NELITO SYSTEMS LTD, MUMBAI V. DCIT CIR 7(1), MUMBAI

ITA 7234/MUM/2008

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8807 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 17-09-2012
• Assessment Year: 1996-1997
• Appeal Filed On: 23-12-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A P SINGH
• Assessee Lawyers: DEVDATTA MAINKAR; D P BAPAT
• Keywords: Business expenditure; Valuation report; Revised return; Revenue expenditure; Capital expenditure
• Section: 37(1); 32; 28

Judgement Text

ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL 'F' BENCH, MUMBAI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.7234/MUM/2008 (ASSESSMENT YEAR: 1996-97) NELITO SYSTEMS LTD, A/251 SHAH & NAHAR INDUSTRIAL ESTATE, DHANRAJ MILLS COMPOUND, LOWER PAREL (WEST), MUMBAI 400013 PAN: AAACN 1818 L VS. DCIT CIRCLE 7(1), AAYAKAR BHAVAN, MK ROAD MUMBAI 400020 (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI D.P. BAPAT & SHRI DEVDATTA MAINKAR DEPARTMENT BY: SHRI A.P. SINGH, CIT(DR) DATE OF HEARING: 17/09/2012 DATE OF PRONOUNCEMENT: 26/09/2012 O R D E R PER B. RAMAKOTAIAH, A.M. THIS IS AN ASSESSEES APPEAL AGAINST THE ORDER OF THE CIT (A)- VII, MUMBAI DATED 19.11.2008. ASSESSEE RAISED THE G ROUND AS UNDER: 1.THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE IOF NON-COMPETE COMPENSATION OF ` .4,00,00,000/- PAID TO THE NATIONAL RADIO & ELECTRONICS CO. LTD (NELCO) AS BUSINESS EXPENDITURE. IN THE COURSE OF THE APPELLATE PROCEEDINGS, ASSESSE E RAISED AN ADDITIONAL GROUND AS UNDER: WITHOUT PREJUDICE TO THE PRIMARY GRIEVANCE STATED IN THE GROUND OF APPEAL NO.1, THE IMPUGNED EXPENDITURE, BE ING NON-COMPETE COMPENSATION, SHOULD BE ALLOWED ON DEFERRED BASIS OVER THE TERM OF THE RELATED AGREEME NT. IT PRAYED FOR ADMISSION OF THE ADDITIONAL GROUND ON THE FOLLOWING CONSIDERATIONS: ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 2 OF 11 (I) THE CLAIM FOR THE DEDUCTIBILITY OF THE EXPENDITURE ON DEFERRED BASIS WAS MADE IN THE ORIGINAL RETURN OF INCOME AS EVIDENCED BY THE OBSERVATION MADE BY AO I N THE ASSESSMENT ORDER PASSED IN THE FIRST ROUND (PB PAGES 35/36). (II) THE EXPENDITURE IS AMORTISED ON DEFERRED BASIS IN T HE ACCOUNTS OF THE COMPANY. (PB PAGES 73, 83, 89 & 90) . (III) THE ADDITIONAL GROUND IS A COMPONENT OF THE MAIN GROUND OF APPEAL WHICH SEEKS TO RAISE ONLY A LEGAL ISSUE BASED ON THE FACTS OF THE RECORDS. 2. WE HAVE CONSIDERED THE ISSUE AND ADMIT THE ADDITION AL GROUND. AT THE OUTSET BOTH THE PARTIES AGREED THAT THE GROUND NO.1 IS HELD AGAINST ASSESSEE I.E. HELD AS CAPITAL OUTLA Y AND CANNOT BE ALLOWED AS REVENUE EXPENDITURE BY THE SPECIAL BENCH OF THE ITAT IN THE CASE OF TECUMSEH INDIA (P) LTD VS. ADD. CIT 127 ITD 1 (DELHI SB). 