While answering substantial questions of law concerning written-off project expenditure and Rs. 40 lakhs non-compete compensation in favour of Tata Chemicals, the Bombay High Court has held that a non-compete payment made for business purposes is allowable as revenue expenditure under Section 37(1) of the Income Tax Act where it facilitates more efficient or profitable business operations without creating a capital asset or adding to the profit-earning apparatus.
The duration of the advantage is not decisive if the advantage is outside the capital field. Once the payment is found to be revenue expenditure, payment in a lump sum or instalments across different financial years does not alter its legal character, added the Court.
Briefly, the dispute concerned deductions under Section 37(1) for expenditure on projects written off and a Rs. 40 lakh non-compete payment to the assessee’s Managing Director, Dr. Seth. The Assessing Officer had partly disallowed the project expenditure and treated the non-compete payment as capital expenditure. On appeal, the Commissioner (Appeals) upheld the disallowances. The Tribunal allowed the claims, finding that the project expenditure related to improvement of existing plants without creating a new asset, while the non-compete payment was compensation that did not confer an enduring benefit of a capital nature.
The Division Bench comprising Justice Suman Shyam and Justice Gautam A. Ankhad noted that the issue was covered by its earlier decision in the assessee’s own case. The Revenue accepted that decision’s applicability and showed no distinguishing feature warranting a different view. The Tribunal’s factual finding that the expenditure improved existing plants without creating a new asset was also not challenged.
On the non-compete payment, the Court noted that it formed part of a settlement package under which Dr. Seth agreed not to compete with the assessee or disclose information acquired during his employment. Applying the Supreme Court’s decision in Sharp Business System vs. CIT [(2025) 181 taxmann.com 657 (SC)], the Court rejected the Revenue’s argument that payment over three financial years, rather than in a single year, changed its character.
