METRO TYRES LTD,NEW DELHI vs. ACIT, CENTRAL CIRCLE-5, NEW DELHI

02.2023 pertaining to Assessment Year 2018-19. The Assessee has raised the following ground of appeal: “1. That, in view of facts and circumstances of the case and in law, the assessment order dated 05.03.2021 passed by the Assessing Officer (‘AO’) under section 143(3) of the Income Tax Act, 1961 (‘the Act) for Assessment Year (‘AY’) 2018-19 and the order of Commissioner of Income Tax (Appeals) [‘CIT(A)’] dated 28.02.2023, and also the addition / disallowance made therein are illegal, bad in law, and without juri iction. 2. That in view of facts and circumstances of the case and in law, the AO/CIT(A) has erred in not appreciating that the addition of Rs. 6,92,920/- is illegal and bad in law and the same is liable to be deleted. 3. That in view of the facts and circumstances of the case and in law, the Appellant had substantiated its claim of depreciation on non-compete fee) and as such the same is allowable in law. 4. That in view of facts and circumstances of the case and in law, the AO/CIT(A) has erred in not appreciating that non-compete fee is an intangible asset as per the provisions of Section 32(1)(ii) of the Act and hence, depreciation is allowable on the same. 5. That, without prejudice, the AO/CIT(A) has erred in not appreciating that the said expense was incurred and non-compete was paid for the purposes of protecting the business of the Appellant and as such is an allowable business expense. 6. That, even otherwise, the AO/CIT(A) has erred in referring to Section 40A(2)(b) of the Act and the same is not attracted in the present case. 7. That, the explanations given, evidence produced and material placed and made available on record have not been properly considered and judicially interpreted and the same do not justify the addition/disallowance. 8. The Appellant craves leave to add to, alter, amend, and/or withdraw any ground or grounds of appeal either before or during the course of hearing the appeal.”

Subsequently, the assessee also raised the additional ground of appeal for adjudication as follows: “5. That without prejudice to other grounds and in the alternative, the non-compete fee paid by the Appellant is allowable expense and the same may kindly be allowed on amortized basis in the year under consideration.”

Facts of the case may be concisely summarized as that the assessee filed return of income for the A.Y. 2018-19, declaring Rs. 20,74,65,120/- and income which was processed u/s 143(1) of the I.T. Act and in the meantime, the case was selected for complete scrutiny through CASS. In pursuation thereof, notices u/s 143(2) and 142(1) of the Act were issued on different dates, and in compliance of the abovecited notices, details furnished by the assessee/ appellant company. The Ld. AO found that Rs. 7,02,596/- has been claimed in respect of non-compete fees, out of which Rs. 6,92,920/- claimed on account of depreciation on non- compete fees. For this purpose, the assessee / appellant asked to explain the non-compete fees reflected in the fixed asset’s chart of the company and the depreciation claimed thereof vide notice u/s 142(1) dated 25.02.2021. After completion of said assessment proceedings, the Ld. AO held that non-compete fees is not an ITA no.- 1165/Del/2023

In the course of hearing, the Ld. AR relied upon the order of Coordinate Bench of ITAT, in assesse’s own case i.e. Metro Tyres Ltd. VS. Add. CIT in ITA No.- 1031/Del/2013 and others, of which the relevant para no. 5 to 9 is reproduced as under: “ 5. It is in this factual backdrop that the instant issue of the assessee's claim raised qua its non-compete fees arises for our apt adjudication. It is evident to us during the course of hearing that this is not the first year of the assessee having claimed the impugned depreciation on non-compete fees as our attention is invited to the relevant non-compete agreement dated 24.10.2005 followed by the assessment records for the corresponding A.Y. 2006-07 comprising of the Assessing Officer's notice dated 10.09.2008 asking for the relevant non-compete fees details (pages 103 to 104 of the paper book), the taxpayer reply to this effect dated 24.09.2008 (pages 105 to 106) followed by the Assessing Officer's section 143(3) assessment dated 30.12.2008 not making disallowance in the said preceding assessment year. any such 6. Mr. Kapoor vehemently submits in light of these facts that once the assessee's impugned depreciation claim stood accepted in the immediate preceding assessment year, the learned lower authorities could not have ignored the settled legal proposition that the corresponding "block of assets" u/s 2(1) r.w.s 32(1)(ii) of the Act is not to be disturbed in the subsequent assessment years as per CIT Vs. Oswal Agro MillsLtd. in ITA 161/2006 & others connected cases, decided on 24.12.2010 as under:

We have considered these submissions of the learned counsel for the parties and are of the opinion that the arguments of the learned counsel for the assessee have to prevail. Mr. Aggarwal, learned Senior counsel for the assessee is right in his submission that the position concerning the manner in which the depreciation is to be allowed, has gone a sea change after the amendment of Section 32 by the Taxation Laws (Amendment) Act, 1986. Section 32(1) of the Act allows the depreciation on the written down value of the assets.

Section 2 (11) of the Act defines the term block of assets" as under:

Along with the aforesaid amendment, definition of written down value as contained in Section 43(6) has also been amended and the amended provisions read as under: "43(6) "Written down value" means

Thus, for the assessment year 1998-99, the W.D.V. of any block of assets shall be the aggregate of the W.D.V. of all the assets falling within that block of assets at the beginning of the previous year. From this, the adjustment has to be made for the increase or reduction in the block of assets during the year under consideration. The deduction from the block of assets has to be made in respect of any asset, sold discarded or demolished or destroyed during the previous year.

