Metro Tyres Ltd. v. ACIT (ITA No. 1165/Del/2023)
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled in favor of the taxpayer in a case concerning the allowability of depreciation on non-compete fees, reiterating that once an asset forms part of a recognized block of assets and has been allowed depreciation in earlier years, it cannot be disallowed in subsequent years.
In this case, the assessee had claimed depreciation on a non-compete fee capitalized in the books, which had been allowed in previous assessment years. However, the Assessing Officer (AO) and CIT(A) disallowed the depreciation for AY 2018–19, treating the non-compete fee as not falling within the meaning of “intangible asset” under Section 32(1)(ii) of the Income Tax Act.
Facts in Brief
- The assessee had capitalized non-compete fee and claimed depreciation of ₹6,92,920 in AY 2018–19.
- The AO disallowed the depreciation, stating that a non-compete fee is not an intangible asset under Section 32(1)(ii).
- The CIT(A) confirmed the disallowance, rejecting the asset’s classification as part of the eligible block.
ITAT’s Key Observations
- The Tribunal noted that identical depreciation on the same non-compete fee had been allowed by the Department in earlier years, particularly in AYs 2006–07 onward.
- The assessee relied on ITAT’s earlier decision in its own case, which had been accepted by the Revenue.
- The Tribunal applied the principle of consistency and referred to the Delhi High Court ruling in PCIT v. Pepsico India Holdings Pvt. Ltd. (ITA 166/2023), which upheld depreciation on non-compete fee despite the earlier Sharp Business System case that had taken a contrary view.
- ITAT held that under the block of assets regime, once an asset enters the block and depreciation is allowed, the Revenue cannot cherry-pick years to deny it, unless there is a material change.
Final Outcome
- Depreciation on non-compete fee of ₹6,92,920 allowed.
- Appeal allowed in full, reaffirming judicial consistency and application of Section 32(1)(ii).
Key Takeaways for Tax Professionals
- Non-compete fees, when capitalized and accepted in earlier years as intangible assets, remain eligible for depreciation in subsequent years under Section 32.
- The block of assets concept eliminates the need for year-wise revalidation of usage or classification.
- Consistency in tax treatment is a settled principle, especially when there’s no change in facts or law.