Non-compete Fees Paid pursuance to non-compete agreement not allowable as revenue expensiture – ITAT Delhi

Saraf Chemicals Ltd. Vs DCIT (ITAT Mumbai)- If the expenditure is made for the initial outlay or for the expansion of the business or a substantial replacement of the equipment, then it would fall under the capital expenditure. It was not an expenditure incurred while the business was being carried on. Though it had been the contention of the assessee that non-compete agreement was executed subsequent to the date of main agreement, yet such contention of the assessee could not be accepted as in the main agreement itself the non-compete agreement was appended as ‘M’ without which the transaction was not complete, as by including the amount paid for non-compete agreement the purchase price as stated in MoU could be arrived at.

The incurring of expenditure also brought an enduring benefit to the assessee if the same was examined from the proposition of law laid down in the case of Assam Bengal Cement Co. Ltd. v. CIT [1995] 27 ITR 34 (SC) wherein their Lordships have considered the period of five years as providing an enduring advantage to the assessee irrespective of the fact that the payment was to be made annually.It is well-settled that expenditure incurred on warding off competition in the business even to a rival dealer will constitute capital expenditure and to hold it as capital expenditure it is not necessary that non-compete fee be paid to create monopoly rights.