COMPUTER AGE MANAGEMENT SERVICES PVT. LTD.,CHENNAI vs. DCIT LTU 2 , CHENNAI

आदेश / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER These are appeals filed by the assessee directed against orders dated 12.01.2018 of Commissioner of Income-tax (Appeals) - 5, Chennai for the impugned assessment years.

ITA Nos.1140, 41 & 42 /2018 :- 2 -:

are common. These grounds, as it appear in the appeal for

assessment year 2012-2013 is reproduced hereunder:-

‘’Ground 1 - Additional disallowance of Rs. 71,02,401 under Section 14A read with Rule 8D is unwarranted 1.1 On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals), Chennai ['CIT(A)'] erred in confirming additional disallowance of Rs. 71 ,02,401 under Section 14A of the Income-tax Act, 1961 ('the Act') read with Rule 8D of the Income-Tax Rules, 1962 ('the Rules'). 1.2 On the facts and circumstances of the case, the learned CIT(A) erred in confirming the mechanical application of Rule 8D of the Rules without recording satisfaction against the claim of the Appellant. 1.3 The Appellant prays that additional disallowance of Rs. 71,02,401 under Section 14A of the Act be deleted. Ground 2 - Depreciation at 10% on temporary shed as against 100% claim of depreciation is unwarranted 2.1 On the facts and circumstances of the case, the learned CIT(A) erred in confirming the restriction of depreciation at 10% on the temporary shed as against 100% depreciation claimed by the Appellant. 2.2 The Appellant prays that depreciation be allowed at 100% on temporary shed as against 10% under the Act. Ground 3 - Depreciation at 10% on electrical fitting as against 15% claim of depreciation is unwarranted 3.1 On the facts and circumstances of the case, the CIT(A) erred in reclassifying electrical fitting under the block of Furniture and fittings, thereby resulting in restriction of depreciation at 10% as against 15% depreciation claimed by the Appellant. 3.2 The Appellant prays that depreciation be allowed at 15% since electrical fitting is classifiable under the block of Plant and Machinery under the Act as against 10%. Ground 4 - Depreciation at 25% on software license as against 60% claim of depreciation is unwarranted 4.1 On the facts and circumstances of the case, the CIT(A) erred in reclassifying software license under the block of Intangibles assets, thereby resulting in restriction of depreciation at 25% on software license as against 60%

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depreciation claimed by the Appellant. 4.2 The Appellant prays that depreciation be allowed at 60% on software license as against 25% under the Act’’.

u/s.14A of the Income Tax Act, 1961 (in short ‘’the Act’’), appearing in

ground No.1, all these grounds are typically worded in all the appeals.

These common grounds are considered first.

First such ground relates to a disallowance made u/s.14A of 4.

the Act r.w.Rule 8D of the Income Tax Rules, 1962 (in short ‘’the

Rules’’).

Assessee had claimed income of �1,84,99,463/-, 5.

�58,07,110/- and �13,94,638/- as exempt for assessment years 2012-

13, 2013-14 and 2014-15 respectively. As against this, assessee had

made suo-motu disallowance of �10,25,350/-, �10,56,076/- and

�35,75,240/- respectively for these assessment years. Ld. Assessing

Officer was of the opinion that assessee had long term investments of

�40,93,66,087/- for assessment year 2012-13, which comprised of

equities worth �40,35,25,000/-, NHAI bonds of �49,44,000/- and

investment in property �8,97,087/-. Such long term investment for

assessment year 2013-14 came to �40,93,21,233/- which comprised of

equities worth �40,35,25,100/- NHAI bonds of �49,44,000/- and

investment in property �8,52,233/-. For assessment year 2014-15,

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the total long term investments as per ld. Assessing Officer came to

�1,76,92,78,621/- comprising of equity shares �1,75,35,25,000/-,

NHAI bonds of �49,44,000/-, property investment of �8,09,621/- and

debt funds of �1,00,00,000/-. Ld. Assessing Officer was of the opinion

that assessee would have incurred expenditure on printing and

stationery, communication cost, manpower cost, legal professional

charges, rent etc, for making and managing such investments. Ld.

