N. Vijayakumaran, J.M. - (1.) THIS appeal by the assessee is directed against the order of the Commissioner of Income-tax Appeals)-VI, Chennai, dated 27-1-2004. It relates to the assessment year 2000-01.
(2.) The assessee-company claimed Rs. 10,50,00,000 as deduction towards payment of non-compete compensation, The assessee-company has made two agreements on the same day. The details are as under: Date of Agreement Name of Recipients Amount paid (1) 3-5-1999 (1) Mr. S. Sasikumar Rs. 6,00,00,000 (2) Smt. Radhika Menon (2) 3-5-1999 (1) Mr. Sasikumar (2) Mrs. Radhika Menon Rs. 4,50,00,000 (3) Mr. P. Bhaskaran Both the authorities rejected the claims of the assessee under section 37(1) of the Income Tax Act. Aggrieved on this the assessee is in appeal and this issue is the first issue agitated before us. We have heard the learned counsel for the assessee and the learned Commissioner of Income-tax - departmental Representative Mr. J. Vinay Kumar for the department. We have carefully perused the materials and the precedents relied on. There is no disputes about facts.
(3.) THE expenditure fall on capital field is not allowable under section 37. THE expenditure incurred for the purpose of business which is neither capital nor personal are allowable. Now, we have to consider whether this payment made by the assessee is allowable or not. Undoubtedly it was laid out and expended for the purpose of business. That alone is not decisive. It should be a revenue expenditure for the purpose of allowance under section 37(i). THE assessee present before us paid this huge sum to ward off the competition in this business by Mr. Sasi Kumar. THE restrictive covenant was for the period of five years. Whether this period of five definite years gives ending benefit to the assessee has also to be seen. THE decision of the Hon'ble Supreme Court in the case of CIT v. Coal Shipments (P.) Ltd. (1971) 82 ITR 902 (SC) THEir Lordships observed: "Payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time; the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be, in order to constitute enduring benefit, would depend on the circumstances and the facts of each individual case. Although an enduring benefit need not be of an everlasting character it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties.";