Madras High Court
M/S.Asianet Communications Ltd vs The Commissioner Of Income Tax on 26 June, 2018
Author: T.S.Sivagnanam
Bench: T.S.Sivagnanam, N.Seshasayee
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 26.06.2018
CORAM
THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAM
and
THE HONOURABLE MR.JUSTICE N.SESHASAYEE
Tax Case (Appeal) No.174 of 2005
M/s.Asianet Communications Ltd.,
1-C, Apex Plaza,
3, Nungambakkam High Road,
Chennai-600 034. ... Appellant
-vs-
The Commissioner of Income Tax,
No.121, Nungambakkam High Road,
Chennai-600 034. ... Respondent
Tax Case (Appeal) filed under Section 260A of the Income-tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Chennai D Bench, dated 03.01.2005 in I.T.A.No.443/Mds/2004 for the assessment year 2000-2001.
For Appellant : Mr.Porus Kaka,
Senior Counsel
For Respondent : Mr.M.Swaminathan
Standing Counsel
******
J U D G M E N T
[Delivered by T.S.Sivagnanam, J.] This appeal by the assessee is directed against the order passed by the Income-tax Appellate Tribunal (ITAT), Chennai, "D" Bench, dated 03.01.2005 in I.T.A.No.443/Mds/2004 for the assessment year 2000-01.
2.The above appeal has been admitted on the following substantial questions of law:-
1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that the consideration paid by the appellant to Mr.SK for the non-competing covenant is not an allowable deduction in computing the income?
2. Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal is right in law in confirming the disallowance of claim for deduction of the payment of Rs.15,68,69,040/- in respect of the transponder hire charges?
3. Mr.Porus Kaka, learned Senior Counsel appearing for the appellant submitted that a brief factual background may be required for this Court to consider the substantial question of law, which has been framed for consideration.
4.The appellant is a company registered under the Companies Act and engaged in the business of television broadcasting, formed in the year 1991. The company was managed by one of the Directors, Mr.SK and he was also the President of the company, managing all the affairs of the company till April, 1999. Mr.SK had 50% shareholding and the balance was held by a Non-Resident Indian, viz., Dr.RM. Mr.SK and Dr.RM decided to part ways and an agreement was arrived at between them by which Mr.SK agreed to sell 50% of his shareholding to Dr.RM or his nominees and to renounce his management of the company. As a part of the said agreement, Mr.SK, agreed not to compete with the business of the assessee company for a period of five years for which the company agreed to pay him a sum of Rs.10.5 Crores during the previous year relevant to the assessment year 2000-01. This amount was paid to Mr.SK in respect of a non-compete covenant, which was claimed as a business expenditure in computing the income for the same year.
5.The Assessing Officer, by order dated 31.03.2003, disallowed the claim and computed the assessee's income stating that the payment is of capital nature and is not allowable under Section 37(1) of the Income Tax Act, 1961. The Assessing Officer held that the decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Coal Shipments Pvt. Ltd., reported in (1971) 82 ITR 902 was not applicable to the facts of the case and distinguished the said decision on the ground that the compensation paid therein was paid for an uncertain period, whereas in the assessee's case, the restrictive covenant was restricted for a period of five years. The decision of this Court in the case of Commissioner of Income Tax vs. Late G.D.Naidu and Others reported in (1987) 168 ITR 63 and the decision of the Hon'ble Supreme Court of India in Empire Jute Co. Ltd. vs. Commissioner of Income Tax reported in (1980) 124 ITR 1, which were relied on by the assessee were held to inapplicable to the facts of the case.
6.As against the order of the Assessing Officer, the appellant preferred appeal before the Commissioner of Incomer-tax (Appeals) [CIT(A)] contending that the assessee has not secured any enduring benefit pursuant to the payment made to Mr.SK in consideration of the restrictive covenant. The CIT(A) confirmed the conclusion of the Assessing Officer holding that expenses having been incurred in respect of an agreement for a period of five years, the expenditure should be deemed to be capital. Against the order of the CIT(A), the appellant preferred appeal before the ITAT and reiterated the contentions raised before the Assessing Officer and CIT(A). The Tribunal rejected the assessee's case holding that the payment made to Mr.SK was expended to ward off competition in the field of the assessee's business and therefore, the stand taken by the Revenue has to be accepted and held that the assessee derived an enduring benefit in its business.
7.The other issue, which was considered was regarding the disallowance of a sum of Rs.15,68,69,040/-, which the assessee claimed as a deduction. It may not be necessary for this Court to go into the factual aspect with regard to question no.2 on account of certain subsequent developments, which have taken place during the pendency of this appeal, which will be dealt in the later part of this judgment.
8.With regard to question no.1, the learned Senior Counsel for the appellant referred to the following decisions:-
(i) Firstly, the decision in the case of Empire Jute Co. Ltd., (supra) and submitted that the expenditure incurred by the appellant for the purpose of removing a restriction with a view to increase its profit was revenue in nature and allowable as a deduction and upon payment of the non-compete fee, no new asset was created. As it was part of the cost of operating the profit earning apparatus and was clearly in the nature of revenue expenditure.
(ii) Relying on G.D.Naidu (supra), it was emphasised that it was also a case where similar non-compete agreement was subject matter of issue and the restrictive covenant was also for a period of five years and the Hon'ble Division Bench held that payment towards such restrictive covenant was on revenue account and it would not amount to any acquisition of an advantage of an enduring nature.
(iii) The decision in the case of Carborandum Universal Ltd. vs. Joint Commissioner of Income-tax reported in (2012) 26 taxmann.com 268 was relied on and it was submitted that the Hon'ble Division Bench of this Court took into consideration all the decisions on the point including the decision in the case of Chelpark Co. Ltd. vs. Commissioner of Income Tax reported in (1991) 191 ITR 249 and held that the assessee therein entered into a non-compete agreement with one U.Mohanrao for a period of five years and paid a sum of Rs.50,00,000/- as a non-compete fee and claimed the same as revenue expenditure and such payment was in respect of performing of business of the assessee and those expenditure was revenue account and not on capital account.
(iv) Reliance was also placed on the decision of Delhi High Court in the case of Commissioner of Income-tax vs. Eicher Ltd. reported in (2008) 302 ITR 249 (Delhi) and it is pointed out that in the said case though the period for which the restrictive covenant was to operate was neither permanent nor ephemeral yet the payment was held to be revenue in character. This decision of the Delhi High Court was confirmed by the Hon'ble Supreme Court in Commissioner of Income-tax vs. Eicher Limited (SC) reported in 312 ITR 333.
9.The learned Senior Counsel further submitted that the other High Courts in the Country have also taken a similar view, and cited the following decisions.
(i) Commissioner of Income-tax vs. Messrs. Piggot Chapman & Co. (Cal.) reported in (1949) 17 ITR 317;
(ii) Commissioner of Income-tax vs. Lahoty Brothers Ltd. (Cal.) reported in (1951) 19 ITR 425;
(iii) Champion Engineering Works Ltd. vs. Commissioner of Income-tax (Bombay) reported in 81 ITR 273;
(iv) Commissioner of Income-tax vs. Bowrisankara Steam Ferry Co. (A.P.) reported in (1973) 87 ITR 650; and
(v) Commissioner of Income-tax vs. Andhra Fuels (P.) Ltd. (A.P.) reported in (2016) 70 taxmann.com 271.
10.The learned Senior Counsel also placed reliance on the recent decision of this Court in the case of M/s.Hatsun Agro Products Ltd., vs. Joint Commissioner of Income Tax in T.C.(Appeals) No.1173 of 2005 dated 10.04.2017, in which the Hon'ble Division Bench, after taking note of the decisions in Alembic Chemical Works Co. Ltd. vs. Commissioner of Income Tax reported in 177 ITR 377, Chelpark Company Limited (supra), Carborandum Universal Limited (supra) and Empire Jute Ltd. (Supra) held that payments made towards restrictive covenant are revenue in nature. Thus, it is the submission of the learned Senior Counsel for the appellant that the payment made to Mr.SK has to be allowed as a revenue expenditure and the question has to be answered in favour of the assessee.
