Sharp Business System Thr. Finance Director Mr. Yoshihisa Mizuno vs. Commissioner Of Income Tax-Iii N.D.

2025 INSC 1481


REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4072 OF 2014


SHARP BUSINESS SYSTEM THR. FINANCE
DIRECTOR MR. YOSHIHISA MIZUNO APPELLANT(S)


VERSUS

COMMISSIONER OF INCOME TAX-III N.D. RESPONDENT(S)

With
CIVIL APPEAL NO. 15048 of 2025
(Arising out of SLP(C) NO. 16277/2014

CIVIL APPEAL NO. 15049 of 2025
(Arising out of SLP(C) NO. 719/2020
CIVIL APPEAL NO. 15050 of 2025
(Arising out of SLP(C) NO. 38046/2025
(Arising out of DIARY NO. 22308/2022

CIVIL APPEAL NO. 15051 of 2025
(Arising out of SLP(C) NO. 24756/2014


J U D G M E N T

UJJAL BHUYAN, J.
Signature Not Verified
Digitally signed by
CHETAN ARORA
Date: 2025.12.19
17:14:51 IST
Reason:
Delay in filing SLP(C) Diary No. 22308/2022 is
condoned.

2. I.A. No. 114870/2022 is allowed.
3. Leave granted in SLP(C) No. 16277/2014, SLP(C)
No. 24756/2014, SLP(C) No. 719/2020 and SLP(C) No.__/2025
(arising out of Diary No. 22308/2022).
4. Civil Appeal No. 4072/2014 is directed against the
judgment and order dated 05.11.2012 passed by the High Court
of Delhi (briefly ‘the Delhi High Court’ hereinafter) dismissing
Income Tax Appeal No. 492/2012 (Sharp Business System Vs.
Commissioner of Income Tax – III) filed by the assessee for the
assessment year 2001-02.
4.1. SLP(C) No. 16277/2014 takes exception to the
judgment and order dated 20.11.2013 passed by the High Court
of Judicature at Madras (briefly ‘the Madras High Court’
hereinafter) in Tax Case (Appeal) No. 1134 of 2008 (M/s.
Pentasoft Technology Limited Vs. DCIT) for the assessment year
2001-02 allowing the appeal of the assessee.
4.2. The judgment and order dated 29.10.2013 passed by
the Madras High Court allowing Tax Case (Appeal) No. 1195 of
2008 (M/s. Pentasoft Technologies Limited Vs. DCIT) of the
2


assessee for the assessment year 2002-03 is under impugnment
in SLP(C) No. 24756/2014.
4.3. In SLP(C) No. 719/2020, the challenge is to the
judgment and order dated 11.06.2019 passed by the High Court
of Judicature at Bombay (briefly ‘the Bombay High Court’
hereinafter) dismissing Income Tax (Appeal) No. 556 of 2017
(Principal Commissioner of Income Tax – VII Vs. Piramal Glass
Limited) of the revenue for the assessment year 2001-02.
4.4. SLP(C) D. No. 22308/2022 has been filed by the
revenue against the judgment and order dated 11.01.2022
passed by the Madras High Court dismissing Tax Case (Appeal)
No. 600 of 2010 (CIT, Chennai Vs. M/s. Pentasoft Technologies
Limited) of the revenue for the assessment year 2001-02.
5. The perennial question of whether an expenditure
incurred by an assessee is capital or revenue again confronts us
in this batch of appeals. The core issue which arises for
consideration in the facts of this batch of appeals is whether non-
compete fee paid by the assessee is a revenue expenditure or
capital expenditure?
3


5.1. Corollary to the above question is whether such
expenditure, if considered to be an expenditure of capital nature,
is entitled to depreciation under Section 32(1)(ii) of the Income
Tax Act, 1961 (briefly ‘the Act’ hereinafter)?
5.2. In SLP(C) No. 719/2020, another issue involved is the
treatment of interest on borrowed funds invested by the assessee
in its sister concern and also provided as interest free advances
to the sister concern and its directors; whether such interest is
an allowable business expenditure?
6. Before we proceed to answer the above questions, it
would be appropriate to have a brief narration of essential facts
in each of the appeals relevant to the issues which have arisen
for our consideration.
Non-compete fee
Civil Appeal No. 4072/2014
7. Assessee is the appellant here. It is a company which
is engaged in the business of importing, marketing and selling
electronic office products and equipments in India. It was
incorporated on 29.02.2000 as a joint venture of M/s. Sharp
Corporation, Japan and M/s. Larsen and Toubro Limited (‘L&T’
4


for short). L&T is in the business of developing, manufacturing,
marketing, distributing and selling, amongst other things,
electronic equipments in India. In this connection, it has a well
established country-wide sales network. M/s. Sharp Corporation
was engaged in the business of designing, developing,
manufacturing, marketing, distributing and selling various
audio/visual products, household electronic appliances,
electronic office products, computers, etc. and other related
products on a worldwide basis.
7.1. During the assessment year 2001-02, assessee paid a
sum of Rs. 3 crores to L&T as consideration for the latter not
setting up or undertaking or assisting in the setting up of or
undertaking any business in India of selling, marketing and
trading in electronic office products for 7 years. The said amount
of Rs. 3 crores was claimed as a deductible revenue expenditure
in the return of income filed by the assessee on 31.10.2001 for
the assessment year 2001-02 as non-compete fee paid to L&T.
Initially, the return was processed under Section 143(1) of the
Act. Thereafter, the case was selected for scrutiny whereafter
notice under Section 143(2) of the Act was issued to the assessee.
5


7.2. Following assessment proceedings, assessing officer
passed assessment order dated 19.03.2004 wherein it was noted
that by making payment of Rs. 3 crores to L&T, assessee could
ward of competition in business. The object of making such
payment to L&T was to derive an advantage by eliminating
competition for a period of 7 years. According to the assessing
officer, such an expenditure had brought into existence an
advantage of enduring nature and hence treated the payment of
Rs. 3 crores as capital expenditure. Therefore, the said amount
was added to the income of the assessee. There were other
aspects in the assessment order with which we are not
concerned in the present proceeding.
7.3. Aggrieved by the order of assessment, assessee
preferred an appeal before the Commissioner of Income Tax
(Appeals), ‘CIT(A)’ for short. In the appeal, assessee contended
that non-compete fee should be treated as an allowable revenue
expenditure. However, in the course of the appellate proceedings,
an alternative ground was put forth by the assessee that if the
amount of non-compete fee paid to L&T was treated as capital
expenditure, then the benefit of depreciation allowance should
be extended to the assessee under Section 32(1)(ii) of the Act.
6


7.4. CIT(A) vide the order dated 02.09.2004 held that such
expenditure was not in the nature of revenue expenditure. In so
far the alternative ground was concerned, CIT(A) held that there
was no apparent justification for the assessee to enter into a non-
compete agreement with L&T for a sum of Rs. 3 crores since L&T
was not a competitor of the assessee and that the business
interest of the assessee would not have suffered for want of such
an agreement. Since the true purport of the expenditure
remained unproved, the same was disallowed being regarded as
non-revenue expenditure, not for the purpose of business of the
assessee. Accordingly, the assessee was held to be not entitled
to depreciation. Consequently, appeal of the assessee was
dismissed by CIT(A).
7.5. Assessee preferred further appeal before the Income
Tax Appellate Tribunal, New Delhi (ITAT) against the order of the
CIT(A) dated 02.09.2004.
7.6. ITAT vide the order dated 30.06.2011 noted that the
assessee by paying a non-compete fee of Rs. 3 crores to L&T had
eliminated competition for a period of 7 years which is a duration
long enough to establish its reputation and a reasonable market
7


share would have been acquired by the assessee. Payment made
by the assessee to L&T was not to increase its profitability. Thus,
the non-compete fee could not be treated as revenue expenditure
but it was in the nature of a capital expenditure. Further, ITAT
held that the non-compete fee would not create intangible asset
eligible for depreciation under the provisions of Section 32(1)(ii)
of the Act. Thus, depreciation was not allowable on the
expenditure made by the assessee as non-compete fee. ITAT held
that just as the right to trade freely or to compete in the market
is not an asset, similarly a right arising out of a non-compete
agreement would not constitute a commercial right falling within
the ambit of intangible asset under Section 32(1)(ii) of the Act.
ITAT found no infirmity in the order passed by the CIT(A) and
dismissed the appeal of the assessee.
7.7. It was thereafter that assessee filed Income Tax
Appeal No. 492/2012 before the Delhi High Court. Vide the
judgment and order dated 05.11.2012, Delhi High Court
dismissed the appeal of the assessee as being devoid of any
merit. Delhi High Court opined that expenditure incurred by the
assessee by way of non-compete fee paid to L&T could not be
claimed as a revenue expenditure as it was clearly a capital
8


expenditure. Despite holding the expenditure to be capital in
nature, Delhi High Court was of the further view that the non-
compete right of the kind acquired by the assessee against L&T
for 7 years did not result in depreciable intangible asset. It was
held that the right acquired by the assessee by payment of non-
compete fee was a right in personam only against L&T for a period
of 7 years. It was not a right in rem. Adverting to the expression
‘similar business or commercial rights’ appearing in Section
32(1)(ii) of the Act, Delhi High Court opined that it has to
necessarily result in an intangible asset against the entire world
to qualify for depreciation under the said provision. Delhi High
Court therefore dismissed the appeal of the assessee.
Civil Appeal No. of 2025
(Arising out of SLP(C) No. 16277/2014)


