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1 IN THE HIGH COURT OF KARNATAKA, BANGALORE DATED THIS THE 13TH DAY OF AUGUST, 2012 PRESENT THE HON'BLE MR. JUSTICE K.SREEDHAR RAO AND THE HON'BLE MR. JUSTICE B.MANOHAR I.T.A. No.579 OF 2006 BETWEEN:- M/s.Lucent Technologies Hindustan Pvt. Ltd., 1, 2 & 4, UGF, Creator Building, International Technology Park, Whitefield Road, Bangalore-560066, Represented by its Director, Sri Amar Datta Gupta, Aged about 47 years, S/o. Sri C.R.Datta Gupta. Appellant (By Sri S. Parthasarthi along with Sri Malhara Rao & Sri Vijay Kumar Punna, Advocates) AND:- The Joint Commissioner of Income-Tax (Asst), Special Range – 4, Bangalore. Respondent (By Sri E. Sanmathi Indra Kumar, Advocate) This I.T.A. is filed U/s.260-A of I.T. Act, 1961 arising out of order dated 27.10.2005 passed in
2 I.T.A.No.723/Bang/2003 for the Assessment Year 1997-98, praying that this Hon’ble Court may be pleased to (i) formulate the substantial questions of law stated therein and (ii) allow the appeal and set-aside the order of the ITAT, bearing ITA No.723/Bang/2003 dated 27.10.2005, in the interest of justice and equity. This appeal is coming on for hearing this day, SREEDHAR RAO, J., delivered the following: J U D G M E N T The Assessee acquired the business of NELCO and in the agreement pertaining to the acquisition, it is stipulated that NELCO shall not carry on business directly or indirectly in India relating to manufacture, supply or marketing of telecommunication equipment. 2. The Assessee had paid lump-sum compensation to NELCO under the agreement. The Assessee has sought for deduction of compensation paid to NELCO as revenue expenditure. The Assessing Officer has rejected the contention and disallowed the expenditure on the ground that the said amount amounts to capital expenditure. The CIT confirmed the order of the Assessing Officer, so also Tribunal confirmed the order of CIT. The following substantial questions of law are framed for consideration:
3 “1. Whether on the facts and in the circumstances of the case, the payment made towards non-competition or for withdrawal of business by the payee was a capital expenditure in the hands of the payer and thus not liable to be allowed as revenue expenditure? 2. Whether the payment towards non- competition in the business would result in acquisition of capital asset to justify the expenditure to be treated as capital expenditure? 3. Whether the accrual of benefit on payment in the business field without resulting acquisition of capital asset would make the expenditure a capital expenditure in light of the judgment of the Supreme Court in Empire Jute Co Ltd., Vs. CIT (1980)124 ITR 1 and several other judicial pronouncements holding such payments as revenue expenditure?” 3. The terms of the agreement reveal that NELCO shall debarred from carrying on the business and that NELCO can revive business only upon the consent of the assessee. It is the contention of the revenue that the benefit received by the assessee by eliminating the competition of
4 NELCO is enduring benefit, therefore, amounts to capital expenditure. 4. Sri S. Parthasarathi, learned counsel for the appellant relied upon the decision in the case of Empire of Jute Co. Ltd., Vs. Commissioner of Income Tax reported in 124 ITR 11. In the cited case, the assessee had purchased extra loom hours for manufacturing the products. The Supreme Court in para 6 of its judgment made the following observations:- “xxxx xxxx xxxx Here, by purchase of loom hours no new asset has been created. There is no addition to or expansion of the profit-making apparatus of the assessee. The income-earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit making structure for a longer number of hours. And this advantage is clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the
5 additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the Revenue.” 5. The Sr. Counsel Sri Indra Kumar relied upon the decision in the case of Commissioner of Income Tax, West Bengal Vs. Coal Shipments P. Ltd., reported in 1971 ITR Vol.82 page 902. In the said decision in page No.910, the following observations are made: “Although we agree that payment made to ward off competition in business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not allow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of
6 contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case.” 6. The decision cited by the counsel of the appellant can be distinguished and does not apply to the facts of the case. In the said case, the benefit of working extra loom hours was limited to 6 months. In the instant case, the advantage derived by the assessee can be put to an end only at his will. Therefore, it cannot be argued that the advantage is not an enduring advantage. The ratio laid down in Commissioner of Income Tax, West Bengal Vs. Coal Shipments P. Ltd., squarely applies to the facts of this case. Accordingly, the questions answered in favour of the revenue. The appeal is dismissed. Sd/- JUDGE Sd/- JUDGE NM*