11.Mr.M.Swaminathan, learned Standing Counsel for the Revenue pointed out that the assessee had entered into two non-compete agreements on the same day, i.e., on 03.05.1999. In the first agreement, i.e., Share Capital Purchase Agreement, the assessee agreed to pay a sum of Rs.6 Crores to M/s.SK Group, so that the said Group, for a period of five years from the date of the agreement, shall not directly or indirectly by themselves or through any of the relatives or associates provide any service, assistance or support of any nature whatsoever related to any business, which may directly or indirectly compete with the business of the assessee.
12.It is pointed out that on the same day, another agreement dated 03.05.1999 was entered into wherein, the recital would clearly show that the payment of Rs.4.5 Crores was an additional amount in pursuance of and in consideration of the Share Purchase Agreement. Therefore, the amount of Rs.4.5 Crores paid under the said agreement should be treated as acquisition of business or business purchase and therefore, to be treated as capital in nature.
13.Furthermore, the learned counsel stressed that the need for entering into two non-compete agreements on the same day itself is an indicator to show that it contemplates purchase, which is in addition to the consideration paid under the Share Capital Purchase Agreement. Further, it is submitted that the assessee in the books of accounts has amortised the payment for a period of five years and they themselves treated the same as capital expenditure, which is impermissible to treat the same in the Revenue field.
14.The learned Standing Counsel referred to the following decisions:-
(i) Neel Kamal Talkies vs. Commissioner of Income-tax reported in [1973] 87 ITR 691 (Allahabad);
(ii) Blaze & Central (P.) Ltd. vs. Commissioner of Income-tax reported in [1979] 1 Taxman 546 (Madras) / [1979] ITR 33 (Madras);
(iii) Commissioner of Income-tax vs. Hindustan Pilkington Glass Works reported in [1981] 7 Taxman 133 (Calcutta) / [1983] 139 ITR 581 (Cal.) / [1981] 24 CTR 327 (Cal.);
(iv) Pitney Bowes India (P.) Ltd. vs. Commissioner of Income-tax reported in [2012] 17 taxmann.com 116 (Delhi) / [2012] 204 Taxman 333 (Delhi) / [2012] 254 CTR 38 (Delhi);
(v) Sharp Business System vs. Commissioner of Income-tax-III reported in [2012] 27 taxmann.com 50 (Delhi) / [2012] 211 Taxman 576 (Delhi) / [2012] 254 CTR 233 (Delhi); and
(vi) M/s.Tamil Nadu Magnesite Ltd. vs. The Assistant Commissioner of Income-tax in T.C.(Appeal) Nos.907 and 908 of 2007 dated 05.06.2018.
15.By referring to the decision in Neel Kamal Talkies (supra), it is submitted that the agreement entered into between the assessee and the firm was one which had the effect of eliminating competition, so far as the assessee was concerned and under it, the said firm was prohibited from exhibiting any films at its Talkies for a period of five years, which was held to be capital expenditure.
16.It is submitted that in Blaze & Central (P.) Ltd. (supra), the agreement entered into by the assessee-company with one B does not indicate that the film shots are subject matter of bargain and in substance and effect, the agreement involved a transfer of the B's business to the assessee-company for a consideration of Rs.1,50,000/- and it cannot be said that the said sum was paid for acquiring the stock-in-trade, as the assessee-company has not only warded off the business rivalry, but also acquired the business of the rival for a period of nine years in a specified area. Referring to the said decision, it is emphasised that when amount is paid to ward off business rivalries, it has to be treated in the capital field.
17.The decision in the case of Hindustan Pilkington Glass Works (supra) was referred to, to support the submission that payment made to eliminate competition was to prevent a person from producing products manufactured by the assessee for five years under an agreement, which was treated as capital in nature.
18.The decision in Pitney Bowes India (P.) Ltd. (supra) was cited to state that when the assessee itself has treated the expenditure as capital in the books of accounts, it cannot be treated to be revenue in nature.
19.Reliance was placed on Sharp Business System (supra), wherein the non-compete fee paid by the assessee to its erstwhile partner as consideration for not setting up any business of selling, marketing and trade of electronic office products for a period of seven years amounted to capital expenditure and thus, the same was not allowable under Section 37(1) of the Income Tax Act, 1961. Therefore, it is submitted that the facts clearly show that the assessee themselves treated the same in their books of accounts as capital expenditure.