3. THE FACTS RELATED TO THE ABOVE CLAIM ARE AS UNDER. ASSESSEE HAS DEBITED AN AMOUNT OF ` .25,75,343/- BY WAY OF NON COMPETE COMPENSATION WRITTEN OFF WITH THE OTHER EXPENSES IN SCHEDULE-4 TO THE PROFIT & LOSS A/C. IT HAS BEEN MENTIONED THAT N ON COMPETE COMPENSATION HAS BEEN AMORTISED OVER A PERIOD OF 10 YEARS ON PRO- RATA BASIS AND IN THE ORIGINAL RETURN FILED ON 26.1 1.1996 NO ADJUSTMENT WAS FOUND NECESSARY AND RETURN OF INCOME WAS FILED ADMITTING ` .1.32 CRORES. ASSESSEE FILED REVISED RETURN ON 12.07.1997 CLAIMING THE ENTIRE NON COMPETE COMPENSA TION OF ` .4 CRORES AS REVENUE EXPENDITURE THEREBY REDUCING THE TOTAL INCOME TO LOSS(-) 2,41,97,900/-. THE NON COMPETE COMPENSATION AGREEMENT DATED 9.8.1995 WAS ENTERED BETWEEN NATIONAL RADIO & ELECTRONIC COMPANY LTD (NELCO) AND NELITO SYSTEMS LTD (NSL) AN D AS PART OF THAT NELCO WILL PART WITH AND WILL CEASE AND DESIST FROM CARRYING ON COMPUTER BUSINESS IN COMMERCIAL MARKETS AFTER TH E BUSINESS ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 3 OF 11 SYSTEM WAS TRANSFERRED/ASSIGNED AS A GOING CONCERN BY NELCO TO NSL AND AS SUCH BUSINESS THEREAFTER WILL BE CARRIED ON ONLY BY NSL. THERE ARE VARIOUS RESTRICTIVE COVENANTS CREATED BY NELCO. NSL HAS MADE PAYMENT OF ` .4 CRORES AS NON-COMPETE COMPENSATION. IT WAS THE CONTENTION OF ASSESSEE THAT PAYMENT OF NON-COMP ETE COMPENSATION OF ` .4 CRORES PAID BY THE NSL TO NELCO DOES NOT RESULT INTO BRINGING INTO EXISTENCE A CAPITAL ADVAN TAGE OR AN ENDURING BENEFIT. RELYING ON THE VARIOUS DECISIONS, THE AMOUNT WAS CLAIMED AS REVENUE EXPENDITURE. AO DISCUSSING ELABO RATELY FROM PAGE NO.3 OF THE ASSESSMENT ORDER TO PAGE 10 HELD T HAT IT IS NOT REVENUE EXPENDITURE AND DISALLOWED THE ENTIRE AMOUN T OF CLAIM. THE CIT (A) FOLLOWING THE SIMILAR ORDERS IN THE CASE OF M/S. BAYER INDIA LTD & M/S P&G HOME PRODUCTS LTD CONFIRMED THE ACTIO N OF AO. 4. IN THE CASE OF TECUMSEH INDIA (P) LTD VS. ADD. CIT 127 ITD 1 (DELHI SB) IT WAS HELD THAT IT IS WELL SETTLED THA T EXPENDITURE INCURRED IN WARDING OFF COMPETITION IN THE BUSINESS EVEN TO RIVAL DEALER WILL CONSTITUTE CAPITAL EXPENDITURE AND TO H OLD IT AS CAPITAL EXPENDITURE, IT IS NOT NECESSARY THAT NON COMPETE F EE BE PAID TO CREATE MONOPOLY RIGHTS. RESPECTFULLY FOLLOWING THE PRINCIPLES LAID DOWN ABOVE DECISION, AS CONCEDED BY THE LEARNED COU NSEL THAT THIS ISSUE IS COVERED BY THE SPECIAL BENCH OF THE ITAT, WE DISMISS GROUND NO.1. 