Assessing Officer put the assessee on notice why disallowance could

not be made under Section 14A r.w.r.8D.

Assessee replied that it had an approved investment policy 6.

for minimizing risk and investments were made based on the

guidelines received from its investment advisors. As per the assessee ,

apart from signing of the forms, management did not spend any

significant time for managing the investment portfolio. Assessee also

pointed out that it had made suo-motu disallowances u/s.14A of the

Act for meeting the expenditure of two staff who were engaged in the

investment transactions.

However, ld. Assessing Officer was not impressed by the 7.

above reply. According to him, assessee did not maintain any separate

account for the expenditure relating to the investments giving rise to

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exempt income. As per the ld. Assessing Officer, assessee also did not

give details of the ratio applied for computing the suo-motu

disallowances made by it. In other words, as per ld. Assessing Officer,

assessee had not given any basis how it arrived at the suo-motu

disallowance for the respective years. As per the ld. Assessing Officer,

investments whether it yielded exempt income or not, had to be

considered for computing the disallowance. Nevertheless, he

restricted the disallowance only to the indirect expenditure specified in

clause (iii) of Rule 8D(2), applying 0.5% on average of the

investments, after giving allowance for the suo-motu disallowances

made by the assessee for the respective assessment years. This

resulted in a further disallowance of �71,02,401/-, �11,92,971/- and

�30,03,694/-. Assessee’s appeal before ld. Commissioner of Income

Tax (Appeals) did not meet with any success.

Now before us, ld. Authorised Representative strongly 8.

assailing the orders of the lower authorities submitted that investments

in mutual funds did not yield any exempt income and had to be

excluded. Further, according to him, investments in subsidiaries also

did not yield any exempt income. Contention of the ld. Authorised

Representative was that equity investments made by the assessee

were in CAMS Repository Services Ltd and CAMS Investors Services

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Pvt. Ltd which were subsidiaries. Reliance were placed on the

following decisions/judgments.

(i) PCIT vs. McDonald’s India Private Limited (ITA No.5094/ Del/2012) ( Delhi HC)

(ii) Chettinad Logistics (P) Ltd (2018) 95 taxmann.com 250 (SC)

(iii) Walfort Share and Stock Brokers (2010) 326 ITR 1 (SC)

(iv) Redington (India) Ltd. vs. ACIT (2017) 77 taxmann.com 257 (Madras HC)

(v) Apex Laboratories (P) Ltd vs. ACIT (2017) 80 taxmann.com 236 (Chennai ITAT)

(vi) Tafe Motors & Tractors Ltd. ACIT (2017) 88 taxmann.com 406 (Chennai ITAT)

(vii) ACB India Limited vs. ACIT (2015) 62 taxmann.com 74 (Delhi High Court)

(viii) Cheminvest Limited vs. CIT (2015) 61 taxmann.com 118 (Delhi High Court)

(ix) Future Corporate Resource Ltd. vs. DCIT, (2017) 85 taxmann.com 190 (Mumbai ITAT)

Per contra, ld. Departmental Representative submitted that 9.

by virtue of the judgment of Hon’ble Apex Court in the case of Maxopp

Investment Ltd. vs. CIT, 402 ITR 640, there was no question of

excluding any investments, while computing disallowance u/s.14A of

the Act.

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orders of the authorities below. It is not disputed that disallowance

made by the ld. Assessing Officer were restricted to what was

stipulated in clause (iii) of Rule 8D(2). Ld. Assessing Officer had

considered whole of the investments made by the assessee while

averaging it for applying 0.5% thereon. Argument of the assessee

before us is that investments in mutual funds and subsidiaries which

did not earn any exempt income had to be excluded. We are afraid

we cannot accept this line of argument, since this issue is no more

res-integra. Hon’ble Apex Court in the case of Maxopp Investment Ltd

(supra) after considering various judgments of the various High Courts

on this issue had held as under at paras 31 to 41 of its judgment.

