The Supreme Court in Sharp Business System v. CIT [2025 INSC 1481] has held that non‑compete fee paid to keep a potential competitor out is a revenue expenditure deductible under section 37(1), expressly overruling the earlier Delhi High Court view that treated it as capital.
Background of the dispute
The controversy around tax treatment of non‑compete fees has been one of the most litigated areas in Indian income tax, with conflicting rulings treating such payments either as capital expenditure or revenue expenditure.
In Sharp Business System’s case, the assessee, a JV between Sharp Corporation (Japan) and L&T, paid ₹3 crore to L&T for a 7‑year non‑compete covenant in the electronic office products business, which the Assessing Officer and Delhi High Court had treated as capital expenditure.
Facts of Sharp Business System case
- Sharp Business System (India) Ltd entered a joint venture structure where L&T agreed not to compete in the electronic office products segment for 7 years against a non‑compete fee of ₹3 crore.
- The assessee claimed this payment as a deduction under section 37(1) as business expenditure, but the AO disallowed it, treating it as capital; this view was affirmed by the ITAT and the Delhi High Court in 2012.
- The matter reached the Supreme Court, which has now reversed the High Court and held that the payment is revenue in nature and hence allowable under section 37(1).
Supreme Court’s core reasoning
The Supreme Court clarified that the traditional “enduring benefit” test is not conclusive by itself; what is decisive is whether the advantage falls in the capital field or relates merely to the profitable conduct of an existing business.
It held that the non‑compete payment did not result in acquisition of a new business, did not add to the profit‑making apparatus, did not create a new asset or monopoly right, and only enabled the assessee to operate its existing business more efficiently and profitably amidst reduced competition.
SC’s reasoning on non‑compete fee specifically
- The bench (Justice Manoj Misra and Justice Ujjal Bhuyan) observed that non‑compete fee is typically paid to give the payer a competitive head‑start or breathing space from competition, not to acquire a new source of income or an independent commercial right.
- The Court noted that such payments are inherently uncertain: the payer may or may not derive the anticipated gains despite the non‑compete, which is inconsistent with the idea of acquiring a concrete capital asset; therefore, the expenditure aligns more with a business/trading outlay
Why the Delhi High Court view was overturned
- The Delhi High Court had treated Sharp’s ₹3 crore payment to L&T (for 7 years) as capital on the logic that keeping a strong competitor out for a fairly long period confers an enduring advantage, and therefore is part of capital field.
- The Supreme Court disagreed and held that merely neutralising competition for a period does not by itself create a new capital asset or structure; Sharp’s fixed capital, business model, and profit‑making apparatus remained the same, so the payment could not be capitalised.
Key legal principles laid down
- Nature from payer’s perspective: Non‑compete compensation is paid in anticipation that absence of competition may yield business benefit, but such benefit is uncertain and contingent; this uncertainty is more consistent with a business expenditure than with the acquisition of a capital asset.
- No new asset/profit apparatus: Where non‑compete fee does not bring into existence any identifiable capital asset, business, or exclusive right, and the assessee’s asset base and business structure remain unchanged, the payment cannot be treated as capital.
- Enduring benefit is not decisive: Even if some commercial advantage extends for multiple years (here, 7 years), it can still be revenue if it only facilitates the operations of an existing business rather than altering its structure or capital framework.
Practical implications for taxpayers and advisors
For payers, non‑compete fees in similar commercial contexts can now be claimed as deductible revenue expenditure under section 37(1), provided they do not result in acquisition of a distinct capital asset or business.
Revenue authorities will need to revisit pending and future litigation where non‑compete payments have been treated as capital based solely on duration or perceived enduring benefit, and instead examine whether any capital asset, right, or business was actually acquired.
FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)
Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.