Case Law Details
IN THE ITAT CHENNAI BENCH ‘A’
Arkema Peroxides India (P.) Ltd.
versus
Assistant Commissioner of Income-tax
IT Appeal No. 2212 (Mds.) of 2006
[ASSESSMENT YEAR 2003-04]
JANUARY 13, 2012
ORDER
N.S. Saini, Accountant Member
This is an appeal filed by the assessee for the assessment year 2003-04 against the order dated September 22, 2006 of the Commissioner of Income-tax-III, Chennai.
2. Ground Nos. 1 and 2 of the appeal read as under :
“1. The learned Commissioner of Income-tax (Appeals) has erred in dismissing the ground of appeal against the Assessing Officer’s rejection of the appellant’s claim for depreciation at 50 per cent. on new motor vehicles as per item III(2)(iid) of the depreciation schedule.
1.1 The learned Commissioner of Income-tax (Appeals) ought not to have agreed with the Assessing Officer’s finding that since the vehicles of the appellant were not commercial vehicles as mentioned in the Income-tax Rules, the same were not entitled to higher rate of depreciation.
2. The learned Commissioner of Income-tax (Appeals) has erred in confirming the Assessing Officer’s exclusion of interest of Rs.13,66,914 from the profits of the business for computing deduction under section 80HHC.
2.1 The learned Commissioner of Income-tax (Appeals) has failed to appreciate that the appellant is engaged in export business and not in investments. The interest earned has nexus with the export business.”
3. At the time of hearing, the learned authorised representative Shri Vikram Vijayaraghavan submitted that he is not pressing the abovestated grounds of appeal. He has also made an endorsement to this effect on the grounds of appeal in the appeal memo. Therefore, these grounds of appeal are dismissed as not pressed.
4. Ground No. 3 of the appeal reads as under :
“3. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of depreciation of Rs. 45,35,625 on non-compete fees of Rs. 3,62,85,000 at 25 per cent. (12.5 per cent. for half year).
3.1 The learned Commissioner of Income-tax (Appeals) has failed to appreciate that the non-compete fees has all the characteristics of ‘any other commercial rights of similar nature’ referred to in the depreciation schedule.”
5. It was the submission of the learned authorised representative that the non-compete fees of Rs. 3.68 crores paid during the year had resulted in the creation of an intangible asset described under section 32(1)(ii) of the Act. It was the submission that the intangible asset of the assessee consists of “commercial right of similar nature” which was similar to the licences mentioned under the category of intangible asset entitled to deduction under section 32 of the Act. It was also the submission that the provisions of section 28(va) of the Act effective from April 1, 2003 are applicable in the case of recipients of the non-compete fees. It was the submission that the non-compete fees may be taxable as revenue receipt in the hands of the recipients. However, it is required to be treated as a capital asset eligible for depreciation in the hands of the payer. It was further submitted that Circular No. 8 of 2002 ([2002] 258 ITR (St.) 13) pertaining to the issue of taxability of non-compete fees has clarified that the receipts for transfer of rights which are chargeable under the head “Capital gains” would not be taxable under the head “Business income”. On the basis of the circular, it was the submission of the learned authorised representative that the payments made for non-compete fees by the assessee has resulted in the creation of capital assets and hence is entitled to depreciation on the said amount. It was also the submission of the learned authorised representative that the hon’ble Supreme Court in the case of CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902 (SC) has held that premium paid on the grant of a lease should be regarded as of capital nature and the payments made by the assessee in the form of non-compete fees are stated to be of similar nature. It was the further submission of the learned authorised representative that the Assessing Officer was not legally correct to rely on the decision in the case of Bharatbhai J. Vyas v. ITO [2005] 97 ITD 284 (Ahd.) on the facts of the assessee’s case. It was the submission that the instant case was pertaining to claim of depreciation on goodwill treating the same as intangible asset. It was the contention that the case of the assessee was totally different in as much as noncompete fees paid by the assessee have resulted in the creation of an intangible asset under section 32(1)(ii) of the Act. It was submitted that the goodwill is not be included in the said provision. It was the submission of the learned authorised representative that the goodwill is not a right, enforceable against anybody whereas the noncompete covenants are legally enforceable rights. It was the submission that goodwill is derived on the excess of the consideration paid over the net value of assets acquired, whereas non-compete fees is paid under a specific agreement. It was, therefore, the submission that the decision pertaining to goodwill cannot be applied in the case of non-compete fees. Lastly, it was the contention that the assessee’s case is covered by the decision of the hon’ble Jurisdictional High Court in the case of CIT v. G. D. Naidu [1987] 165 ITR 63. It was also the submission that the case of the assessee is covered by the decision of the hon’ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. It was the submission of the learned authorised representative that the decision of Smartchem Technologies Ltd. v. ITO [2006] 150 Taxman 63 (Ahd.) (Mag.) was directly in favour of the assessee on this issue.