8. This appeal is by the revenue assailing the judgment
and order dated 20.11.2013 passed by the Madras High Court
allowing Tax Case (Appeal) No. 1134 of 2008 filed by the assessee
for the assessment year 2001-02.
8.1. As noted above, respondent is the assessee which is a
public limited company carrying on the business of software
development, hardware sales, technical training and engineering
9


services. Assessee exports software from its industrial units set
up in software technology parks and makes domestic sales from
its industrial units situated outside software technology parks.
8.2. Assessee filed its return of income for the assessment
year 2001-02 on 29.10.2001 claiming various exemptions.
Assessing officer passed assessment order dated 31.03.2004
under Section 143(3) of the Act raising a demand of Rs.
55,25,86,888.00 besides initiating penalty proceedings.
8.3. Aggrieved by the aforesaid order of assessment,
assessee preferred appeal before CIT(A). During the appellate
proceedings, assessee raised additional grounds of appeal, one
of which related to depreciation on intangible assets like
intellectual property rights and non-compete fee. Assessee
contended that assessing officer had not granted depreciation on
intangible assets as well as on non-compete fee. It may be
mentioned that assessee had paid Rs. 180 crores as non-
compete fee during acquisition of software development and
training division of M/s. Pentamedia Graphics Limited. In these
proceedings, we are not concerned with the claim of depreciation
on intangible assets like intellectual property rights.
10


8.4. CIT(A) in the order dated 30.11.2006 held that non-
compete fee is nothing but a license. Non-compete fee paid to
M/s. Pentamedia Graphics Limited restrained it from using the
brand name ‘Pentasoft’, further restraining it from undertaking
any development of software. Assessee could therefore
exclusively carry on the business of software development,
training and export of such technologies by restraining M/s.
Pentamedia Graphics Limited from carrying out the same
activities. This commercial right acquired by payment of non-
compete fee was held to be an intangible asset entitled to
depreciation under Section 32(1)(ii) of the Act. Accordingly,
direction was issued to the assessing officer.
8.5. Aggrieved by the aforesaid order of CIT(A), revenue
preferred appeal before the ITAT, Chennai particularly the
finding of CIT(A) that non-compete fee is eligible for depreciation
under Section 32(1)(ii) of the Act.
8.6. ITAT vide the order dated 14.03.2008 relied on its
previous decision in the assessee’s own case and held that non-
compete fee was not an intangible asset and, therefore,
depreciation could not be allowed on non-compete fee.
11


8.7. Assessee preferred appeal before the Madras High
Court. Madras High Court noted in the judgment and order
dated 20.11.2013 that the issue as to whether non-compete fee
was an intangible asset and hence entitled to depreciation was
already decided by it in the assessee’s own case dated
29.10.2013 for the assessment year 2002-03. Accordingly,
Madras High Court decided the appeal in favour of the assessee
by holding that assessee was entitled to depreciation on non-
compete fee, it being an intangible asset, under Section 32(1)(ii)
of the Act.
Civil Appeal No. of 2025
(Arising out of SLP(C) No. 24756 of 2014)


9. This appeal is by the revenue. Respondent is the
assessee, details of which have already been mentioned in the
previous appeal.
9.1. For the assessment year 2002-03, respondent filed its
return of income on 31.10.2001 declaring net loss of Rs.
37,12,20,853.00. Initially the return was processed under
Section 143(1) of the Act but subsequently the case was selected
for scrutiny during which proceedings, assessee filed a revised
12


return increasing its loss. It also submitted a note on the
admissibility of depreciation on intellectual property rights and
on non-compete fee on 23.02.2000. Assessee stated that it had
entered into an agreement with M/s. Pentamedia Graphics
Limited for acquisition of the software development and training
division. In the agreement dated 23.02.2000, there was a clause
relating to non-competition by virtue of which M/s. Pentamedia
Graphics Limited agreed that it would not enter into the business
of the assessee either directly or indirectly in any country for a
period of 10 years. Assessee paid Rs. 180 crores as non-compete
fee to M/s. Pentamedia Graphics Limited.
9.2. Assessing officer vide the assessment order dated
30.03.2005 rejected capitalisation of non-compete fee as well as
disallowed the claim of depreciation.
9.3. Assessee preferred appeal before CIT(A), Chennai.
CIT(A) vide the order dated 27.02.2006 held that the assessee
could carry on the business in software development export and
training by restraining M/s. Pentamedia Graphics Limited from
carrying out the same activities. Assessee had acquired
commercial right to conduct training programmes with the use
13


of the trademark ‘Pentasoft’ and engaged in software
development and export of various software products. According
to CIT(A), accounting standard 26 of the Institute of Chartered
Accountants of India, non-compete fee is classifiable as
intangible asset since it satisfies the criteria of being: (i)
identifiable, (ii) controllable, and (iii) economic benefits flowed
out to the enterprise. Since the three criteria were satisfied and
the assets were unconditionally transferred by M/s. Pentamedia
Graphics Limited, CIT(A) held that the assessee had acquired the
absolute right to enjoy, utilize and exploit such commercial right.
Therefore, it was an intangible asset entitled to depreciation
under Section 32(1)(ii) of the Act.
9.4. Both revenue and assessee preferred separate
appeals before the ITAT, Chennai. In the order dated 06.02.2008,
ITAT held that non-compete fee was not an asset which the
assessee could use like a license or franchise in its business.
Non-compete fee was a payment made to ward off a competitor
for a specified number of years. It only conferred a right to sue
in case of breach by the person to whom the amount was paid.
It could only be enforced when a default occurred. As such, ITAT
held that depreciation could not be allowed on non-compete fee.
14


9.5. Aggrieved by the order of ITAT, assessee preferred
appeal before the Madras High Court, being Tax Case (Appeal)
No. 1195 of 2008. Madras High Court held that non-compete
agreement between parties was a composite agreement. Under
the agreement, the transferor had transferred all its rights
including copyrights and trade marks as well as the training and
development division to the assessee. In the composite
agreement, there was a non-compete clause by virtue of which
the transferor was restrained from doing the same business as
that of the assessee. High Court held such a right to be a
commercial right. Thus, High Court was of the view that non-
compete agreement and the various terms and conditions
contained therein, binds the parties. Non-compete fee was,
therefore, held to be an intangible asset and in terms of Section
32(1)(ii) of the Act, it would be a capital asset entitled to
depreciation.
Civil Appeal No. of 2025
(Arising out of SLP(C) No. 719/2020)


10. This appeal is at the instance of the revenue assailing
the judgment and order dated 11.06.2019 passed by the Bombay
High Court in Income Tax Appeal No. 556 of 2017 (Principal
15


Commissioner of Income Tax Vs. Piramal Glass Limited)
preferred by the revenue. The assessment year under
consideration is 2001-2002.
10.1. Assessee, which is the respondent, is a subsidiary
company of Nicholas Piramal India Limited which holds 53.76
percent of equity shares of the assessee. The rest of the equity
shares have been subscribed by foreign parties. Assessee has
two manufacturing divisions, both in Gujarat.
10.2. Assessee had filed its return of income for the
assessment year under consideration on 30.10.2001 declaring
total income of Rs. 17,11,64,492.00 under Section 115JA of the
Act and a loss of Rs. 20,52,26,552.00. Though initially the return
was processed under Section 143(1) of the Act, subsequently,
assessment proceedings were initiated under Section 143
thereof.
10.3. During the assessment year 1999-2000, assessee had
acquired the glass division from Nicholas Piramal India Limited
for which a non-compete fee of Rs. 18,00,00,000.00 was paid.
10.4. In the assessment order dated 19.02.2004 passed by
the assessing officer under Section 143(3) of the Act the claim of
16


depreciation on non-compete fee was disallowed by following the
earlier order of assessment in the case of the assessee itself for
the assessment year 1999-2000 holding that the expenditure
was in no way connected with the acquisition of various assets.
The disallowance in this regard was worked out at Rs.
12,18,37,337.00.
10.5. Assessee preferred appeal before CIT(A) who, however,
in his appellate order dated 02.09.2004 upheld the decision of
the assessing officer disallowing depreciation on non-compete
fee.
10.6. Aggrieved thereby, assessee preferred further appeal
before ITAT, ‘B’ Bench, Mumbai. Cross appeal was also filed by
the revenue in respect of other issues. Vide its order dated
02.03.2016, ITAT held that so long as non-compete fee in
question is capital expenditure, the same would be entitled for
depreciation. ITAT, therefore, directed the assessing officer to
allow the claim of depreciation on the amount of non-compete
fee paid treating the same as intangible asset.
10.7. Assailing the aforesaid finding of the ITAT, revenue
preferred appeal before the Bombay High Court being Income
17


