07 January 2012
A aged 77 is having a Petrol Pump since 10 years, having a good business. His son b is looking the administration of the Petrol Pump and is remunerated.
Now, B has also established is own Petrol Pump in the same locality last year although he is in employment.
A has entered into an agreement with B to discontinue his Petrol Pump and agreed to pay Rs. 25000/- per month for 5 years to avoid loss of his business.
Please advise with decided judgment whether the payment will be revenue expenditure for A.
08 January 2012
It will be a capital expenditure In the case of Tecumseh India Pvt. Ltd. v. ACIT [2010-TIOL-408-ITAT-DEL-SE3]
“129. According to above observations it can be seen that warding off competition in business even to a rival dealer will constitute capital expenditure and to hold them capital expenditure it is not necessary that non-compete fee is paid to create monopoly rights. 130 . The assessee also cannot get any help from the decision of Hon‟ble Delhi High Court in the case of CIT vs. Eicher Company Ltd. (supra) as in that case their Lordships have clearly found from the record that it was not clear that how long the restrictive covenant was to last and what the assessee had done was that it eliminated the competition in the two-wheeler business for a while. Their Lordships have also found that the benefit received by the assessee in that case was neither permanent nor ephemeral. Therefore, the said decision is not applicable to the facts of the present case as in the case of assessee the non compete agreement is applicable for 5 years, which period has been considered to be sufficient to give enduring benefit in the case of Assam Bengal (supra). 131. With these observations we hold that the expenditure of Rs.2.65 crore claimed by the assessee in pursuance of non-compete agreement dated 10th July, 1997 are capital expenditure, the deduction of which cannot be granted to the assessee as revenue expenditure. The main issue is decided against the assessee and in favour of the revenue.”
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