6. It was the alternative contention of the learned authorised representative that if non-compete fees are not treated as intangible capital asset eligible for depreciation, the entire amount of expenditure should be allowed as revenue expenditure. It was further submitted that this contention was raised before the learned Commissioner of Income-tax (Appeals) who has not adjudicated the same.
7. On the other hand, the learned Departmental representative Shri Shaji P. Jacob, vehemently argued supporting the orders of the lower authorities and relied on the decision of the Delhi Special Bench of the Tribunal in the case of Tecumseh India (P.) Ltd. v. Addl. CIT [2010] 127 ITD 1 (Delhi) (SB) and the decision of the Tribunal in the case of Sharp Business Systems (India) Ltd. v. Dy. CIT [2011] 133 ITD 275.
8. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. The facts, in brief, leading to this appeal are that M/s. Sanmar Properties and Investments Ltd., Chennai and its three nominees transferred Rs. 4,65,500 equity shares of Rs. 10 each in the assessee-company in favour of Atofina, France, a foreign company and that two nominees Mr. Jean Pierre Seeuws and Mr. William Kraus (one share each) for a total consideration of US $ 5 million converted to Rs. 24,19,00,000 at Rs. 48.38 per US dollar prevailing on the date of foreign currency remittance and the said transaction of transfer of shares has been completed on October 11, 2002. The board of directors of the assessee-company approved the transfer and the assessee-company also effected the necessary changes in the share holders register. As a result of this transaction, the assessee-company became a 100 per cent. subsidiary of Atofina, France. In other words M/s. Sanmar Properties and Investments Ltd was holding 49 per cent. interest in the share capital of the assessee-company and the balance 51 per cent. was held by M/s. Atofina France, a foreign company and M/s. Sanmar Properties and Investments Ltd. transferred its 49 per cent. interest in the assessee-company in favour of Atofina France for a consideration of Rs. 24,19,00,000. The share purchase agreement entered into between the foreign company and M/s. Sanmar dated August 28, 2002 was gone through. The transfer is stated to be part of the totality of arrangements between the transferor and transferee relating to disengagement of Sanmar from the business of the assessee-company.
9. As a part of this agreement, a sum equivalent in Indian rupees to US dollars 7,50,000 was to be paid by the assessee to M/s. Sanmar in consideration of M/s. Sanmar, N. Shankar, managing director of Sanmar Group and M/s. Chemplast Sanmar Ltd. agreeing to give up their right to carry on the Atofina peroxide business in India for a period of five years. Apart from the said agreement, a separate agreement dated October 11, 2002 was entered into between the assessee and M/s. Sanmar whereby a sum of Rs.3,62,85,000 was paid by the assessee to M/s. Sanmar to give up their right to carry on Atofina business in India. This payment was treated as an intangible asset within the meaning of Explanation 3 to section 32 and claimed depreciation at 12.5 per cent. thereon amounting to Rs. 45,35,625.
10. The Assessing Officer disallowed the claim for depreciation on the ground that the payment made as consideration for the other party to give up their right to carry on the business for a period of five years cannot fit into the list of items designated as intangible asset or any other business or commercial rights of similar nature. Therefore, the amount paid by the assessee does not result into acquisition of any intangible asset which is eligible for depreciation. Hence, depreciation claimed at Rs. 45,35,625 on non-compete fees was disallowed by the Assessing Officer.
11. The assessee filed appeal against the said order of the Assessing Officer before the learned Commissioner of Income-tax (Appeals).
