Non-Compete Fee Allowable As 'Business Expense'!!

In a significant ruling impacting ongoing disputes, the Supreme Court¹ has held that non-compete fees paid to ward off competition are allowable as revenue expenditure under Section 37(1) of the IT Act. The Apex Court held that, since such payment merely facilitates efficient conduct of business and does not result in creation of a capital asset or profit-earning apparatus, such payment could not partake the character of 'capital expenditure'.

Whilst holding so, the Supreme Court overturned the Delhi High Court's decision, which had treated a sum of INR 3 crore being paid as non-compete fee (for a seven year restriction) as capital in nature. The Delhi High Court held that the payment of non-compete fee secured an advantage of enduring nature, as it eliminated competition for a fixed period of seven years. Further, the Delhi High Court observed that such expenditure was not incurred merely to facilitate day-to-day business operations but to obtain a long-term