Sharp Business Systems Thr. Finance Director Mr. Yoshihisa Mizuno v. Commissioner of Income Tax-III N.D.  (Civil Appeal No. 4072 of 2014 with Civil Appeal Nos. 15048 to 15051 of 2025) Order Dated 19th December 2025

The Supreme Court examined a batch of appeals arising from divergent views taken by various High Courts on the tax treatment of non-compete fees under the Income Tax Act, 1961. The principal questions before the Court were whether payments made towards non-compete arrangements are capital or revenue in nature and, if regarded as capital expenditure, whether such payments constitute intangible assets eligible for depreciation under Section 32(1)(ii) of the Act.

In this case, the assessee had paid a sum of ₹3 crores to Larsen & Toubro for a non-compete covenant operative for a period of seven years. The Assessing Officer, the Commissioner (Appeals), the Income Tax Appellate Tribunal, and subsequently the Delhi High Court, consistently held that the payment was capital in nature. However, depreciation was denied on the ground that the non-compete right was enforceable only against L&T, constituting a right in personam, and not a right enforceable against the world at large. The Delhi High Court highlighted that depreciation under Section 32(1)(ii) is available only in respect of commercial rights of an enduring character that are enforceable in rem.

A contrary approach was adopted by the Madras High Court in the Pentasoft Technologies cases, where the assessee had paid ₹180 crores as non-compete fees in the course of acquiring a software division. The Court held that the payment resulted in the acquisition of valuable commercial rights as part of a composite transaction involving the transfer of intellectual property and business interests. On this basis, the non-compete fee was treated as an intangible asset qualifying for depreciation. A similar view was taken by the Bombay High Court in Piramal Glass Limited, which upheld the allowance of depreciation on non-compete fees, observing that the expression “business or commercial rights of similar nature” in Section 32(1)(ii) is of wide amplitude and includes rights that yield enduring business advantages by shielding the assessee from competition.

The Supreme Court therefore reconciled these differing judicial opinions by drawing a distinction between restrictive covenants of a limited nature and commercial rights of enduring significance. It held that where a non-compete payment merely imposes a restraint on competition enforceable only in personam, without conferring any transferable or independently enforceable commercial right, such payment cannot be regarded as a depreciable intangible asset under Section 32(1)(ii). At the same time, the Court clarified that payments of this nature, when incurred wholly and exclusively for the purposes of business, do not result in the acquisition of a capital asset or a new profit-earning structure. Relying on the principles laid down in Empire Jute and Madras Auto Services, the Court concluded that non-compete fees are allowable as revenue expenditure under Section 37(1) of the Act. Consequently, while depreciation under Section 32(1)(ii) may not be available in all cases, the expenditure itself remains deductible as a business expense, thereby settling the long-standing controversy in favour of assessees.