Sharp Business System Vs CIT (Supreme Court of India)
SC: Non-compete payments aid business efficiency, create no asset; Allowable as revenue expenditure u/s 37(1)
In Sharp Business System v. CIT, the Supreme Court held that non-compete fees paid to facilitate business operations do not create a capital asset and are allowable as revenue expenditure under Section 37(1) of the Income-tax Act. The assessee, a joint venture between Sharp Corporation, Japan, and Larsen & Toubro Ltd. (L&T), paid ₹3 crore to L&T under a non-compete agreement restraining it from engaging in competing office automation business in India for seven years. The Assessing Officer, CIT(A), ITAT, and Delhi High Court treated the payment as capital expenditure on the ground that it conferred an enduring benefit by eliminating competition. Reversing these findings, the Supreme Court reiterated that there is no rigid test to distinguish capital and revenue expenditure and that the “enduring benefit” test must be applied pragmatically. The Court observed that non-compete payments merely facilitate the efficient and profitable conduct of business without altering the fixed capital structure or profit-making apparatus. Such payments do not bring into existence any asset, monopoly, or structural advantage in the capital field. Even if the benefit lasts for a certain period, it remains revenue in nature so long as it aids business efficiency. Accordingly, the Court allowed the deduction under Section 37(1) and set aside the High Court’s judgment, holding that the question of depreciation on non-compete rights did not survive.
