DEEPAK NITRITE LIMITED vs DY. COMMISSIONER OF INCOME TAX

C/TAXAP/766/2008 JUDGMENT DATED: 15/07/2026
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 766 of 2008

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI
================================================================
Approved for Reporting Yes No
No
================================================================
DEEPAK NITRITE LIMITED
Versus
DY. COMMISSIONER OF INCOME TAX
================================================================
Appearance:
MR MANISH J SHAH(1320) for the Appellant(s) No. 1
MR RUTVIJ R PATEL(10615) for the Opponent(s) No. 1
================================================================
CORAM: HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI

Date : 15/07/2026

ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned advocate Mr.Manish J.
Shah assisted by learned advocate Mr.Jimi
Patel for the appellant and learned Senior
Standing Counsel Mr.Rutvij R. Patel for the
respondent.
2. This Appeal was admitted vide order
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rd
dated 23 March, 2009 for consideration of
the following substantial questions of
law :
“(i) Whether on the facts and in the
circumstances of the case, the
Tribunal was right in law in holding
that the amount of Rs.80,00,000/
which the assessee paid to
M/s.Chemcrown (India) Ltd. for non-
compete agreement is a capital
expenditure and not allowable revenue
expenditure ?”
(ii)Whether on the facts and in the
circumstances of the case, the
Tribunal was right in law in holding
that the expenditure of Rs.34,10,824/
for acquiring the use of technology
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for manufacturing Chloro benzene,
which the assessee was already
producing from the Asst. Year 199192
was capital expenditure and not
allowable revenue expenditure?”
3. The brief facts of the case regarding
substantial questions of law are as under :
3.1. The assessee entered into the
agreement with one M/s.Chemcrown (India)
Ltd. for purchase of goodwill and brand
name with non-compete clause by the said
company for not to engage in the business
or manufacture or sale of the products and
to run any consultancy or advice to any
other company engaged in similar business.
th
The said agreement dated 26 March, 1996
was made for a consideration of Rs.80 Lakhs
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by the assessee.
th
3.2. Initially the assessee claimed 1/5
of total consideration or Rs.16 Lakhs paid
to be written off over a period of five
years relying upon the decisions of the
Hon’ble Supreme Court in cases of Expire
Jute Co. Ltd Vs. CIT reported in 124 ITR 1
(SC) and Modipon Ltd. Vs. IAC reported in
52 TTJ 477 (Delhi) claiming it to be
revenue expenditure and was allowable as
business expenditure.
3.3. The Assessing Officer, however, did
not accept the claim of the assessee and
held that expenditure was made to acquire
goodwill and brand names which were having
enduring benefits and hence, expenditure
was capital in nature as it was an
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arrangement to bring into existence assets
or advantage of enduring nature.
3.4. Being aggrieved, the assessee
preferred an Appeal before the CIT
(Appeals), where the assessee raised a
ground that though the Assessing Officer
has disallowed the amount of amortization
of Rs.16 Lakhs, the entire amount of Rs.80
Lakhs is admissible as revenue expenditure.
The CIT (Appeals) however, dismissed the
Appeal of the assessee.
3.5. Being aggrieved, the assessee
preferred an Appeal before the Tribunal.
3.6. Before the Tribunal, the assessee
submitted that the entire amount of Rs.80
Lakhs was made for avoiding the competition
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and for this purpose, agreement was made to
acquire goodwill and for some restrictive
covenants.
3.7. The Tribunal after considering the
submissions made by both the sides, held as
under :
“5. We have heard rival submissions
and perused material available on
record as also case laws cited at
bard lollows from the couse of events
that assessee initially wanted to
purchase entire plant of "CIL”
situated at Athipattu (T.N.). For
some reasons or other, assessee did
not fulfill this contract and "CIL"
filed a suit in Calcutta High Court
mentioned above, which was ultimately
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settled out of court by the parties
and payment of Rs.80 lakhs proposed
to be paid over a period of time by
the assessee for purchase of
goodwill, brand names and attached
benefits in perpetuity in "CIL".
