Ind. Global Corporate Finance Pvt. Ltd. was given a verdict by the Mumbai Bench of Income tax appellate regarding the non-competent fee paid by the company who purchased its shares. The company that purchases shares of a company to the promoters of the selling company pays the Non-competent fees. This is generally done because the promoters, who sell the shares of the company, are well known about the business Payment of non-competent fees that restricts the promoters of the selling company to enter into same line of business for a fixed period.
In this case, the company that purchased the shares of Ind. Global Corporate Finance Pvt. Ltd had paid Rs. 2.5 million to the Managing Director of Ind. Global Corporate Finance Pvt. Ltd and paid Rs. 10 million to the MD as non-competent fee, which prohibited the MD to enter into same line of business for 36 months. The Mumbai Bench of Income Tax Tribunal stated that the payment was not tax deductible, because it is capital in nature.
Non-competent fee Eligible for Depreciation
The Income Tax Act of 1961 however claims that non-competent fees are eligible for depreciation or deduction. The Assessing Officer claimed that the payment cannot be considered under tax deduction, but the Commissioner of Income Tax has claimed that the expenditure was revenue in nature. The taxpaying company however claimed that Real Image Pvt. Ltd. was given tax deduction by Chennai Tribunal for paying non-competent fees, though it was capital expenditure.
The taxpaying company however claimed that it has paid Rs. 2.5 million for getting information on business methodologies and skills. The tribunal however compared the present case to the case of Tecumseh India Private Limited and Real Image Pvt. Ltd., where non-competent fees as considered as capital in nature and depreciation were allowed respectively. The tribunal on conducting an in-depth focus in the present case found that the taxpayer has not shown any evidence of payment of money for acquiring understanding of running a merchant business or acquiring goodwill. The tribunal also found that laws of running a merchant business can easily be found in the market and the tax-paying company was already involved in merchant banking business. Thus, the tribunal rejected the taxpayer’s claim of getting tax deduction for the non-competent fee and allowed it as depreciation.
The other case is concerned with SA builders, who borrowed money from some source and gave interest free loan to its sister concern. SA builders also claimed for interest deduction for income tax benefit. The Supreme Court said that tax benefit can be given, if the sister concern used the money for commercial expediency (means business purpose). The Assessing Officer rejected S.A. builder’s claim of deduction of interest, but the Commissioner of Income Tax accepted it.