Vivek Jalan
By terminating the services of a vendor, an assessee may intend to save the expense that it would have had to incur in the relevant previous year as well as for few more years going ahead. However, it cannot be said that this saving is an enduring benefit or has resulted in creating an asset. Thus, payment made for termination of contract by way of compensation would be an allowable deduction under The Income Tax Act, in computing the total income of assessee as was held in the case of Commissioner of Income Tax V/s. Ashok Leyland Ltd. [(1972) 86 ITR 549 (SC)]. If assessee got rid of its liability to pay the commission it was required to pay under the agreement not only during the accounting year but also for a few years more, the expenditure thus saved undoubtedly swelled the profits of the company and where the termination was on business considerations and as a matter of commercial expediency it cannot be stated that by terminating the agreement, assessee acquired any enduring benefit or any income yielding asset was held in the case of COMMISSIONER OF INCOME TAX – 14, MUMBAI Vs MUSIC BROADCAST PRIVATE LIMITED [2023-VIL-105-BOM-DT].
Now in a case where the contrary is correct, i.e., when an expenditure does result in creating an enduring benefit or a capital asset, the question arises that can depreciation be claimed on this expenditure by taking it as an intangible asset. On perusal of the meaning of the categories of specific ‘intangible assets’ referred to in section 32(1)(ii) of the Income Tax Act, preceding the term "business or commercial rights of similar nature" it is seen that intangible assets are not of the same kind and are clearly distinct from one another. The legislature thus did not intend to provide for depreciation only in respect of the specified intangible assets but also to other categories of intangible assets which may not be possible to exhaustively enumerate. Thus, an assessee who acquires commercial rights to sell products under the trade name and through the network created by the seller for sale in should be entitled to deprecation.
Non-compete fees paid to an ex-employee, or any other person creates rights which gives not only enduring benefit but also protects an assesses business against competition. Hence the same must be considered as intangible asset and depreciation be allowed on the same was held by The Bombay High Court in the case of PR. COMMISSIONER OF INCOME TAX – 14, MUMBAI Vs MUSIC BROADCAST PRIVATE LIMITED [2023-VIL-105-BOM-DT]
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