Sharp Business System v. Commissioner of Income Tax-III; 2025 INSC 1481 - S.37 Income Tax Act - Non Compete Fee

Income Tax Act, 1961 -Section 37- Any expenditure incurred wholly and exclusively for the purposes of the business shall be allowed in computing the income chargeable under the head ‘profits and gains of business or profession.’ For such an expenditure to be allowed, it should fulfill the following criteria: i) it should not be an expenditure described in Sections 30 to 36; ii) it should not be in the nature of capital expenditure or personal expenses of the assessee - Such expenditure should be incurred during the previous year relevant to the assessment year under consideration -the length of time over which the enduring advantage may enure to the payer is not determinative of the nature of expenditure. As long as the enduring advantage is not in the capital field, where the advantage merely facilitates in carrying on the business more efficiently and profitably, leaving the fixed assets untouched, the payment made to secure such advantage would be an allowable business expenditure, irrespective of the period over which the advantage may accrue to the payer (assessee) by incurring of such expenditure.(Para 27)

Non-compete fee - Non-compete fee is paid by one party to another to restrain the latter from competing with the payer in the same line of business. It may be by way of a written agreement or by an oral understanding. The restriction may be limited to a specified territory or otherwise; similarly, it can be for a specified period or otherwise. Purpose of non-compete payment is to give a head start to the business of the payer. It can also be for the purpose of protecting the business of the payer or for enhancing the profitability of the business of the payer by insulating the payer from competition. on-compete fee only seeks to protect or enhance the profitability of the business, thereby facilitating the carrying on of the business more efficiently and profitably. Such payment neither results in creation of any new asset nor accretion to the profit earning apparatus of the payer. The enduring advantage, if any, by restricting a competitor in business, is not in the capital field(Para 25)

Income Tax Act, 1961 -Section 36 - assessee is entitled to claim allowance of interest on the funds invested in sister concern for acquiring of controlling interest - The advances were made to the sister concern and its directors would also be covered by the principle of commercial expediency. (Para 39-40)