By TIOL News Service

NEW DELHI, JAN 09, 2018: THE issue is - Whether non compete fees paid upon acquisition of a 'running business', is eligible for claim of depreciation as 'intangible asset'. NO IS THE ANSWER.

Facts of the case:

The Assessee, a wholly owned subsidiary of EAS Industrial Ingredients PTE Ltd., engaged in the business of wholesale trading in general and specialty chemicals, filed its return at a loss of Rs. 11261525/-. During the course of assessment proceedings, it was noted that assessee had acquired running business from Nitrex Chemicals India Ltd and paid non compete fees of Rs. 35830000/- and claimed deprecation thereon @25% under the head "intangible assets". The claim of the assessee was rejected because assessee had debited 1/5 of non compete fees in profit and loss account as restriction was for period of five years. The claim of AO was that assessee had not acquired any intangible assets as the business of the assessee was specialized and there were not many other players who could enter into its business because of its complexity. Consequently, depreciation was disallowed to the extent of Rs. 4478750/-.

ITAT held that,

++ it is seen that the assessee company had purchased the trading unit of Nitrex Chemicals for a total consideration of 244.06 million as a going concern on slump sale basis vide business transfer agreement. According to the BTA, the assessee has paid a non compete fee of 35.83 million for a period of five years. The assessee claimed Rs. 4478750 as depreciation on the said sum considering it as "intangible asset". The AO denied the claim holding that the business is of specialize nature and there are no chances that other parties can enter into the business due to its complexity. Therefore, according to him the assessee has not acquired any intangible asset. The CIT(A) however held that by the amendment to the income tax act by the Finance Act 1998 w.e.f. AY 1999-2000, the intangible asset are eligible for depreciation. According to him, any right which is obtained for carrying on the business will fall in the definition of intangible asset. Hence, he deleted the addition;

++ it is however seen that this issue is squarely covered against the assessee in view of the decision of Delhi High Court in case of Sharp Business Systems Vs CIT, wherein it was held that non compete fee is not an eligible intangible asset as the words "similar business or commercial rights" have to necessary result in an intangible asset against the entire word which can be asserted as such to qualify for depreciation u/s 32(1)(ii), which non compete fees lacks. In view of the decision of Jurisdictional High Court, the finding of the CIT(A) in granting deprecation to the assessee on non compete fees is set aside.

(See 2018-TIOL-44-ITAT-DEL)