12. The learned Commissioner of Income-tax (Appeals), after considering the submissions made by the assessee observed that the non-compete fees paid by the assessee had not resulted into creation or acquisition of any tangible or intangible assets in the hands of the assessee-company. According to him, non-compete fees is similar to goodwill just as depreciation is not allowable on goodwill, similarly depreciation cannot be allowed on non-compete fees also. He drew support from the decision of the Ahmedabad Bench of the Tribunal in the case of Bharatbhai J. Vyas (supra). Further, the learned Commissioner of Income-tax (Appeals) also observed that items of capital assets of the nature of intangible assets on which depreciation is allowable under section 32(1)(ii) does not include non-compete fees. The non-compete fees paid are conspicuous by its absence in the said provisions. He was of the view that the non-compete fees cannot be equated with various other categories of intangible assets given in the said provisions relating to allowance of depreciation. He was of the further view that the term “any other business or commercial rights of similar nature” mentioned in section 32(1)(ii) of the Act refers to and relates only to know-how, patents, copyrights, licenses, franchise, etc. The non-compete fees, in his view, do not fall in the category of any of the above categories of assets. The learned Commissioner of Income-tax (Appeals) further observed that for any expenditure which is capital in nature, the Act does not provide for depreciation on all such capital payments. For this, he relied on the decision of the hon’ble Gujarat High Court in the case of CIT v. VAC Met Corporation (P.) Ltd. [1978] 115 ITR 550 (Guj). Further, the learned Commissioner of Income-tax (Appeals) observed that in the case of Coal Shipments (P.) Ltd. (supra), the issue involved was entirely different, i.e., whether the payment is capital or revenue in nature. He therefore, observed that similarly in the case of Smartchem Technologies Ltd. (supra) and G. D. Naidu (supra) the issue involved was whether the expenditure on non-compete fee is revenue or capital in nature and the issue on allowance of depreciation on non-compete fee was not involved in those case laws. He further observed that Circular No. 8 of 2002 ([2002] 258 ITR (St.) 13) of the Board relied upon by the assessee was an issue on an entirely different context. It explains about the issue of taxability of non-compete fees in the hands of the recipient under section 28 of the Act and does not provide that non-compete fees should be equated with other tangible assets mentioned under section 32(1)(ii) of the Act He further observed that as on the date of passing of the order, there was no decision of the hon’ble jurisdictional High Court or the Tribunal directly on the issue. Lastly, the learned Commissioner of Income-tax (Appeals) observed that the provisions of section 32(1)(ii) of the Act are clearly against the assessee since the non-compete fee is not included for the purpose of depreciation and that the basic requirement for allowance of depreciation on an asset was that it should have been used for the purpose of business of the assessee. The payment of non-compete fees does not create any asset which can be said to have been used for carrying out the business of the assessee. The non-compete fee agreement merely prohibits competition in a particular field of business. He, therefore, confirmed the order of the Assessing Officer and dismissed the ground of appeal of the assessee.
13. We find that in the instant case it is not in dispute that the assessee had incurred expenditure of Rs. 3,62,85,000 on account of non-compete fee. The assessee’s claim for depreciation on the above expenditure was disallowed by the Assessing Officer and such disallowance was confirmed by the learned Commissioner of Income-tax (Appeals). The reasoning given by the learned Commissioner of Income-tax (Appeals) is stated above in this order. We find that the issue in the instant appeal is squarely covered by the decision of the Delhi Bench of the Tribunal in the case of Sharp Business Systems (India) Ltd. (supra) wherein it has been held as under :
“11. We have heard both the parties and gone through the material available on record. In the case before us there is no dispute that before formation of joint venture by L&T Ltd. and Sharp Corporation, Japan, L&T Ltd. was engaged in the business of developing, manufacturing, marketing, distributing and selling among other things, various electronic equipments and products in India and had a well established country-wide sales network. L&T Ltd. by entering into agreement with the assessee had undertaken not to set up any undertaking or assist in setting up, undertaking any business in India of selling/marketing and trading of electronic office products for a period of 7 years in lieu of which payment of Rs. 3 crores had been received. The business of joint venture is of importing, marketing and selling in India certain electric and electronic office products. Though, the business of joint venture, i.e., Sharp Business Systems (India) Ltd. appears similar to that of L&T Ltd. but payment of Rs. 3,00,00,000 has been made in lieu of the latter, not setting up undertaking/assisting in setting up, undertaking any business in India of selling, marketing and trading of electronic office products for a period of 7 years. There is no dispute about the fact that L&T Ltd. was having well established country-wide network in developing, manufacturing, marketing, distributing and selling various electronic equipments and products in India. The joint venture would have faced tough competition if L&T Ltd. had set up any undertaking or assisted in setting up, undertaking any business in India of selling/marketing and trading of electronic office products. To ward off that competition, the assessee-company had paid Rs. 3 crores to L&T Ltd. Therefore, by payment of non-compete fee to L&T Ltd. the competition for a period of 7 years has been eliminated. The period of 7 years is quite long during which any new company can establish its reputation and a reasonable market share would have been acquired. Therefore, the payment made by the assessee to L&T Ltd. is not to increase the profitability, but to establish itself in the market and acquire market share. By keeping away L&T Ltd. from the same business, the assessee had visualized to acquire a good market share. The contention of the assessee that after a period of 7 years L&T Ltd. would have entered in the same trade and, therefore, the expenditure should be treated as revenue in nature, we are not in agreement with this arguments of the assessee. The payment has been made to ward off the competition for a period of 7 years during which any company could have set up its products and reputation in the market. Therefore, the expenditure cannot be treated to have been incurred in revenue field.
12. The next contention of the learned authorised representative for the assessee that the payment of noncompete fee has not created any asset or advantage in the capital field and, therefore, it should be revenue in nature. The decision of the hon’ble Supreme Court in the case of Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 (SC) cannot be applied to the facts of the case before us. In that case the assessee had taken the premises for 39 years on lease and invested in the construction of building. The building did not belong to the assessee and the assessee was paying nominal rent for a period of 39 years. Under these circumstances, the hon’ble Supreme Court held that no asset of enduring nature was created and, therefore, the expenditure was to be treated as revenue in nature. The ratio of this decision is of no avail in the case of non-compete payments as in that case the incurring of expenses did not create any asset as against that it has been clearly held by the hon’ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) that the protection fee paid by the assessee had acquired an advantage of an enduring nature which ensured for the benefit of the whole of the business. The decision of the hon’ble Gujarat High Court relied upon by assessee is not applicable to the facts of the case as in that case the assessee paid amount for laying of cables by the electricity board to ensure the regular supply of electricity. In the case before us, expenditure has not been laid for creation of any asset which did not belong to the assessee, but has been paid to ward off the competition. The aforesaid decision of the hon’ble Supreme Court in the case of Assam Bengal Cement Company v. CIT has been referred in almost all the cases touching this issue and till date the said decision has not been overruled.
13. The hon’ble Supreme Court in the case of Coal Shipments P. Ltd. [1971] 82 ITR 902 (SC) has held that even in a case where payment is made to ward off competition in business to a rival dealer would constitute capital expenditure and to hold them capital expenditure it is not necessary that non-compete fee is paid to create monopoly rights. The hon’ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd. v. CIT [1997] 225 ITR 792 (SC) has held that the fee paid to the Registrar for expansion of the capital base of the company was directly related to capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit making, it still retains the character of capital expenditure since the expenditure was directly related to the expansion of capital base of the company and thus it was not an expense in the nature of revenue. The hon’ble Delhi High Court in the case of CIT v. J. K. Synthetics Ltd. [2009] 309 ITR 371 (Delhi) had held that the basic test to determine the nature of an expenditure remains same even in the context of modern situation and these tests are the test of (i) initial outlay of the business, (ii) the aim and objects of the expenditure, (iii) enduring benefit test, and (iv) the test of fixed and circulating capital. In the case of the assessee the payment of Rs. 3 crores to L&T Ltd. has been made at the start of business of joint venture. Therefore, the assessee’s case will fall under the first test laid down in CIT v. J.K. Synthetics Ltd. which describes that if expenditure is made for initial outlay or for the extension of business or a substantial replacement of equipment then it will fall under the capital expenditure.
14. The Tribunal Delhi Special Bench in the case of Tecumseh India P. Ltd. v. Addl. CIT [2010] 5 ITR (Trib) 150 (Delhi) has examined the proposition canvassed by the assessee that the purpose of making non-compete fee is to maintain the profitability of the business by insulating the same from the risk of competition. This contention of the assessee has been rejected after detailed discussion keeping in view the judicial pronouncements. It has been held that when expenditure is made for initial outlay or for expansion of business or for a substantial replacement of equipment, then it would fall under capital expenditure. The payment of non-compete fee for acquisition of business has been held as capital expenditure as the same was incurred for initial outlay of the business. In the instant case the expenditure was incurred to ward off the competition for a period of 7 years at the start of the business and hence will form part of the initial outlay of the business. Accordingly the assessee’s case is squarely covered by the decision of the Special Bench in the case of Tecumseh India P. Ltd. v. Addl. CIT [2010] 5 ITR (Trib) 150 (Delhi). Therefore, the expenditure by way of non-compete fee has to be treated capital in nature.