‘’31. We have given our thoughtful consideration to the argument of counsel for the parties on both sides, in the light of various judgments which have been cited before us, some of which have already been taken note of above. 32. In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee "in relation to income which does not form part of the total income under this Act". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred

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in respect of other income which is to be treated as part of the total income. 33. There is no quarrel in assigning this meaning to section 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on the one hand or the Punjab and Haryana High Court on the other hand, have agreed in providing this interpretation to section 14A of the Act. The entire dispute is as to what interpretation is to be given to the words "in relation to" in the given scenario, viz., where the dividend income on the shares is earned, though the dominant purpose for subscribing in those shares of the investee- company was not to earn dividend. We have two scenarios in these sets of appeals. In one group of cases the main purpose for investing in shares was to gain control over the investee-company. Other cases are those where the shares of investee-company were held by the assessees as stock-in-trade (i.e. as a business activity) and not as investment to earn dividends. In this context, it is to be examined as to whether the expenditure was incurred, in respective scenarios, in relation to the dividend income or not. 34. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee-company. However, that does not appear to be a relevant factor in determining the issue at hand. The fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind section 14A of the Act in mind, the said provision has to be interpreted, particularly, the words "in relation to the income" that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle

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which is engrained in section 14A of the Act. This is so held in Walfort Share and Stock Brokers P. Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom* : "The next phrase is, 'in relation to income which does not form part of total income under the Act'. It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A . . . The theory of appor tionment of expenditure between taxable and non- taxable has, in principle, been now widened under section 14A." 35. The Delhi High Court, therefore, correctly observed that prior to introduction of section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income-tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum Explaining the Provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of the Punjab and Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee-company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee-companies have to fail and are, therefore, dismissed. 36. There is yet another aspect which still needs to be looked into. What happens when the shares are held as "stock-in-trade" and not as "investment", particularly,

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by the banks ? On this specific aspect, the Central Board of Direct Taxes has issued Circular No. 18 of 2015, dated November 2, 2015. 37. This circular has already been reproduced in Para 19 above. This circular takes note of the judgment of this court in Nawanshahar case wherein it is held that investments made by a banking concern are part of the business of banking. Therefore, the income arises from such investments is attributable to business of banking falling under the head "Profits and gains of business and profession". On that basis, the circular contains the decision of the Board that no appeal would be filed on this ground by the officers of the Department and if the appeals are already filed, they should be withdrawn. A reading of this circular would make it clear that the issue was as to whether income by way of interest on securities shall be chargeable to Income-tax under the head "Income from other sources" or it is to fall under the head "Profits and gains of business and profession". The Board, going by the decision of this court in Nawanshahar case, clarified that it has to be treated as income falling under the head "Profits and gains of business and profession". The Board also went to the extent of saying that this would not be limited only to co-operative societies/banks claiming deduction under section 80P(2)(a)(i) of the Act but would also be applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 38. From this, the Punjab and Haryana High Court pointed out that this circular carves out a distinction between "stock-in-trade" and "investment" and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment. To this extent, the High Court may be correct. At the same time, we do not agree with the test of dominant intention applied by the Punjab and Haryana High Court, which we have already discarded. In that event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as "stock-in-trade" and not as "investment". We proceed to discuss this aspect hereinafter.

ITA Nos.1140, 41 & 42 /2018 :- 11 -:

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continue to hold those shares as it wants to retain control over the investee-company. In that case, whenever dividend is declared by the investee-company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. 41. Having regard to the language of section 14A(2) of the Act, read with rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo motu disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares/ making the investment in shares is to be examined by the Assessing Officer’’.

Except for investment made in a trading field, there is no question of

any exclusion while calculating the disallowance u/s.14A of the Act. It

is not disputed that none of the investments of the assessee were

held as stock in trade. Accordingly, we are of the opinion that lower

authorities were justified in making a disallowance u/s.14A of the Act

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read with rule 8D(2) (iii) of the Rules. Especially so, since ld.

