INCOME TAX ACT, 1961

Section 32(1)

Depreciation - Allowability - Non-compete fee - Paid on acquisition of interest in firm -- AO denied assessee's claim holding that payment to existing partners had been made with an intent to avoid capital gains tax

Assessee acquired 78% of interest in a firm known as M/s. Landmark which was engaged in business of retailing and publishing the books and magazines. It paid Rs. 10 lakh each to two partners as non-compete fee for not carrying on or competing with the firm for 5 years from the date of agreement. Assessee claimed that said payment was made as non-compete fee in order to protect 78% of business interest in the firm M/s. Landmark and therefore, assessee claimed depreciation @ 25% thereon. AO denied assessee's claim holding that payment to existing partners had been made with an intent to avoid capital gains tax. Held: After going through non-compete agreement and considering the facts that assessee acquired 78% of interest in partnership firm, it could be firmly said payment which was made for not competing with the firm for the period of five years, evidently fell within the ambit of non-compete fee as payment was made to protect the business interest of assessee as assessee's cost of investment in the said firm was Rs. 91.51 crores which was made by way of capital contribution to the tune of Rs. 3.9 crores and Rs. 87.61 for acquiring the rights in the said partnership. Accordingly, assessee was entitled to claim depreciation @ 25% on said non-complete fee and AO was not justified in treating the same as tax avoidance arrangement.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2006-07

INCOME TAX ACT, 1961

Section 32(1)

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