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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: SHRI B.R.BASKARAN (AM) & SHRI RAM LAL NEGI (JM)
These four appeals have been filed by the assessee against four separate orders, passed by the Ld. CIT(Appeals)- V, Mumbai. Since all the four appeals pertain to the same assessee for the assessment year 2000-2001 and the issues involved are identical (except the concerned parties and the amount involved), all the four appeals were clubbed and heard together and are being disposed of by this common order for the sake of convenience.
Since the facts and circumstances of all the four cases are common, we discuss the brief facts of which has been filed by the assessee against order dated 25.06.2009 passed by the CIT(A).
The appellant company is engaged in the business of coaching for commerce students in the western suburbs of western and central Mumbai. Shri. Deepak Mistry is the Managing Director of the appellant company. M/s. Pluto Commercial Classes (PCC), which is a proprietary concern of Mr. Niraj Vohra, is also carrying on the similar business at Borivali, Kandivali, Malad, Vile Parle, Dahisar, which are suburbs of Mumbai. The appellant filed its return of income on 16/08/2000 declaring the total income of Rs. 14,05,630/- after claiming deduction of Rs. 3,00,000/- on account of non compete fee paid to Mr. Niraj Vora, Proprietor of M/s. PCC.
During the assessment proceeding, the appellant submitted that the payment of Rs. 3,00,000/- was made as non compete fee to Mr. Niraj Vora, Proprietor of M/s. PCC, under an agreement to restrain PCC from carrying on the business of coaching for a period of two years. The fixed capital of the appellant has not changed and therefore the expenditure incurred is revenue in nature hence, claimed the same as revenue expenditure in the profit and loss account. However, the A.O disallowed the claim holding that the expenses incurred by the appellant are not for the purpose of its business.
The assessee challenged the assessment order before the CIT(A). The CIT(A) deleted the addition holding the expenditure incurred by the assessee as revenue expenditure. The said order was challenged by the revenue before the ITAT. The Tribunal restored the issue to the office of the AO observing as under:-
“4. The CIT(A) while holding that the non-compete fee paid by the assessee were revenue in nature, has not considered the factual discussion made by the Assessing Authority. Therefore, we find that this matter has to be re-examined in accordance with law. The order of the CIT(A) are, accordingly, set aside and all the four files restored to the file of Assessing Officer for reconsidering the issue and passing appropriate orders, in accordance with law. The Assessing Officer shall provide a fair and reasonable opportunity of hearing to all the assessees.”
6. After hearing the assessee, the assessing officer again disallowed the deduction of Rs 3,00,000/- paid on account of non compete fee holding that the appellant has not incurred the expenses for the purpose of business and the expenditure is capital in nature. In the second round of appeal, the Ld.CIT(A) confirmed the findings of the AO and dismissed the assessee’s appeal. The assessee has challenged the impugned order on the following effective grounds:- “1. The CIT(A)(V) has erred in confirming the payment of non- complete fees of a Rs. 3,00,000/- as Capital Expenditure.
2. The CIT(A)(V)has also erred in concluding the non-compete fees as not an expenditure wholly and exclusively incurred for the purpose of business.”
Before us, the Ld. authorised representative (AR) submitted that since the agreement was for two years only, there cannot be any enduring or permanent benefit. The activities of the assessee and PCC are in the nature of profession and not a business. There is no acquisition of capital asset or any enduring benefit accruing to the assessee. The agreement was entered into just to safeguard commercial interest of the assessee and bona fide of payment has been verified. The Ld. AR further submitted that in the light of ratio laid down by the Hon’ble Supreme Court in the case of Empire Jute Com. Ltd. 124 ITR 1, the finding of the Ld. CIT(A) are erroneous and liable to be set aside. On the other hand the Ld. DR relying on the finding of the authorities below submitted that there is no legal infirmity in the impugned order to interfere with the same. The Ld. CIT(A) has passed the order in accordance with the principles of law laid down by the Hon’ble Supreme court in Durga Prasad More, 82 ITR 540.
We have heard the rival submissions and perused the material placed before us including the cases relied upon by the parties. The only issue involved in this case is whether the non-compete fee paid by the assessee to its counterpart is a capital expenditure or a revenue expenditure? Section 37(1) of the Act contemplates that any expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “profit and gains of the business or profession.’’ As per the accepted principles of law, capital expenditure is something which is spent once for all while the revenue expenditure is recurring in nature. Secondly, if the expenditure is to bring into existence an asset or advantage for the enduring benefit of the business, that is capital expenditure. In the present case since the assessee is engaged in the business/profession of running tuition classes, it is essential to ascertain, in the light of the general principles of law as to whether the intention of the assessee was to acquire advantage for the enduring benefit of the business by paying non-compete fee as per the terms of the agreement or it was a temporary measure to make the business viable for two years by restraining its counterpart from carrying on the same business. The relevant portion of the agreement reads as under:-
“ 5.With a view to pool the resources, better utilisation of faculties, to avoid competition, to enjoy economies of scale, Mr Miraj Vora of PCC approached Mr. Deepak Missed of DCC to merge the business of PCC with that of DCC and seeing mutual benefits both the parties signed in principle agreement in the form of an MOU dated 19th appeal 1999.
As part of the commercial understanding between the parties to the MOU, it was agreed that the PCC shall not compete and/or carry on the coaching profession or assist any person to carry on the profession of or participate in any manner whatsoever through any person in any business profession similar or identical to that of the company.”……………. “[4] The term of this agreement shall be the longer of (i) the period of 2 (two) years from the effective date, unless terminated earlier; or (ii) the period ending with admission procedures for the academic year2001/02.”
The contents of agreement do not suggest that the intention of the assessee was to acquire advantage for the enduring benefit of the business since the PCC is restrained only for two years. Para 5 aforesaid of the agreement makes it explicit that the arrangement was made with a view to pool the resources, better utilization of faculties and to avoid competition. So the arrangement was made for a period of two years for making the business more viable and profitable. AO has verified the genuineness of the transaction. Hence, in our considered view, the amount paid by the assessee towards non- compete fee cannot be treated as capital expenditure. We, therefore, hold that the non-compete fee paid by the assessee in this case is revenue expenditure and the same was paid exclusively for the purpose of business. Accordingly, the impugned order passed by the Ld. CIT(A) is set aside. AO is directed to allow the non- compete fee paid by the assessee as revenue expenditure.
The issues urged and facts prevailing in these appeals are identical in nature and since we have already decided the identical grounds of appeal in favour of the assessee in aforesaid, we decide the grounds of appeal in ITA No 5106/M/2009, 5477/M/2009 and 5778/M/2009 in favour of the assessee for the same reasons and set aside the impugned orders passed by the Ld. CIT(A). Accordingly, AO is directed to allow the non- compete fee paid by the assessee as revenue expenditure.
In the result, all the four appeals filed by the assessee for the assessment year 2000-01 are allowed.
Order pronounced in the open court on 9th June 2016