Facts

The assessee, Sharp Business System, paid a non-compete fee to another corporate entity pursuant to a commercial arrangement restricting the latter from engaging in competing business activities for a specified period. The payment was claimed as a deduction in computing business income. The Assessing Officer treated the expenditure as capital in nature and disallowed the claim. The disallowance was upheld by the Commissioner (Appeals), the Income Tax Appellate Tribunal, and the High Court.

Issue

Whether payment of non-compete fee constitutes:

  1. Revenue expenditure allowable as deduction under Section 37(1) of the Income-tax Act, 1961; or

  2. Capital expenditure, and if so, whether such payment results in acquisition of an intangible asset eligible for depreciation under Section 32(1)(ii).

Findings and Reasoning

The Supreme Court examined the nature and purpose of the non-compete payment and analysed whether it resulted in creation of a capital asset or enduring advantage in the capital field. The Court observed that where a non-compete payment is made to facilitate smooth and efficient conduct of an existing business, without creating or acquiring a new asset or expanding the profit-earning apparatus, such expenditure is revenue in nature.

The Court also examined the scope of “business or commercial rights of similar nature” under Section 32(1)(ii) and noted the divergent judicial views on depreciation of non-compete rights. However, once the expenditure itself is held to be revenue in nature, the question of treating it as a depreciable capital asset does not arise.

Outcome

Adverting to the facts of this case, we find that the respondent assessee had claimed interest on borrowed funds under Section 36(1)(iii) of the Act which was utilized for investment in M/S Ceylon Glass Company Ltd., a subsidiary company of the assessee. The investment was made for controlling the interest in the associate concern by purchase of shares. Thus the investment was clearly for commercial expediency. We agree with the finding recorded by the ITAT and affirmed by the High Court that assessee is entitled to claim allowance of interest on the funds invested in sister concern for acquiring of controlling interest. 
40. Following the decision of this Court in SA Builders Ltd. (supra), we find that the purpose for which the advances were made to the sister concern and its directors would also be covered by the principle of commercial expediency.
41. Accordingly, the decision of the ITAT on this point, which was not interfered with by the High Court, is hereby affirmed. Consequently, the appeal filed by the revenue on this issue is dismissed. The question framed in paragraph 5.2 of this judgment is thus answered in favour of the assessee and against the revenue.
42. All the appeals are hereby disposed of in terms of paragraphs 29 to 34 and 39 to 41 supra.

Related Judicial Context

The judgment addresses and resolves the long-standing conflict arising from earlier High Court and Tribunal decisions that had treated non-compete fees as capital expenditure and denied depreciation on the ground that such rights were personal and non-transferable. The Supreme Court’s ruling provides authoritative clarity on the tax treatment of non-compete payments.

Sources
https://api.sci.gov.in/supremecourt/2013/5229/5229_2013_14_1504_67116_Judgement_19-Dec-2025.pdf


Disclaimer
This content is for academic and professional reference only, prepared with the assistance of AI tools and based on indicative Income-tax Portal/ITBA practices from reliable sources. Readers must independently verify all laws and procedures from official portals and their own sources. No liability is assumed, and the content is not intended for legal or professional reliance.