Income Tax Act, 1961 — S. 37(1) — Business expenditure — Capital vs Revenue Non-compete fee paid by an assessee to restrain another party from competing in business is an expenditure incurred for facilitating the carrying on of business more efficiently and profitably. Such payment does not result in creation of any new asset nor does it add to the profit-earning apparatus of the assessee. (Paras 25–26)

Income Tax Act, 1961 — S. 37(1) — Business expenditure — Capital vs Revenue

Non-compete fee paid by an assessee to restrain another party from competing in business is an expenditure incurred for facilitating the carrying on of business more efficiently and profitably. Such payment does not result in creation of any new asset nor does it add to the profit-earning apparatus of the assessee.
(Paras 25–26)

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Capital expenditure — Enduring benefit — Test

The test of enduring benefit is not conclusive. Even if an advantage endures for a long period, the expenditure would be on revenue account if the advantage is not in the capital field and merely facilitates the conduct of business while leaving fixed capital untouched.
(Paras 22.1, 26–27)

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Non-compete fee — Nature of advantage

Non-compete fee is paid to protect or enhance the profitability of business by insulating the assessee from competition. The advantage obtained is commercial in nature and not an advantage in the capital field.
(Paras 25–27)

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Non-compete fee — No acquisition of asset

Payment of non-compete fee does not result in acquisition of any capital asset or addition to the profit-making structure. The assets of the assessee remain the same after such payment.
(Paras 26, 28)

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Duration of restraint — Relevance

The length of time over which the advantage of non-competition may enure is not determinative of the character of expenditure. What is relevant is the nature of the advantage in a commercial sense.
(Para 27)

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Section 37(1) — Allowability

Where non-compete fee is incurred wholly and exclusively for the purposes of business and does not fall in the capital field, it is allowable as a deduction under Section 37(1) of the Income Tax Act, 1961.
(Paras 16–17, 26–27)

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Depreciation — S. 32(1)(ii) — Alternative plea

Once non-compete fee is held to be revenue expenditure, the question of treating it as a capital asset and granting depreciation under Section 32(1)(ii) does not arise.
(Paras 25–28, read with issue framing in Paras 5–5.2)

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Held

Non-compete fee paid by the assessee is revenue expenditure allowable under Section 37(1) of the Act. Contrary views of the Delhi High Court in Sharp Business System disapproved. Appeals of assessees allowed; appeals of revenue dismissed.
(Paras 26–28, concluding portion)

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B. ANALYSIS OF FACTS AND LAW (with Paragraph Numbers)

I. FACTUAL BACKGROUND (Paras 4–11)

1. The batch of appeals raised a common issue regarding the tax treatment of non-compete fee paid by assessees across different assessment years (para 5).

2. In Civil Appeal No. 4072 of 2014, the assessee paid ₹3 crores to L&T to restrain it from competing in the business of electronic office products for seven years (para 7.1).

3. The Assessing Officer treated the payment as capital expenditure on the ground that it conferred an enduring benefit (para 7.2).

4. CIT(A), ITAT and the Delhi High Court affirmed the view that:

   • the expenditure was capital in nature; and

   • the non-compete right was not a depreciable intangible asset (paras 7.4–7.7).

5. In connected appeals from Madras and Bombay High Courts, assessees had succeeded either in claiming depreciation or in resisting disallowance (paras 8–11).

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II. CORE ISSUES (Paras 5–5.2)

1. Whether non-compete fee is capital or revenue expenditure.

2. If capital, whether depreciation is allowable under Section 32(1)(ii).

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III. LEGAL PRINCIPLES CONSIDERED (Paras 16–24)

1. Section 37(1) permits deduction of business expenditure unless it is capital or personal in nature (para 16).

2. Tests of:

   • enduring benefit (para 18), and

   • fixed vs circulating capital (para 19)
     are only guiding principles and not rigid rules.

3. Decisions in Empire Jute, Coal Shipments, Alembic Chemical Works and Madras Auto Services reaffirm that:

   • an enduring advantage may still be on revenue account if not in the capital field (paras 21–24).

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IV. APPLICATION OF LAW TO NON-COMPETE FEE (Paras 25–28)

1. Non-compete fee is paid to restrain competition and to protect or enhance profitability (para 25).

2. Such payment:

   • does not create a new asset;

   • does not expand the profit-earning apparatus;

   • leaves fixed capital untouched (para 26).

3. The advantage, though possibly enduring, is not in the capital field (paras 26–27).

4. There is no certainty that the payer will actually derive the expected benefit; absence of competition does not guarantee commercial success (para 28).

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V. CONCLUSION / RATIO DECIDENDI (Paras 26–28)

1. Non-compete fee is a revenue expenditure.

2. It is allowable as a deduction under Section 37(1).

3. The contrary view treating it as capital expenditure is incorrect.

4. Once held to be revenue expenditure, the issue of depreciation does not survive.