Relevant parts of the agreement are
reproduced above. A plain reading of
these clauses goes to show that the
payment made was for purchase of
goodwill and brand names from "CIL"
in perpetuity Clause-2 of the
agreement, which is on the terms of
goodwill itself includes brand name
and rights of the assessee, debarring
"CIL" in further to grant, use or
license of brand name to any other
persons. In fine, agreement is for
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purchase of goodwill and brand names
in perpetuity, which includes
restriction on "CIL" not to part with
or use intrinsic knowledge in this
behalf to any other parties in
perpetuity. In our considered
opinion, what assessee claims to be
restrictive covenant is nothing but a
consequential action for selling
goodwill and brand names of the
business of "CIL" to itself. It is
clear that purchase of goodwill and
brand name in perpetuity was with a
package of "dos and don'ts" and these
arrangements of such assignment
cannot be conveniently called an
agreement for restrictive covenant to
claim them as revenue expenses. In
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consideration of agreement and terms
and conditions thereto, we are of
view that agreement predominantly
envisages purchase of goodwill and
brand names of "CIL" by the assessee
for a sum of Rs.80 lakhs with package
of rights enjoyed by larger use of
goodwill and brand names in
perpetuity to the exclusion of
others. We are unable to agree with
proposition of learned counsel that
the agreement is necessary a non-
compete agreement. In view of those
facts and observations, we hold that
agreement is nothing but for purchase
of goodwill and brand name in
perpetuity entitling the assessee and
forbiding "CIL" in respect of certain
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nights and obligations, In view
thereof, we hold that consideration
for this agreement for purchase of
goodwill and brand names in
perpetuity is clearly capital
expenditure. Our view is fortified by
the above mentioned judgments relied
on by CIT(A).”
3.8. The Tribunal thereafter,
distinguished the decision in case of
Smartchem Technologies Ltd. Versus ITO in
ITA No.3955/Ahd/2003, referred to and
relied upon by the assessee for securing
non-compete agreement allowable as revenue
expenditure on the ground that if the
purchase of goodwill and brand name would
be for the perpetuity coupled with the
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restrictive covenants would result into
capital expenditure. The Tribunal therefore
dismissed the claim of the assessee for
entire amount of Rs.80 Lakhs to be claimed
as revenue expenditure for the year under
consideration.
3.9. The assessee also claimed
Rs.34,10,824/- for acquiring the use of
technology for manufacturing Chlorobenzene
as revenue expenditure. The Assessing
Officer, after considering the facts of the
case that the assessee has explore the
possibility of extending its business
activity of manufacture and sale of
Chlorobenzene, sought access to advance
technology used by the leading manufacturer
of Chlorobenzene based in USA via Dupont
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and entered into an agreement with Dupont
and it was agreed between the parties to
hand over the assessee company its plant
and machinery situated in USA on as is
where is basis, along with technical
documentation to the extent available
covering operations controlled as well as
drawings of plant and machinery. Various
agreements were entered into, to execute
sale agreement, Dawn Stream Product
agreement, distributor agreement and
technology agreement in this regard with
Dupont by the assessee. However,
eventually, the said agreements could not
be executed and the entire scheme was
aborted and for this purpose, the
expenditure of Rs.34,10,823/- comprising of
Rs.28,99,128.40/- towards Legal and
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Professional expenses, Rs.20,855/- for
General expenses, Rs.4,02,214/- for Foreign
Tour, Rs.90,444.60/- for Travelling and
Rs.2,181.60/- for Postage was incurred by
the assessee. However, the Assessing
Officer, disallowed the said expenditure on
the ground that the entire expenditure was
incurred for the acquisition of the capital
asset and therefore, the same was required
to be capitalised by the assessee.
3.10. The CIT (Appeals) also rejected the
claim of the assessee holding the same to
be capital in nature, as the sum total of
all the expenses was towards understanding
the feasibility of implementing the entire
project and if the project had been
completed, then all the expenses would have
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been covered with the feasibility
expenditure being recommencement in nature.
3.11. The Tribunal also upheld the
reasoning of the CIT (Appeals) by observing
as under :
“8. We have heard rival submissions
and perused material available on
record. As the facts emerge, it is
clear that though the assessee was in
same line of business, nevertheless,
the expenditure in question was
incurred for acquiring a capital
asset, coupled with the fact that,
expenditure incurred was for an
aborted project, as the pursuit was
given up. In view thereof.
expenditure in question is
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undoubtedly incurred for aborted
project, which was capital in nature.
In our view, ratio of Hon'ble Gujarat
High Court and Bombay High Court in
the decisions cited (supra) is
applicable to assessee's case. In the
case of United Phosphorous (supra)
assessee acquired new business,
whereas in the assesseee's case,
project has been aborted, which draws
a clear line of distinction in the
facts of assessee's case. In view
thereof, we uphold the order of lower
authorities treating the expenditure
on aborted Dupont project as capital
in nature. ”
4.1. Learned advocate Mr.Manish J. Shah
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for the appellant-assessee submitted that
though there are concurrent findings of
fact recorded by the Tribunal, this Court
may consider the clauses of the agreement
th
dated 26 March, 1996 entered between the
assessee and M/s.Chemcrown (India) Ltd. to
find out as to whether the Tribunal has
committed an error in holding that the
payment of Rs.80 Lakhs was made only for
acquiring the goodwill and trade name or
the same would also cover the non-compete
fees, which would otherwise be revenue
expenditure in view of the decision of the
Hon’ble Apex Court in case of Sharp
Business System Versus Commissioner of
Income Tax reported in [2025] 181
taxmann.com 657 or not.
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4.2. Reliance was also placed on the
decision of the Hon’ble Supreme Court in
case of Commissioner of Income Tax Versus
Dawoodi Bohra Jamat reported in [2014] 364
ITR 31 (SC) in support of his submissions
that the Appellate Courts may examine that
whether the question involves merely a
finding of fact or the legal effect of such
proven facts and documents in Appeal.
4.3. It was therefore submitted that
considering the clauses 1 to 4 of the
th
agreement dated 26 March, 1996, the amount
of Rs.80 Lakhs was to be paid by the
assessee to M/s.Chemcrown (India) whereas,
clause 1 with regard to assignment and
transfer of the goodwill and business would
be in nature of to be protected by the non-
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compete covenant in clauses 2 and 3. It was
therefore submitted that the Tribunal has
misinterpreted the clauses by taking into
consideration that Rs.80 Lakhs was agreed
to be paid by the assessee for acquiring
goodwill and trade name, whereas, as per
the assesssee, the said amount was agreed
to be paid for non-compete fees, so as to
give effect to the assignment and transfer
of the goodwill of the business carried on
by M/s.Chemcrown (India) Ltd. of
manufacture, distribution and sale of its
products along with trade name, etc.
4.4. It was further submitted that there
was a supplementary agreement between
M/s.Chemcrown (India) Ltd. and the assessee
for consideration of Rs.80 Lakhs after the
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th
main agreement was entered into on 26
March, 1996 and accordingly, the assessee
th
has claimed 1/5 of the entire
consideration agreed to be paid for the
year under consideration in the Return of
Income, however, the entire amount of Rs.80
Lakhs was claimed by the assessee in the
Appeal filed before the CIT (Appeals).
4.5. It was therefore submitted that in
this context, both the CIT (Appeals) and
the Tribunal held that the entire amount of
Rs.80 Lakhs agreed to be paid by the
assessee could be of capital nature by
ignoring the clauses 2 and 3 of the
agreement for which, the amount of Rs.80
Lakhs was agreed to be paid, so as to see
that M/s.Chemcrown (India) Ltd assigns the
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goodwill and trade name to the assesse as
stated in clause 1 of the agreement.
4.6. It was submitted that the Hon’ble
Apex Court in case of Sharp Business System
(Supra) , after considering the entire case
law on the issue of the non-compete revenue
expenditure or capital expenditure, has
held that length of time for which the
enduring advantage may endure to the payer
is not determinative of nature of
expenditure. It was therefore submitted
that the Assessing Officer, the CIT
(Appeals) and the Tribunal have committed
an error by considering the amount agreed
to be paid by the assesse for non-compete
fees for assignment of goodwill and trade
name as capital expenditure.
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4.7. Learned advocate Mr.Manish J. Shah,
under instructions, further submitted that
if the entire amount of Rs.80 Lakhs may not
be considered as a revenue expenditure for
the year under consideration, but what was
claimed by the assesses in the Return of
Income of amortization of the entire amount
to be spread over five years, i.e. Rs.16
Lakhs, may be considered as a revenue
expenditure for the year under
consideration, so as to enable the assessee
to claim Rs.16 Lakhs as revenue expenditure
for a period of five years.
4.8. Regarding the question No.2, It was
submitted by learned advocate Mr.Manish
Shah that it is not in dispute that the
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project of acquiring the plant and
machinery from Dupont for manufacture of
Benzene was abundant by the assessee and
hence, the expenditure incurred by the
assesse for legal and professional fees,
traveling, etc was claimed as revenue
expenditure and the same cannot be
considered as capital expenditure as no
capital asset was acquired by the assessee.
4.9. In support of his submissions,
reliance was placed on the decision of this
Court in case of Dy. CIT (Asstt.) Versus
Gujarat Narmada Velly Fertilizers Co. Ltd.
in Tax Appeal No.447 of 2000 and other
allied Appeals, which was followed in Tax
Appeal No.516 of 2012.
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5.1. On the other hand, learned Senior
Standing Counsel Mr.Rutvij Patel for the
respondent relied upon the order passed by
the Tribunal and the concurrent findings of
fact recorded by the Tribunal, after
consideration of the clauses of the
th
agreement dated 26 March, 1996, to hold
that the assessee has acquired the goodwill
and trade name for Rs.80 Lakhs and a
consequence thereof, the non-compete
clauses were agreed upon by the parties so
as to see that there is an assignment of
goodwill and trade name in favor of the
assessee by M/s.Chemcrown (India) Ltd.
5.2. It was therefore submitted that in
view of the concurrent findings of fact
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arrived at by the Tribunal, when it is held
that an amount of Rs.80 Lakhs was agreed to
be paid by the assesse for acquiring the
goodwill and trade name, the same would be
of capital nature and cannot partake the
character of non-compete fees, as tried to
be contended on behalf of the assessee. It
was therefore submitted that the entire
expenditure having been considered as
capital expenditure, no interference is
called for in the impugned order of the
Tribunal.
5.3. With regard to question No.2, it
was submitted by learned advocate Mr.Rutvij
Patel that it is emerging from the record
that the agreement was entered into between
the assessee and Dupont for transfer of the
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plant and machinery, which was subsequently
abandoned and therefore, in view of the
concurrent findings of fact arrived at by
the Assessing Officer, the CIT (Appeal) and
the Tribunal, no interference is called for
in the impugned order of the Tribunal.
5.4. In support of his submissions,
reliance was placed on the decision of this
Court in case of Shree Digvijay Wollen
Mills Ltd. Versus Commissioner of Income
Tax reported in [1994] 77 Taxman 30
(Gujarat) wherein, it is held that
expenditure incurred in boring tubewell was
capital expenditure, notwithstanding that
tubewell turned out to be useless.
6. Having heard the learned advocates for
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the respective parties and considering the
facts of the case, the undisputed fact
emerging from the record is that there was
an agreement between the assesses and
M/s.Chemcrown (India) Ltd. The relevant
clauses of the agreement reads as under :
“1. CHEMCROWN as beneficial owner
shall assign and transfer to DEEPAK the
goodwill of the business carried on by
CHECROWN of manufacture, distribution
and sale of the said products with the
exclusive rights to the said name or
style in which the said business was
carried on and the said brand name/s of
the said products with all the rights
and benefits belonging thereto forever
and to hold the same in perpetuity.
2. CHEMCROWN hereby represents and
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warrants DEEPAK that (i) it has full
right and absolute authority to assign
the goodwill and the said Brand name/s
with all rights appurtenant thereto;
(ii) that it ha snot assigned or agreed
to assign the same or to grant and
shall not grant any license to use the
said brand name/s and goodwill of the
business hereafter in favour of any
other person or created and/or shall
create any encumbrance thereon; (iii)
DEEPAK will be entitled to use the said
brand name/s and goodwill of the
business of CHEMCROWN's said division
and to use the said Brand Name/s in
respect of the said products
Manufactured or to be manufactured or
sold by DEEPAK without any objection or
interruption by CHEMCROWN or any person
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claiming under it; and (iv) CHEMCROWN
will at the request and costs of
DEEPAK: at any time execute any
document and or wring as may be
required by DEEPAK for better and more
parfectly assuring the use of the said
Brand Name/s and goodwill by DEEPAK.
3. CHEMCROWN hereby further covenant
with DEEPAK that CHEMCROWN shall not
carry on any business in India of
manufacturing or distributing or
selling the said products or in any
manner dealing with the said Products
either by itself or through its Sonil
Division or through anybody else in
whatsoever manner and competing with
the business of DEEPAK in perpetuity
and further s covenant with DEEPAK that
CHEMCROWN shall not sale, dispose of,
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give or lease or permit any person to
use the Plant and/or Machinery of the
said Sonil Division in whatsoever
manner to manufacture the said Products
hereafter.
CHEMCROWN hereby further covenants with
DEEPAK that CHEMCROWN shall not render
any consultancy or advise to any other
company engaged in a similar business
or permit any other Company or person
to use the said plant/factory/machinery
in perpetuity.
4. In consideration of the negative
covenant and the undertaking given by
CHEMCROWN in clauses 2 and 3 above,
DEEPAK shall pay to CHEMCROWN a sum of
Rs.80,00,000/- (Rupees Eighty Lacs
only) as follows:-
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a. Rs.5,00,000/- (Rupees Five Lacs
only) upon execution of this
agreement.
b. Rs.30,00,000/- (Rupees Thirty
Lacs only) payable on the date when
CHEMCROWN unconditionally withdraws
the Suit No.363 of 1994 pending in
the High Court at Calculta
(hereinafter referred to as
"Withdrawal date") for the purpose
of brevity).
c. Rs.25,00,000/- (Rupees Twenty
Five lacs only) upon completion of
15 (fifteen) months from the
aforesaid withdrawal date.
d. Rs.20,00,000/- (Rupees Twenty
lacs only) upon completion of 33
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(thirty-three) months from the
aforesaid withdrawal date.”
Payment of (c) and (d) will he made
within 10 days from the date of
applicable for the payment.”
7. On perusal of the above clauses, it is
clear that the goodwill and the business of
the M/s.Chemcrown (India) Ltd. of
manufacture and distribution of the sale of
its product was assigned to the assesse
along with the trade names and brand names
and to give effect to such agreement,
negative covenants were prescribed in
clauses 2 and 3 of the agreement for which,
the consideration of Rs.80 Lakhs was agreed
to be paid by the assessee to
M/s.Chemcrown (India) Ltd.
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8. It is therefore not possible to
bifurcate the amount consideration of Rs.80
Lakhs between acquisition of goodwill and
trade name or brand name and non-compete
fees, as the same is of composite nature.
However, the fact remains that the assesse
was in the same line of business of
manufacture of the products and it has
acquired the business of the M/s.Chemcrown
(India) Ltd. and as a result,
M/s.Chemcrown (India) Ltd. was prohibited
from use of its brand name and goodwill in
any manner whatsoever and composite lumpsum
amount of Rs.80 Lakhs was agreed to be paid
as a consideration by the assesse to
M/s.Chemcrown (India) Ltd. Therefore, the
question arises as to what would be the
nature of such payment by the assessee, and
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whether the same would be capital in nature
or revenue in nature.