Assessing Officer had clearly stated the reasons why he was not

satisfied with the suo-motu disallowance made by the assessee.

Accordingly, ground No.1 of the assessee for all the years stands

dismissed.

temporary sheds which was restricted to 10%.

Ld. Counsel for the assessee submitted that the sheds on 12.

which 100% depreciation was claimed by the assessee were

temporary in nature and made for the purpose of sheltering

generators. According to him, ld. Assessing Officer took a view that

the temporary sheds having been built by using steel pipes and iron

meshes, could not be considered as eligible for 100% depreciation.

As per the ld. Authorised Representative, this view was confirmed by

the ld. Commissioner of Income Tax (Appeals). Contention of the ld.

Authorised Representative was that temporary sheds were kept in

open space and subjected to all vagaries of nature. According to him,

just because it was made of steel pipes and iron meshes did not

make it a permanent structure.

Per contra, ld. Departmental Representative strongly 13.

supported the orders of the lower authorities.

ITA Nos.1140, 41 & 42 /2018 :- 14 -:

We have considered the rival contentions and perused the 14.

orders of the authorities below. It is not disputed that the sheds

were made by using steel pipes and iron meshes. Such structures

which are built in open space are susceptible to very fast corrosion.

Especially so, in a sea side area like Chennai. We cannot say that such

structure is having an enduring nature. We are of the opinion that

assessee was eligible to claim 100% depreciation on such structures.

We set aside the orders of the lower authorities and allow the claim of

the assessee for 100% depreciation on such temporary sheds built

by using steel pipes and iron meshes. Ground No.2 of the assessee for

all the years stands allowed.

of depreciation claimed on electrical fittings, ld. Counsel for the

assessee submitted that the electrical fittings were eligible for 15%

depreciation, whereas lower authorities had given the rates available

for buildings. As per the ld. Authorised Representative such electrical

fittings were to be considered as part of plant and machinery and was

eligible for 15% depreciation.

Per contra, ld. Departmental Representative strongly 16.

supported the orders of the lower authorities.

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orders of the authorities below. It is not disputed that electrical

fittings if considered as part of building is eligible for only 10%

depreciation. Claim of the assessee is that these fittings were to be

considered as part of plant and machinery. However nothing has been

brought on record to show that electrical wiring, switches, sockets,

other fittings were part of any plant and machinery. Accordingly, we

are of the opinion that lower authorities were justified in restricting the

depreciation to 10%. Ground No.3 of the assessee stands dismissed.

Arguing on fourth common ground, which is on restriction of 18.

the claim of depreciation on software, ld. Authorised Representative

submitted that ld. Assessing Officer had restricted the depreciation

to 25% against 60% available for computer systems. According to ld.

Authorised Representative, what was acquired were only software

license which enabled the assessee to use the applications. According

to him, by virtue of definition of software given in New Appendix I of

Income Tax Rules, computers including computer software were

eligible for 60% depreciation.

what were acquired by the assessee was only a licence and could at

the best be considered as an intangible asset. Thus, according to him,

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lower authorities were justified in restricting the depreciation claim to

25%.

orders of the authorities below. Nature of items on which assessee

had claimed depreciation @60% are listed hereunder:-

Sl.No Description of the Asset 1 Sco Unix 6.0 Enterprise User License

2 Server Licenses and customization charges for insurance process.

3 Server Licenses and customization charges for insurance process.

4 PI Sql Developer/ Single User license

5 PI Sql Developer/ Single User license

6 Vfox Pro 9.0 Office Std 2010 licence

7 Dynamics Nav Final Milestone license

8 Server licenses and customization charges for insurance process

9 Server licenses and customization charges for insurance process

10 Citrus software license basic server licenses 1

11 Server licenses and customization charges for insurance process

12 Server License

13 Server License

14 Server License

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15 Server License

16 Cisco-firewall license

17 Window 2008 R2 standard license

What we find from the above description is that all these were nothing

but items in the nature software or software applications. Entry No.5

coming in III of Part A in New Appendix I clearly says that computer

included computer software. Note 7 of the Appendix, defines computer

software as any computer programme recorded in any information

storage device. We are therefore of the opinion that assessee was

eligible to claim depreciation at the rate of 60% on the above items.

