When paying a non-compete fee for business purposes, depreciation is permitted
Fact and issue of the case
These are the appeals filed by the assessee and revenue against the separate orders dated 27.01.2017, 17.01.2018 & 30.01.2019, passed by the ld. CIT(A)-5, Chennai for the assessment years 2009-2010 to 2015-2016.
All these 11 appeals either by the assessee or by the department are belonged to the same assessee, having common and identical issues except difference in quantum, therefore the same, for the sake of convenience and brevity, are being disposed off by this common order.
First, we shall take up the appeal of the assessee in ITA No.936/CHNY/2018 for A.Y.2009-2010 and the grounds mentioned therein are as under
The order of The Commissioner of Income tax (Appeals) is contrary to law, facts and circumstances of the case.
The Commissioner of Income tax (Appeals) erred in confirming the reopening of the assessment u/s 147.
The Commissioner of Income tax (Appeals) ought to have appreciated that the appellant has furnished all the materials and particulars fully and truly. The assessment u/s 143(3) was completed on 28.12.2011 and issue of notice u/s 148 on 28.03.2014 has arisen only due to change of opinion and not on account of concealment of any particulars by the Appellant; hence the order is to be quashed as being without jurisdiction.
Appellant relies on the decision of the Supreme Court in the case of CIT V. Kelvinator India Limited, reported in 320 ITR 561 (SC).
The Commissioner of the Income tax (Appeals) erred in confirming the restriction of depreciation claimed on electrical installations to 10% as against 15% claimed by the appellant.
The Commissioner of the Income tax (Appeals) ought to have appreciated that the electrical installations installed are primarily Air Conditioners, Refrigerators, Generators, etc. and have classified under plant and machinery. Other items such as Bulbs, Holders, Adaptors and small wiring works have been classified as electrical fittings and are included under Furniture and Fittings eligible for depreciation @ 10%.
The Commissioner of the Income tax (Appeals) ought to have appreciated that the above electrical installations are to be reckoned as plant and machinery and not in the nature of electrical fittings to be capitalized under furniture and fittings. Hence the claim of the appellant that the depreciation @ 15% should be allowed.
The Commissioner of the Income tax (Appeals) erred in confirming the disallowance of depreciation on non-compete fee @ 25% amounting to Rs.50,00,000/-.
The Commissioner of the Income tax (Appeals) ought to have appreciated that the appellant has paid non-compete fees to AGS Hotels & Resorts Private Limited by executing non-compete agreement dated 22.08.2008 for a consideration of Rs.2,00,00,000/-. This agreement was entered pursuant to the purchase of the hotel business of AGS Hotels by the appellant.
The Commissioner of the Income tax (Appeals) ought to have appreciated that non-compete fee is an intangible asset eligible for depreciation u/s 32(1 (ii). Appellant relies on the decision of the supreme court in the case of Techno shares and stocks Ltd Vs. CIT, reported in 327 ITR 323(SC). And Madras High Court Decision in the case of Pentasoft Technologies Ltd Vs. DCIT, reported in 264 CTR 197(Mad).
Without prejudice to the above, Non-compete fee paid to ward off competition and protect the business of the appellant should be allowed as revenue deduction. 6 The Appellant craves leave to file additional grounds at the time of hearing.
Brief Facts:
The assessee company is engaged in the business of selling vacation ownership and providing holiday facilities. Return of Income for the Assessment Year 2009-10 was filed by the assessee on 20.09.2009, declaring a total income of Rs.112,97,47,884/-. Return was processed u/s 143(1) on 29.03.2011. Scrutiny assessment u/s 143(3) of the Act was completed on 28.12.2011 determining the assessed income at Rs.302,04,55,046/-, an addition of Rs.189,07,07,163/- was made. Subsequently, the assessment was reopened u/s 147 of the Act. Reasons ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 for reopening were recorded by the AO, which were communicated to assessee vide an office letter dated 27.08.2014. Two reasons for reopening were
Excess claim of depreciation for 15% on Electrical Fitting Capitalized, instead of 10%,
Treating of non-compete fee as an intangible asset and claimed depreciation @25%. In response to the notice and letter with reasons for reopening, the assessee objected on the reopening itself, by stating that the company has submitted all the details / information called for by the AO during the scrutiny assessment proceedings including financial statements, tax audit report, computation of total income and other supporting documents. According to assessee, the order passed by AO u/s 143(3) was after examining the records of the assessee and have accepted the claim of depreciation on electrical fitting at 15% and on noncompete fee @25%, thus in absence of any fresh material reopening of assessment was not justified and the reponing was only on the basis of change of opinion. Objections of the assessee were considered by the AO but have not accepted, finally the proposed disallowances were confirmed for Rs. 23,88,822/- and Rs. 50,00,000/-towards Excess claim of depreciation on Electrical Fitting by 5% and Depreciation @25% on non-compete fee, respectively. Aggrieved by the order of AO u/s 143(3) r.w.s. 147 of the Act, assessee preferred an appeal before the Ld CIT(A), but no success.
