Case Law Details
Facts:-Srivatsan Surveyors Pvt. Ltd. (‘Appellant’) is engaged in the business of licensed surveyors and loss assessors under the Insurance Act, 1938. The Appellant entered into a non-compete covenant with its director, Mr. Srivatsan and paid a sum of Rs.10 million, on which depreciation was claimed, treating it as an intangible asset.
As per the covenant, Mr. 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 interests of the Appellant in any manner.
The Assessing Officer disallowed the depreciation on the non-compete fee. On appeal by the Appellant, the Commissioner of Income Tax (Appeals) upheld the order of the Assessing Officer. Aggrieved by the decision, the Appellant preferred an appeal before the Income Tax Appellate Tribunal (‘ITAT’), Chennai Bench.
Contentions of the Revenue :- The Tax Department disallowed the depreciation claim holding the payment to be subterfuge on the following basis:
- Before granting the licence to the Appellant, the Insurance Regulatory and Development Authority (‘IRDA’), had imposed a restriction that the directors, who were in the same line of profession, should surrender the licences issued in their individual names by the IRDA.
- IRDA precluded Mr. Srivatsan from practicing in his individual capacity on his individual license while holding the license to act as a corporate entity during his term as the director of the company.
- The Appellant did not face any competition from Mr. Srivatsan in respect of which the non-compete fees was paid.
Observations of the ITAT
- 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. However, 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.
- Depreciation is not allowable on the payment made for non-compete right as the same does not fall within the class of intangible assets referred to in section 32(1)(ii) of the Income-tax Act.
Conclusion :- The ruling disallows depreciation on non-compete right distinguishing it from other intangibles such as know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights. It may, however, be noted that the Chennai ITAT in a subsequent decision in the case of Medicorp Technologies India Limited (ITA No. 2328/Mds/2007) had allowed depreciation on non-compete right treating it as an intangible asset.