Orders of the lower authorities on this issue are set aside and the

claim is allowed. Ground No.4 of the assessee stands allowed.

This leaves us with one another ground which is appear in 21.

the appeal of the assessee for the assessment year 2014-15. This

ground is reproduced hereunder:-

‘’Ground 5 - Disallowance of payment of non-compete fees of Rs, 12,35,58,502 is unwarranted. 5.1 On the facts and circumstances of the case, the CIT(A) erred in confirming disallowance of Rs. 12,35,58,502 towards non-compete fees claimed by the Appellant as revenue expenditure. 5.2 On the facts and circumstances of the case, the CIT(A) erred in confirming the rejection of the Appellant's alternative claim for allowing expenditure over the period of the non- compete agreement (i.e. 18 months) 5.3 On the facts and circumstances of the case, the CIT(A)

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erred in confirming rejection of the Appellant's alternative claim for depreciation on the non-compete fee under the block of intangible asset under the Act.

5.4 The Appellant prays that disallowance of non-compete fees be deleted or alternatively claim for expenditure over the period of agreement or depreciation on the same be allowed’’.

Facts apropos are that during the previous year relevant to 22.

assessment year 2014-15, assessee had acquired the business of one

M/s. Sterling Software Pvt Ltd, through a Business Transfer

Agreement (BTA) dated 16.05.2013 with one Shri. V. Shankar, who

was the promoter of the said company. Under the BTA, Shri. V.

Shankar was restricted from competing with the business of M/s.

Sterling Software Private Ltd for a period of eighteen months. Non

compete fee of �12,35,58,502/- was paid. As per the assessee, this

was purely a revenue expenditure though in its books, it had treated

the amount as deferred revenue expenditure, spread over the period

of eighteen months, which was the agreed non-compete period.

However, ld. Assessing Officer was of the opinion that the object of

such payment was to avoid competition, and assessee gained a

benefit of an enduring nature. Relying on the decisions of Co-ordinate

Bench in the case of JCIT vs. HatsunAgro Products Ltd (ITA

No.1200/Mds/1999, dated 27.07.2005), Act India Ltd vs. CIT (ITA

No.615/Mds/1999, dated 10.02.2006) and that of Asianet

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Communication P. Ltd vs. CIT( ITA No.443/Mds/2004, dated

03.01.2005), ld. Assessing Officer held that expenditure could only be

considered as incurred in a capital field. Ld. Assessing Officer

disallowed the claim of �12,35,58,502/-. Ld. Assessing Officer did not

allow any depreciation also on such non-compete fee. According to

him, there was no asset of any intangible nature acquired on the

payment paid to Shri. V. Shankar, as non compete fee. Assessee’s

appeal before ld. Commissioner of Income Tax (Appeals) did not meet

with any success.

Now before us, the ld. Authorised Representative strongly 23.

assailing the order of the ld. Commissioner of Income Tax (Appeals)

submitted that there was no enduring benefit for the assessee nor did

the payment result in any increase in its profit earning capacity.

According to him, it was purely a revenue expenditure. In any case as

per ld. Authorised Representative, if it was considered to have been

incurred in a capital field, then it resulted in an intangible asset eligible

for depreciation u/s.32 of the Act. Reliance were placed on the

following judgments:-

(i) CIT vs. Coal Shipments (P) Ltd (1971) 82 ITR 902 (SC)

(ii) Empire Jute Co. Ltd vs. CIT, (1980) 3 Taxman 69 (SC)

(iii) Carborandum Universal Ltd vs. JCIT(2012) 26 Taxmann.com 268 (Madras HC)

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(iv) CIT vs. (Late) GD Naidu and others (1986) 24 Taxmann 255 268 (Madras HC)

(v) Asianet Communications Ltd vs. CIT(2018 ) 96 26 Taxmann.com 399 (Madras HC)

