ITAT Denies Discount on Non-Competition Fee Under Section 194L

In an order released lately, the Income Tax Appellate Tribunal (ITAT) rejected the depreciation claim on Non-Competition Fee.

The said claim was filed by the assessee, Fortis Hospitals Ltd., on a recent acquisition of the Wockhardt Group of hospitals under an agreement that included payment of a non-competent fee of Rs. 15.50 crores. The fee was capitalized by Fortis in its accounts, on which it has recently filed a depreciation claim.

While reviewing the case, the Assessment Officer (AO) rejected the said claim saying that TDS under section 194L Know everything about TDS section 194I, 194IB & 194IC that are related to rent under the income tax. Also, we covered some special points under section 194I has already been deducted on the payment, the transaction comes under the provision Section 40(a)(ia) of the Income Tax Act. As a result, he disallowed the entire amount and not just the depreciation amount claimed.

The assessee further filed an appeal to the Commissioner of Income Tax (Appeals) saying that since the Section 194L has ceased to operate with effect from 01.06.2000, TDS was not mandatory on the payment, which means it should not come under the Section 40(a)(ia) of the Income Tax Act. Accepting the argument, the CIT(A) restored the assessee’s claim on account of depreciation on the grounds that the non-compete fee should be treated as an intangible asset.

At the same time, the assessee, Fortis Hospitals Ltd., accepted that there were some inadvertent mistakes made in terms of the meaning of Section 254(2) of the Act that caused unnecessary damage to the case of the assessee.

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The ITAT opposed the assessee application and passed the order saying that the Tribunal has made its decision after considering all the arguments made by the assessee during the hearing. While the application was partly allowed by the Coram, it maintained that non-competent fees do not give the right to continue the primary business operation.