Case Law Details
RELEVANT PARAGRAPH
3. We have heard the rival submissions in the light of the material placed before us and the precedents relied upon. The assessee company was carrying on the business as licensed surveyors and loss assessors under the Insurance Act, 1938. During the relevant year the assessee did claim depreciation amounting to Rs. 12,50,000/- in relation to payment of non compete fee arising out of a restrictive covenants. In the schedule of fixed assets an item was reflected under the caption restrictive covenant valued at Rs. 1 crore, on which depreciation at the rate of 12.5 % (relating to the second half of the financial year) was claimed.
4. The amount of Rs. 1 crore was paid to one of the directors on the basis of non compete covenant dated 1-10-2001 entered into between the assessee company and its director Shri R. Srivatsan. As per this agreement Shri Srivatsan agreed not to carry on his individual business of general insurance survey, loss assessment, valuation of assets, etc. for a period of seven years and also to abstain from other activities which might jeopardize the business interest of the assessee company in any manner. In consideration thereof the assessee paid a sum of Rs. 1 crore to Shri Srivatsan.
6. The Insurance Regulatory and Development Authority (IRDA) directed the assessee not to use the individual licence while holding the licence as director of the company. As such there was no question of any competition being faced by the assessee from Shri Srivatsan. It was found by the Revenue authorities that Shri Srivatsan was precluded from practicing by the order of the IRDA as long as the assessee company carried on its business. One of the conditions imposed by the IRDA before granting licence to the assessee was that the directors, who were in the same line of profession, should surrender their respective licences issued in their names by the IRDA. On that basis Shri Srivatsan was precluded from practicing the profession of general insurance survey, loss assessment and valuation of assets in his individual capacity. IRDA made it clear that there was no legal bar on the individual director from practicing as a surveyor in his individual capacity after surrender of the licence to act as a corporate entity. On this factual backdrop payment of the non compete fee in relation to restrictive covenant was found to be subterfuge. As such no depreciation was allowed.
7. Section 32(1)(ii) prescribes for depreciation in respect of know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the first day of April, 1998 owned fully or partly by the assessee and used for the purpose of the business or profession. There is no prescription for allowance of depreciation in respect of non compete fees.
8. The tenets of law are being enacted on the basis of pragmatism. Similarly, the Rules relating to interpretation are also based on common sense approach. Suppose a man tells his wife to go out and buy bread, butter, milk and anything else she needs, he will no normally be understood to include in the EJUSDEM GENERIS refers to similar situation. It means of the same kind, class or nature. The rule is that when general words must be confined to the things of the same kind as those specified. NOSCITUR A SOCIIUS is a broader version of the maxim EJUSDEM GENERIS. A man may be known by the company he keeps and a word may be interpreted with reference to the accompanying words. Words derived colour from the surrounding words.
9. Right as to know-how, patents, copyrights, trademarks, licences, franchises, etc. can be construed to be `right in rem’ which can be claimed against the world at large. Right in restrictive covenant is `right in personam’ which is available against the contracting parties only. As such right in restrictive covenant is not of similar nature. Therefore depreciation on restrictive covenant is not allowable as per the prescription of section 32(1)(ii). Once this conclusion is arrived at, the issue whether the transaction was collusive and colourable becomes only academic.
