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Income Tax Appellate Tribunal, MUMBAI BENCH “A” MUMBAI
Before: SHRI PAWAN SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2010-11. The appeal is directed against the order u/s 263 of the Income Tax Act 1961, (the ‘Act’) passed by the Commissioner of Income Tax (Large Taxpayer Unit), Mumbai [in short ‘CIT’].
The grounds of appeal
filed by the assessee read as under:
1. That on facts and in the circumstances of the case, action of the Ld. CIT (LTU) to initiate revision proceedings under Suction. 263 was unjustified and bad in law in as much as specific responses on the singular issue covered by the revision notice sought by the assessing officer in the assessment proceedings ACC Ltd. Assessing Officer.
2. That on facts and in the circumstance of the case, Ld. CIT- LTU was not justified and grossly erred in not appreciating that non-compete fee paid represents a commercial right and enables the appellant in maintaining and enhancing its profitability of its business by insulating from competition and thus is eligible for depreciation under Section 32(l)(ii).
3. That on facts and in the circumstance of the case, Ld. CIT- LTU was not justified and grossly erred in stating that the ratio laid down by Hon’ble Delhi High Court, in respect of non-compete fee in the case of Sharp Business Systems was not controverted by the appellant, completely disregarding the detailed submissions made by the appellant explaining that the decision of the Hon’ble Karnataka High Court in CIT vs Ingersoll Rand Ind. Ltd. (2014) 277 Taxman 176 (Kar) had considered the observations of the Hon'ble Delhi High Court in the case of Sharp Business Systems and held that non-complete fee is an intangible right.
3. There has been a delay of 35 days on the part of the assessee in filing this appeal before the Tribunal. An affidavit has been filed by the by the Managing Director of the assessee-company stating that the order u/s 263 was passed by the CIT on 29.03.2016 and it was served on the appellant on 31.03.2016. That the time for filing of appeal before the Tribunal was to expire on 30.05.2016. It is stated in the affidavit that the concerned person handling tax matters by an inadvertent error misplaced the captioned order. Moreover, since the order giving effect to the order passed by the CIT was not passed by the Department, the concerned executive was under an honest impression that the submissions of the appellant were accepted and no further action was necessary. However, the appellant received a notice dated 21.06.2016 ACC Ltd. Assistant Commissioner of Income Tax (LTU) and served on the appellant on 28.06.2016 calling upon the appellant to appear before him. Upon inquiry at the office, the appellant was informed that the said notice was served to discuss the order passed u/s 263 on 29.03.2016. The concerned executive thereafter traced the order that was inadvertently misfiled. In the circumstances, the order against which the appeal is being filed could be traced only after the expiry of time limit of filing appeal before the ITAT. Therefore, it is submitted that the delay of 35 days in filing the appeal be condoned. Reliance is placed by him on the decision in Collector, Land Acquisition and others vs. Katiji & Others (AIR 1987 SC 1353), Archway Investment Company Ltd. vs. ITO (ITA 1977/M/2011, order dated January 29, 2016) (Mum-Trib.), Coastal Gujarat Power Ltd. vs. CIT (ITA 1410/M/2015, order dated November 6, 2015) (Mum-Trib.), Raj Homes Pvt. Ltd. vs. ACIT (ITA 329-331/Ind/2011, order dated July, 2012)(Ind.-Trib), Nirman Shares Brokers Pvt. Ltd. vs. ACIT (ITA 180/Ind/2012, Order dated June 13, 2012)(Ind.-Trib) The Ld. DR submits that the delay in filing the appeal should not be condoned as the deponent has failed to put his signature on the place meant for it. Also it is stated by him that the said affidavit is not notarized. Reliance is placed by him on the order of the Tribunal in the case of Kunal Surana (2013) 36 taxmann.com 319 (Mumbai-Trib). We have heard the rival submissions and perused the relevant materials on record. It is found that the Managing Director of the assessee-company has forgotten to sign on the place meant for the deponent. But he has signed on the verification of the same page. As it is ACC Ltd. 35 days only, considering the facts and circumstances of the case, we condone the above delay on the part of the appellant to file this appeal before the Tribunal.
