The Supreme Court of India, in Sharp Business System v. Commissioner of Income-tax and connected appeals, examined the long-standing controversy as to whether non-compete fee paid by an assessee constitutes revenue or capital expenditure, and if capital in nature, whether such expenditure qualifies as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961.

The appeals arose from divergent judgments of various High Courts on the tax treatment of non-compete fee. In Sharp Business System, the assessee had paid a non-compete fee to its joint venture partner to restrain it from carrying on competing business for a specified period. The Assessing Officer treated the payment as capital expenditure and denied depreciation. The Delhi High Court upheld the disallowance, holding that the non-compete right was merely a personal right in personam and did not constitute a depreciable intangible asset.

In contrast, other High Courts, including the Madras, Bombay, Gujarat, and Karnataka High Courts, had taken a consistent view that non-compete fee confers a valuable commercial right and qualifies as an intangible asset eligible for depreciation. This divergence led to the batch of appeals being considered together by the Supreme Court.

The Supreme Court undertook an exhaustive review of the jurisprudence on capital versus revenue expenditure, including Assam Bengal Cement Co. Ltd., Empire Jute Co. Ltd., Alembic Chemical Works Co. Ltd., Madras Auto Services (P) Ltd., and Guffic Chem (P) Ltd. The Court reaffirmed that non-compete fee is paid to obtain an enduring advantage by restricting competition and, therefore, constitutes capital expenditure rather than revenue expenditure under Section 37.

However, on the issue of depreciation, the Supreme Court disagreed with the restrictive interpretation adopted by the Delhi High Court. Interpreting Section 32(1)(ii) and Explanation 3 thereto, the Court held that the expression “any other business or commercial rights of similar nature” is of wide amplitude and is not confined only to intellectual property rights such as patents, trademarks, or copyrights. The genus underlying the provision is “intangible assets,” and the enumerated rights are illustrative rather than exhaustive.

The Court held that the right acquired under a non-compete agreement is a valuable commercial right which enables the assessee to conduct business with reduced competition and enhanced profitability. Such right, though arising from a negative covenant imposed on the transferor, yields a positive commercial advantage to the transferee and satisfies the requirements of ownership and use for the purposes of business. The Court rejected the distinction between rights in rem and rights in personam as being alien to the scheme of Section 32.

Relying inter alia on Techno Shares & Stocks Ltd. v. CIT, the Supreme Court held that even rights which are contractual in nature and enforceable against specific persons can constitute intangible assets eligible for depreciation. The Court further observed that the subsequent insertion of Section 28(va) taxing non-compete receipts reinforces the legislative intent to treat such rights as part of the commercial and capital framework.

Accordingly, the Supreme Court held that while non-compete fee is capital expenditure and not allowable as a revenue deduction under Section 37, it constitutes an intangible asset falling within the ambit of Section 32(1)(ii) and is eligible for depreciation. The contrary view taken by the Delhi High Court was overruled, and the appeals of assessees claiming depreciation were allowed, while the Revenue’s appeals were dismissed.

Source- https://api.sci.gov.in/supremecourt/2013/5229/5229_2013_14_1504_67116_Judgement_19-Dec-2025.pdf

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