5. THE ADDITIONAL GROUND IS THE CLAIM THAT THE AMOUNT OF NON- COMPETE COMPENSATION SHOULD BE ALLOWED ON DEFERRED BASIS OVER THE TERM OF THE AGREEMENT. IT WAS THE CONTENTION OF THE LEARNED COUNSEL THAT SIMILAR ISSUE WAS CONSIDERED BY THE CHENNAI BE NCH OF THE ITAT IN THE CASE OF ORCHID CHEMICALS & PHARMACEUTICALS L TD VS. ACIT, 131 ITD 385 WHEREIN IT WAS HELD THAT OUTGO SHOULD B E TREATED AS REVENUE IN NATURE AND HENCE ALLOWABLE OVER A PERIOD OF 4 YEARS PRO- RATA. IT WAS FURTHER RELIED ON THE HON'BLE DELHI HI GH COURT IN THE CASE OF PITNEY BOWES INDIA (P) LTD VS. CIT, 204 TAX MAN 333 FOR THE PROPOSITION THAT THE HON'BLE HIGH COURT DECIDED THE ISSUE ON THE ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 4 OF 11 REASON THAT IN THE BOOKS OF ACCOUNT ASSESSEE TREATE D THE SAME AS CAPITAL EXPENDITURE IT WAS HELD AS CAPITAL EXPENDIT URE, WHEREAS ASSESSEE IN THE BOOKS OF ACCOUNT TREATED AS DEFERRE D REVENUE EXPENDITURE, THEREFORE, THE SAME SHOULD BE TREATED AS REVENUE EXPENDITURE. IT WAS FURTHER CONTENDED THAT THE HON' BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PUNJAB ALKALIES & CHEMICALS LTD VS. CIT 338 ITR 86 CONSIDERED THAT ONE-THIRD OF THE EXPENDITURE INCURRED ON ASSETS COULD BE REVENUE EXPENDITURE. TH EREFORE, FOLLOWING THE SAME PRINCIPLES, ASSESSEE CLAIMS THE NON COMPETE FEE PAID AS DEFERRED REVENUE EXPENDITURE. 6. THE LEARNED CIT (DR) IN REPLY SUBMITTED THAT HAVING HELD THAT EXPENDITURE IS CAPITAL IN NATURE, THE AMOUNT CANNOT BE ALLOWED UNDER SECTION 37(1) AND THE CASE LAW RELIED UPON B Y ASSESSEE ARE NOT APPLICABLE TO FACTS OF THE CASE. EVEN UNDER SEC TION 35D ONLY REVENUE EXPENDITURE COULD BE AMORTISED AND SINCE TH E EXPENDITURE IS CAPITAL IN NATURE, THIS CANNOT BE AMORTISED. HE RELIED ON THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SES OF CIT VS. BHOR INDUSTRIES LTD 128 TAXMAN 626 AND TAPARIA TOOL S LTD VS. JT.CIT, 126 TAXMAN 544. THE LEARNED COUNSEL IN REPL Y SUBMITTED THAT THE CLAIM IS UNDER SECTION 28 AND ALSO ON THE METHOD OF ACCOUNTING BUT FAIRLY SUBMITTED THAT THE ITAT IN TH E CASE OF SHARP BUSINESS SYSTEMS (INDIA) LTD. V. DCIT IN 133 ITD 27 5 HELD THE ISSUE AGAINST ASSESSEE. 7. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE CLAIM . THE PROVISIONS OF SECTION 37(1) ARE AS UNDER: 37 (1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPEN SES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 5 OF 11 AS PROVIDED UNDER SECTION 37(1), EXPENDITURE OF CAP ITAL NATURE CANNOT BE ALLOWED AS A DEDUCTION. IT WAS ALREADY HE LD BY THE SPECIAL BENCH IN THE CASE OF TECUMSEH INDIA (P) LTD VS. ADD . CIT (SUPRA), THAT THE EXPENDITURE FOR NON-COMPETE FEES IS CAPITA L IN NATURE WHICH WAS NOT DISPUTED BY EITHER PARTIES. HAVING BEEN HEL D THAT THE EXPENDITURE IS CAPITAL IN NATURE, THE SAME CANNOT B E ALLOWED UNDER SECTION 37(1). THE LEARNED COUNSELS RELIANCE ON TH E COORDINATE BENCH DECISION IN THE CASE OF ORCHID CHEMICALS & PH ARMACEUTICALS LTD VS. ACIT, 131 ITD 385 IS ALSO NOT CORRECT IN TH E SENSE THAT THE ORDER HAS BEEN PRONOUNCED ON 18 TH JUNE, 2010, WHEREAS THE SPECIAL BENCH JUDGMENT HAS BEEN PRONOUNCED