Tax Appeal No.556 of 2017. It was noted by the Bombay High
Court that on the question of grant of depreciation on non-
compete fee paid, various High Courts have held in favour of the
assessee. A non-compete fee provides an enduring benefit and
protects the assessee against competition. The expression ‘or any
other business or commercial rights of similar nature’ appearing
in Section 32(1)(ii) is wide enough to include non-compete fee.
Therefore, Bombay High Court was of the view that no question
of law arose in this regard.
Civil Appeal No. of 2025
(Arising out of SLP(C) No. of 2025)
(Arising out of Diary No. 22308 of 2022)


11. This appeal by the revenue is directed against the
judgment and order dated 11.01.2022 passed by the Madras
High Court dismissing Tax Case (Appeal) No. 600 of 2010 of the
revenue. Assessment year under consideration is 2001-02.
11.1. Assessee is the respondent. It is a public limited
company carrying on the business in software development,
hardware sales and technical training and engineering services.
It has software export unit situated in a software technology park
in India.
18


11.2. Assessee filed return of income for the assessment
year under consideration on 29.10.2001 declaring a net loss of
Rs. 66,59,04,421.00. Initially the return was processed under
Section 143(1) of the Act but subsequently, assessment
proceedings were initiated under Section 143 of the Act.
11.3. In the assessment order dated 31.03.2004, total
income of the assessee was computed at Rs. 96,25,86,888.00
which resulted in net demand of Rs. 55,25,86,888.00 including
interest under Section 234B of the Act. Consequently, penalty
proceedings under Section 271(1)(c) of the Act were also initiated
by the assessing officer against the assessee. In the assessment
order, assessing officer made several disallowances which are
not the subject matter of the appeal.
11.4. Assessee preferred appeal before the CIT(A), Chennai.
During the appellate proceedings, assessee raised additional
grounds of appeal which according to it were ignored by the
assessing officer in the assessment proceedings. One of the
additional grounds raised by the assessee related to claim of
depreciation of intangible assets like intellectual property rights
and non-compete fee. It was stated that assessee had paid Rs.
19


180 crores as non-compete fee to M/s. Pentamedia Graphics
Limited for acquisition of its software development and training
division.
11.5. CIT(A) in its order dated 30.11.2006 held that non-
compete fee is nothing but a license. Assessee could exclusively
carry on the business of software development, training and
export of technologies by restraining M/s. Pentamedia Graphics
Limited from carrying out the same activities. Thus, payment of
non-compete fee was held to be an intangible asset entitled to
depreciation under Section 32(1)(ii) of the Act.
11.6. Revenue preferred appeal before ITAT, Chennai
challenging the decision of the CIT(A) holding that non-compete
fee is an intangible asset eligible for depreciation. Cross appeal
was also filed by the assessee on other grounds.
11.7. ITAT vide the order dated 14.03.2008 held that non-
compete fee is an intangible asset entitled to depreciation under
Section 32(1)(ii) of the Act.
11.8. This finding of the ITAT came to be challenged before
the Madras High Court by the revenue in Tax Case (Appeal) No.
600 of 2010. Madras High Court followed its earlier decision in
20


the case of the assessee itself for the assessment year 2002-03
and dismissed the appeal filed by the revenue upholding the
decision of the ITAT on this point.
Submissions


12. Mr. Ajay Vohra, learned senior counsel appearing for
Sharp Business System (assessee) (appellant in Civil Appeal No.
4072/2014), at the outset submits that the expenditure incurred
on account of non-compete fee is a revenue expenditure and is,
therefore, an allowable deduction. He has referred to Section 37
of the Act, more particularly to sub-section (1) thereof, and
submits that any expenditure of an assessee may be allowed as
a deduction while computing the income chargeable under the
head ‘profits and gains of business or profession’ subject to
fulfillment of the following conditions:
(i) if the expenditure does not fall within the ambit of
Sections 30 to 36 of the Act;
(ii) if the expenditure has been incurred in the
accounting year relevant to the assessment year
under consideration;
21


(iii) it should be expended wholly and exclusively for the
purpose of the business or profession carried on by
the assessee; and
(iv) it should not be in the nature of capital expenditure
or personal expenses of the assessee.
12.1. Adverting to the above, Mr. Vohra submits that the
expenditure incurred by the assessee in the form of non-compete
fee is certainly not a personal expense of the assessee; the
expenditure was wholly and exclusively incurred for the purpose
of its business, for the purpose of establishing and enlarging the
business of the assessee. There is no doubt it was expended
during the relevant accounting year.
12.2. Mr. Vohra asserts that such expenditure incurred by
the assessee is on revenue account since it was expended wholly
and exclusively for the purpose of business. Therefore, such an
expenditure should be allowed as a deduction.
12.3. He has referred to the decision of this Court in Empire
1
Jute Company Limited Vs. Commissioner of Income Tax where it
has been held that in certain situations or circumstances, the

1
(1980) 124 ITR 1
22


test of enduring benefit may fail. In fact, learned senior counsel
submits that the test of enduring benefit may not be applicable
universally to determine the character of the expenditure. Even
when such an expenditure results in a benefit of enduring
nature, that by itself would not be conclusive to regard or treat
the expenditure as capital expenditure, if the benefit merely
facilitates in carrying on the business more profitably and
efficiently.
12.4. Applying the tests laid down by this Court in the case
of Empire Jute (supra), learned senior counsel submits that non-
compete fee only seeks to protect and enhance the business of
the assessee thereby facilitating the carrying on of the business
more efficiently and profitably. According to him, such payment
does not result in creation of a new asset or any accretion to the
business apparatus. The benefit, though of enduring advantage,
is due to restriction of a competitor or potential competitor in
business. Therefore, such a benefit even if of an enduring nature
is not in the capital field.
12.5. Continuing with his submissions, Mr. Vohra has
alluded to a judgment of this Court in Commissioner of Income
23


2
Tax Vs. Madras Auto Services (P) Limited . Relying on the
aforesaid decision, Mr. Vohra submits that the period or length
of time over which the enduring advantage may spread over is
not determinative of the nature of expenditure where the
advantage merely facilitates in carrying on the business more
efficiently and profitably, leaving the fixed assets untouched.
12.6. Mr. Vohra next refers to another decision of this Court
3
in CIT, West Bengal II, Calcutta Vs. Coal Shipments (P) Limited
and submitted that this Court considered its decision in Assam
4
Bengal Cement Company Limited Vs. CIT and held that if
payment is made to ward off competition in business or with an
object of deriving an advantage by eliminating competition over
a period of time, the same would be in the nature of capital
expenditure. On the other hand, where there is no certainty of
the duration of the advantage and the same could be put to an
end at any time, such an expenditure would be a revenue
expenditure.

2
(1998) 233 ITR 468
3
(1971) 82 ITR 902
4
(1955) 27 ITR 34
24


12.7. It is the submission of Mr. Vohra that if the aforesaid
decisions of this Court in Coal Shipments (supra) and Empire
Jute (supra) are read conjointly, the only legal inference that can
be drawn is that when the expenditure incurred by the assessee
brings into existence a benefit of enduring nature in the capital
field such payment of non-compete fee would be treated as
capital expenditure and not otherwise. If the expenditure so
incurred is for carrying on the business more efficiently or
profitably without any addition to the profit earning apparatus,
the same would be an allowable revenue deduction, irrespective
of the fact whether the benefit is enduring or ephemeral.
12.8. Applying the ratio of the aforesaid decisions to the
facts of the appeal, he submits that as a matter of fact there is
no elimination of competition; nor does the payment create any
monopoly over the business of electronic products etc. by
making the non-compete fee payment to L&T. Payment was
made to L&T not to eliminate competition or create a monopoly
but only to run the business more efficiently and profitably. Such
consideration paid to L&T cannot therefore be said to be for the
acquisition of any capital asset or towards bringing into
existence a new profit earning apparatus. Delhi High Court failed
25


to appreciate that payment of non-compete fee does not bring
into existence any capital asset or advantage of enduring benefit
in the capital field. Therefore, such an expenditure cannot be
treated as capital expenditure. Such expenditure only helps in
enhancing the profitability of business. Therefore, it is an
allowable expenditure under Section 37(1) of the Act.
12.9. He thereafter makes an alternative submission.
Referring to Section 32 of the Act, he submits that even if such
an expenditure is construed to be a capital expenditure,
depreciation cannot be denied. Section 32(1)(ii) of the Act
provides that in respect of depreciation of know-how, patents,
copyrights, trade marks, licences, franchises or any other
business or commercial rights of similar nature being intangible
assets acquired on or after the first day of April, 1998, not being
goodwill of a business or profession, owned wholly or partly by
the assessee, and used for the purposes of the business or
profession, the deductions as provided thereunder shall be
allowed. Explanation 3 to sub-section (1) of Section 32 explains
the meaning of the word ‘assets’ to mean (a) tangible assets,
being buildings, machinery, plant or furniture; and (b) intangible
assets, being know-how, patents, copyrights, trade marks,
26


