Depreciation allowable on non-compete fee paid for acquisition of non-compete rights

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IN THE ITAT AHMEDABAD BENCH ‘D’

ACIT v. GE Plastics India Ltd.

IT APPEAL NOS. 483 & 573 (AHD.) OF 2007

[ASSESSMENT YEAR 2003-04]

MARCH 23, 2012

In the Tribunal decision rendered in the case of Srivatsan Surveyors (P.) Ltd. v. ITO [2009] 32 SOT 268 (Chennai) the issue was decided against the assessee on the basis that the depreciation on restrictive covenant is ‘a right in persona’ and not a ‘right in rem’ and, hence, depreciation on it is not allowable as per the provisions of section 32(1)(ii). In that case, Rs. 1 crore was paid to one of the directors on the basis of non-compete covenant entered into between the assessee-company and its director R. Srivatsan, as per which the said director agreed not to carry on his individual business of general insurance survey, loss assessment, valuation of assets, etc., for a period of seven years. In the instant case also, non-compete fee was paid for the acquisition of non-compete rights from ‘J’ for agreeing for not entering into or participate in any business which directly compete with the business of the assessee-company. It shows that the facts are similar and, therefore, this Tribunal decision cited by the revenue is applicable in the instant case, but at the same time, the subsequent decision of the Tribunal rendered in the case of ITO v. Medicorp Technologies India (P.) Ltd. [2009] 30 SOT 506 (Chennai) is also regarding the allowability of depreciation on non-compete fees paid by the assessee of Rs. 2 crores and in that case, the issue was decided by the Tribunal in favour of the assessee. It is now settled position of law that when there are two views possible, the view favourable to the assessee should be followed. Hence, this issue is decided in favour of the assessee by following the Tribunal decision rendered in the case of Medicorp Technologies India Ltd.(supra).