ON 30 TH JULY, 2010. IN VIEW OF THIS, THE COORDINATE BENCH DECISION CAN NOT BE FOLLOWED AS LATER DECISION BY THE SPECIAL BENCH IS BINDING O N THE OTHER DIVISION BENCHES. IN VIEW OF THIS, WE ARE NOT INCLI NED TO AGREE WITH THE LEARNED COUNSELS SUBMISSION THAT THE COORDINAT E BENCH DECISION ALLOWS THE EXPENDITURE TO BE CLAIMED OVER A PERIOD OF 10 YEARS. THIS CONTENTION IS THEREFORE REJECTED. WIT H REFERENCE TO THE RELIANCE ON THE DECISION OF THE PUNJAB & HARYANA HI GH COURT IN THE CASE OF PUNJAB ALKALIES & CHEMICALS LTD VS. CIT 338 ITR 86 (P&H), THE ISSUE IS WITH REFERENCE TO THE EXPENDITURE ON R EPLACEMENT OF MEMBRANE WHICH HAS A LIFE OF THREE YEARS AND EIGHT YEARS. ON THE FACTS OF THE CASE THE HON'BLE HIGH COURT HELD THAT THE EXPENDITURE TO THE EXTENT OF ONE-THIRD COULD BE REVENUE EXPENDITUR E AND REMAINING EXPENDITURE COULD NOT BE TREATED AS REVENUE EXPENDI TURE AND ALLOWED UNDER SECTION 37 OF THE INCOME TAX ACT AS P ERMISSIBLE EXPENDITURE. THERE WAS A CLAIM OF REPLACEMENT OF AN ASSET USED IN THE BUSINESS AND ON THE FACTS OF THE CASE IT IS NOT ICED THAT THE LIFE OF THE MEMBRANE WAS FOR THREE YEARS. THEREFORE, EXPEND ITURE WAS ALLOWED TO THE EXTENT OF ONE-THIRD. HOWEVER, BALANC E OF THE EXPENDITURE WAS HELD TO BE NOT REVENUE EXPENDITURE SO THAT THE PROVISIONS OF SECTION 37(1) CANNOT BE CONSIDERED FO R ALLOWING THAT EXPENDITURE. IN FACT THE PRINCIPLES LAID DOWN BY TH E ABOVE JUDGMENT ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 6 OF 11 ARE IN FAVOUR OF THE REVENUE. MOREOVER, NO ASSET WA S CREATED BY PAYING NON COMPETE FEE. PROVISIONS OF SEC 32 WITH R EFERENCE TO INTANGIBLE ASSETS DOES NOT APPLY AS THE PROVISION WAS INTRODUCED MUCH LATER AND NOT APPLICABLE TO THE YEAR UNDER CON SIDERATION. 8. IN THE CASE OF PITNEY BOWES INDIA (P) LTD VS. CIT, 204 TAXMAN 333, THE HON'BLE HIGH COURT OF DELHI IN FACT UPHELD THE DECISION OF THE SPECIAL BENCH IN THE CASE OF TECUMSEH INDIA (P) LTD VS. ADDL. CIT AND TREATED THE EXPENDITURE AS CAPITAL IN NATUR E. IN ARRIVING AT THE DECISION THE HON'BLE HIGH COURT ALSO CONSIDERED THAT ASSESSEE TREATED THE EXPENDITURE AS CAPITAL IN THE BOOKS OF ACCOUNT. JUST BECAUSE IN THIS CASE, ASSESSEE TREATED THE EXPENDIT URE AS REVENUE EXPENDITURE IT DOES NOT MEAN THAT THE JUDGMENT OF T HE HON'BLE DELHI HIGH COURT ON THE CONVERSE APPLY TO ASSESSEES FACT S OF CASE. IN FACT THE ABOVE JUDGMENT RELIED ON BY THE COUNSEL SUPPORT THE CASE OF THE REVENUE. IT WAS HELD VIDE PARAS 11 TO 14 AS UNDER: 11. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES. WE FIND THAT IN THE RETURN FILED BY THE AS SESSEE, IT HAD GIVEN ITS NOTES TO THE COMPUTATION AND NOTE FIL E PERTAINED TO NON-COMPETE FEE, WHICH WAS STATED IN T HE FOLLOWING TERMS: 5. NON-COMPETE FEE PAID TO KOAL DURING THE YEAR, THE COMPANY HAD ACQUIRED THE MAILING BUSINESS FROM KOAL AS A GOING CONCERN IN PURSUANCE OF THE BTA ON A SLUMP SALE BASIS FOR A TOTAL PURCHASE CONSIDERATION OF RS. 1892 LACS. A PART OF THE PURCHASE CONSIDERATION SO PAID WAS ALSO TOWARDS NON-COMPETE FEE WHICH RESTRICTS THE KOAL AND ITS DIRECTORS TO ENGAGE ITSELF IN THE COMPETING BUSINESS FOR A PERIOD OF 5 YEARS. THE VALUE OF THE NON-COMPETE FEE HAS BEEN CONSIDERED AS PER THE VALUATION REPORT AND HAS BEEN TREATED AS A CAPITAL EXPENDITURE IN THE BOOKS OF ACCOUNT. IT IS PAID TO KOAL FOR THE LOSS OF BUSINESS THAT THEY WOULD SUFFER FOR NOT COMPETING WITH THE COMPANY AND THEREFORE, IT IS IN THE NATURE OF REVENUE EXPENDITURE. ACCORDINGLY, THE SAME HAS BEEN TREATED AS REVENUE EXPENDITURE IN THE TAX RETURN. RELIANCE IN THIS REGARD IS PLACED ON THE JUDGMENT OF SMARTCHEM TECHNOLOGIES LTD. V. ITO [2005] 97 ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 7 OF 11 TTJ 818 (AHMEDABAD TRIBUNAL). (EMPHASIS SUPPLIED) 12. THUS, THE ASSESSEE ITSELF TREATED THE EXPENDITU RE AS CAPITAL IN THE BOOKS OF ACCOUNTS. HOWEVER, AT THE S AME TIME, IT WAS MAINTAINED THAT SINCE IT WAS PAID FOR LOSS O F BUSINESS THAT KOAL WOULD SUFFER FOR NON-COMPETE FEE , THE SAME WAS TREATED AS REVENUE IN NATURE. LIKEWISE, IN SCHEDULE 2 TO THE BALANCE SHEET DISCLOSING FIXED A SSETS , PAYMENT OF NON- COMPETE FEE IS TREATED AS INTANGIB LE ASSETS . THIS ALSO SHOWS THAT THE ASSESSEE TREATS THIS AS ASSET ACQUIRED, WHICH IS INTANGIBLE IN NATURE. THE ISSUE REGARDING FORWARDING OF PAYMENT WAS DISCUSSED BY TH E SPECIAL BENCH OF THE TRIBUNAL IN M/S TECUMSEH INDIA PVT. LTD. (SUPRA) IN GREATER DETAILS AND AFTER APPLYING THE RATIO OF VARIOUS JUDGMENTS OF DIFFERENT HIGH COURTS INCLU DING JURISDICTIONAL COURT AS WELL AS THE SUPREME COURT, THE TRIBUNAL SUMMARIZED IN THE FOLLOWING TERMS: 129. ACCORDING TO ABOVE OBSERVATIONS IT CAN BE SEEN THAT WARDING OFF COMPETITION IN BUSINESS EVEN TO A RIVAL DEALER WILL CONSTITUTE CAPITAL EXPENDITURE AND TO HOLD THEM CAPITAL EXPENDITURE IT IS NOT NECESSARY THAT NON-COMPETE FEE IS PAID TO CREATE MONOPOLY RIGHTS. 130. THE ASSESSEE ALSO CANNOT GET ANY HELP FROM THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. EICHER COMPANY LTD. (SUPRA) AS IN THAT CASE THEIR LORDSHIPS HAVE CLEARLY FOUND FROM THE RECORD THAT IT WAS NOT CLEAR THAT HOW LONG THE RESTRICTIVE COVENANT WAS TO LAST AND WHAT THE ASSESSEE HAD DONE WAS THAT IT ELIMINATED THE COMPETITION IN THE TWO-WHEELER BUSINESS FOR A WHILE. THEIR LORDSHIPS HAVE ALSO FOUND THAT THE BENEFIT RECEIVED BY THE ASSESSEE IN THAT CASE WAS NEITHER PERMANENT NOR EPHEMERAL. THEREFORE, THE SAID DECISION IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AS IN THE CASE OF ASSESSEE THE NON COMPETE AGREEMENT IS APPLICABLE FOR 5 YEARS, WHICH PERIOD HAS BEEN CONSIDERED TO BE SUFFICIENT TO GIVE ENDURING BENEFIT IN THE CASE OF ASSAM BENGAL (SUPRA). 