SHARP BUSINESS SYSTEM Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The following questions of law were framed for consideration by the Court:

(2.) The appellant, a company which used to import, market and sell electronic office products and equipment in India, at the relevant time, was incorporated on 29.02.2000, as a joint-venture of M/s. Sharp Corporation, Japan, and L&T Ltd. During the year under consideration, the appellant paid Rs. 3 crores to L&T as consideration for the latter not setting-up or undertaking or assisting in the setting-up or undertaking any business in India, of selling, marketing and trade of electronic office products for seven years. This amount was treated as deferred revenue expenditure in the assessee's books of accounts and written-off over corresponding period of seven years. For Assessment Year 2001-02, in the return filed, assessee claimed entire sum as Revenue deduction. The assessee contended, during the proceedings that the amount paid facilitated its business and did not enhance or alter the fixed capital and ought to be treated as revenue expenditure. The AO, however, disallowed the deduction on account of non-compete fee, by order dated 19.03.2004, as according to him, it conferred a capital advantage of enduring value. The assessee's appeal was rejected by the CIT (Appeal) by order dated 02.09.2004. The CIT (Appeal) also rejected the alternative contention of the assessee, that the payment was for the further purposes of business and, therefore, the assessee could not claim depreciation.

(3.) Being aggrieved, the assessee appealed to the Tribunal. The Tribunal rejected the claim that the non-competing fee of Rs. 3 crores which was the subject matter of the appeal constituted revenue expenditure and that its treatment as such was justified. The reasoning of the Tribunal is as follows: