Case Details:

Fortis Hospitals Ltd. vs. ACIT

Appeal No.:

ITA 132/2021

Order pronounced by:

Delhi High Court

Date of Order:

29-07-2021

The appellant had entered into a Business Transfer Agreement with Wockhardt Hospitals Limited on 24.08.2009 for acquiring a business division of Wockhardt Hospitals Limited consisting of 10 hospitals situated in various cities. The appellant paid non-compete fees of Rs. 15.50 crores to Wockhardt Hospitals Limited for not directly or indirectly carrying on the business of hospital and related services for a period of 3 years in the respective cities. The appellant capitalized the non-compete fees so paid in his books of accounts as an intangible asset and claimed depreciation u/s 32(1)(ii) of the Act.

The L’d A.O. disallowed the entire amount of non-compete fee of Rs. 15.50 crores  u/s 40(a)(ia) of the Income Tax Act on account of non-deduction of TDS u/s 194L of the Act. The assessee filed an appeal before CIT(A). The L’d CIT(A) ruled in favour of the assessee quoting as below:

“It is clear from the language of the Statue that the assessee was not obliged in law to deduct any tax since section 194L invoked by the Assessing Officer ceased to operate w.e.f. 1^st June, 2000.”

The L’d CIT(A) also did not dispute the fact that non-compete fee was entitled to depreciation as an intangible asset. Aggrieved by the order of L’d CIT(A), the respondent (A.O.) filed an appeal before ITAT.

The L’d ITAT placing reliance on the judgement of this Court in Sharp Business System Income-tax- III, 2012 SCC Online Del 5639: 211 Taxman 576 (Delhi), has held that non-compete fee cannot be termed as ‘intangible asset’ and therefore depreciation claimed on the same could not be allowed. The assessee preferred further appeal with this court on the basis of the ground that the L’d ITAT has exceeded its jurisdiction by delving into issues that were accepted by the Assessing Officer.

“The Learned ITAT has exceeded its jurisdiction by delving into issues that were accepted by the A.O. He submits that the A.O. had rejected the claim of the appellant on account of depreciation on non-compete fee, not on the ground that it was not an intangible asset but on the ground of non-deduction of TDS, thereby disallowing u/s 40(a)(ia) of the Act. It was only this limited finding which was challenged by the appellant before the learned CIT(A). The A.O. had therefore, accepted the claim of the appellant that the depreciation claims on non-compete fee could be claimed.”

“The Revenue did not challenge the said order. Appeal was filed only by the appellant herein. In appeal, the learned CIT(A) had set aside this finding of the A.O. by holding that the appellant was not obliged in law to deduct any tax u/s 194L of the Act as the said section ceased to operate w.e.f. 01-06-2000. The learned CIT(A) therefore, also did not dispute that the non-compete fee was entitled to depreciation as an intangible asset”.

“The learned ITAT, therefore, could not have reopened this issue on which there was no dispute raised by the respondent. Reliance was placed on the following judgements:

• Hukumchand Mills Ltd. v. Commissioner of Income Tax, Central Bombay, AIR 1967 SC 455: (1967) 63 ITR 232

• MCorp Global Pvt. Ltd. v. Commissioner of Income Tax (2009) 2 SCC 420: (2009) 309 ITR 434

Relying on the above judgements, the learned counsel for the appellant submits that the learned ITAT has no power to enhance the assessment or take back the benefit granted to the assessee by the A.O.”

He further relied upon the following:

• Indian steel & Wire Products Limited v. CIT 208 ITR 740 (Cal)
• CIT vs. G.M. Chennabasappa 35 ITR 261 (AP)
• Pokhraj Hirachand vs. CIT 49 ITR 293 (Bom)
• The Motor Union Insurance Co. Limited vs. CIT 13 ITR 272 (Bom)
• Chandulal Lallubhai (HUF) vs. CIT 139 ITR 642, 649-50 (Guj.)
• Rajgarhia vs. ITO 107 ITR 347
• Daimler India Commercial Vehicles (P) Ltd. vs. DCIT 416 ITR 343 (Mad.

The learned counsel for the assessee further submits that non-compete fee, being an intangible asset is entitled for claim of depreciation u/s 32(1)(ii) of the Act. He submits that the judgement in the case of Sharp Business System (supra) as relied upon by the ITAT is not correctly decided and is pending a challenge before the Supreme Court with leave having being granted by the Supreme Court vide its Order dated 24.03.2020 14 in SLP(C) No. 11410 of 2013.

Issue-1

Issue-2

Whether ITAT exceeded jurisdiction by delving into issues accepted by the A.O.

Whether depreciation is allowable on non-compete fees being an intangible asset

• The A.O. did not go into the question as to whether the non-compete fee can be treated as an ‘intangible asset’, whereby the appellant would be entitled to claim depreciation u/s 32(1)(ii) of the Act, or not.
• The claim of the appellant of depreciation was in fact rejected by the A.O. Therefore, there was no occasion for the respondent (A.O.) to have challenged the said order.
• In appeal, the CIT(A) went ahead and directed the A.O. to allow the claim of depreciation on the non-compete fee treating the same to be an ‘intangible asset’. It was this finding which was challenged by the respondent in appeal.

• In the case of Sharp Business System (supra) on the issue of non-compete fee, it was held that the depreciation u/s 32(1)(ii) of the Act is not allowable on non-compete fee as it is not an intangible asset.
• Though an appeal against the said judgement is claimed to be admitted by the Supreme Court, it is not claimed by the appellant that the operation of the judgement was also stayed by the Supreme Court. We, therefore, presently are bound to follow the same and see no reason to disagree with the same.
• Merely because another appeal raising similar questions has been admitted by this Court, also does not persuade us to admit the present appeal as well only on this ground.

Ruling: It therefore, cannot be said that the issue of claim of depreciation on non-compete fee stood concluded before the A.O. and/ or the learned ITAT has exceeded its jurisdiction.

Ruling: Thus, the ground raised by the respondent (A.O.) stands accepted. Hence, non-compete fee is not an intangible asset and depreciation u/s 32(1)(ii) of the Act is, therefore, not allowable.