131. WITH THESE OBSERVATIONS WE HOLD THAT THE EXPENDITURE OF RS.2.65 CRORE CLAIMED BY THE ASSESSEE IN PURSUANCE OF NON-COMPETE AGREEMENT DATED 10TH JULY, 1997 ARE CAPITAL EXPENDITURE, THE DEDUCTION OF ITA NO.784 OF 2011 PAGE 11 OF 13 WHICH CANNOT BE GRANTED TO ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 8 OF 11 THE ASSESSEE AS REVENUE EXPENDITURE. THE MAIN ISSUE IS DECIDED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. 13. THE POSITION IN THE INSTANT CASE IS ALMOST IDEN TICAL. THAT WAS A REASON THAT EVEN THE LEARNED COUNSEL FOR THE APPELLANT HAD CONCEDED BEFORE THE TRIBUNAL THAT THE MATTER WAS COVERED BY THE AFORESAID SPECIAL BENCH DECISION . 14. AGREEING WITH THE AFORESAID VIEW, WE ARE OF THE OPINION THAT THE TRIBUNAL RIGHTLY HELD THAT THE EXPENDITURE WAS CAPITAL IN NATURE. QUESTION NO.(1) IS ANSWERED ACCO RDINGLY . 9. THEREFORE, THIS JUDGMENT DOES NOT SUPPORT THE CONTE NTIONS RAISED BY THE LEARNED COUNSEL BEFORE US. THE ISSUE WHETHER THE NON COMPETE EXPENDITURE CAN BE ALLOWED AS DEFERRED REVE NUE EXPENDITURE WAS CONSIDERED BY THE COORDINATE BENCH IN THE CASE OF SHARP BUSINESS SYSTEMS (INDIA) LTD. V. DCIT IN 133 ITD 275 WHEREIN IT WAS CONSIDERED IN PARA 21 AS UNDER: 21. THE NEXT CONTENTION OF THE ASSESSEE IS THAT THE EXPENDITURE INCURRED BYWAY OF NON-COMPETE FEE SHOULD BE ALLOWED DURING THE PERIOD OF SEVEN YEARS. THE RELIANCE HAS BEEN PLACED ON THE DECISION OF THE IT AT, CHENNAI BENCH IN THE CASE OF ORCHID CHEMICALS & PHARMACEUTICALS LTD. V. ASSTT. CIT[2011] 137 ITJ 373/7 ITR (TRIB.) 601/131 ITD 385/9 TAXMANN.COM 44 WHEREIN IT HAS BEEN HELD THAT PAYMENT OF NON- COMPETE FEE SHOULD BE SPREAD OVER IN THE LIGHT OF DECISION OF HON'BLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPN. LTD V. CIT [ 1997] 91 TAXMAN 340/225 ITR 802. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE. WE FOLLOWING THE DECISION OF SPECIAL BENCH, DELHI IN THE CASE OF TECUMSEH INDIA (P.) LTD. (SUPRA) 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 CR ORES AMOUNTED TO RS.3LAKHS. FOR ASSESSMENT YEAR 196869 THE ASSESSEE WROTE OFF RS. 12,500/- OUT OF THE TOTAL DISCOUNT OF RS. 3LAKHS BEING THE PROPORTIONATE AMOUNT OF DISCOUNT FOR THE PERIOD OF SIX MONTHS ENDING WITH JUNE 30TH, 1967, TAKING INTO ACCOUNT THE PERIOD OF 12 YEARS WHICH WAS THE ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 9 OF 11 PERIOD OF REDEMPTION AND DIVIDING THE DISCOUNT OF RS.3LAKHS OVER THE PERIOD OF 12 YEARS. THE ASSESSING OFFICER DISALLOWED THE CLAIM BUT THE AAC 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 REFERENCE THE HIGH COURT NOTED THAT OUT OF THE TOTAL DISCOUNT OF RS. 3LAKHS 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. 