Non-compete Fee Paid to Protect Business is Capital Expenditure | Claim of Depriciation is to Be Allowed | ITAT

Case Details: Eaton Power Quality Private Limited vs. DCIT - [2023] 156 taxmann.com 14 (Chennai-Trib.)

Judiciary and Counsel Details

• • Mahavir Singh, Vice-president & Manoj Kumar Aggarwal, Accountant Member
  • Vishal Kalra, Adv. for the Appellant.
  • V. Suresh Guduri for the Respondent.

Facts of the Case

Assessee was engaged in manufacturing and selling fuse and fuse fittings to both export and domestic markets and engaged in trading activities. During the assessment proceedings, the Assessing Officer (AO) noted that the company had acquired the fuse and fuse accessories business from another company for a total consideration of Rs. 6.12 crores.

Assessee claimed deductions amounting to Rs. 3.22 crores under various heads, including non-compete fees. AO disallowed these deductions, considering them as capital expenditure.

On appeal, the CIT(A) confirmed the action of the AO. Aggrieved by the order, the assessee filed an appeal to the Chennai Tribunal.

ITAT Held

The Tribunal held that the non-compete fee paid by the assessee formed part of the initial outlay on the acquisition of the business. The combined reading of the asset purchase agreement and non-compete agreement suggested that the non-compete agreement was very much part of the entire business purchase by the assessee.

By virtue of the non-compete agreement, the assessee had acquired the right to carry on business unfettered by any competition, which resulted in the protection of the business as a whole and will help appreciate the whole of the capital assets.

Further, the alternative argument of the assessee that since it was held as capital expenditure, the assessee is entitled to depreciation under section 32(1)(ii) was agreeable. Thus, the AO was directed to allow depreciation on payments made on non-compete fees under section 32(1)(ii).