20.By way of alternate submission, it is submitted that the amount of Rs.4.5 Crores paid under the second non-compete agreement dated 03.05.1999 being a payment in addition to the Share Capital Purchase Agreement, should be treated as capital expenditure or in other words, as a share purchase price. On the above submissions, the learned Standing Counsel sought for rejecting the appeal.
21.In reply, Mr.Porus Kaka, learned Senior Counsel, submitted that the decision of the Delhi High Court in the case of Sharp Business System (supra) does not lay down the correct legal position. Though in paragraph 9 of the said judgment, the Court had referred to the decision in Empire Jute Co. Ltd. (supra) and the decision in Alembic Chemical Works Co. Ltd. (supra), but had applied the wrong test and held that the expenditure was capital in nature. Further, it is submitted that though the Court referred to the decision in G.D.Naidu (supra), while discussing the various decisions on the point, did not discuss about the decision laid down in G.D.Naidu, which is subsequent to the decision in Blaze & Central (P.) Ltd. (supra), which judgment was distinguished in G.D.Naidu.
22.With regard to the submission of the Revenue that there were two non-compete agreements, the learned Senior Counsel would submit that they are with different parties and with different objectives and this argument was never advanced by the Revenue at any earlier point of time. Furthermore, before the ITAT, the facts were not in dispute and it was recorded so in the order of the Tribunal. It is the further contention that the amount of Rs.4.5 Crores should be treated as capital expenditure is never the case of the Revenue, as it is evident from the perusal of the order passed by the Tribunal, wherein the Tribunal held that there is no dispute about the facts and the amount expended was for the purpose of business.
23.Further, it is submitted that in the case of Carborandum Universal Limited, there were three agreements. It is submitted that the assessee has not capitalised the expenditure in his account, but has treated the same as deferred Revenue expenditure for a period of five years and such a contention was never raised by the Revenue before the Assessing Officer or the CIT(A) or the Tribunal and therefore, the said contention deserves to be rejected.
24.Further, it is submitted that the method of accounting is totally irrelevant, and to support this argument, the learned Standing Counsel referred to the decision in the case of Taparia Tools Ltd. vs. Joint Commissioner of Income-tax reported in [2015] 55 taxmann.com 361 (SC). Thus, the learned counsel concluded by submitting that on account of the payment of the non-compete fee, the company does not acquire any business, the profit making apparatus remains the same and the assessee used to run the business remains the same and there is no new business or new source of income and therefore, the expenditure has to be treated as revenue.
25.After elaborately hearing the learned counsels for the parties and carefully perusing the materials placed on record, we are in agreement with the submissions made by the learned Senior Counsel for the assessee. We support such conclusion with the following reasons:-
26.The first argument of the Revenue is that there were two agreements on the same day and the purpose of entering into two non-compete agreements has not been properly explained and the recital in the second non-compete agreement whereby payment of Rs.4.5 Crores was made would clearly indicate that it is in addition to the consideration payable under the Share Purchase Agreement and therefore, it is a capital expenditure. This contention has not been raised by the Revenue at an earlier point of time, viz., before the Assessing Officer or before the CIT(A).
27.Before the Tribunal, both the Revenue as well as the assessee stated that there is no dispute about the facts. It was so recorded in the order passed by the Tribunal. In paragraph 3, the ITAT has observed that undoubtedly it was laid out and expended for the purpose of business. Thus, such a factual point having not been canvassed before any of the authorities, it would be too late for the Revenue to raise it before us in an appeal under Section 260A of the Income Tax Act. Therefore, the submission made by the Revenue is liable to be rejected.
28.The Revenue would further contend that the assessee has amortised the payment and spread over the same for a period of five years and thus, the assessee having treated the same in the books of accounts as a capital expenditure, have to be bound over by the same and cannot take a different stand.
29.As pointed out earlier, The Tribunal while accepting that the facts are not in dispute, has specifically pointed out that the expenditure is laid out and expended for the purpose of business. The assessee has explained that they have not capitalised the said expenditure in their accounts, but they have treated as deferred revenue expenditure for a period of five years.
30.Thus, the question would be as to whether the manner in which the accounts of an assessee are maintained could impact the assessment under the provisions of the Act. This question was answered by the Apex Court in Taparia Tools Ltd. (supra), pointing out that the Court has repeatedly held that the entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of the provisions contained in the Act. Therefore, the second contention advanced by the Revenue does not merit acceptance.
