COMMISSIONER OF INCOME TAX FARIDABAD vs. M/S HEIDELBERG CEMENT INDIA LTD

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ITA/436/2014HC Punjab & HaryanaPHHC01109592201427 March 2015Bench: MR. JUSTICE M.M. AGGARWAL,MR. JUSTICE JITENDRA CHAUHAN2 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the question of whether a payment for a non-compete clause is capital or revenue expenditure is a mixed question of law and fact. In this specific case, the non-compete clause was operative only for one year. The Court found no material to suggest that this payment resulted in the acquisition of an asset of an enduring nature. The Court also found no reasons provided to support the classification of the expenditure as capital. The reliance placed by the revenue on Article 8 (confidentiality) and Article 9 (intellectual property) was not found to be well-founded. The Court reasoned that confidentiality is a general obligation of an employee, and intellectual property developed during employment already belongs to the company under a contract of service. Therefore, these clauses could not be clubbed with the non-compete agreement to justify treating the expenditure as capital. The appeal filed by the revenue was dismissed.

What were the facts?

The Commissioner of Income Tax (CIT), Faridabad, appealed against an order dated 28.02.2014 passed by the Income Tax Appellate Tribunal (ITAT), Mumbai. The ITAT had allowed the appeal of M/s Heidelberg Cement India Ltd. (the assessee) against the order of the CIT(Appeals). The CIT(Appeals) had confirmed the disallowance of ₹80.88 lacs paid by the assessee as a non-compete fee to an Executive Director. The revenue had treated this payment as capital expenditure. The assessment year in question is 2008-09. The non-compete fee was paid pursuant to Article 5 of an agreement and was operative for a period of one year.

What were the issues?

1. Whether the payment of ₹80.88 lacs as a non-compete fee to an Executive Director, operative for one year, is an expenditure on capital account or revenue account? (Mixed question of law and fact, concerning the nature of expenditure). Assessee's contentions: The assessee argued that the payment was for a non-compete clause operative only for one year and did not result in acquiring an asset of an enduring nature. The ITAT found no reasons to suggest it was capital expenditure. Revenue's contentions: The revenue relied on Article 8 (confidentiality clause) and Article 9 (intellectual property clause) of the agreement to support its claim that the expenditure was capital in nature. The revenue contended that these clauses, when clubbed with the non-compete agreement, could lead to expenditure on capital account.

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of decision: 27.03.2015 ITA No. 436 of 2014 (O&M) The Commissioner of Income Tax, Faridabad ----Appellant Versus M/s Heidelberg Cement India Ltd. -----Respondent Coram: Hon'ble Mr. Justice S.J. Vazifdar, Acting Chief Justice Hon'ble Mr. Justice Harinder Singh Sidhu 1. To be referred to the Reporters or not? 2. Whether the judgment should be reported in the Digest? Present: Mr. Tajender K. Joshi, Advocate for the appellant. **** S.J. VAZIFADAR, A.C.J. (Oral) CM-28984-CII-2014 For the reasons recorded in the application, the delay of 120 days in re-filing the appeal, is condoned. Civil Misc. Application is allowed. ITA No. 436 of 2014 This is an appeal against the order dated 28.02.2014 passed by the Income Tax Appellate Tribunal, Mumbai (for short 'the Tribunal') allowing the respondent's appeal against the order passed by the Commissioner of Income Tax (Appeals) confirming the disallowance of `80.88 lacs paid as non-compete fee to an Executive Director and treating the same as capital expenditure. The matter pertained to the assessment year 2008-09. 2. The non-compete fee was paid to the respondent-Executive Director in terms of Article 5 of an agreement between them. The non-compete clause was ATUL KUMAR TRIPATHI 2015.04.01 11:01 I attest to the accuracy and integrity of this document

ITA No. 436 of 2014 (O&M) -2- operative only for a period of one year. The question whether such payment must be on capital or on revenue account is not a question of law alone. It is a question of fact and in any event, a mixed question of law and of fact. 3. In the present case, there is nothing to suggest that the payment in consideration of the non-compete clause, which was to operate only for a period of one year, resulted in the respondent acquiring an asset of an enduring nature. No reasons have been given to suggest that the payment would be a capital expenditure. 4. The reliance upon Article 8 of the agreement is not well founded. Article 8 was a confidentiality clause. In any event, the former Executive Director was bound to maintain confidentiality of any information acquired by him in the course of his employment, which is not in public domain. Nor is the reliance upon Article 9 of any relevance. It merely provided that all intellectual property in any work or material developed, discovered, invented, designed and/or authored by the Executive Director, during the course of his employment, with the company, shall belong to and are the absolute property of the company. The same having been created by the Executive Director as an employee of the company was under a contract of service and not under a contract for services. The intellectual property thus belonged to the company in any event. 5. Thus, it is difficult to see how such provisions can be clubbed with the clause containing the non-compete agreement can bring about expenditure on capital account. The appeal is dismissed. (S.J. VAZIFDAR)

ACTING CHIEF JUSTICE (HARINDER SINGH SIDHU)

JUDGE 27.03.2015 Atul ATUL KUMAR TRIPATHI 2015.04.01 11:01 I attest to the accuracy and integrity of this document

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