law.
19.In view of the above conspectus of law analysed by the Hon’ble Apex Court, we are of the opinion that amount of Rs.80 Lakhs agreed to be paid by the assessee was for composite consideration for assignment of goodwill and non-compete fees and therefore, non-compete fees is required to be considered as a revenue expenditure and therefore, the assessee had rightly claimed 1/5th of the expenditure for the year under consideration as differed revenue expenditure, as it contains both acquisition of goodwill and non-compete fees and if the entire expenditure is not allowed as revenue, the assessee would have claimed as capital expenditure, which would be entitled to depreciation under Section 132 of the Act.
20.However, without considering the aspect of depreciation in the facts of the case and applying the ratio of the Hon’ble Apex Court in case of Sharp Business System (Supra) and considering the facts of the present case and in view of the statement made at bar by learned advocate Mr. Manish Shah, under instructions, we would answer the question No.1 partly in favour of the assessee to the effect that the assessee would be entitled to 1/5th of the amount of Rs.80 Lakhs, i.e. Rs.16 Lakhs to be claimed as revenue expenditure for the year under consideration and remaining amount equally claimed in subsequent four years. Thus, amount of Rs.80 Lakhs shall be spread over for five years as differed revenue expenditure by the assessee.
21.The impugned order of the Tribunal is modified to the above extent.
22.So far as the question No.2 is concerned, it is not in dispute that the assessee has not acquired any capital asset, which was agreed to be acquired from Dupont USA and the expenses are incurred by the assessee only for the purpose of acquiring capital asset in an endeavor to acquire capital asset, however, there is no capital asset which has come into existence.
23.In the case of Shree Digvijay Wollen Mills Ltd. Versus CIT before this Court, the borewell was already constructed and thereafter, the borewell became useless as the water which was obtained therefrom was not found suitable and in such circumstances, this Court held the expenditure incurred for boring tubewell was capital expenditure. However, in the facts of the case, no capital asset has come into existence of enduring nature and therefore, the Assessing Officer, the CIT (Appeals) and the Tribunal were not justified in holding the same to be capital in nature.
24.This Court in case of Deputy Commissioner of Income-tax Versus Gujarat Narmada Velley Fertilizers Co. Ltd. reported in [2015] 57 taxmann.com 250 (Gujarat) rendered on 9th December, 2014 has held as under:
“10. In view of above observations, in our view, the tribunal has rightly considered the first question in right perspective. The amount which has never materialized, i.e. the expenses incurred towards such project is rightly treated as revenue expense and not as capital expenditure. In that view of the matter, the question of law raised is answered in favour of the assessee and against the department. ”
25.The aforesaid decision of this Court is followed in the subsequent years in Tax Appeal No.516 of 2012 in the same assessee’s case.
26.In view of the foregoing reasons, the question No.2 is answered in favour of the assessee and against the Revenue.
27.The Appeal is accordingly disposed of.