15. We are conscious of the provisions of section 28(va) inserted in the statute by the Finance Act, 2002 with effect from 1st April, 2003 according to which any sum, whether received or receivable, in cash or kind, under an agreement for not carrying out any activity in relation to any business will be chargeable to tax under the head ‘profits and gains of business or profession’. In the appeal before us the assessment year involved is 2001-02. It is not the case of the assessee that L&T Ltd. had treated the payments received by it as business income and hence as a corollary to the amended provisions of section 28(va) the payment made will be treated as revenue expenditure. Hence, it is not possible to treat the payment of non-compete fee as revenue expenditure in the hands of the assessee for the assessment year under consideration.
16. In view of the above it is held that the non-compete fee paid by the assessee to ward off competition from L&T Ltd. is capital in nature and as such, it cannot be allowed as revenue expenditure. Accordingly, we do not find any infirmity in the order passed by the learned Commissioner of Income-tax (Appeals) confirming the addition made by the Assessing Officer.
17. Alternatively, it has been argued that in case the expenditure is treated as capital in nature, in view of the decision of the Tribunal in the case of ITO (OSD) v. Medicorp Technologies India Ltd. [2010] 2 ITR (Trib) 367 (Chennai) depreciation should be allowed as non-compete fee is an intangible asset. Under section 32(1)(ii) depreciation in respect of know-how, patent, copyright, trade mark, licences, franchises or any other business or commercial rights of similar nature being intangible assets acquired on or after 1st day of April, 1998, owned wholly and partly by the assessee and used for the purpose of business or profession, shall be allowed at the specified rates. From a plain reading of language of section 32(1)(ii) it is clear that (i) the asset should be an intangible asset ; (ii) should be wholly or partly owned by the assessee ; and (iii) used for the purposes of business or profession. All three conditions are cumulative and non-fulfilment of any of the conditions would disentitle the assessee for depreciation allowance. Admittedly, the non-compete fee is not in the nature of know-how, patents, copyright, trade marks, licences or franchises. Now, it is to be seen whether non-compete fee would fall under residuary part of the definition ‘any other business or commercial rights of similar nature’. The intangible asset falling in expression ‘any other business or commercial rights of similar nature’ should belong to same genus to which know-how, patents, copyrights, trade marks, licences/franchises belong. Therefore, the expression ‘any other business or commercial rights of similar nature’ would mean that the business or commercial right should be in the nature of know-how, patents, copyrights, trade marks, licences or franchises. By no stretch of imagination, the non-compete fee can be treated to have belonged the same genus to which know-how, patents, copyrights, trade marks, licences/franchises belong.
18. An asset whether tangible or intangible must be one for which a market value can be ascertained. There is no dispute that know-how, patents, copyrights, trade marks, licences/franchises, etc., are intellectual property rights, which can be transferred/assigned/leased out to any other parties for a price. Non-compete agreement between two parties is like personal services contract which is unassignable. Personal services contract cannot survive on the demise of either of the parties. Similarly the non-compete agreement between two parties will come to an end on the demise of either of the parties. While intangible assets like know-how, patents, copyrights, trade marks, licences/franchises, etc., can be sold/assigned to any other person for a value but non-compete right acquired on payment cannot be transferred for a price. No third party can be roped in, in the agreement for non-compete by way of sale/assignment as it is non-saleable/unassignable. Similarly, the right to trade freely or to compete in the market is not an asset. Hence, a right arising out of an agreement of non-compete or not to trade freely will not constitute a commercial right falling in the category of intangible assets.
19. Non-compete fee of Rs. 3,00,00,000 has been paid to ward off the competition from L&T Ltd. The hon’ble Delhi High Court in the case of CIT v. Hindustan Coco Cola Beverages (P.) Ltd. [2011] 331 ITR 192 (Delhi) ; [2011] 238 CTR (Del) 1 ; [2011] 50 DTR 122 while dealing with issue of depreciation on goodwill in paragraph 22 held as under :
’22. To effectively understand what would constitute an intangible asset, certain aspects, like the nature of goodwill involved, how the goodwill has been generated, how it has been valued, agreement under which it has been acquired, what intangible asset it represents, namely, trademark, right, patent, etc., and further whether it would come within the clause, namely, “any other business or commercial rights which are of similar nature” are to be borne in mind’.
The hon’ble Delhi High Court in paragraph 24 explained the meaning of ‘business or commercial right of similar nature’ in the following words :
’24. It is worth noting that the meaning of “business or commercial rights of similar nature” has to be understood in the backdrop of section 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. The dictionary clause clearly stipulates that business or commercial rights should be of similar nature as know-how, patents, copyrights, trade marks, licences, franchises, etc. and all these assets which are not manufactured or produced over-night, but are brought into existence by experience and reputation. They gain significance in the commercial world as they represent a similar benefit or advantage or reputation built over a certain span of time and the customers associate with such assets.’