31.The third contention advanced by the Revenue was based upon the decisions in Neel Kamal Talkies (supra), Blaze & Central (P.) Ltd. (supra), Commissioner of Income-tax (supra), Pitney Bowes India (P.) Ltd. (supra) and Sharp Business System (supra).
32.So far as Neel Kamal Talkies (supra) is concerned, this decision was rendered prior to Empire Jute Co. Ltd. (supra), which has laid down principle and broadened the field of interpretation to ascertain the real nature of the advantage, which the taxpayer would derive. Therefore, we are of the view that after the decision in the case of Empire Jute Co. Ltd., the Revenue would be precluded by referring to the decision in Neel Kamal Talkies (supra). So far as Blaze & Central (P.) Ltd. is concerned, this decision was distinguished in G.D.Naidu. At this juncture, it would be relevant to take note of the findings rendered by the Division Bench in G.D.Naidu, which read as follows:-
26........... It may be also mentioned that in the present case, it is not a new business of the assessee, though the new partners have come in for the first time. The old business of the outgoing partners was being carried on by the new partners and we have already pointed out that even the Income-tax Officer has registered the firm under the Income-tax Act for the subsequent years also.
27. In Blaze and Central (P.) Ltd. v. CIT , the facts were these. The assessee which was carrying on business of arranging exhibition of advertisement and film shorts in licensed public cinema theatres in the four Southern States of Madras, Andhra, Kerala and Mysore, entered into an agreement with one Saraswathi Publicities who was also carrying on similar business on behalf of two companies in the four States. Under the said agreement, Saraswathi Publicities agreed to part with its business in the four States for period of 9 years in consideration of the assessee paying a sum of Rs. 1,50,000. This court held that the assessee had taken over the business carried on by Saraswathi Publicities for a consideration of Rs. 1,50,000 though it was for a period of 9 years. It was further held that the assessee not only derived an advantage by eliminating competition and also acquired a business which generated income. It is in those circumstances, this court held that the sum of Rs. 1,50,000 paid by the assessee was capital in nature and was not allowable as a revenue expenditure. It may be seen from the facts of that case that that case also related to an acquisition of an existing competitive business, whereas in our case it is only a restrictive covenant. No separate business of the old partners was acquired or any competition was eliminated by such acquisition. Since there is no acquisition of any business by payment of the amount referable to the restrictive covenant and there is no benefit of an enduring nature being acquired, we are in entire agreement with the Tribunal that the payment can only be treated as a revenue outgoing and not capital in nature. These findings will answer questions Nos. 6, 7, 8 and 9 and all those questions are answered in favour of the assessee and against the Revenue.
33.Therefore, reliance placed on the decision in Blaze & Central (P.) Ltd. (supra) does not merit acceptance.
34.Similarly, the decision in the case of Hindustan Pilkington Glass Works (supra) was prior to G.D.Naidu, which decision of the Division Bench has laid down principle, that too, in a case, which is more or less identical to that of the case of the assessee.
35.So far as the decision in Pitney Bowes India (P.) Ltd. (supra) is concerned, we find that the decision was rendered on a concession made by the learned counsels on either side. This is evident from paragraphs 10 & 13 of the judgment, wherein both the assessee as well as the Revenue treated the expenditure as capital expenditure. Thus, the said decision does not render any support to the stand taken by the Revenue.
36.So far as the decision in Sharp Business System (supra) is concerned, as pointed out earlier, in paragraph 5 of the judgment, it has referred to the decision of this Court in G.D.Naidu. The discussion is in paragraph 9 and the conclusion is in paragraph 10.
37.In paragraph 9 of the judgment, the Court has not discussed the decision of G.D.Naidu, though it has referred to it in paragraph 5 of the judgment. This is pointed out because, the Court has discussed the decision in Blaze & Central (P.) Ltd. (supra), which was distinguished in G.D.Naidu. We find that in paragraph 9 of the judgment, the Court after referring to Empire Jute Co. Ltd. (supra) and Alembic Chemical Works Co. Ltd. (supra), has pointed out that the single test, that is, whether the payment results in an enduring benefit cannot be conclusive in a decision as to whether an expenditure qualifies as one falling or in the capital field and that the decisions have emphasized the need to shift from a narrower field to a broader one, to ascertain the real nature of the advantage, which the taxpayer would derive.
38.Thus, the test to be applied following Empire Jute Co. Ltd. (supra) is to see as to whether it added to the capital of the assessee, whether a new asset was created and whether there was an addition or expansion of the profit making apparatus of the assessee and whether the assessee acquired source of profit or income when such investment was made. However, the Court in our respectful view, applied the test, which does not flow from the test laid down in Empire Jute Co. Ltd. (supra) by observing that the test is one of ascertaining whether from commercial angle and the advantage results in a capital field or it is the expenditure falls legitimately within the revenue field. Ultimately, the Court held that the arrangement for a period of 7 years is an enduring benefit. This in our respectful view, does not fulfil the test laid down by Empire Jute Co. Ltd. (supra) and in fact, the Court itself had pointed out that is not the conclusive test to determine whether expenditure is in capital field or revenue. Thus, for the above reasons, we are not in respectful agreement with the reasoning given by the Hon'ble Division Bench in Sharp Business System (supra).
39.It would be relevant to note that, in the case of Sharp Business System (supra), the Joint-venture company was incorporated in the assessment year 2001-02 and in the first year of business, with a view to warding off competition, it entered into agreement by paying a non-compete fee of Rs.73 Crores to L & T Ltd., of setting-up or undertaking or assisting in the setting-up or undertaking any business in India, of selling, marketing and trade of electronic office products for seven years and this amount was treated as deferred revenue expenditure in the assessees books of accounts and written-off over corresponding period of seven years.
40.There is a marked difference in the factual position in Sharp Business System (supra) and the factual position in the case on hand where the assessee's business continues to remain the same, and this is also one more reason to hold that the decision in Sharp Business System (supra) is not applicable to the facts of the case apart from the reservation expressed by us above.
41.In Carborandum Universal Limited, one of the questions framed for consideration was whether the Tribunal was right in holding that non-compete fee paid to Shri U.Mohan Rao was capital expenditure, without appreciating that such expenditure has not resulted in an enduring benefit. To be noted that in the said case there were three agreements entered into with the said U.Mohan Rao all pertaining to non-compete and that there were different sets of parties. The expenditure so incurred was held to be revenue and the decision applies with full force to the assessee's case.
42.In the case of Hindustan Pilkington Glass Works (supra), the Division Bench referred to the decision in Empire Jute Co. Ltd (supra) and pointed out that the test of enduring benefit could not be applied blindly with regard to the facts and circumstances that arise in the given case. It was pointed out that the conclusion of the Tribunal that the payment has enduring benefit and is capital in nature does not take into account the commercial benefit raised by the company and that the Tribunal appears to have guided solely by an earlier decision rendered by it in the case of Asianet (the case on hand).
43.Further, it was pointed out that the advantage of restraining individuals from engaging any competition is in the field of facilitating its own business and rendering much more profit in the capital field. In the said case, the Directors, to whom the non-compete fee was paid was with a view to remain with the company. While analysing this factual aspect, the Division Bench pointed out that though there was no actual or limited threat of the Directors so far they are ties with their company or starting a new venture always remains and prudence dictates that the company protects itself as against such a probability. Thus, the payment made as non-compete fee to the directors was held to constitute revenue expenditure in the hands of the assessee.
44.In Tamilnadu Magnesite Ltd., (supra), we had decided some what similar issue and applied the decision of the Hon'ble Supreme Court in Empire Jute Co. Ltd. (supra) and held in favour of the assessee.
45.Even as the doctrine of enduring benefit is on the wane, in determining whether an expenditure is a capital expenditure or not, the point at hand can still be tested on this aspect. The point here is whether the non-compete compensation paid is to be termed as a capital expenditure.
46.The governance for non-compete is traceable to Section 27 of the Indian Contract Act, 1872, which reads as below :
27. Agreements in restraint of trade, void. Every agreement, by which any one is restrained from exercising a lawful profession, trade or business or any kind, is to that extent void.
Exception 1.Saving of agreement not to carry on business of which goodwill is sold One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business.
Any contractual term that imposes restraint on a contracting party from engaging in any business for a reasonable term must be backed by consideration. Therefore, the non-compete compensation is but a consideration paid to the party who is kept out of competing business during the term of the contract.
47.The non-compete compensation, from the stand point of the payee of such compensation, is so paid in anticipation that absence of a competition from the other party to the contract may secure a benefit to the party paying the compensation. There is no certainty that such benefit would accrue. In other words, inspite of the fact that a competitor is kept out of the competition, one may still suffer loss. If it were to be a capital expenditure whether or not, an assessee makes a business profit, the character and value of the capital assets will, subject to depreciation, remain unaltered.
48.Thus, the facts clearly disclose that on account of the payment of non-compete fee, the assessee has not acquired any new business, profit making apparatus has remained the same, the assets used to run the business remained the same and there is no new business or no new source of income, which accrue to the assessee on account of the payment of non-compete fee. Apart from that the stand taken by the Revenue that the petitioner had amortised expenditure spread over for the period of five years has been found to be factually incorrect, as the assessee has not capitalised the same in their accounts, but treated it as deferred revenue expenditure for a period of five years. That apart, such issue was never raised by the Revenue before any of the lower authorities, as the Tribunal has recorded that there is no dispute regarding the facts.
49.Accordingly, the first substantial question of law is answered in favour of the assessee and against the Revenue.
50.This leaves us with question no.2 for decision. As pointed out earlier, this pertains to disallowance of claim for deduction of the payment of Rs.15,68,69,040/-. The disallowance was confirmed by the CIT(A) by order dated 27.01.2004, for the reason that in the assessment year 1995-96, the assessee's company succeeded in their case and the payments to Mr.Menon U.K.Limited as transponder hire charges are not hit by the purview of the provisions of Section 40(a)(i) of the Income Tax Act and the learned CIT(A), vide order in I.T.A.No.27/2002-03 dated 29.07.2002, held that the transponder hire charges made by the appellant on which no tax has been deducted does not come under the purview of either Royalty or Technical Fees on which tax has to be deducted. Accordingly, no disallowance under Section 40(a)(i) of the Income Tax Act is warranted on those payments. Therefore, the CIT(A) held that the TDS payment claim made by the assessee to the extent of Rs.15,68,69,040/- is prima facie not an allowable expenditure, when the assessee is not required to deduct any TDS on payment of transponder charges and so the payment itself is not covered by Section 40 (i) (a) of the Income Tax Act. Thus, the assessee's claim for TDS payment for the year 2000-01 was held to be not permissible and the same was disallowed. The reason for disallowing this deduction was as a result of the decision in the assessee's own case for the assessment year 1995-96.
51.As against the said order passed by the CIT(A), for the assessment year 1995-96 dated 29.07.2002, both the assessee and the Revenue preferred appeals before the ITAT. The ITAT by order dated 11.12.2009, allowed the appeal filed by the Revenue, set aside the order passed by the CIT(A) and upheld the disallowance. The assessee's appeal was dismissed as withdrawn. Though the assessee had filed an appeal against the order passed by the ITAT, in the Revenue's appeal, subsequently, the appeal was withdrawn and the assessee has accepted the orders passed by the ITAT and paid the taxes. Thus, the disallowance deduction of the payment of Rs.15,68,69,040/- has to be redone in the light of the subsequent developments, which had occurred during the pendency of this appeal.
52.Question No.2 is answered, accordingly and the findings of both the Assessing Officer [CIT(A)] and the Tribunal are set aside and the matter is remanded to the Assessing Officer to take note of the aforesaid facts and to pass fresh orders.
53.In the result, the appeal is allowed and the first substantial question of law is answered in favour of the assessee and against the Revenue and the second substantial question of law is answered on the terms referred above. In the light of the above decision, the Assessing Officer is directed to give effect to the order in accordance with law. No costs.
(T.S.S., J.) & (N.S.S., J.)
26.06.2018
abr
Index : Yes / No
Speaking / Non-Speaking Order
To
1.The Income Tax Appellate Tribunal,
Chennai D Bench.
2.The Commissioner of Income Tax,
No.121, Nungambakkam High Road,
Chennai-600 034.
3.The Commissioner of Income-tax (Appeals)-VI,
Chennai.
T.S.Sivagnanam, J.
and
N.Seshasayee, J.
abr
Tax Case (Appeal) No.174 of 2005
26.06.2018