Nature of Expenditure – Non-Compete Fee

Capital or Revenue | Allowability of Depreciation under Section 32(1)(ii)

 

Sharp Business System (India) Pvt. Ltd. v. Commissioner of Income Tax

Supreme Court | Civil Appeal No. 4072 of 2014 & batch

Judgment dated: 19 December 2025

 

I. Issues for Consideration (Para 5)

                1.            Whether non-compete fee paid by an assessee is revenue expenditure allowable under section 37(1) or capital expenditure.

                2.            If treated as capital expenditure, whether such non-compete fee constitutes an intangible asset eligible for depreciation under section 32(1)(ii).

                3.            Whether the test of enduring benefit is determinative in characterising non-compete payments.

 

II. Statutory Provisions Involved (Paras 12–16)

Section 37(1) – Allowability of business expenditure

Section 32(1)(ii) – Depreciation on intangible assets

Explanation 3 to Section 32(1) – Meaning and scope of “intangible assets”

Section 36(1)(iii) – Interest on borrowed capital (ancillary issue)

 

III. Material Facts (Lead Case) (Paras 7–7.7)

 

The assessee, a joint venture between Sharp Corporation (Japan) and Larsen & Toubro Ltd., paid ₹3 crores as non-compete fee to restrain L&T from entering the business of electronic office products in India for seven years.

 

The assessee claimed the payment as revenue expenditure.

The Assessing Officer treated it as capital expenditure, holding that it resulted in an enduring advantage (para 7.2).

The CIT(A), ITAT and Delhi High Court upheld the capital nature of the expenditure and denied depreciation (paras 7.4–7.7).

 

IV. OPERATING PARAGRAPHS – SUMMARISED WITH REFERENCES (Paras 16–34)

 

A. Scope of Section 37(1) (Paras 16–16.2)

The Court held that Section 37(1) is a residuary provision, allowing deduction of business expenditure not covered by Sections 30 to 36 and not capital or personal in nature. Mere business purpose is insufficient; the expenditure must also not fall in the capital field.

 

B. Capital vs Revenue – No Rigid Formula (Paras 17–20)

The Court reiterated that no single inflexible test determines the nature of expenditure. Tests such as enduring benefit, once-for-all payment, and fixed versus circulating capital are guiding tools, not conclusive rules.

 

C. Enduring Benefit Test Explained (Paras 18–20)

An expenditure may yield an enduring benefit yet remain revenue in nature. What is decisive is whether the advantage lies in the capital field. If the advantage merely facilitates efficient business operations without altering the profit-making structure, the expenditure is revenue.

 

D. Payments to Ward Off Competition (Paras 21–21.5)

Relying on Coal Shipments Pvt. Ltd., the Court held that payments made to restrict competition do not become capital expenditure unless they create monopoly, permanent business structure, or capital advantage.

 

E. Breakdown of Enduring Benefit Test (Paras 22–22.4)

Following Empire Jute, the Court held that enduring benefit is not a litmus test. If the expenditure enables the assessee to operate its existing business more efficiently while leaving fixed capital untouched, it remains revenue.

 

F. Once-for-All Payment Not Determinative (Paras 23–23.2)

From Alembic Chemical Works, the Court reiterated that a once-for-all payment does not automatically imply capital expenditure. The purpose and commercial effect of the payment are determinative.

 

G. Commercial Viewpoint Test (Paras 24–24.3)

Adopting the reasoning in Madras Auto Service, the Court held that where expenditure substitutes revenue outgoings and no capital asset is acquired, it retains the character of revenue expenditure even if the benefit is long-term.

 

H. Nature of Non-Compete Fee (Paras 25–26)

The Court characterised non-compete fee as a payment made to protect or enhance profitability and to provide a business head start. It does not add to the profit-making apparatus, create monopoly, or bring into existence a new business structure.

 

I. Duration of Advantage Irrelevant (Para 27)

The Court laid down that the length of time over which the benefit endures is irrelevant, so long as the advantage does not lie in the capital field.

 

J. Absence of Certainty of Benefit (Para 28)

Non-compete payments are made in anticipation of benefit, not with certainty. In the present case, no new asset was acquired, no monopoly was created, and no structural change occurred.

 

K. Consequences and Directions (Paras 29–34)

The Court held the non-compete fee to be allowable revenue expenditure under Section 37(1), set aside the Delhi High Court judgment, rendered the depreciation issue academic for the assessee, and remanded connected matters to the ITATs for reconsideration in light of this ratio.

 

V. Judicial Precedents Relied Upon

Alembic Chemical Works Co. Ltd. v. CIT (Paras 17, 23) – Purpose and business reality prevail over form.

Atherton v. British Insulated & Helsby Cables Ltd. (Para 18) – Enduring benefit relevant only if in capital field.

John Smith & Son v. Moore (Para 19) – Fixed versus circulating capital distinction.

Assam Bengal Cement Co. Ltd. v. CIT (Para 20) – Capital expenditure relates to business framework.

Coal Shipments Pvt. Ltd. v. CIT (Paras 21–21.5) – Temporary restraint of competition is not capital expenditure.

Empire Jute Co. Ltd. v. CIT (Paras 22–22.4) – Enduring benefit test is not conclusive.

Madras Auto Service (P) Ltd. v. CIT (Paras 24–24.3) – Substitute for revenue expense remains revenue.

 

VI. Final Decision (Paras 29–34)

                1.            Non-compete fee is not per se capital expenditure.

                2.            Where it merely facilitates efficient conduct of an existing business, it is revenue expenditure allowable under section 37(1).

                3.            The test of enduring benefit is not determinative.

                4.            The Delhi High Court judgment in Sharp Business System (2012) is set aside.

                5.            Depreciation on capitalised non-compete fee cannot be denied solely because the right is contractual or negative.

                6.            Connected matters are remanded to the ITATs for fresh consideration.

 

VII. Ratio Decidendi

Payment of non-compete fee which does not result in acquisition of a capital asset or expansion of the profit-making apparatus, and merely facilitates efficient conduct of business, is allowable as revenue expenditure under section 37(1), irrespective of the duration of the advantage.