(vi) Hatsun Agro Products Ltd. vs. JCIT (2018) 99 26 Taxmann.com 220 (Madras HC)

(vii) Hidelberg Cement India Ltd vs. ACIT( 2015) 55 26 Taxmann.com 336 (Mumbai ITAT)

Per contra, ld. Departmental Representative submitted that 24.

even though the tenure of the agreement was only for eighteen

months, it had a linkering effect. According to him, non compete

agreement placed at paper book pages 273 to 285, clearly indicated

that Shri. V. Shankar could not even recruit any person from the

assessee company during the tenure of such agreement. This,

according to him, clearly gave rise to an enduring benefit. As per the

ld. Departmental Representative , the difference should be seen with

reference to the long lasting benefit accruing to the assessee due to

the restriction placed on Shri. V. Shankar from weaning away the

employees. Hence, as per the ld. Departmental Representative,

expenditure was incurred in the capital field and rightly disallowed by

the lower authorities.

ITA Nos.1140, 41 & 42 /2018 :- 21 -:

orders of the authorities below. Non compete agreement entered by

the assessee on 16.12.2013 with Shri. V.Shankar is placed at paper

book pages 273 to 285. Para 2 of the said agreement which stipulates

the nature of the restriction placed on Shri. V. Shankar is reproduced

hereunder:-

NON-COMPETITION AND NON-SOLICITATION In view of the transactions contemplated by the SPA, during the Restricted Period the Founder shall not directly or indirectly; 2.1.1 through his Affiliates; 2.1.2 cause his Affiliates; or 2.1.3 assist any Person to; (a) engage in any business anywhere in the Territory that conducts any of the Company's Activities; or (b) own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as a partner, stockholder, co-venturer, consultant or otherwise, any Person that is engaged in the business of conducting any of the Company's Activities anywhere in the Territory, provided, however, that, for the purposes of this Clause 2.1: (i) ownership by the Founder of securities having no more than 5% (five per cent) of the outstanding voting power of any Person listed on any national securities exchange; and/or (ii) investment by the Founder in a Person by way of a portfolio investment and not constituting more than 5% (five per cent) of the' equity capital (calculated on a fully diluted basis) of. such Person provided such investment is a purely passive investment; shall be permitted as long as the Founder has no other connection or relationship with such Person and the Founder has not, in any manner, directly or indirectly assisted, supported, or otherwise been involved in the affairs of such Person. 2.2 During the Restricted period, the founder shall not, directly or indirectly, 2.2.1 for himself or on behalf of or in conjunction with any other Person;

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2.2.2 cause his Affiliates; or 2.2.3 assist any Person to; call upon any Retained Employees or any individual who is, at the time the individual is called upon, an employee of the Company, (a) for the purpose or with the intent of soliciting such employee away from, or out of the employment of the Company, or employ or offer employment to any individual who was an employee of the Company during the period of 12 (twelve) months prior thereto or is employed by the Company; or (b) with a view to use the specific knowledge or skills of such person for the benefit of any Person carrying on Company's Activities; or Cc) to terminate or breach a contractual or any other relationship with the Company' Nothing in this Clause 2.2 shall apply to an individual who has ceased to be employed by the Company for a period of at least 12 (twelve) months prior thereto or an individual who has applied for employment with the founder or his affiliates or with any Person who is being assisted by the Founder, in response to a general solicitation for such employment made by the Founder or his Affiliates or by any Person who is being assisted by the Founder, whether by way of newspaper advertisements or other medium

As the Founder has, from, time to time, had dealings with the Customers as set out In Schedule I, the Founder, undertakes that during the Restricted Period, the Founder: 2.3.1 shall not, directly or indirectly; 2.3.2 shall procure that his Affiliates shall not; or 2.3.3 shall not, directly or indirectly assist any Person; for the purposes of carrying, facilitating or assisting any Company's Activities, either through themselves or any other Person: a) solicit or deal, with any Customer; or b) use his knowledge of, or influence over, any Customer, or c) seek to contract with, or engage, any Customer.