9. The Tribunal, after considering the
aforesaid clauses has concurred with the
findings arrived at by the Assessing
Officer and the CIT (Appeals) that the
nature of payment of Rs.80 Lakhs was for
the purpose of acquiring goodwill and brand
name of M/s.Chemcrown (India) Ltd. by the
assessee and such payment would be capital
in nature. The Tribunal has also considered
that in absence of such agreement,
M/s.Chemcrown (India) Ltd. would have the
liberty of manufacture of goods and/or
resale acknowledging other manufactures,
which would have entailed the competition
which the assessee wanted to avoid, as the
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entire business was taken over by the
assessee and composite price was paid.
10. The Tribunal, however, did not consider
such aspect while interpreting the clauses
of the agreement between assessee and
M/s.Chemcrown (India) Ltd. and has
committed an error in holding that the
plain reading of the clauses goes to show
that payment made was for purchase of
goodwill and brand name of M/s.Chemcrown
(India) Ltd. in perpetuating the assessee
by ignoring the fact that without negative
covenants, the assessee would not have been
able to utilize the brand name and goodwill
of the M/s.Chemcrown (India) Ltd.
11. Thus, in essence, the agreement between
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the assessee and M/s.Chemcrown (India)
Ltd. is in nature of non-compete fees paid
by the assessee for assignment of the
goodwill and brand name of M/s.Chemcrown
(India) Ltd.
12. The Tribunal has also further erred in
law in interpreting the clauses of the
agreement by singling out the clause No.1
of the agreement and ignoring the clause
Nos.2 and 3, which pertain to negative
covenants, for which the reference is made
in clause 4 that consideration is paid for
negative covenants mentioned in clause nos.
2 and 3 and therefore, on reading the
agreement between the assessee and the
M/s.Chemcrown (India) Ltd. as a whole, it
appears that it was a composite agreement
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for assignment of goodwill and brand name
of M/s.Chemcrown (India) Ltd. with negative
covenants, for which consideration of Rs.80
Lakhs was agreed to be paid by the assesse.
13. The Hon’ble Apex Court in case of Sharp
Business System (Supra), after considering
the entire case law on the issue of as to
whether the non-compete fees would be
capital in nature or revenue in nature, has
held as under :
“25. Having adverted to the relevant
case laws, we may now examine the
nature and character of non-compete
fee; whether payment of non-compete
fee is revenue expenditure or capital
expenditure. Non-compete fee is paid
by one party to another to restrain
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the latter from competing with the
payer in the same line of business.
It may be by way of a written
agreement or by an oral
understanding. The restriction may be
limited to a specified territory or
otherwise; similarly, it can be for a
specified period or otherwise.
Purpose of non-compete payment is to
give a head start to the business of
the payer. It can also be for the
purpose of protecting the business of
the payer or for enhancing the
profitability of the business of the
payer by insulating the payer from
competition.
26. Thus non-compete fee only seeks
to protect or enhance the
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profitability of the business,
thereby facilitating the carrying on
of the business more efficiently and
profitably. Such payment neither
results in creation of any new asset
nor accretion to the profit earning
apparatus of the payer. The enduring
advantage, if any, by restricting a
competitor in business, is not in the
capital field.
27. Following the judicial trend, it
can be safely inferred that the
length of time over which the
enduring advantage may enure to the
payer is not determinative of the
nature of expenditure. As long as the
enduring advantage is not in the
capital field, where the advantage
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merely facilitates in carrying on the
business more efficiently and
profitably, leaving the fixed assets
untouched, the payment made to secure
such advantage would be an allowable
business expenditure, irrespective of
the period over which the advantage
may accrue to the payer (assessee) by
incurring of such expenditure.
28. The non-compete compensation from
the stand point of the payer of such
compensation is so paid in
anticipation that absence of a
competition from the other party may
secure a benefit to the party paying
the compensation. However, there is
no certainty that such benefit would
accrue. Notwithstanding such an
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arrangement, the payer (assesee) may
still not achieve the desired result.
In so far the present case is
concerned, on account of payment of
non-compete fee, the assessee had not
acquired any new business and there
is no addition to the profit making
apparatus of the assessee. The assets
remained the same. The expenditure
incurred was essentially to keep a
potential competitor out of the same
business. Further, there is no
complete elimination of competition.
Such payment made by the appellant to
L&T did not create a monopoly of the
appellant over the business of
electronic products/equipments.
Payment was made to L&T only to
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ensure that the appellant operated
the business more efficiently and
profitably. Such payment made to L&T
cannot, therefore, be considered to
be for acquisition of any capital
asset or towards bringing into
existence a new profit earning
apparatus.”
14. It would be pertinent to note that
before arriving at the above conclusion,
the Hon’ble Apex Court, on the issue as to
whether such expenditure would be allowable
as a revenue expenditure under Section
37(1) of the Act or not, in paragraph
No.16, has analyzed the provisions of
Section 37 of the Act as under :
“16. Let us advert to Section 37 of
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the Act at the outset. It is a
residuary provision. Sub-section (1)
of Section 37 reads as follows:
(1) Any expenditure not being
expenditure of the nature
described in Sections 30 to 36 and
not being in the nature of capital
expenditure or personal expenses
of the assessee laid out or
expended wholly and exclusively
for the purposes of the business
or profession shall be allowed in
computing the income chargeable
under the head ‘profits and gains
of business or profession’.
16.1. This provision contemplates
that any expenditure incurred wholly
and exclusively for the purposes of
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the business shall be allowed in
computing the income chargeable under
the head ‘profits and gains of
business or profession.’ For such an
expenditure to be allowed, it should
fulfill the following criteria:
(i) it should not be an
expenditure described in Sections
30 to 36;
(ii) it should not be in the
nature of capital expenditure or
personal expenses of the assessee.
16.2. It is axiomatic that such
expenditure should be incurred during
the previous year relevant to the
assessment year under consideration.
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15. In order to analyse further, the
Hon’ble Apex Court has referred to and
relied upon the decision in case of Alembic
Chemical Works Co. Ltd Versus Commissioner
of Income tax reported in [1989] 177 ITR
377 (SC) wherein, it is explained that in
computing the income chargeable under the
head profit and gains of the business or
profession, Section 37 of the Act enables
the deduction of any expenditure laid out
or expended wholly and exclusively for the
purpose of business or profession, as the
case may be and has held as under:
“17. This provision was examined by
this Court in Alembic Chemical Works
Co. Ltd. (supra). It has been
explained that in computing the
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income chargeable under the head
‘profits and gains of business or
profession’, Section 37 of the Act
enables the deduction of any
expenditure laid out or expended
wholly and exclusively for the
purposes of business or profession,
as the case may be. The fact that an
item of expenditure is wholly and
exclusively laid out for the purpose
of business by itself is not
sufficient to entitle its allowance
in computing the income chargeable to
tax. In addition, the expenditure
should not be in the nature of a
capital expenditure. In the infinite
variety of situational diversities in
which the concept of what is capital
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expenditure and what is revenue
expenditure arises, it is well nigh
impossible to formulate any general
rule, even in the generality of
cases, sufficiently accurate and
reasonably comprehensive, to draw any
clear line of demarcation. However,
some broad and general tests have
been suggested from time to time to
ascertain on which side of the line
the outlay in any particular case
might reasonably be held to fall.
These tests are generally efficacious
and serve as useful servants but as
masters they tend to be over-
exacting.”
16. Reference was also made to decision in
case of Atherton V. British Insulated and
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Helsby Cables Ltd. reported in (1925) 10 TC
155 wherein, the classical test laid down
by Lord Cave L.C. was referred to as
under :
“18. There is a classical test laid
down by Lord Cave L.C. in Atherton
Vs. British Insulated and Helsby
Cables Ltd.16, where it was held:
When an expenditure is made, not only
once and for all, but with a view to
bringing into existence an asset or
an advantage for the enduring benefit
of a trade, I think that there is
very good reason (in the absence of
special circumstances leading to an
opposite conclusion) for treating
such an expenditure as properly
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attributable not to revenue but to
capital.”
17. The Hon’ble Apex Court also referred to
the decision of Lord Haldane in case of
John Smith and Son v. Moore reported in
(1921) 12 TC 266, which pertains to test of
contemporary vintage based on distinction
between fixed and circulating capital and
was propounded and explained as under :
“Fixed capital is what the owner
turns to profit by keeping it in his
own possession; circulating capital
is what he makes profit of by parting
with it and letting it change
masters.”
18. Considering the above decisions,
Hon’ble Apex Court referred to the
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decisions in cases of Assam Bengal Cement
Company Ltd v. CIT reported in [1995] 27
ITR 34 (SC) and Empire Jute Co. Ltd. V. CIT
reported in [1980] 124 ITR 1 (SC) to arrive
at the above dictum of law.
19. In view of the above conspectus of law
analysed by the Hon’ble Apex Court, we are
of the opinion that amount of Rs.80 Lakhs
agreed to be paid by the assessee was for
composite consideration for assignment of
goodwill and non-compete fees and
therefore, non-compete fees is required to
be considered as a revenue expenditure and
therefore, the assessee had rightly claimed
th
1/5 of the expenditure for the year under
consideration as differed revenue
expenditure, as it contains both
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acquisition of goodwill and non-compete
fees and if the entire expenditure is not
allowed as revenue, the assessee would have
claimed as capital expenditure, which would
be entitled to depreciation under Section
132 of the Act.
20. However, without considering the aspect
of depreciation in the facts of the case
and applying the ratio of the Hon’ble Apex
Court in case of Sharp Business System
(Supra) and considering the facts of the
present case and in view of the statement
made at bar by learned advocate Mr.Manish
Shah, under instructions, we would answer
the question No.1 partly in favour of the
assessee to the effect that the assessee
th
would be entitled to 1/5 of the amount of
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Rs.80 Lakhs, i.e. Rs.16 Lakhs to be claimed
as revenue expenditure for the year under
consideration and remaining amount equally
claimed in subsequent four years. Thus,
amount of Rs.80 Lakhs shall be spread over
for five years as differed revenue
expenditure by the assessee.
21. The impugned order of the Tribunal is
modified to the above extent.
22. So far as the question No.2 is
concerned, it is not in dispute that the
assessee has not acquired any capital
asset, which was agreed to be acquired from
Dupont USA and the expenses are incurred by
the assessee only for the purpose of
acquiring capital asset in an endeavor to
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acquire capital asset, however, there is no
capital asset which has come into
existence.
23. In the case of Shree Digvijay Wollen
Mills Ltd. Versus CIT before this Court,
the borewell was already constructed and
thereafter, the borewell became useless as
the water which was obtained therefrom was
not found suitable and in such
circumstances, this Court held the
expenditure incurred for boring tubewell
was capital expenditure. However, in the
facts of the case, no capital asset has
come into existence of enduring nature and
therefore, the Assessing Officer, the CIT
(Appeals) and the Tribunal were not
justified in holding the same to be capital
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in nature.
24. This Court in case of Deputy
Commissioner of Income-tax Versus Gujarat
Narmada Velley Fertilizers Co. Ltd.
reported in [2015] 57 taxmann.com 250
th
(Gujarat) rendered on 9 December, 2014 has
held as under :
“10. In view of above observations,
in our view, the tribunal has rightly
considered the first question in
right perspective. The amount which
has never materialized, i.e. the
expenses incurred towards such
project is rightly treated as revenue
expense and not as capital
expenditure. In that view of the
matter, the question of law raised is
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answered in favour of the assessee
and against the department.”
25. The aforesaid decision of this Court is
followed in the subsequent years in Tax
Appeal No.516 of 2012 in the same
assessee’s case.
26. In view of the foregoing reasons, the
question No.2 is answered in favour of the
assessee and against the Revenue.
27. The Appeal is accordingly disposed of.
(BHARGAV D. KARIA, J)
(PRANAV TRIVEDI,J)
PALAK
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