Non Compete Fee Can Be Claimed As Revenue Expenditure: SC

The Supreme Court has held that non-compete fees can be claimed as revenue expenditure under Section 37(1) of the Income Tax Act, 1961. The bench Justice Manoj Misra and Justice Ujjal Bhuyan has observed that the 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. The bench agreed 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. In the lead case, Sharp Business System, a joint venture between Sharp Corporation of Japan and Larsen & Toubro, was engaged in the business of importing and selling electronic office equipment in India. During the relevant assessment year, the company paid ₹3 crore to Larsen & Toubro under a non-compete agreement restraining L&T from engaging in a similar line of business in India for a period of seven years. The assessee claimed this payment as a deductible business expense in its income tax return. The Assessing Officer, however, treated the non-compete fee as capital expenditure on the ground that it resulted in an enduring benefit by eliminating competition for a significant period. The claim was disallowed, and the amount was added back to the assessee’s income. While the Commissioner of Income Tax (Appeals) upheld this view, the assessee alternatively argued that even if the payment was capital in nature, depreciation should be allowed treating the non-compete right as an intangible asset. This plea was also rejected. The Income Tax Appellate Tribunal and subsequently the Delhi High Court affirmed the disallowance. The Delhi High Court held that the non-compete agreement merely created a personal contractual right enforceable only against the counterparty and did not result in the acquisition of an intangible asset comparable to patents, trademarks or licences. On this basis, depreciation under Section 32(1)(ii) of the Income Tax Act was denied. In contrast, similar disputes in other cases produced different outcomes. In the Pentasoft Technologies matters, the assessee had paid a substantial non-compete fee of about ₹180 crore while acquiring the software development and training division of another company. The Madras High Court held that the non-compete agreement was part of a composite commercial arrangement and that the restraint on competition enabled the assessee to exclusively carry on its business. It ruled that such a right amounted to a “business or commercial right” and qualified as an intangible asset eligible for depreciation. Likewise, in the Piramal Glass case, the assessee paid non-compete fees during the acquisition of a glass manufacturing division. The Bombay High Court held that non-compete payments confer an enduring business advantage and fall within the ambit of “any other business or commercial rights of similar nature” under Section 32(1)(ii), thereby allowing depreciation. Because of these conflicting judicial views, the issue repeatedly surfaced across jurisdictions, leading to prolonged litigation and uncertainty for businesses, particularly in mergers, acquisitions and restructuring transactions where non-compete clauses are routine. Against this backdrop, the Supreme Court undertook an extensive examination of earlier precedents on capital versus revenue expenditure, including landmark rulings such as Empire Jute, Assam Bengal Cement, Coal Shipments, and Alembic Chemical Works. The Court analysed whether the advantage obtained by paying non-compete fees merely facilitated business operations or altered the capital structure of the enterprise. The Court ultimately held that non-compete fees create an enduring commercial advantage by restraining competition and therefore cannot be treated as revenue expenditure. However, it decisively rejected the narrow interpretation adopted by the Delhi High Court, ruling that non-compete rights are identifiable and valuable commercial rights. Such rights, the Court held, fall squarely within the scope of intangible assets eligible for depreciation under the Income Tax Act. Case Details Case Title: Sharp Business System Versus Commissioner Of Income Tax-III Case No.: Civil Appeal No. 4072 Of 2014 Date: 19/12/2025 Click Here To Read Order Read More: Delhi High Court Examines GST Applicability on Medicines Supplied to Hospital Inpatients

Non Compete Fee Can Be Claimed As Revenue Expenditure: SC

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