20. Thus from the decision of the hon’ble Delhi High Court in the case of CIT v. Hindustan Coco Cola Beverages (P.) Ltd. [2011] 331 ITR 192 (Delhi) it is clear that ‘business or commercial rights of similar nature’ are not manufactured or produced over-night, but are brought into existence by experience and reputation. The non-compete fee is outcome of an agreement entered into between two parties. It does not represent any intangible asset, such as, know-how, patents, copyrights, trade marks, licences, franchises, etc. Therefore, in view of decision of the hon’ble Delhi High Court in the case of Hindustan Coca Cola Beverages P. Ltd. non-compete agreement would not create an asset of intangible nature eligible for depreciation under section 32(1)(ii) of the Act. The decision of the Tribunal, Chennai Bench in the case of ITO (OSD) v. Medicorp Technologies India Ltd. [2010] 2 ITR (Trib) 367 (Chennai) was rendered prior to the decision of the hon’ble Delhi High Court in the case of Hindustan Coca Cola Beverages P. Ltd. Hence it renders no help to the assessee. Therefore, we are not in agreement with the arguments of the assessee that non-compete fee is an intangible asset to which provisions of section 32(1)(ii) of the Act are applicable. Therefore, in our considered opinion, the depreciation cannot be allowed on amount of non-compete fee. We accordingly dismiss this contention of the assessee.
21. The next contention of the assessee is that the expenditure incurred by way of non-compete fee should be allowed during the period of seven years. The reliance has been placed on the decision of the Tribunal, Chennai Bench in the case of Orchid Chemicals and Pharmaceuticals Ltd. v. Asst. CIT [2011] 7 ITR (Trib) 601 (Chennai) wherein it has been held that payment of non-compete fee should be spread over in the light of decision of the hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 (SC). We have considered the submissions made by the assessee. We following the decision of the Special Bench, Delhi in the case of Tecumseh India (P.) Ltd. [2010] 5 ITR (Trib) 150 (Delhi) have held that payment of non-compete fee is capital expenditure. In Madras Industrial Investment Corporation Ltd. the assessee issued debentures in December, 1966 at a discount. The total discount on issue of Rs. 1.5 crores amounted to Rs. 3 lakhs. For the assessment year 1968-69 the assessee wrote off Rs. 12,500 out of the total discount of Rs. 3 lakhs being the proportionate amount of discount for the period of six months ending with June 30, 1967, taking into account the period of 12 years which was the period of redemption and dividing the discount of Rs. 3 lakhs over the period of 12 years. The Assessing Officer disallowed the claim but the Appellate Assistant Commissioner allowed deduction of Rs. 12,500. On further appeal the Tribunal held that the entire expenditure of Rs. 3 lakhs was allowable as expenditure incurred for the purpose of the business. On a reference the High Court noted that out of the total discount of Rs. 3 lakhs an amount of Rs. 12,500 had been allowed which the Department had not challenged. Hence the High Court was concerned only with the balance amount of Rs. 2,87,500 which the High Court held, could not be considered as expenditure. On further appeal to the hon’ble Supreme Court it was held that liability to pay the discounted amount over and above the amount received for the debentures was a liability incurred by the company for the purpose of its business in order to generate funds for its business activities. It was, therefore, expenditure. The assessee had in its return correctly claimed a deduction only in respect of proportionate part of the discount of Rs. 12,500 over the relevant accounting period in question. This was also in conformity with the accounting practice of showing the discount in the ‘discount on debenture account’ which was written off over the period of debentures. The assessee was entitled to deduct a sum of Rs. 12,500 out of discount of Rs. 3 lakhs in the relevant assessment year. The hon’ble Supreme Court also held that ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of debentures. From the decision of the hon’ble Supreme Court it is clear that expenditure which is revenue in nature and is incurred to secure a benefit over a number of years can be spread over the period of benefit derived by an assessee. However, where the expenditure incurred is in the nature of capital expenditure, the spread over cannot be allowed. Since we have held that the expenditure incurred by way of non-compete fee is capital in nature, it cannot be allowed to be spread over for the period of seven years. Therefore, the claim of the assessee for spread over of the expenditure cannot be entertained. Accordingly, this ground of appeal raised by the assessee is also dismissed.”
14. We respectfully following the above decision of the Tribunal, do not find any merits on this issue in the appeal of the assessee. Hence this ground of appeal of the assessee is dismissed.
15. In the result, the appeal of the assessee is dismissed.
