Adv. Ashish Parashar – [2025] 181 taxmann.com 904 (Article)
1. Introduction
The tax treatment of non-compete fees has been a persistent source of litigation under the Income-tax Act, 1961 (“the Act”). The core controversy revolves around whether payments made to restrain competition are capital in nature and hence disallowable under section 37(1), or whether they constitute revenue expenditure incurred wholly and exclusively for business purposes. In its recent judgment delivered in December 2025, the Supreme Court has decisively addressed this controversy, reaffirming established principles governing capital and revenue expenditure and clarifying the correct approach for tax authorities and taxpayers alike.
2. Background and Litigation History
Assessing Officers have traditionally viewed non-compete payments as capital expenditure on the ground that such payments confer an “enduring benefit”. This approach drew support from certain High Court rulings, notably where non-compete fees were paid in conjunction with acquisition of business or commercial rights.
Conversely, several High Courts and ITAT benches held that a negative covenant restraining competition does not, by itself, result in creation of a capital asset and therefore qualifies as revenue expenditure or, alternatively, as a depreciable intangible asset. This divergence resulted in prolonged litigation and inconsistent application of the law.
3. Issues before the Hon’ble Supreme Court
The Supreme Court was called upon two fold issues to determine:
- whether non-compete fees are capital or revenue expenditure for the purposes of section 37(1); and
- whether, if treated as capital, such payments qualify as “intangible assets” eligible for depreciation under section 32(1)(ii).
4. “Enduring Benefit Test” – Not a Conclusive Formula
Reiterating settled jurisprudence, the Court observed that the “enduring benefit” test is not conclusive in isolation. Reliance was placed on earlier landmark rulings where it was held that an expenditure may yield benefits extending over several years and yet remain revenue in character if it does not add to the fixed capital structure of the assessee.
The Court emphasised that the true test is whether the expenditure results in the acquisition of a capital asset or an addition to the profit-making apparatus, as opposed to facilitating the efficient conduct of existing business operations.
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