4. Briefly stated, the facts of the case are that the CIT, on verification of records for the impugned assessment year, found that the appellant had capitalized non-compete fees of Rs. 5 crore paid to Encore Cement and added back in the computation of income and claimed depreciation thereon and the same was allowed by the Assessing Officer (AO). The CIT, then referred to the judgment of the Hon’ble Delhi High Court in M/s Sharp Business Systems v. CIT (2012) 211 Taxman 576, stating that non-compete fees paid by the taxpayer was capital in nature as the arrangement was to endure for a substantial period. Further it is held therein that no depreciation is allowable as the right of non-compete fees acquired by the taxpayer was restrictive and personal in nature and it was not an intangible right enforceable against the world at large. The said allowance by the AO resulted in under assessment of to that extent, involving tax effect of Rs.42,48,750/-. In response to a show cause notice to his proposal to revise the order u/s 263, the appellant filed a written submission before the CIT, which has been summarized at para 3.1, 3.2 and 3.3 of the impugned order dated 29.03.2016. However, the CIT was not convinced with the above explanation of the appellant and relying on the above decision in M/s Sharp Business Systems, held the order passed by the AO u/s 143(3) dated 21.03.2014 as prejudicial to the interest of revenue and therefore directed the AO to modify the same as per his direction contained in the impugned order.
Before us, the Ld. counsel of the assessee submits that in the absence of ‘lack of inquiry’ on the part of the AO, the assessment order cannot be treated as ‘erroneous’ for the purpose of section 263. Reliance is placed by him on the decision of the Hon’ble Bombay High Court in CIT v. Nirav Modi (241 Taxman 255). Also it is submitted by him that where two views are possible and the AO has taken one of the possible view which resulted in loss of revenue, the order cannot be treated as ‘erroneous’ for the purpose of section 263. In this regard the Ld. counsel relies on the decision in Malabar Industrial Co. Ltd. (243 ITR 83) (SC), CIT v. Max India Ltd. (295 ITR 282) (SC), CIT v. Gabriel India Ltd. (203 ITR 108) (Bom HC), CIT v. Grasim Industries Ltd. (2014) 226 Taxman 165 (Bom HC), CIT v. LIC Housing Finance Ltd. (2014) 367 ITR 458/272 CTR 10 (Bom HC) and Grasim Industries Ltd. v. CIT (2010) 321 ITR 92 (Bom HC). Further the Ld. counsel submits that both conditions of section 263 i.e. order is ‘erroneous’ and ‘prejudicial to the interest of revenue’ are conjuctive. He relies on the decision in CIT v. Greenworld Corporation (181 Taxman 111) (SC), Malabar Industrial Co. Ltd. v. CIT (243 ITR 83) (SC), CIT v. Max India Ltd. (295 ITR 282) (SC). Finally, it is submitted by the Ld. counsel that the expenditure incurred for acquiring non-compete right is capital in nature entitled to depreciation u/s 32(1)(ii) of the Act. To support his contentions, reliance is placed by him on the decision in CIT v. Ingersoll Rand International Ind. Ltd. (227 Taxman 176) (Kar HC) (2014) and Pentasoft Technologies Ltd. v. DCIT (222 Taxman 209) (Mad HC) (2013).