2.4If a final judgment of a court or tribunal of competent jurisdiction determines that any term or provision contained in Clause 2 is invalid or unenforceable, then the Parties agree that the court or tribunal shall have the power to reduce the scope, duration, or geographic area of the term of provision, to delete specific words or

ITA Nos.1140, 41 & 42 /2018 :- 23 -:

phases or to replace any invalid of unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. This Clause 2.4 shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. The Parties agree that this Clause 2.4 is reasonable and necessary to protect and preserve the legitimate business interests, the value of the Company's Activities, being acquired by the Acquirer and to prevent any unfair advantage being conferred on either Party.

2.5 The Parties agree that the covenants of non- competition and non-solicitation contained in this Clause 2 are reasonable covenants under the circumstances’’.

Restriction period mentioned in the definition clause 1.1, of the above

agreement is a period of eighteen months, from the closing date. Or in

other words, the tenure of the agreement was only for eighteen

months. We cannot say that assessee derived any enduring benefit

due to the above payment effected by it for obtaining certain

commitments from Shri V. Shankar and restricting himself from

indulging in any competition with the business of the assessee or from

weaning way the employees. Hon’be Jurisdictional High Court in the

case of M/s.Asianet Communications Ltd vs. CIT [T.C (Appeal) No.174

of 2005 dated 26.06.2018] with regard to non compete compensation,

had held as under at paras 46 to 49 of its judgment.

ITA Nos.1140, 41 & 42 /2018 :- 24 -:

46.The governance for non-compete is traceable to Section 27 of the Indian Contract Act, 1872 which reads as below

"27. Agreements in restraint of trade, void.- Every agreement, - by which anyone is restrained from exercising a lawful profession, trade or business or any kind, is to that extent void. 1. Exception -Saving of agreement not to carry on business of which goodwill is sold - One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business. Any contractual term that imposes restraint on a contracting party from engaging in any business for a reasonable term must be backed by consideration. Therefore, the non-compete compensation is but a consideration paid to the party who is kept out of competing business during the term of the contract.

47.The non-compete compensation, from the stand point of the payee of such compensation, is so paid in anticipation that absence of a competition from the other party to the contract may secure a benefit to the party paying the compensation. There is no certainty that such benefit would accrue. In other words, inspite of the fact that a competitor is kept out of the competition, one may still suffer loss. If it were to be a capital expenditure

ITA Nos.1140, 41 & 42 /2018 :- 25 -:

whether or not, an assessee makes a business profit, the character and value of the capital assets will, subject to depreciation, remain unaltered

48.Thus, the facts clearly disclose that on account of the payment of non-compete fee, the assessee has not acquired any new business, profit making apparatus has remained the same, the assets used to run the business remained the same and there is no new business or no new source of income, which accrue to the assessee on account of the payment of non-compete fee. Apart from that the stand taken by the Revenue that the petitioner had amortised expenditure spread over for the period of five years has been found to be factually incorrect, as the assessee has not capitalised the same in their accounts, but treated it as deferred revenue expenditure for a period of five years. That apart, such issue was never raised by the Revenue before any of the lower authorities, as the Tribunal has recorded that there is no dispute regarding the facts.

49.Accordingly, the first substantial question of law is answered in favour of the assessee and against the Revenue’’.

In the facts and circumstances of the case, we are of the opinion that

non compete fee was a revenue expenditure, and had to be allowed

in one go, irrespective of the method of accounting adopted by the

assessee. Accordingly, we set aside the orders of the lower authorities

ITA Nos.1140, 41 & 42 /2018 :- 26 -:

and allow the claim of the assessee. Ground No.5 of the assessee for assessment year 2014-15 stands allowed.

Order pronounced on Friday, the 14th day of December, 2018, at Chennai.

Sd/- Sd/- (धु�वु� आर.एल रे�डी) (अ�ाहम पी. जॉज�) (DUVVURU RL REDDY) (ABRAHAM P. GEORGE) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated:14th December, 2018. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF