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1. Aforesaid appeals by assessee for Assessment Years [in short referred to as ‘AY’] 1998-99 to 2000-01 contest separate orders of learned first appellate authority. Since grievance of the assessee in all the years is substantially the same, the appeals were heard together and are now being disposed-off by way of this common order for the sake of convenience and brevity. The name of the erstwhile assessee namely International Computers (India) Limited (ICIL) has undergone change to Zensar Technologies Limited w.e.f. 14/01/2000 vide fresh certificate of incorporation issued by appropriate authority, a copy of which has been placed on record. Finding the same in order, we take-up the appeal for AY 1998-99 as the lead year.
ITA No. 2079/Mum/2003: AY 1998-99
2. This appeal assails he order of learned Commissioner of Income Tax (Appeals)-XXXIII, Mumbai [CIT(A)] dated 09/12/2002 on following grounds of appeal: -
Ground No. 1
The Commissioner of Income-tax (Appeals) XXXIII, Mumbai [hereinafter referred to as the CIT(A)]erred in not allowing deduction of Rs.2,00,00,000/- being the amount of non-compete fees charged to the accounts for the year ended 31st March, 1998 on the ground that the same constitutes capital expenditure.
Ground No. 2
The CIT (A) erred in upholding the ACIT's action in holding that Interest and Rent totaling to Rs.64,94,107/- (90% being Rs.58,44,696/-) is assessable under the head "Income from other Sources”.
Ground No. 3
The CIT (A) erred in upholding the action of the ACIT in reducing the entire amount of Rs.63,91,317/- consisting of provision no longer required Rs.40,30,766, miscellaneous recovery Rs.7,01,244, trade creditors amounts written back as no longer payable Rs.1,49,220 royalty recovery Rs.10,85,784 and miscellaneous receipts Rs.4,24,303 from the head 'Business Income' and assessing the same under the head 'Income from other Sources'.
Ground No. 4
The CIT(A) erred in upholding the action of the ACIT in holding that while computing "Profits of the business" for the purpose of deduction under section 80HHE, 90% of income totaling Rs.63,91,317, should be reduced from "Profits of business" treating the same as covered by 'any other receipt of similar nature' as appearing in Explanation (d) to section 80HHE.”
3. We have carefully heard the rival submissions, perused relevant material on record and deliberated in various judicial pronouncements as cited before us. Our adjudication to various grounds of appeal would be as given in succeeding paragraphs.
4. Facts on record would reveal that the assessee being resident corporate assessee stated to be engaged in development and marketing of software was assessed for year under consideration u/s. 143(3) on 30/03/2001 wherein the income of the assessee was determined at Rs.185.59 Lacs under normal provisions after certain additions / disallowances / adjustments as against returned income of Rs.125.71 Lacs filed by the assessee on 30/11/1998.
Ground No.1-Disallowance of Non-compete fee.
5.1 During assessment proceedings, it transpired that assessee purchased software business of M/s. Fujitsu ICIM Ltd. (FIL) (assessee’s holding company) and entered into a non-compete agreement with the said entity on 31/12/1996 for a period of 10 years which was to be effective from 01/10/1996. The total consideration paid by the assessee was Rs.20 Crores and the accordingly, the same was amortized over a period of 120 months being duration of the non-compete agreement. As per the terms of the agreement, the said consideration was to be satisfied partly by issue of shares / securities or by payment of cash in the agreed manner. In the financial statements, the assessee has accumulated the said expenditure under the head miscellaneous expenditure and adopted an accounting policy to write-off the same over a period of 10 years. Accordingly, an amount of Rs.2 Crores, being amount written-off for the year under consideration was debited to Profit & Loss Account and claimed as deduction.
5.2 The Ld. AO, forming an opinion that non-compete fee would be capital in nature, show-caused the assessee as to why the same should not be disallowed. In defense, the assessee submitted that the terms of software business were embodied into two agreements. Non-compete fee agreement bound FIL for a period of 10 years from entering into any software business arrangement for carrying out any software business relating to development and export of computer software and consultancy services including design development, maintenance, implementation, upgradation and porting of software for overseas market. The fee was based on projected profit, that would be forgone by FIL and therefore, the expenditure was deductible expenditure. As benefit was spread over 10 years, the same was being claimed over such period instead of being claimed in one year. The assessee further submitted that expenditure was in the nature of deferred revenue expenditure over a period of 10 years and therefore, the same was being amortized over such a period.