As per amended Section 32, deduction is to be allowed "In the case of any block of assets, such percentage on the written down value thereof as may be prescribed". Thus, the depreciation is allowed on block of assets, and the Revenue cannot segregate a particular asset therefrom on the ground that it was not put to use. 30. With the aforesaid amendment, the depreciation is now to be allowed on the written down value of the block of assets" at such percentage as may be prescribed. With this amendment, individual assets have lost their identity and concept of block of assets" has been introduced, which is relevant for calculating the deprecation. It would be of benefit to take note of the Circular issued by the Revenue itself explaining the purpose behind the amended provision. The same is contained in CBDT Circular No.469 dated 23.09.1986, wherein the rationale behind the aforesaid amendment is described as under:

It becomes manifest from the reading of the aforesaid Circular that the Legislature felt that keeping the details with regard to each and every depreciable assets was time consuming both for the assessee and the Assessing Officer. Therefore, they amended the law to provide for allowing of the depreciation on the entire block of assets instead of each individual asset. The block of assets has also been defined to include the group of asset falling within the same class of assets.

Another significant and contemporaneous development, which needs to be noticed is that the Legislature has also deleted the provision for allowing terminal depreciation in respect of each asset, whichwas previously allowable under section 32(1)(iii) and also taxing of balancing charge under section 41(2) in the year of sale. Instead of these two provisions, now whatever is the saleproceed of sale of any depreciable asset, it has to be reduced from the block of assets. This amendment was made because now the assessees are not required to maintain particulars of each asset separately and in the absence of such particular, It cannot be ascertained whether on sale of any asset, there was any profit liable to be taxed under section 41(2) or terminal loss allowable under section 32(1)(iii). This amendment also strengthen the claim that now only detail for "block of assets" has to be maintained and not separately for each asset.

Having regard to this legislative intent contained in the aforesaid amendment, it is difficult to accept the submission of the learned counsel for the Revenue that for allowing the depreciation, user of each and every asset is essential even when a particular asset forms part of block of assets". Acceptance of this contention would mean that the assessee is to be directed to maintain the details of each asset separately and that would frustrate the very purpose for which the amendment was brought about. It is also essential to point out that the Revenue is not put to any loss by adopting such method and allowing depreciation on a particular asset, forming part of the block of assets" even when that particular asset is not used in the relevant assessment year. Whenever such an asset is sold, it would result in short term capital gain, which would be exigible to tax and for this reason, we say that there is no loss to Revenue either.

The upshot of the aforesaid discussion is that though we are not entirely agreeing with the reasoning of the Tribunal contained in the impugned judgment, we are upholding the conclusion of the Tribunal based on the block of assets" as discussed above. The consequence

Faced with this situation, learned CIT-DR quotes hon'ble juri ictional high court's decision in Sharp Business System Vs. CIT (2012) 211 taxmann.com 576 (Del) holding that such a depreciation claim is not admissible since a non-compete clause does not form an intangible asset. Ms. Chaudhary vehemently contends therefore, that once the issues standsettled in the preceding terms, we ought to confirm the learned lower authorities action rejecting the assessee's depreciation claim.

We find no merit in the Revenue's submissions as their lordships subsequent decision in PCIT Vs. Pepsico India Holding Pvt. Ltd. order in ITA 166/2023 dated 16.04.2024; pronounced after "Sharp Business System" has reiterated the fact that the Impugned disallowance could not be made once corresponding depreciation stood accepted in the preceding assessment years as under:

That only leaves us to deal with the question of depreciation on non- compete fee. We note that the Issue of deprecation on non-compete fee is an issue which is no longer res integra and stands answered by our Court in Sharp Business System v. Income Tax-III, [2012 SCC OnLine Del 5639] in favour of the appellant.

However, insofar the present case is concerned, the ITAT has taken into consideration the following facts as would be evident from paragraph no.26, which is reproduced as under:

The ITAT has essentially followed the principle of consistency Insofar as the case of the respondent assessee is concerned.

We consequently find no justification to interfere with or disturb the ultimate conclusions rendered by the ITAT, notwithstanding it having failed to notice or consider the judgment rendered in Sharp Business System.

We find sufficient merit in the path that we propose to take since although the issue which arises inter parties and for the year in question would be rendered a quietus consequent to the disposal of the present appeal, the question of law already stands settled by Sharp Business System and would govern the issue if it arise in any subsequent adjudication.

The appeal consequently fails and shall stand dismissed."

It is thus clear that their lordship's above latter decision has settled the issue in assessee's favour that even inspite of the case law "Sharp Business System", once the assessee's corresponding depreciation stood duly accepted in the preceding assessment year, it's relevant "block of assets" could not have been interfered with by the learned departmental authorities. We accordingly find merit in the assessee's instant first and foremost substantive ground and accept its impugned depreciation claim non-compete fees. The assessee's on succeeds in its instant first and foremost substantive ground in the "lead" appeal (supra) and its latter twin cases ITA No. 5966/Del/2016 and 4734/Del/2017 for A.Y. 2013-14 and 2014-15, respectively, raising this sole substantive issue succeed in very terms.”

Respectfully following and maintaining the rule of consistency the abovecited order in assessee’s own case, we find material