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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI DUVVURU RL REDDY, & SHRI D.S.SUNDER SINGH
आदेश / O R D E R
PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the Order dated 27.05.2016 of Commissioner of Income Tax (Appeals)-1, Chennai, in (New ITA No.64/CIT(A)-1/2014-15) for the AY 2011-12 and raised the following grounds:
ITA No.2279/Mds/2016 :- 2 -:
INTERIOR DECORATION EXPENSES: Rs.4,54,257/-:
The Assessee had taken on lease hospitals at various locations and incurred interior decoration expenses. These expenses are revenue in nature and do not have enduring benefit.
The interior works undertaken by the assessee do not partake the character of structural improvements since the assessee has not constructed any structure or had undertaken renovation or extension or improvement to the buildings which were taken on lease.
The Interior decorations would lose their value when the property is handed over to the owner of the building and hence the assessee does not enjoy any enduring benefit out of it and there is no provision in the Act to allow terminal depredation for such discarded assets on surrender of leasehold rights. The expenditure incurred was towards maintaining cleanliness and provide better ambience so as to attract more patients since the business of the assessee was of running eye Hospitals. The Hon’ble Delhi High Court in the case of CIT v. Escorts Finance Ltd. (205 CTR 574) wherein it was held that expenditure incurred on providing wooden partition, painting, glass work and other repairs to the lease hold premises was revenue expenditure.
It may be pointed out here that, the ITAT D Bench had allowed similar expenditure in the Assessees own case vide for the A.Y.2008-09.
PAYMENT FOR BUSINESS CONSIDERATION: Rs.33,04,810/-:
The Assessee paid in earlier years, payments towards Business Consideration for takeover of hospitals at various locations and capitalised these payments under the head Goodwill, an asset being intangible in nature and claimed Depreciation @25% of the Written down Value. The depreciation was claimed u/s.32 for acquiring intangible assets like Patents, Trademarks, Licenses, Franchisees and other businesses. Hence, the claim for Depreciation on the above intangible assets should be allowed.
2.0 Ground No.1 is general in nature which do not require specific adjudication 3.0 Ground No.2 is related to the interior decoration expenses amounting to Rs.4,54,257/-. The AO during the assessment proceedings found that the assessee has incurred the expenditure for setting up of optical rooms and operation theatre rooms for an amount of Rs.5,04,730/- as under:
Sl. Vendor Name Nature TOS Amt. Branch Remarks No. Interior Optical Room 1 Mark Interiors Deducted 54000 Nanganallur decoration Interior work Interior Optical Room 2 Mark Interiors Deducted 50730 Nanganallur decoration Interior work Fan, Light Interior 3 Celerity Deducted 400000 Vellore Construction of Decoration OT Room
ITA No.2279/Mds/2016 :- 3 -:
The AO called for the details and found that the assessee has incurred a sum of Rs.9,35,725/- under the interior decoration expenses and after verification of the details of expenses the AO allowed a sum of Rs.4,30,995/- as Revenue expenditure and the balance was treated as capital expenditure and allowed the depreciation as wooden partition on lease hold premises @ 10%. The AO treated the interior decoration expenses as capital expenditure by invoking expl.1 to section 32 of the I.T. Act, which reads as under:
“Where the business or profession of the assessee is carried on in a building not owned by him, but, in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purpose of this business or profession on the construction of any structure or doing any work by way of renovation or extension or improvement to the building then, this clause shall apply as if the said structure or work is the building owned by the assessee.”
4.0 The assessee went on appeal before the CIT(A) and the Ld.CIT(A) observed that the assessee had claimed a sum of Rs.9,35,725/- under the interior decoration expenses and the AO after verification of the details allowed a sum of Rs.4,30,995/- as Revenue expenditure and the balance was rightly treated as capital expenditure and allowed the depreciation on wooden partition of the lease hold premises @ 10% treating the same as furniture.
4.1 Aggrieved by the Order of the Ld.CIT(A)’s, the assessee is in appeal before us.
Appearing for the assessee, the Ld.AR argued that the assessee has taken the premises on lease at various hospitals in different locations and ITA No.2279/Mds/2016 :- 4 -: incurred the interior decoration expenses. The work of the interior decoration is required in hospitals to give better customer facilities and separate partition for optical rooms and the theaters. The lease was taken for a temporary periods and it cannot be reused or removed at the time of surrendering the premises. The expenditure do not give any enduring benefit and has to be allowed as revenue expenditure.
4.2 On the other hand, the Ld.DR argued that after the amendment to Income Tax Act by inserting Explanation-1 to Sec.32 the construction of any structure or doing any work by way of renovation or extension or improvement to the building on leasehold premises required to be included as assets for the purpose of depreciation. The assessee has made civil works and interior decoration for operation theatres and optical rooms. Though the assessee claimed that premises was taken on lease for shorter periods it has not given the particulars of the premises surrendered in shorter period. Accordingly, the Ld.DR vehemently opposed the contentions of the Ld.AR.