licences, franchises or any other business or commercial rights
of similar nature, not being goodwill of a business or profession.
Mr. Vohra submits that the crucial expression to be noticed in
this provision is ‘any other business or commercial rights of
similar nature’. According to him, it would be too simplistic to
apply the doctrine of ejusdem generis to say that the aforesaid
expression would mean business or commercial rights of similar
nature like intellectual property rights, such as, know-how,
patents, copyrights, trade marks etc. Once the High Court held
that payment of non-compete fee gave the appellant an
advantage of enduring benefit, then the High Court could not
have denied depreciation thereon by taking the view that no
asset was brought into existence.
12.10. He then refers to the decision of this Court in the case
5
of which has held that
Techno Shares & Stocks Limited Vs. CIT
membership card of Bombay Stock Exchange is in the nature of
license to trade. Hence, it is an intangible asset entitled to
depreciation under Section 32(1)(ii) of the Act. Based on the
aforesaid decision, he submits that depreciation is allowable on

5
(2010) 327 ITR 323
27


payment of non-compete fee as such payment results in
acquisition of an intangible asset within the meaning of
Explanation 3 to Section 32(1) of the Act.
12.11. Learned senior counsel therefore submits that firstly
the expenses incurred by the assessee by way of non-compete
fee is a revenue expenditure and therefore is an allowable
deduction. Alternatively, he submits that if the same is
construed to be a capital expenditure, then depreciation would
be allowable thereon in terms of Section 32(1)(ii) of the Act.
13. Mr. Arvind P. Datar, learned senior counsel
representing M/s. Piramal Glass Private Limited (formerly
known as Piramal Glass Limited) submits that his client
acknowledges that non-compete fee paid is not a revenue
expenditure but a capital expenditure. However, the further
contention is that as a capital expenditure, it is entitled to
depreciation under Section 32 of the Act. Therefore, the question
which arises for consideration is whether the right which accrues
to the assessee on account of the non-compete agreement can
be said to be an ‘intangible asset’ qualifying for depreciation
under Section 32 of the Act.
28


13.1. Mr. Datar then refers to Section 32(1)(ii) of the Act and
submits that the said provision clearly provides for depreciation
on intangible assets owned and used for the purpose of business
and profession. Intangibles include know-how, patents,
copyrights, trade marks, licences, franchises or any other
business or commercial rights of similar nature. Explanation 3
to Section 32 defines the term ‘assets’ and clause(b) of the
Explanation defining ‘intangible assets’ is in similar terms as is
referred to in Section 32(1)(ii) of the Act. He then refers to the
definition of ‘block of assets’ as provided in Section 2(11) of the
Act, clearly bifurcating assets into tangible assets and intangible
assets. Intangible assets include ‘or any other business or
commercial rights of similar nature’. In this connection, Mr.
Datar has also referred to the old Appendix I of the Income Tax
Rules, 1962 (briefly ‘the Rules’ hereinafter) and submits that the
said provision would be applicable in the present appeal since
the assessment year under consideration is 2001-02. The said
Appendix I has two parts: Part A dealing with tangible assets and
Part B dealing with intangible assets.
13.2. Mr. Datar submits that the expression ‘any other
business or commercial rights of similar nature’ appearing in
29


Section 32(1)(ii) of the Act should take the meaning of or refer to
intangible assets and not the species of intangible assets, such
as, know-how, patents, copyrights, trade marks, licences and
franchises. Thus, the submission is that under intangible assets
the abovestated intellectual property rights are the first category;
and ‘other business or commercial rights’ fall within the second
category. According to him, in 1998 when this provision came to
be substituted, the legislature could not have envisaged any
other rights emanating from commercial arrangements and
hence deemed it fit to allow depreciation on ‘any other business
or commercial rights of similar nature’. The principle of ejusdem
generis requires a commonality; and in the present case, the
commonality is neither positive nor negative rights or either
rights in rem or rights in personam . The commonality is that all
are species of the genus ‘intangible assets’.
13.3. Adverting to the distinction made by the Delhi High
Court as regards rights in rem and rights in personam, Mr. Datar
submits that law does not require any such distinction for
allowability of depreciation: as to whether such rights are rights
in rem or rights in personam. While generally patents, copyrights
and trade marks confer rights in rem, other categories like
30


technical know-how, licences or franchises generally confer
rights in personam. Even under The Patents Act, 1970, The
Copyrights Act, 1957 and The Trade Marks Act, 1999, certain
rights can be in rem and certain in personam. Similar is the case
of a license being a privilege may be right in rem for some people
and right in personam for some other people. However, Mr. Datar
emphatically submits that such a debate qua rights in rem or
rights in should be avoided as it is not necessary for
personam
determining the issue at hand.
13.4. Taking exception to the decision of the Delhi High
Court in Sharp Business System, Mr. Datar submits that such a
line of reasoning is against the uniform view taken by different
high courts of the country. In fact, on non-compete fee, the
Gujarat, Bombay, Madras and Karnataka High Courts have
taken a view favorable to the assessee.
13.5. In any view of the matter, the plea regarding positive
and negative rights was not taken by the revenue at any stage:
from the assessing officer to the High Court. Therefore, such a
plea cannot be entertained for the first time before the Supreme
Court under Article 136 of the Constitution.
31


13.6. Without prejudice to the above, it is the further
submission of Mr. Datar that the expression ‘any other business
or commercial rights of similar nature’ is intended to cover all
intangible assets other than know-how, patents, trade marks
etc. which are specifically enumerated. The scope of this
expression cannot be restricted or read down by carving out an
exception for so-called negative rights.
13.7. Positive or negative rights are just one of the nine
species of rights. As set out in Chapter VII of Salmond on
Jurisprudence, the classification of rights into positive or
negative rights, vested or tangible rights etc. is only for the
purpose of characterization of such rights in the context of co-
related duties. Such classification cannot be relied upon to
interpret the scope of the expression ‘any other business or
commercial rights of similar nature’ appearing in Section 32(1)(ii)
of the Act. That apart, emphasis on such a classification may
lead to absurd consequences because rights are not only divided
into positive and negative rights. Rights can also be partially
positive and partially negative. In such a case, it will be absurd
to suggest that depreciation will be granted only on prorata basis
by the assessing officer.
32


13.8. Mr. Datar submits that by the Finance Act, 2002,
legislature has inserted clause (va) to Section 28 of the Act to tax
such receipts. There is no distinction or test stating that only if
it is a receipt on account of positive rights, it would be taxable.
Irrespective of whether it is a positive right or a negative right,
such receipts from the assessment year 2003-04 onwards is
taxable. Based on this, Mr. Datar submits that for taxing such
receipts on account of non-compete fee, there is no distinction
for allowing depreciation. Therefore, revenue cannot approbate
or reprobate to contend that only positive rights are eligible for
claiming depreciation on intangible asset.
13.9. Dehors the aforesaid submission, Mr. Datar further
contends that the amount paid for non-compete fee gives a
positive advantage to the assessee who acquires such right. It
enables the assessee to expand its business because of reduced
competition. Thus in the hands of the acquirer, it has a positive
advantage; however in the hands of the recipient of non-compete
fee, the negative convenant results in a negative application or
duty. Therefore, there is no negative right at play here.
33


13.10. Adverting to Section 2(14) of the Act, Mr. Datar
submits that ‘capital asset’ has been defined to include property
of any kind held by an assessee. The word ‘property’ is defined
in the Explanation to sub-section (14) of Section 2 to include and
always be deemed to have included rights of management or
control or any other rights whatsoever. Based on such an
analogy, rights acquired on payment of non-compete fee are
property and hence assumes the character of a capital asset.
Such an asset is an intangible asset and thus will be entitled for
depreciation.
13.11. Mr. Datar then referred to the word ‘used’ appearing
in Section 32(1) of the Act. He submits that for claiming
depreciation, the assets whether tangible or intangible must be
owned by the assessee and used for the purpose of business or
profession. In any intangible asset, a physical or active
demonstrating user test cannot be satisfied as compared to
tangible asset. Therefore, the word ‘used’ has to be read in a
broader context. A passive use or latent use would also satisfy
the word ‘used’. In case of a non-compete covenant, the user is
using such a covenant the day he enters into the agreement for
keeping a dominant or established player out of the same
34


business, thereby earning better profits. Thus, there cannot be
any dispute that by a non-compete covenant, an intangible asset
is being used. No prudent businessman will pay non-compete fee
if he is not going to get a return.
13.12. Summing up his arguments, Mr. Datar, learned
senior counsel, submits that the view taken by the Delhi High
Court is wholly erroneous. Non-compete fee is a capital
expenditure and is entitled to depreciation in terms of Section
32(1)(ii) of the Act.
14. Appearing on behalf of the revenue, Mr. S.
Dwarakanath, learned Additional Solicitor General of India, at
the outset, submits that the issue which arises for adjudication
in the present matters is whether payment of non-compete fee is
in the nature of revenue expenditure or capital expenditure?
Corollary to the above is, if such payment is construed to be of
capital nature, then whether depreciation under Section 32(1) of
the Act is allowable on such payment?
14.1. Supporting the judgment of the Delhi High Court in
Sharp Business System , Mr. Dwarakanath submits that
payment of non-compete fee is not in the nature of revenue
35


expenditure. Delhi High Court has rightly held that such
payment constitutes capital expenditure in the hands of the
payer, having been incurred for acquiring an enduring benefit of
an ephemeral nature. In this connection, learned counsel has
placed reliance on the following decisions:
(i) Empire Jute Co. Ltd. (supra);
6
(ii) Guffic Chem (P.) Ltd. Vs. CIT ;
7
(iii) CIT Vs. Bharti Hexacom Ltd . ;
8
(iv) Pitney Bowes India (P) Ltd. Vs. CIT
14.2. From an analysis of the aforesaid decisions, it is
evident that by expending non-compete fee, assessee had
acquired an enduring benefit of an ephemeral nature. Therefore,
the question which follows is whether such payment would be
eligible for depreciation under Section 32(1) of the Act?
14.3. In this connection, Mr. Dwarakanath submits that
Section 32(1) allowing depreciation on tangible and intangible
assets must be read holistically. Insofar payment of non-compete

6
(2011) 332 ITR 602
7
(2023) 458 ITR 593
8
2011 SCC OnLine Del 5114
36


fee is concerned, it certainly results in creation of an intangible
asset. There are two aspects of allowance of depreciation in
respect of intangible assets. Firstly, it should fall within one of
the enumerated categories i.e. know-how, patents, copyrights,
trade marks, licenses, franchises or ‘any other business or
commercial rights of similar nature’; secondly, it should be
‘owned’, either wholly or partly, by the assessee and should be
‘used’ for the purpose of its business or profession.
14.4. Elaborating on the above aspect, learned Additional
Solicitor General submits that the issues to be adjudicated are
twofold: one, whether the right acquired on payment of non-
compete fee falls within the expression ‘any other business or
commercial rights of similar nature’; and two, whether such right
is ‘owned’ (wholly or partly) by the assessee and ‘used’ for the
purpose of its business or profession, business in this case.
14.5. In this regard, he submits that applying the principles
of statutory interpretation and ejusdem generis , the appropriate
construction of the expression ‘any other business or commercial
rights of similar nature’, appearing in Section 32(1) (ii) of the Act
would be to follow the preceding words i.e. know-how, patents,
37


copyrights, trade marks, licenses and franchises. In this
connection, reliance has been placed on the following decisions
of this Court:
9
(i) Siddeshwari Cotton Mills (P) Ltd. Vs. Union of India ;
10
(ii) CIT Vs. McDowell & Co. Ltd.
14.6. Explaining the above, Mr. Dwarakanath submits that
the concept of ejusdem generis signifies a principle of
construction whereby the words in a statute which are otherwise
wide but are associated in the text with more limited words are,
by implication, given a restricted operation and are limited to
matters of the same class or genus as preceding them. That
apart, in the absence of a comma, after the word franchises,
either in Section 32(1)(ii) of the Act or in the Explanation thereto
or in Section 2(11) of the same defining block of assets, the
legislative intent becomes quite clear: the expression ‘any other
business or commercial rights of similar nature’ does not
constitute a separate category but is to be read alongwith the
preceding categories. In support of this contention, learned

9
(1989) 2 SCC 458
10
(2009) 314 ITR 167
38


Additional Solicitor General has placed reliance on the following
decisions:
11
(i) Sree Durga Distributors Vs. State of Karnataka ;
12
(ii) Mohd. Shabir Vs. State of Maharashtra ;
14.7. Applying the above principle to the issue in hand, it is
submitted that the specific words ‘know-how, patents,
copyrights, trade marks, licenses and franchises’ constitute a
distinct class or category of positive rights that are capable of
being used or put to use. Referring to the judgment of the Delhi
13
High Court in CIT Vs. Hindustan Coca Cola Beverages (P) Ltd. ,
learned Additional Solicitor General submits that whether
owned, wholly or partially, either in rem or in personam , the
common underlying feature of the above set of intellectual
property rights is that these are positive rights, brought into
existence by experience and/or reputation, granted either under
a statute or under a contract and capable of being used or put
to use for the purpose of business.

11
(2007) 4 SCC 476
12
(1979) 1 SCC 568
13
(2011) 331 ITR 192
39


14.8. He further submits that the right acquired by the
payer on payment of non-compete fee does not fall in this
category. It is a negative covenant that imposes an obligation on
the recipient of the fee to desist from doing something and as
such, it cannot be ‘used’ by the payer for the purpose of its
business. Such a negative covenant on the part of the recipient
only ‘exists’ and it is vital to draw a distinction between a positive
right being ‘owned’ and ‘used’, whether actively or passively vis-
a-vis a negative obligation merely ‘existing’. The only ‘right’
obtained by the payer of non-compete fee is the right to pursue
legal remedies in the event of breach of contract on the part of
the payee. As such, there is no ownership or usage of any
intangible asset in the manner envisaged in case of other
specified items.
14.9. Positive rights can only be owned and/or used.
Negative covenants only exists - those cannot be owned and/or
used, whether actively or passively. The statute does not
envisage allowance of depreciation on such rights/assets that
are not inherently capable of being put to use for the purpose of
business.
40


14.10. Hence, the expression ‘any other business or
commercial rights of similar nature’ must be read as being
limited to rights/assets specified by the preceding words i.e.
know-how, patents, copyrights, trade marks, licenses and
franchises which are positive rights conferred by the statute or
by a contract and capable of being ‘owned’ and put to use for the
purpose of business. As to the interpretation of the words ‘owned’
and ‘used’ in the context of Section 32(1), learned counsel has
placed reliance on the following two decisions of this Court:
14
(i) Liquidators of Pursa Ltd. Vs. CIT ;
15
(ii) Mysore Minerals Ltd. Vs. CIT ;
14.11. By way of analogy, learned Additional Solicitor
General has referred to Section 66E(e) of the Finance Act, 1994
which deals with the concept of negative covenant/non-compete
fee qua declared services, relevant portion of which reads thus:
S.66E. Declared Services:
…

Explanation (II)
…

(e) agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act;
…

14
(1954) 25 ITR 265
15
(1999) 239 ITR 775
41



14.12. In the context of the Act, more particularly Section 32
thereof, there is no similar provision which specifically lays down
that a right which is not capable of being put to use like the right
acquired on payment of non-compete fee is nonetheless eligible
for depreciation.
14.13. Summing up his arguments, Mr. Dwarakanath
asserts that firstly, non-compete fee is not a revenue expenditure
but a capital expenditure. Secondly, even though it is a capital
expenditure leading to accrual of intangible asset, it is not
eligible for deduction because it is not ‘owned’ and ‘used’ by the
assessee for the purpose of its business.
15. Submissions made by learned counsel for the parties
have received the due consideration of the Court.
Analysis

16. Let us advert to Section 37 of the Act at the outset. It
is a residuary provision. Sub-section (1) of Section 37 reads as
follows:
(1) Any expenditure not being expenditure of the
nature described in Sections 30 to 36 and not being
in the nature of capital expenditure or personal
42


expenses of the assessee laid out or expended wholly
and exclusively for the purposes of the business or
profession shall be allowed in computing the income
chargeable under the head ‘profits and gains of
business or profession’.
16.1. This provision contemplates that any expenditure
incurred wholly and exclusively for the purposes of the business
shall be allowed in computing the income chargeable under the
head ‘profits and gains of business or profession.’ For such an
expenditure to be allowed, it should fulfill the following criteria:
i) it should not be an expenditure described in
Sections 30 to 36;
ii) it should not be in the nature of capital expenditure
or personal expenses of the assessee.
16.2. It is axiomatic that such expenditure should be
incurred during the previous year relevant to the assessment
year under consideration.
17. This provision was examined by this Court in Alembic
Chemical Works Co. Ltd. (supra). It has been explained that in
computing the income chargeable under the head ‘profits and
gains of business or profession’, Section 37 of the Act enables
43


the deduction of any expenditure laid out or expended wholly
and exclusively for the purposes of business or profession, as the
case may be. The fact that an item of expenditure is wholly and
exclusively laid out for the purpose of business by itself is not
sufficient to entitle its allowance in computing the income
chargeable to tax. In addition, the expenditure should not be in
the nature of a capital expenditure. In the infinite variety of
situational diversities in which the concept of what is capital
expenditure and what is revenue expenditure arises, it is well
nigh impossible to formulate any general rule, even in the
generality of cases, sufficiently accurate and reasonably
comprehensive, to draw any clear line of demarcation. However,
some broad and general tests have been suggested from time to
time to ascertain on which side of the line the outlay in any
particular case might reasonably be held to fall. These tests are
generally efficacious and serve as useful servants but as masters
they tend to be over-exacting.
18. There is a classical test laid down by Lord Cave L.C.
16
in Atherton Vs. British Insulated and Helsby Cables Ltd. , where
it was held:

16
(1925) 10 TC 155
44


When an expenditure is made, not only once and for
all, but with a view to bringing into existence an asset
or an advantage for the enduring benefit of a trade, I
think that there is very good reason (in the absence of
special circumstances leading to an opposite
conclusion) for treating such an expenditure as
properly attributable not to revenue but to capital.

