In a significant ruling impacting ongoing disputes, the Supreme Court^[1] 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 business advantage, resulting in creation of a capital asset in the hands of the Assessee. Thus, the same resulted in disallowance of the claim. Aggrieved, the Assessee approached the Supreme Court.

The Apex Court held that restricting a competitor does not, by itself, create an enduring advantage in the capital field, even if the benefit accrues over multiple years. The decisive test is whether the payment alters the fixed capital structure or merely improves business efficiency and not the duration of the benefit. The Supreme Court clarified that non-compete payments neither create a new asset nor add to the profit-earning apparatus of the Assessee.

Further, it was opined that the ‘enduring benefit’ test is not conclusive where the advantage only enables smoother or more profitable business operations and hence, such payments would qualify as revenue expenditure, even if they provide temporary insulation from competition. As a natural corollary, the Apex Court found it unnecessary to treat non-compete rights as depreciable intangible assets under Section 32(1)(ii) of the IT Act.

The ruling of the Supreme Court provides long-awaited clarity and is likely to result in substantial relief for taxpayers, particularly in acquisition, joint venture, and restructuring contexts involving non-compete arrangements. Further, the ruling of the Supreme Court once again reiterates that the ‘enduring benefit test’ is not the sole test to determine the nature of the expenditure incurred by the Assessee, to be an allowable expenditure under Section 37 of the IT Act.

[1]              Sharp Business System v. Commissioner of Income-tax, 2025 INSC 1481 (SC).