On the other hand, the Ld. DR relies on the decision in Jeevan Investment & Finance (P.) Ltd. v. CIT (2017) 88 taxmann.com 552 (Bom), stating: “that merely asking a question which goes to the root of the matter and not carrying it further is a case of non-inquiry, if the inquiry is not otherwise satisfied while responding to another query. In the instant case, the Assessing Officer raised query regarding valuation of shares in question to which response was only that the unquoted shares were valued at costs. No method of valuation of the shares was submitted to the Assessing Officer during the proceedings, leading to the assessment order. It, therefore, appeared that the Assessing Officer after having asked a pertinent question of the method of valuing unlisted shares did not pursue that line of inquiry. Thus this was a case of non-inquiry and not adequate inquiry. Therefore, the order of the Assessing Officer was certainly erroneous and prejudicial to the revenue”. Further relying on the decision in Sify Software Ltd. v. ACIT (2017) 80 taxmann.com 273 (Chennai-Trib), the Ld. DR submits that where the Assessing Officer accepted claim made by the assessee towards depreciation on intangible assets without proper examination or inquiry or verification or objective consideration of such claim, the exercise of jurisdiction by the Commissioner u/s 263(1) was justified. Also the Ld. DR relies on the order dated 01.03.2018 of the ITAT ‘B’ Bench Delhi in the case of DCIT v. Excelex Bio Polymers (P.) Ltd. (ITA No. 1110/Del/2013 for the AY 2007-08). With the above submissions, the Ld. DR strongly supports the order passed by the CIT u/s 263 of the Act.
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below. During the course of assessment proceedings, u/s 143(3) the AO vide questionnaire issued along with notice dated 26.06.2013 had called for explanation of the assessee to justify its claim of depreciation on non-compete fees. In reply to it, the assessee vide written submission dated 15.01.2014 had explained the basis on which it had claimed depreciation on non-compete fees. It is found that the AO had made adequate inquiry while allowing depreciation of Rs.5,50,29,78,040/- out of the claim of Rs.6,75,23,77,744/- made by the assessee-company in its revised return of income. The same is evident from para 9 of the assessment order dated 21.03.2014 made by the AO. We find that the assessee had filed a copy of (i) computation of depreciation admissible u/s 32(1)(ii) and (ii) details of licensing rights under the head “Intangible Assets”. Thus in the instant case the AO had made sufficient inquiries while allowing depreciation on non-compete fees. 7.1 In the case of Ingersoll Rand International Ind. Ltd. (supra), the Hon’ble Karnataka High Court has held that whenever assessee makes payment of non-compete fee, commercial right comes into existence and therefore, that right which assessee acquires on payment of non- compete fee confers in him a commercial or a business right which is held to be similar in nature to knowhow, patents, copyrights, trade marks, licences, franchises and the commercial right so acquired by ACC Ltd. 32(1)(ii) is to be allowed. In Pentasoft Technologies Ltd. (supra), the Hon’ble Madras High Court has held that “where assessee carrying on business in software development, etc. entered into an agreement with one “P” for hiving off and transfer of software development and training divisions from “P” and paid certain amount to “P” towards acquisition of intellectual property rights and non-compete fee, since agreement between parties was a composite agreement, assessee was entitled to depreciation on intellectual property rights as well as on non-compete fees”. On the other hand, in the decision in Sharp Business Systems (supra), relied on by the CIT, it is held “that every species of right spelt out expressly by the Statute i.e. of the intellectual property right and other advantages such as knowhow, franchise, license etc. and even those considered by the Courts, such as goodwill can be said to be alienable. Such is not the case with an agreement not to compete which is purely personal.” To recapitulate, we have two set of contrary decisions of the High Courts. On the one hand we have Ingersoll Rand International Ind. Ltd. (supra) and Pentasoft Technologies Ltd. (supra) for the assessee. On the other hand the decision in Sharp Business Systems (supra) is for the revenue.
ACC Ltd. In the case of Max India Ltd. (supra), it is held that if two views were possible on the disputed issue on the day when the Commissioner passes the order, then the order u/s 263 is not tenable. The CIT passed his order u/s 263 on 29.03.2016. On that date all the three decisions were prevailing and two views were possible on the present issue. Therefore, following the decision in Max India Ltd. (supra), the order u/s 263 passed by the CIT is not tenable. 7.2 In view of the facts that the AO had made necessary inquiries before allowing depreciation on non-compete fees and also the ground that two views were inherently possible on the same issue on the day when the Commissioner passed his order u/s 263, we are inclined to set aside the impugned order.
In the result, the appeal is allowed. Order pronounced in the open Court 15/10/2018.