Pitney Bowes India (P.) Ltd. v. Commissioner of Incometax

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The Tax Publishers2012 TaxPub(DT) 0811 (Del-HC) : (2012) 047 (I) ITCL 0151 : (2012) 254 CTR 0038 : (2012) 204 TAXMAN 0333 : (2012) 076 DTR 0034 INCOME TAX ACT, 1961 Depreciation- Allowability-Not-Compete fee Assessee was engaged in the business of wholesale trading, selling and marketing of hi-tech documents and providing maintenance and after sales services of its products. It had acquired mailing business from seller company as a going concern on a slump sale basis pursuant to Business Transfer Agreement entered into by assessee with the latter. The consideration for such transfer included a sum by way of non-compete fee which was limited for a period of 5 years. Assessee filed its return of income, wherein deduction of non-compete fee was claimed as business/revenue expenditure. AO disallowed the same on the ground that the payment of non-compete fee was a capital outlay, non-allowable under section 37. CIT(A) was held that the expenditure incurred on non-compete fee by assessee was to be allowed on deferred revenue basis, i.e., in five years as the period of non-compete fee agreement was for five years. Tribunal was held that non-compete fee paid by assessee was capital in nature and he disallowed the claim. Tribunal restored the alternate plea in respect of allowance of depreciation under section 32(1)(ii) to assessing officer for deciding it. *Held:Assessee treated expenditure as capital in the books of account. But it was maintained that since it was paid for loss of business that seller company would suffer, same was treated as revenue in nature. In schedule 2 to the balance sheet disclosing `fixed assets`, payment of non-compete fee was treated as `intangible assets`. This also showed that assessee treats this as asset acquired, which was intangible in nature. (Para 12) Tribunal was held that the expenditure was capital in nature. (Para 14) No doubt, Tribunal had determined the nature of payment, viz. treated the non-compete fee as capital in nature. Order of Tribunal would further reflect that alternate submission of assessee was countered on the ground that no asset was created by making the said payment and there was no question of allowing the depreciation. It was also argued that non-compete fee was for five years and assessee itself had been pleading that it was revenue expenditure. Such a contention of revenue could not be allowed, which was self-contradictory. When nature of payment was discussed at that stage, department pleaded that expenditure was not revenue in nature, but was of capital nature, there was no reason to remit the case back to assessing officer to determine the nature of expenditure. Thus, though assessing officer would not have to consider the nature of expenditure, as that had been determined by Tribunal that depreciation thereupon was to be allowed or not under section 32(1)(ii ) had to be decided. (Para 16) No fault was found in the order of Tribunal remitting the case back to assessing officer. (Para 17) Income Tax Act,* 1961 Section 32(1)(ii) SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0811 (Del-HC) : (2012) 047 (I) ITCL 0151 : (2012) 254 CTR 0038 : (2012) 204 TAXMAN 0333 : (2012) 076 DTR 0034

INCOME TAX ACT, 1961

Depreciation- Allowability-Not-Compete fee

Assessee was engaged in the business of wholesale trading, selling and marketing of hi-tech documents and providing maintenance and after sales services of its products. It had acquired mailing business from seller company as a going concern on a slump sale basis pursuant to Business Transfer Agreement entered into by assessee with the latter. The consideration for such transfer included a sum by way of non-compete fee which was limited for a period of 5 years. Assessee filed its return of income, wherein deduction of non-compete fee was claimed as business/revenue expenditure. AO disallowed the same on the ground that the payment of non-compete fee was a capital outlay, non-allowable under section 37. CIT(A) was held that the expenditure incurred on non-compete fee by assessee was to be allowed on deferred revenue basis, i.e., in five years as the period of non-compete fee agreement was for five years. Tribunal was held that non-compete fee paid by assessee was capital in nature and he disallowed the claim. Tribunal restored the alternate plea in respect of allowance of depreciation under section 32(1)(ii) to assessing officer for deciding it. Held:Assessee treated expenditure as capital in the books of account. But it was maintained that since it was paid for loss of business that seller company would suffer, same was treated as revenue in nature. In schedule 2 to the balance sheet disclosing `fixed assets`, payment of non-compete fee was treated as `intangible assets`. This also showed that assessee treats this as asset acquired, which was intangible in nature. (Para 12)

Tribunal was held that the expenditure was capital in nature. (Para 14)

No doubt, Tribunal had determined the nature of payment, viz. treated the non-compete fee as capital in nature. Order of Tribunal would further reflect that alternate submission of assessee was countered on the ground that no asset was created by making the said payment and there was no question of allowing the depreciation. It was also argued that non-compete fee was for five years and assessee itself had been pleading that it was revenue expenditure. Such a contention of revenue could not be allowed, which was self-contradictory. When nature of payment was discussed at that stage, department pleaded that expenditure was not revenue in nature, but was of capital nature, there was no reason to remit the case back to assessing officer to determine the nature of expenditure. Thus, though assessing officer would not have to consider the nature of expenditure, as that had been determined by Tribunal that depreciation thereupon was to be allowed or not under section 32(1)(ii ) had to be decided. (Para 16)

No fault was found in the order of Tribunal remitting the case back to assessing officer. (Para 17)

Income Tax Act, 1961 Section 32(1)(ii)