5.0 We heard the rival submissions and perused the material placed on record.
The assessee relied on the orders of this Tribunal in the assessee’s own case in and the Hon’ble jurisdictional High Court judgment in TCA No.548/2015 and argued that the assessee’s case is covered by the decisions of the Co-ordinate Benches and the Hon’ble
ITA No.2279/Mds/2016 :- 5 -: jurisdictional High Court in his favour. However, the expenditure incurred by the assessee is dependent on the nature of expenses and the length of the period of the lease premises taken by the assessee and the asset created out of the expenditure. The assessee neither furnished the details of expenditure incurred related to interior decoration expenses nor the copies of the lease agreements for our verification, and the nature of asset created out of the expenses. The Hon’ble jurisdictional High Court has not considered the Explanation-1 of Sec.32 in the judgment relied up on by the assessee. For a query from the bench, the Ld.AR fairly agreed to remit the matter back to the file of Ld.CIT(A) for verification of the nature of expenses and lease agreements and the nature of asset to decide the issue whether it is capital expenditure or a Revenue expenditure. The Ld.DR also conceded for remitting the matter back to the file of the Ld.CIT(A). Accordingly, we are of the considered opinion that the issue needs further verification of facts from the nature of expenses as well as the lease agreements to decide whether the expenditure in question is capital or revenue. Hence we remit the matter back to the file of the Ld.CIT(A) to re-adjudicate the issue after verification of the lease agreements and the nature of expenses. The assessee’s appeal is allowed for statistical purpose.
6.0 Ground No.3 is related to the payment for disallowance on account of business considerations : Rs.33,04,810/-
During the assessment proceedings, the AO found that the assessee has claimed a depreciation of Rs.33,04,810/- on the payments made to ITA No.2279/Mds/2016 :- 6 -: the Doctors stating that payment was for acquiring the intangible assets of knowhow patents, copyright, trade mark and license. The entire payment was made during the FY 2009-10, which is relevant to the AY 2010-11. The AO held that the payment to Doctors as payment towards professional fee, retainer fee and accordingly disallowed the depreciation claimed by the assessee on opening balance of Rs.1,32,19,239/-.
6.1 Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) dismissed the assessee’s appeal as
per the detailed discussion made in Para Nos.10-14 which are as under:
I have carefully considered the facts, order of the AO, submissions made by the appellant and material on record. The pith and substance of the transaction between the doctor and the hospital and the payment made with the nomenclature ‘goodwill’ is purely either payment towards non compete or in nature of exgratia. The other issue is as to whether they constitute an asset and therefore is depreciable. The issues, which arise for consideration on the facts of the case at hand simply put are (i) Whether the ‘intangible asset’ of non-compete/ goodwill fee paid is eligible for depreciation (ii) as to whether the payment is eligible to be allowed as revenue expenditure u/s.37(1) of the Act. The answers to the issues raised by the appellant are addressed in the paragraphs to follow taking aid from several decided cases which include –
(i) M/s.A.B.Mauria India Pvt. Ltd. Vs. ACIT in (for the AY 2001-02) decided by the Chennai Tribunal. (ii) M/s.Lanxess India (P) Ltd. ACIT in ITA No.2479, 2480 & 2481/Mad/2006 Asst. year 2000-01 to 2003-04 decided by the ITAT Chennai, ‘B’ Bench. M/s.Sritvatsan Surveyors (P) Ltd vs. ITO in ITA No.1899/Mds/2007; Asst. Year 2002-03 decided by the ITAT, Chennai , ‘C Berch. (iii) M/s.Sharp Business Systems (India) Ltd vs. DCIT (233 lTD 275 (Del)/2011. (iv) M/s.Sharp Business System v. CIT (211 Taxmann 575 (Del) (HC)/2012.
In the case of M/s. AB Mauria India Pvt. Ltd vs. ACIT (supra), the lTAT was ceased with an order u/s.263 passed by the CIT holding the action of the AO allowing depreciation on non compete fees as erroneous and prejudicial to the interests of Revenue. The order was upheld holding that the non compete fee was not an asset unlike license or franchise etc and hence the appeal filed by the appellant was dismissed. In the case of Lanxess India (P) Ltd vs. ACIT (supra), similar view was taken. In the case of M/s.Srivastan Surveyors (P) Ltd vs. ITO (supra), it was similarly held that non compete covenant was not a tangible asset qualifying for depreciation in terms of provisions of Sec.32(1)(ii) on the principle of ejusdem generis having regard to the application of the said provision in respect of know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of commercial nature.