Now, the assessee being aggrieved with the order of Ld CIT(A), is in appeal before us
Observation of the court
I have heard the contention of the AR and perused the grounds of appeal, assessment order, written submission and material available on record. My observations in respect of the grounds raised by the appellant are as follows:
Addition of Advance received from members Rs.185,14,41,408/-
In the grounds of appeal the appellant contested as under
The Assistant Commissioner of Income tax, LTU erred in treating a sum of Rs.185,14,41,408 received during the year from the customers/New members, being a part of the membership fees relatable to the-“” contracted membership periods as income of the year under appeal.
The Assistant Commissioner of income tax, LTU ought to have appreciated that the assessee has been consistently following an accepted method of accounting in respect of such fees by offering 60% of the fees received from the members as income in the year of which the member is admitted and the balance 40% is equally spread over the balance membership period, which consistently reflects the correct income of the Appellant which at the highest, could be brought to tax in the year under appeal.
The appellant has to provide stay at holiday resorts of assessee for agreed period every year to the members, over the period of their membership. Further as and when the member resigns from membership, pro rate fee is refunded. Hence, the entire fee paid by the member cannot be assessed as income of the assessee in the year of joining of the member.
The Assistant Commissioner of Income tax, LTU erred in not following the Order of the Hon’ble ITAT Special Bench, Chennai in the assessee’s own case for the assessment years 1998-99 to 2003-04 in ITA Nos.2412 to 2416/Md5/2005 dated-26.05-2010 wherein the claim of the assessee has been allowed. Subsequently in Consistent with the ruling of Special bench, the ITAT, Chennai in ITA nos. 1614, 1615, 1616 and 1764/Mds/2011 has accepted the appellant’s stand that deferred income of 40% be charged to tax in year subsequent to receipt of the payment for AY 2006-07, 2007-08 & 2008-09. Without prejudice, if the entire income is assessed in the year of joining estimated expenditure to be incurred throughout the period of membership should also be estimated and allowed as a deduction
This issue was decided by the hon’ble ITAT ‘B’ Bench Chennai in assessee’s own case for the A.Y 2009-10 in ITA No. 1339 & 1227/Mds/2013 at Para No. 38 to 39 in Page No. 18 to 20 as under: “Revenue is aggrieved that CIT(Appeals) deleted an addition made towards advance membership fees. We find that on the issue of advance membership fee Id. ClT(Appeals) had followed the decision of Special Bench of this Tribunal in assessee’s own case for assessment years 1998-99 to 2003-04 in ACIT v. Mahindra Holidays & Resorts (India) Ltd (2010) 131 TTJ
Ld CIT(Appeals) having followed the Special Bench order in assessee’s own case which was in turn relied on by this Tribunal on Revenue’s appeal for assessment year 2006-07 and 2007-08, we do not find any reason to interfere.
The Assessing Officer is directed to follow the Order of the Hon’ble ITAT Special Bench, Chennai in the assessee’s own case for the assessment years 1998-99 to 2003-04 in ITA Nos.2412 to 2416/Mds/2005 dated-26.05-2010.
On perusal of the above observations of the ld. CIT(A), we found that since the ld. CIT(A) has followed the issue decided in the case of M/s Ashok Leyland (supra) by allowing the depreciation @60% on UPS in favour of the assessee, we do not see any reason to interfere in the findings so recorded by the ld. CIT(A) in this regard. Thus, we uphold the same and dismiss this ground of revenue.
Thus, the appeal of the revenue in ITA No.942/CHNY/2018 is dismissed. ITA Nos.943 & 944/CHNY/2018 & 1089/CHNY/2018 (Department’s appeal for AYs. 2012-2013, 2013-2014 & 2014-2015).
The sole issue involved in all the three appeals of the revenue is with regard to department’s grievance against the finding of the Ld CIT(A) that “The CIT(A) has failed to appreciate the fact that the department has not accepted the relied upon order of ITAT in the assessee’s own case in ITA No. 2412 to 2416/Mds/2005 dated 26.05.2010” in granting of relief to the assessee from disallowances made by the Ld AO towards advance received by the assessee during the respective years from customers / new members, being part of the membership fee relatable to the contracted membership periods as income of the year under appeal, relying on the decision in assessee’s own case in ITA No.2412 to 2416/MDS/2005, order dated 26.05.2010. Since, this issue has already been dealt with and decided by us in appeal of the revenue for A.Y.2011-2012 in ITA No.942/CHNY/2018 wherein we have upheld the findings of the ld. CIT(A). In view of the same, we dismiss the sole ground raised in all these three appeals of the revenue.
Thus, appeals of the revenue in ITA Nos.943&944/CHNY/2018 & ITA No.1089/CHNY/2018 are dismissed.
In the result the appeals of the assessee i.e. ITA Nos.936, 937, 938, 939, 940, 941/CHNY/2018 & ITA No.1012/CHNY/2019 are partly allowed for statistical purposes. And the appeals of the revenue in ITA Nos.942, 943 & 944/CHNY/2018 & ITA No.1089/CHNY/2018 are dismissed.
Order pronounced in pursuance to the Rule 34(4) of ITAT Rules,1963 on 10/05/2023.
Conclusion
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from here
Mahindra-Holidays-Resorts-Ltd-Vs-DCIT-LTU-ITAT-Chennai-2
