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Income Tax Appellate Tribunal, Hyderabad ‘ A ‘ Bench, Hyderabad
Before: Shri A. Mohan Alankamony & Shri S.S. Godara
O R D E R Per A. Mohan Alankamony, A.M. This appeal is filed by the assessee against the order of learned Commissioner of Income Tax (Appeals) – 4, Hyderabad in Appeal No.10283/2018-19/ACIT.Cir.16(1)/CIT(A)-4/Hyd/19-20 dated 17.06.2019 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as “the Act”).
The assessee has raised four grounds in its appeal, however, the crux of the issues are as follows :
The learned CIT(A) has erred in confirming the order of the learned Assessing Officer who had disallowed an amount of Rs.17,50,000/- being the claim of depreciation on intangible assets.
2. The learned CIT(A) has erred in not directing the Assessing Officer to give effect to the tax deducted at source as per Form 26AS.
The brief facts of the case are that the assessee is a Private Limited company engaged in the business of medical diagnosis, filed its return of income for the relevant assessment year on 29.09.2016 admitting income of Rs.1,94,81,570/- and book profit of Rs.1,39,05,745/- u/s 115JB of the Act. Thereafter, the case was selected for scrutiny and the assessment was completed u/s 143(3) of the Act vide order dt.23.12.2018 wherein the learned Assessing Officer disallowed the claim of depreciation on non-compete fee of Rs.17,50,000/- which was further confirmed by the learned CIT(A). Aggrieved by the order of the Ld.CIT(A) the assessee is now in appeal before us.
During the course of scrutiny assessment, it was observed by the learned Assessing Officer that the assessee had claimed depreciation of Rs.17,50,000/- towards non compete fee paid to 2 related parties amounting to Rs.3,50,00,000/-. On perusing the agreement between the assessee and the related parties with respect to payment made for Rs.3,50,00,000/- towards non compete fee, the learned Assessing Officer concluded as follows :
"3.5 It is seen from the conditions of the non compete agreement, that the fee paid is more in the nature of an internal arrangement between the parties, as the non compete clause is in force only for a period of 5 years from the date of the arrangement (Point 2 of agreement). Non- compete fee not confer any enduring benefit or right to the assessee. The payment of Rs. 3.5 Crores is only in relation to the non compete clause which is only a restrictive clause, that too only in force for a period of 5 years. It is clear that the fee is paid only in relation to the non compete clause (Point 4 of agreement). 3.6 As far as the Brand Name and Logo "Lucid", it is clearly seen as per point 3 of the agreement that the ownership of the same was that of the assessee company (LMD) and it is stated therein that LMD being the 'original first Company of the Group' would continue to own the same, and LDKPL is authorized to use the logo for a period of transition of 30 months from Dec 2015 only. Hence, the original right of Logo and Brand name were that of the assessee company, and continue to be owned by it. Further, as clarified in para 3.4 of this order, the payment is clearly made only for the non compete clause.”
Thereafter, the learned Assessing Officer opined that the claim of the assessee is not bonafide and therefore he disallowed the claim of depreciation on non-compete fee for Rs.17,50,000/-.
On appeal, the ld.CIT(A) confirmed the order of the learned Assessing Officer by observing as under :
“4.2 I have carefully considered the assessment order, submissions of the AR and the issue involved therein. I have observed that in this case, both payee and payer are related parties and exercise control or significant influence on each other, having same brand name, nature of business and business modality. The claim of depreciation on non- 3 compete fee cannot be allowed as all intangible assets are not eligible for depreciation. The payment made by the appellant company does not come under knowhow, patents, copyrights, trade marks, licenses, franchises. Any business or commercial rights not similar to the aforesaid items cannot be treated as intangible assets eligible for depreciation. Moreover, the fee paid is paid to a related party with the same brand, logo and nature of business. As there is little chance of any competition, both being located in different geographical areas, the question of paying non-compete fee will not arise. As such, non- compete fee does not provide any asset of enduring nature, hence not eligible for depreciation under any section. Moreover, non compete; does not find place in the provision, because non compete fee does not fall within the ambit of any other commercial or business rights, even when examined the meaning of it. In view of the above, I am of the considered opinion that the addition of made by the AO of Rs.17,50,000/- towards disallowance of non-compete fee is correct and hence, confirmed. The appeal raised on this ground is dismissed.”
Before us, the Ld.A.R. vehemently argued that the payment of non-compete fee of Rs.3,50,00,000/- is genuine as it brings substantial benefit to the assessee in the subsequent years by way of increase in revenue. The ld.A.R. further submitted that since the amount paid as non-compete fee is an intangible asset of the assessee, the assessee is entitled for the claim of depreciation on the same. It was therefore pleaded that the disallowance made by the learned Assessing Officer which was further confirmed by the ld. CIT(A) may be deleted.
Ld. D.R. on the other hand, relied on the orders of the learned lower authorities and prayed for confirming the same.
We have heard the rival submissions and carefully perused the material on record. Om perusing the facts of the case, it is not in dispute that the transactions were made between the related 4 parties. Further, there is nothing on record to suggest as to in what manner the non-compete fee is computed to justify the expenditure incurred by the assessee. In the absence of such explanation to substantiate the quantum of expenditure incurred by the assessee towards non-compete fee, we are of the view that the decision rendered by the learned revenue authorities requires no interference. It is also pertinent to mention that shifting of profit from one entity to another without proving the bonafide of the transaction is not admissible as per the provisions of the Act. Accordingly, we hereby confirm the order of the learned revenue authorities on this issue.
With respect to the other ground raised by the assessee, we hereby remit the matter back to the file of the Assessing Officer to verify the genuineness of the tax deducted at source and reconcile with Form 26AS and if the tax deducted at source is found to be genuine, credit the same to the assessee’s account in accordance with the law and merit.
In the result, the appeal of the assessee is partly allowed for statistical purposes.