19. There is another test of contemporary vintage. This
test is based on the distinction between fixed and circulating
capital and was propounded by Lord Haldane in John Smith and
17
Son Vs. Moore . This test was explained in the following manner:
Fixed capital is what the owner turns to profit by keeping
it in his own possession; circulating capital is what he
makes profit of by parting with it and letting it change
masters.
20. In Assam Bengal Cement Company Ltd. (supra), this
Court opined that if the expenditure is made for acquiring or
bringing into existence an asset or advantage for the enduring
benefit of the business, it is properly attributable to capital and
is of the nature of capital expenditure. If on the other hand, it is
not made for the purpose of bringing into existence any such
asset or advantage but for running the business or working it

17
(1921) 12 TC 266
45


with a view to produce the profits, it is revenue expenditure. The
ratio laid down in this judgment was summed up by this Court
in the recent decision, Bharti Hexacom Ltd. (supra). This Court
explained that where the expenditure is made for the initial
outlay or for extension of a business or for substantial
replacement of the equipment, it is capital expenditure. If the
expenditure is for running the business or working it with a view
to produce profits, it is revenue expenditure. Expenditure which
relates to the very framework or structure or edifice of the
taxpayer’s business is capital expenditure.
21. Coal Shipments Pvt. Ltd. (supra) is a case which dealt
with export of coal from India to Burma. Shipment of coal to
Burma got disrupted because of the second world war, which
was resumed after the cessation of hostilities. In order to
overcome the difficulties in the conduct of the trade following the
war, members of the coal trade in Bengal formed an association.
Coal Shipments Pvt. Ltd. and M/S HV Low & Co. Ltd. were two
of the major members of the association. The two companies
came to an understanding and arrived at an agreement whereby
it was decided that M/S HV Low & Co. Ltd. would not export coal
46


to Burma during the subsistence of the agreement and that it
would assist Coal Shipments Pvt. Ltd. in procuring coal for
shipment to Burma. For this, Coal Shipments Pvt. Ltd. made
certain payments to M/S HV Low & Co. Ltd. which were taxed in
the hand of M/S HV Low & Co. Ltd.
21.1. Coal Shipments Pvt. Ltd. claimed the payment of the
above amounts as admissible business expenditure for the
relevant assessment year. Income Tax Officer was of the view
such expenditure could not be allowed as there was no written
agreement in proof of such arrangement. It was not possible to
say that the payments were made for the purpose of the
assessee’s business. It was further held that even if the
payments were held to have been made to keep off M/S HV Low
& Co. Ltd. from the Burma trade, those were payments made to
secure a monopoly and thus were not allowable as revenue
expenditure.
21.2. On appeal, the appellate authority i.e. Appellate
Assistant Commissioner upheld the order of the Income Tax
Officer.
47


21.3. On further appeal before the ITAT, it was held that the
impugned payments were made to carry on the trade in a more
facile and profitable manner. According to the ITAT, the
arrangement that was arrived at verbally between the parties
was a temporary measure liable to be terminated at will. Coal
Shipments Pvt. Ltd. did not derive any advantage of an enduring
character by such payments. The expenditure in question were
attributable to revenue and not to capital. Accordingly, those
were held to be permissible expenditure under Section 10(2)(xv)
of the Indian Income Tax Act, 1922 (corresponding to Section 37
of the Act).
21.4. On reference before the High Court, it was held that
such expenditure did not create any monopoly or bring about
any capital advantage to the assessee. Such arrangement was
not likely to have an enduring beneficial effect. It was held that
Coal Shipments Pvt. Ltd. was entitled to claim deduction of such
expenditure.
21.5. This Court after adverting to the facts noted that the
controversy between the parties was centered on the point as to
whether that part of the payment which was made because of
48


M/S HV Low & Co. Ltd. having agreed not to export coal to
Burma during the subsistence of the agreement constituted
capital expenditure or revenue expenditure. This Court
thereafter referred to several judicial decisions laying down
broad principles in order to determine whether an expenditure
is of a capital nature or revenue nature, such as, enduring
benefit and fixed capital vis-a-vis circulating capital. This Court
rejected the contention of the revenue that as the object of
making the payments in question was to eliminate competition
of a rival exporter, the benefit which enured to the respondent
was of an enduring nature and as such, the payment should be
treated as capital expenditure. Further it was noted that the
arrangement between the two parties was not for any fixed term
but could be terminated at any time at the volition of any of the
parties. This Court held that although an enduring benefit need
not be of an ever-lasting character, it should not, at the same
time, be so transitory and ephemeral that it can be terminated
at any time at the volition of any of the parties. That apart, this
Court was of the view that payments made to M/S HV Low & Co.
Ltd. were related to actual shipment of coal in the course of the
trading activities of Coal Shipments Pvt. Ltd. and had no relation
49


to the capital value of the assets. Accordingly, the appeal of the
revenue was dismissed.
22. In Empire Jute Company Ltd. (supra), this Court was
concerned with an agreement between members of the Indian
Jute Mills Association of which the assessee was also a member.
Clause 4 of the agreement provided that no signatory shall work
for more than 45 hours per week. As per Clause 6(b), the
signatories were entitled to transfer, either wholly or partly, their
allotment of hours of work per week to any one or more of the
signatories. Under this clause, the assessee had purchased ‘loom
hours’ from four other mills for the aggregate sum of Rs.
2,03,255.00 during the previous year relevant to the assessment
year 1960-61 and claimed deduction of the said amount as
revenue expenditure. When the matter came before the High
Court, it was held that the amount paid by the assessee for
purchase of loom hours was in the nature of capital expenditure
and was, therefore, not deductable under Section 10(2)(xv) of the
Indian Income Tax Act, 1922.
22.1. Reversing the decision of the High Court, this Court
opined that whether it is capital expenditure or revenue
50


expenditure would have to be determined having regard to the
nature of the transaction and other relevant factors. This Court
observed that there may be cases where expenditure even if
incurred for obtaining an advantage of enduring benefit, may
nonetheless be on revenue account and the test of enduring
benefit may break down. It is not every advantage of enduring
nature acquired by an assessee that brings the case within the
ambit of capital expenditure. What is material to consider is the
nature of the advantage in a commercial sense and it is only
where the advantage is in the capital field that the expenditure
would be disallowable on an application of the test of enduring
benefit. If the advantage consists merely in facilitating the
assessee’s trading operations or enabling the management and
conduct of the assessee’s business to be carried on more
efficiently or more profitably while leaving the fixed capital
untouched, the expenditure would be on revenue account, even
though the advantage may endure for an indefinite future.
22.2. Applying the above test to the facts of that case, this
Court held that by purchase of loom hours, no new asset was
created. There was no addition to or expansion of the profit
51


making apparatus of the assessee. The income earning machine
remained what it was prior to the purchase of loom hours. The
assessee was merely enabled to operate the profit making
structure for a longer number of hours. That apart, the
advantage was clearly not of an enduring nature. It was limited
in its duration to six months; moreover, the additional working
hours per week transferred to the assessee had to be utilised
during the week and could not be carried forward to the next
week. This Court was, therefore, of the opinion that it was not
possible to say that any advantage of enduring benefit in the
capital field was acquired by the assessee in purchasing the loom
hours.
22.3. Even applying the test of fixed and circulating capital,
this Court was of the view that it would not be possible to
characterize the amount paid for purchase of loom hours as
capital expenditure because acquisition of additional loom hours
did not add at all to the fixed capital of the assessee. The
permanent structure remained the same; it was not enlarged.
Thus loom hours were not part of fixed capital on the basis of
52


which, it could be said that payment for purchase of loom hours
was in the nature of capital expenditure.
22.4. This Court opined that the question as to whether an
expenditure is capital or revenue must be viewed in the larger
context of business necessity or expediency. If the outgoing
expenditure is so related to the carrying on or the conduct of the
business that it may be regarded as an integral part of the profit
earning process and not for acquisition of an asset or a right of
permanent character, the possession of which is a condition of
the carrying on of the business, the expenditure may be regarded
as revenue expenditure. Thus, this Court concluded that the
payment of Rs. 2,03,255.00 made by the assessee for purchase
of loom hours represented revenue expenditure and was
allowable as a deduction under Section 10(2)(xv) of the Indian
Income Tax Act, 1922.
23. In Alembic Chemical Works Co. Ltd. (supra), the
assessee was the manufacture of the antibiotic penicillin. In its
initial years, it could produce only about 5000 units of penicillin
per milli-liter of the culture-medium. With a view to increase the
yield of penicillin, assessee negotiated with M/S Meiji Seika
53


Kaisha Ltd. of Japan. The negotiations ended in an agreement
whereby and whereunder, M/S Meiji agreed to supply the
technical know-how to increase production of penicillin to more
than 10000 units for a consideration of ‘once for all’ payment of
50,000 US dollars. In the assessment proceedings, assessee
claimed this expenditure as revenue expenditure. The Income
Tax Officer, on the other hand, took the view that the
expenditure was incurred for the acquisition of an asset or
advantage of an enduring benefit. Holding such expenditure to
be capital in nature, the Income Tax Officer declined the
deduction. This view of the Income Tax Officer was affirmed by
the first appellate authority i.e. Appellate Assistant
Commissioner. The further appeal of the assessee was also
dismissed by the ITAT. At the instance of the assessee, a
reference was made to the High Court which was, however,
decided in the negative against the assessee. It was thereafter
that the matter travelled to this Court.
23.1. This Court after alluding to the judicial
pronouncements on this point, observed that the idea of ‘once
for all’ payment and ‘enduring benefit’ are not to be treated as
54


something akin to statutory conditions. These concepts require
flexibility and not a rigid approach. There is no single definitive
criterion which by itself is determinative as to whether a
particular outlay is capital or revenue. The ‘once for all’ payment
test is also inconclusive. What is relevant is the purpose of the
outlay and its intended object and effect considered in a common
sense way having regard to the business realities.
23.2. In the facts of that case, this Court held that the
financial outlay under the agreement was for the better conduct
and improvement of the existing business and should therefore
be treated as revenue expenditure. Consequently, the appeal by
the assessee was allowed and the question of law answered in
the affirmative and against the revenue.
24. The next case that we may advert to is the case of Madras
Auto Services (P) Ltd. (supra). In this case, the respondent
assessee, a tenant, had incurred expenditure on demolition and
construction of a new building which was to vest in the landlord.
Assessee in lieu of incurring the actual cost of construction was
entitled to use the premises for a period of 39 years at a reduced
rent. The entire capital cost of construction was claimed by the
55


assessee as revenue expenditure on the ground that the assessee
had not acquired any new asset or such expenditure did not
result in any enduring advantage to the assessee in the capital
field. The above stand of the assessee was accepted by the ITAT
and the High Court. When revenue came up in appeal before this
Court, it was held as under:

In order to decide whether this expenditure is revenue
expenditure or capital expenditure, one has to look at the
expenditure from a commercial point of view. What
advantage did the assessee get by constructing a building
which belonged to somebody else and spending money for
such construction? The assessee got a long lease of a
newly constructed building suitable to its own business at
a very concessional rent. The expenditure, therefore, was
made in order to secure a long lease of new and more
suitable business premises at a lower rent. In other words,
the assessee made substantial savings in monthly rent for
a period of 39 years by expending these amounts. The
saving in expenditure was a saving in revenue expenditure
in the form of rent. Whatever substitutes for revenue
expenditure should normally be considered as revenue
expenditure. Moreover, the assessee in the present case
did not get any capital asset by spending the said
amounts. The assessee, therefore, could not have claimed
any depreciation. Looking to the nature of the advantage
56


which the assessee obtained in a commercial sense, the
expenditure appears to be revenue expenditure.
*
Right from inception, the building was of the
ownership of the lessor. Therefore, by spending this
money, the assessee did not acquire any capital asset. The
only advantage which the assessee derived by spending
the money was that it got the lease of a new building at a
low rent. From the business point of view, therefore, the
assessee got the benefit of reduced rent. The High Court
has, therefore, rightly considered this as obtaining a
business advantage. The expenditure is, therefore, to be
treated as revenue expenditure.
*
All these cases have looked upon expenditure which
did bring about some kind of an enduring benefit to the
company as a revenue expenditure when the expenditure
did not bring into existence any capital asset for the
company. The asset which was created belonged to
somebody else and the company derived an enduring
business advantage by expending the amount. In all these
cases, the expenses have been looked upon as having been
made for the purpose of conducting the business of the
assessee more profitably or more successfully. In the
present case also, since the asset created by spending the
said amounts did not belong to the assessee but the
assessee got the business advantage of using modern
premises at a low rent, thus saving considerable revenue
expenditure for the next 39 years, both the Tribunal as
well as the High Court have rightly come to the conclusion
57


that the expenditure should be looked upon as revenue
expenditure.
25. Having adverted to the relevant case laws, we may now
examine the nature and character of non-compete fee; whether
payment of non-compete fee is revenue expenditure or capital
expenditure. Non-compete fee is paid by one party to another to
restrain the latter from competing with the payer in the same
line of business. It may be by way of a written agreement or by
an oral understanding. The restriction may be limited to a
specified territory or otherwise; similarly, it can be for a specified
period or otherwise. Purpose of non-compete payment is to give
a head start to the business of the payer. It can also be for the
purpose of protecting the business of the payer or for enhancing
the profitability of the business of the payer by insulating the
payer from competition.
26. Thus non-compete fee only seeks to protect or
enhance the profitability of the business, thereby facilitating the
carrying on of the business more efficiently and profitably. Such
payment neither results in creation of any new asset nor
accretion to the profit earning apparatus of the payer. The
58


enduring advantage, if any, by restricting a competitor in
business, is not in the capital field.
27. Following the judicial trend, it can be safely inferred
that the length of time over which the enduring advantage may
enure to the payer is not determinative of the nature of
expenditure. As long as the enduring advantage is not in the
capital field, where the advantage merely facilitates in carrying
on the business more efficiently and profitably, leaving the fixed
assets untouched, the payment made to secure such advantage
would be an allowable business expenditure, irrespective of the
period over which the advantage may accrue to the payer
(assessee) by incurring of such expenditure.
28. The non-compete compensation from the stand point
of the payer of such compensation is so paid in anticipation that
absence of a competition from the other party may secure a
benefit to the party paying the compensation. However, there is
no certainty that such benefit would accrue. Notwithstanding
such an arrangement, the payer (assesee) may still not achieve
the desired result. In so far the present case is concerned, on
account of payment of non-compete fee, the assessee had not
59


acquired any new business and there is no addition to the profit
making apparatus of the assessee. The assets remained the
same. The expenditure incurred was essentially to keep a
potential competitor out of the same business. Further, there is
no complete elimination of competition. Such payment made by
the appellant to L&T did not create a monopoly of the appellant
over the business of electronic products/ equipments. Payment
was made to L&T only to ensure that the appellant operated the
business more efficiently and profitably. Such payment made to
L&T cannot, therefore, be considered to be for acquisition of any
capital asset or towards bringing into existence a new profit
earning apparatus.
Conclusion
29. That being the position, we are of the considered
opinion that payment made by the appellant to L&T as non-
compete fee is an allowable revenue expenditure under Section
37(1) of the Act.
30. Consequently, the impugned judgment and order of
the Delhi High Court dated 05.11.2012 passed in Income Tax
Appeal No. 492/2012 is hereby set aside. The question framed
60


in paragraph 5 of this judgment is thus answered in favour of
the assessee and against the revenue. Civil Appeal No.
4072/2014 is accordingly allowed.
31. In view of what we have held above, the
supplementary question framed in paragraph 5.1 of this
judgment has been rendered redundant. Therefore,
consideration of the submissions made in this regard is not
necessary.
32. As regards the remaining appeals, we are of the view
that it would be appropriate if the matters are remanded back to
the respective ITATs, all appeals/ cross-appeals filed are revived
and heard afresh having regard to the ratio laid down in this
judgment.
33. Ordered accordingly.
34. Since the appeals/ cross-appeals before the ITATs
have been revived, parties would be at liberty to raise additional
ground(s) based on the present judgment.


61


Interest on borrowed funds.
Civil Appeal No. _/2025
(Arising out of SLP(C) No. 719/2020,
PCIT Vs. Piramal Glass Ltd).

35. During the assessment proceedings for the
assessment year 2001-2002, the Assessing Officer noted the
claim of the assessee regarding interest on investments made in
subsidiary company as well as interest on borrowings for
payment of interest-free loan to sister concern and its directors.
Vide the assessment order dated 09.02.2004 passed under
Section 143(3) of the Act, the Assessing Officer noted from the
balance sheet of the assessee that it had invested Rs. 2,587.10
lakhs in the shares of the subsidiary company M/S Ceylon Glass
Company Ltd., Sri Lanka. At the same time, he found that there
were interest bearing borrowings of Rs. 3267.41 crores and
interest of 38.22 crores was debited to the profit and loss
account. This claim of deduction of the assessee under Section
36(1)(iii) of the Act to the extent of Rs. 3,36,32,300.00 was
disallowed by the Assessing Officer. According to the Assessing
Officer, interest on money borrowed for investment can be
allowed against income from investment. But if the shares are
acquired, not as an investment for earning income but to acquire
62


controlling interest in a company, it would not be entitled to
deduction of interest on borrowing. If the dominant purpose of
expenditure was not for earning profit but to acquire controlling
interest, it could not be allowed as a deduction. As a result,
interest @ 13% in investment made in the subsidiary company
was not allowed as a deduction. The total disallowance out of
interest payment was worked out at Rs. 3,36,32,300.00.
35.1. The Assessing Officer also noted that an amount of
Rs. 3,00,000.00 was outstanding from a director of the assessee
company and an amount of Rs. 346.43 lakhs was due from
companies where directors of the assessee were interested as
directors. After considering the explanation of the assessee, the
Assessing Officer made disallowance of an amount of
Rs.99,49,264.00. Assessing Officer held that assessee’s claim for
deduction of interest paid on loan, utilized for giving interest free
loan/ advances to sister concern, was not in accordance with
law. The assessee also could not establish the nexus with the
funds from which the advances were made to the subsidiary
company. In the absence of such details, the interest was worked
out to 13% per annum on account of the advances made to the
63


sister concern. It was disallowed on the ground that borrowed
funds were used for non-business purposes. Thus the amount
of disallowance at the interest rate of 13% per annum was
worked out at Rs.99,49,264.00.
35.2. The first appellate authority i.e. CIT(A) agreed with the
reasonings given by the Assessing Officer and disallowed the
interest payment on borrowed fund claimed under Section
36(1)(iii) of the Act and upheld the order of assessment.
35.3 On further appeal, ITAT observed that since the
investment was made for controlling interest in the sister
concern, assessee was entitled to the claim of allowance of the
interest. Investment was made in the shares of the sister
company with a similar line of business and for commercial
expediency. Thus no disallowance was warranted under Section
36(1)(iii) of the Act. ITAT following the decision of this Court in
18
SA Builders Ltd. Vs. CIT , directed the Assessing Officer to allow
the claim of the assessee in respect of interest on borrowed fund

18
288 ITR 1
64


since the advances were made for the purposes of commercial
expediency.
35.4. Revenue challenged the aforesaid decision of the ITAT
before the Bombay High Court. Adverting to one of its previous
decisions, High Court held that the assessee was entitled to
deduction of interest under Section 36(1)(iii) of the Act when the
investment was made by the assessee in a subsidiary company
to have control over the said company. With respect to interest
free advances made by the assessee to the sister concern out of
borrowed funds, High Court was of the view that this question
had become infructuous.
Submissions
36. Mr. Dwarakanath, learned Additional Solicitor
General of India appearing for the revenue, though made
extensive submissions on the issue of non-compete fee, did not,
however, advance any argument on the point of investment in
shares of the sister concern or on interest on borrowed funds
given to sister concern and its directors. However, Mr. Ajay
Vohra, learned senior counsel for the respondent assessee,
submitted that revenue was incorrect in contending that the
65


assessee had not established that the investment was made for
acquiring the controlling interest in the associate concern. In
fact, it was clearly mentioned by the assessee that it had made
investment of Rs. 2587.10 lakhs in the subsidiary company viz,
M/S Ceylon Glass Company Ltd. Dividend income from a foreign
company like the subsidiary company is taxable and not exempt
under Section 10(33) of the Act.
36.1. Assessing Officer had recorded that shares of the
subsidiary company were acquired not for earning profit but for
acquiring controlling assets. Where the Assessing Officer himself
recorded the finding that investment in the subsidiary company
was made for acquiring controlling interest, revenue was not
justified in contending that assessee had not established that
the investment was made for earning income. The fact that the
assessee had made investment for acquiring controlling interest
in the subsidiary company is itself sufficient for claiming
deduction of interest under Section 36(1)(iii) of the Act.
Investment made in the subsidiary company was in the line of
the existing business of the assessee and was for the business of
the assessee. In such circumstances, deduction is allowable
under Section 36(1)(iii) of the Act.
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36.2. In this connection, Mr. Vohra, learned senior counsel,
relied upon the decision of this Court in SA Builders Ltd. (supra).
He submits that the assessee had duly established that the debit
balance in the account of the sister concern was for the purpose
of business, and therefore, on these facts, the decision of this
Court in SA Builders Ltd. (supra) would be squarely applicable to
the facts of the present case.
Analysis
37. Section 36 of the Act deals with other deductions that
may be allowed while computing the total income under the
heading ‘profits and gains of business or profession’ referred to
in Section 28 of the Act. Section 36(1)(iii) says that
the deductions provided for the amount of interest paid in
respect of capital borrowed for the purposes of the business or
profession shall be allowed in computing the income referred to
in Section 28.
38. In SA Builders Ltd. (supra), this Court considered the
question regarding allowability of interest on borrowed funds.
This Court referred to the provisions of Section 36(1)(iii) of the
Act and to the facts of that case. It was noted that the borrowed
67


amount in question was not utilized by the assessee in its own
business but was advanced as interest free loan to its sister
concern. This Court opined that this factum was not really
relevant. What was relevant was whether the assessee had
advanced such amount to its sister concern as a measure of
commercial expediency. Once it is established that there was
nexus between the expenditure and the purpose of the business,
which need not necessarily be the business of the assesee itself,
revenue cannot justifiably claim to put itself in the arm-chair of
the businessman or in the position of the board of directors and
then decide how much would be the reasonable expenditure.
Income tax authorities must put themselves in the shoes of the
assessee and see how a prudent businessman would act. We
have to see the transfer of the borrowed funds to a sister concern
from the point of view of commercial expediency and not from
the point of view of whether the amount was advanced for
earning profits. No businessman can be compelled to maximize
his profits. However, this Court put in a caveat that it is not in
every case interest on borrowed fund has to be allowed if the
assessee advances it to a sister concern. It all depends upon the
facts and circumstances of the case. This Court held thus:
68


34. We agree with the view taken by the Delhi High Court
in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377
that once it is established that there was nexus between
the expenditure and the purpose of the business (which
need not necessarily be the business of the assessee itself),
the revenue cannot justifiably claim to put itself in the
arm-chair of the businessman or in the position of the
board of directors and assume the role to decide how
much is reasonable expenditure having regard to the
circumstances of the case. No businessman can be
compelled to maximize its profit. The income tax
authorities must put themselves in the shoes of the
assessee and see how a prudent businessman would act.
The authorities must not look at the matter from their own
view point but that of a prudent businessman. As already
stated above, we have to see the transfer of the borrowed
funds to a sister concern from the point of view of
commercial expediency and not from the point of view
whether the amount was advanced for earning profits.

35. We wish to make it clear that it is not our opinion
that in every case interest on borrowed loan has to be
allowed if the assessee advances it to a sister concern.
It all depends on the facts and circumstances of the
respective case. For instance, if the Directors of the
sister concern utilize the amount advanced to it by the
assessee for their personal benefit, obviously it cannot
be said that such money was advanced as a measure
of commercial expediency. However, money can be
69


said to be advanced to a sister concern for commercial
expediency in many other circumstances (which need
not be enumerated here). However, where it is obvious
that a holding company has a deep interest in its
subsidiary, and hence if the holding company
advances borrowed money to a subsidiary and the
same is used by the subsidiary for some business
purposes, the assessee would, in our opinion,
ordinarily be entitled to deduction of interest on its
borrowed loans.
Conclusions
39. Adverting to the facts of this case, we find that the
respondent assessee had claimed interest on borrowed funds
under Section 36(1)(iii) of the Act which was utilized for
investment in M/S Ceylon Glass Company Ltd., a subsidiary
company of the assessee. The investment was made for
controlling the interest in the associate concern by purchase of
shares. Thus the investment was clearly for commercial
expediency. We agree with the finding recorded by the ITAT and
affirmed by the High Court that assessee is entitled to claim
allowance of interest on the funds invested in sister concern for
acquiring of controlling interest.
70


40. Following the decision of this Court in SA Builders Ltd.
(supra), we find that the purpose for which the advances were
made to the sister concern and its directors would also be
covered by the principle of commercial expediency.
41. Accordingly, the decision of the ITAT on this point,
which was not interfered with by the High Court, is hereby
affirmed. Consequently, the appeal filed by the revenue on this
issue is dismissed. The question framed in paragraph 5.2 of this
judgment is thus answered in favour of the assessee and against
the revenue.
42. All the appeals are hereby disposed of in terms of
paragraphs 29 to 34 and 39 to 41 supra.


……………………………J.
[MANOJ MISRA]



……………………………J.
[UJJAL BHUYAN]
NEW DELHI;
DECEMBER 19, 2025.


71