Likewise, in M/s.Sharp Business Systems (India) Ltd (supra) the issues which came up for consideration were identical to those obtaining in the case of the Appellant. The appellant there had paid a sum of Rs.3 crores to M/s. L&T Ltd., in lieu of not setting up undertaking or assisting in setting up undertaking any business India of selling, marketing and trading of electronic office products for a period of 7 years. The appellant had treated the amount of Rs.3 crores as deferred revenue expenditure in the books of accounts and was writing off the same over a period of 7 years. It was held that view taken by the ITA No.2279/Mds/2016 :- 7 -:
appellant was untenable and the claim of expenditure cannot be treated to have been incurred in revenue field. The payment of non compete fee for acquisition of business has also been held as capital expenditure as the same was incurred for initial outlay of the business. In coming to such a conclusion, ratios of several case laws including M/s. Assam Bengal Cement Co. Ltd vs. CIT (27 ITR 34) (SC), CIT vs. M/s.Coal Shipments Ltd (82 ITR 902) (SC), Punjab State Industrial Development Corporation Ltd vs. CIT (225 ITR 792 (SC), CIT vs. JK Synthetics Ltd (309 ITR 371 ) and ITAT, Delhi, Special Bench in the case of Tecumseh India (P) Ltd vs Addl. CIT (2010) 127 ITD 1/5 ITR (Trib) (150) (Delhi)(SB). The ITAT while holding the expenditure being capital in nature, rejected the plea that it was eligible for depreciation as an “intangible asset” u/s.32(1)(ii). Amongst other reasons assigned, it was held that non compete agreement between two parties is like personal service contract which is unassignable and cannot survive on the demise of either of the parties. Similarly, the right to trade freely or to compete in the market is not an asset and non compete agreement would not create an asset of intangible nature eligible for depreciation u/s.32(1)(ii) of the Act. This view found support in the decision of Hon’ble Delhi High Court in the case of CIT v. Hindustan Coca Cola Beverages (P) Ltd (2011) (231 ITR 192) as also the decision of the ITAT, Chennai Bench in the case of ITO vs. M/s, Medicorp Technologies (India) Ltd (2009) (30 SOT 506) (Chennai).
Finally in the case of M/s. Sharp Business System v. CIT (supra) the decision of the tribunal was affirmed on all the counts. The Hon’ble High Court held that such payment of non compete fee to ward off competition had to be treated as being in “capital” and held that the deduction towards non compete fee could not be allowed as it conferred a capital advantage. It also held for such reasons also that the deduction cannot be claimed as a revenue expenditure as it clearly fell within capital field. With regard to application of Sec. 32(1)(ii) being an intangible asset, it took the view that in the case of non compete agreement or covenant, the advantage is a restricted one, in point of time. It does not necessarily confer any exclusive right to carry on the primary business activity. The right can be asserted in the present instance only against L&T and in a sense, the right “in personam” as distinct from right “in rem”. The agreement not to compete is purely personal.
Taking the sum totality of the facts and discussion in the foregoing paragraphs, I am of the considered view that the plea made by the appellant on either or both the counts cannot be upheld as the expenditure is clearly in the capital field and not eligible for depreciation claimed u/s.32(1)(ii) and that it neither cannot be allowed for such reasons as a revenue expenditure. This ground of appeal is dismissed. 6.1 We heard both the parties and perused the material placed before us.
According to the Ld.AR, the depreciation was claimed in the opening balance and there were no intangible assets acquired during the FY 2010-
11. The entire payment was made during the FY 2009-10 and claimed the depreciation and the appeal is pending before the Ld.CIT(A) for the FY 2009-10. Further, the Ld.AR requested this Tribunal to remit the matter back to the file of the AO to consider the issue for both the assessment years and to decide the issue. On the other hand, the Ld. DR did not ITA No.2279/Mds/2016 :- 8 -:
make any objection for remitting the matter back to the file of CIT(A).
The issue in question is whether the assessee has acquired any Depreciable intangible assets during the FY 2009-10 or not? If so, whether the Depreciation is allowable on the assets or not?. Initial year of expenditure was incurred in the A.Y. 2010-11 and the nature of payment required to be examined in the A.Y. 2010-11, and finding has to be reached whether the expenditure is capital or revenue expenditure. The payments were made to the Doctors without mentioning the purpose, reasons for payments relevant agreement and nature of treatment of the payments in the books of the assessee as well as the recipient. In the absence of the complete details and relevant documents, it is not possible to decide the issue whether it is a capital expenditure or the payment is for acquiring intangible assets or payments towards non-compete fee as held by the Ld.CIT(A). The Ld.DR/AR could not submit any of the details required above. Therefore, we remit the matter back to the file of the Ld.CIT(A) with a direction to examine all the details and decide the issue afresh on merits in the light of the above discussion. The assessee’s appeal on the issue is allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the Open Court on 30th May, 2017, at Chennai.