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 OVE R 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 YE AR 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 ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 10 OF 11 OVER THE ENTIRE PERIOD. THE LIABILITY SHOULD, THEREFORE, BE SPREAD OVER THE PERIOD OF DEBENTURES. FROM THE DECISION OF 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. 10. IN VIEW OF THE ABOVE SINCE THE AMOUNT PAID FOR NON- COMPETE FEES IS CONSIDERED AS CAPITAL OUTLAY, THE SAME CANN OT BE ALLOWED AS THE REVENUE EXPENDITURE UNDER SECTION 37(1). MOREOV ER SINCE THE AMOUNT IS NOT IN THE NATURE OF REVENUE EXPENDITURE, A PART OF IT CANNOT BE CONSIDERED AS DEFERRED REVENUE EXPENDITUR E SO AS TO ALLOW OVER PERIOD OF NON COMPETE AGREEMENT. IN VIEW OF TH IS, ASSESSEES CONTENTION CANNOT BE ACCEPTED. 11. THE LEARNED DR RELIED ON THE BOMBAY HIGH COURT IN T HE CASE OF CIT VS. BHOR INDUSTRIES LTD 128 TAXMAN 626 AND T APARIA TOOLS LTD VS. JT.CIT, 126 TAXMAN 544 TO SUBMIT THAT REVEN UE EXPENDITURE CAN ONLY BE CONSIDERED FOR DEFERRED REVENUE EXPENDI TURE. THE FACTS IN THE ABOVE TWO CASES ARE THAT THE CLAIMS ARE OF R EVENUE EXPENDITURE BUT ALLOWED ON DEFERRED REVENUE BASIS. EXPENDITURE CLAIM IN BHOR INDUSTRIES (SUPRA) PERTAINS TO EXPENS ES INCURRED ON VOLUNTARY RETIREMENT SCHEME CLAIMED AS REVENUE EXPE NDITURE, WHEREAS IN THE CASE OF TAPARIA TOOLS LTD(SUPRA) THE CLAIM IS FOR THE PAYMENT OF INTEREST ON NON CONVERTIBLE DEBENTURES. THEREFORE, ON THE FACTS OF THE CASE THE REVENUE EXPENDITURE COULD BE JUSTIFIED TO SPREAD OVER THE PERIOD BECAUSE ALLOWING THE ENTIRE EXPENDITURE IN ONE YEAR MIGHT GIVE DISTORTED PICTURE OF PROFITS IN A PARTICULAR YEAR. ITA NO.7234 OF 2008 NELITO SYSTEMS LTD MUMBAI PAGE 11 OF 11 THE ABOVE JUDGMENTS GIVEN IN THE CONTEXT OF CLAIMS OF REVENUE EXPENDITURE AS DEFERRED REVENUE EXPENDITURE ARE IN SUPPORT OF LD. CIT DR CONTENTION THAT ONLY REVENUE EXPENDITURE CAN BE ALLOWED AS DEFERRED EXPENDITURE. 12. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE FIRM OPINION THAT AMOUNT PAID AS NON-COMPETE FEE BEING CAPITAL O UT LAY, CAN NOT BE ALLOWED AS REVENUE EXPENDITURE, MORE SO IN THE G UISE OF DEFERRED REVENUE EXPENDITURE. CONSEQUENTLY, WE DISMISS THE ADDITIONAL GROUND RAISED BY ASSESSEE AND CONFIRM THE ACTION OF AO IN THIS REGARD. 13. IN THE RESULT, APPEAL FILED BY ASSESSEE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH SEPTEMBER, 2012. SD/- SD/- (I.P. BANSAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 26 TH SEPTEMBER, 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, F BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI