“non-compete fee”
The decision most relied on for non-compete fee is Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (58 ITR 241), cited in 69 judgments on BharatTax.
Leading authorities on non-compete fee
The test of enduring benefit for classifying expenditure as capital or revenue is not absolute; expenditure incurred for an enduring advantage may nonetheless be on revenue account, as the test can break down depending on the facts.
The case is cited for the principle that when a payment is made for a non-compete agreement which is part of a larger business transfer, the characterisation of the payment depends on whether it is for the enduring benefit of the business or for the loss of potential profits.
Compensation received for a non-compete covenant or for not carrying on a specific business activity is a capital receipt and not liable to tax as business income.
Payments for non-compete fees or restrictive covenants are revenue expenditure if they are for a limited or uncertain duration and do not confer an enduring advantage to the assessee. The classification as revenue or capital depends on the specific facts and circumstances of each case.
Receipt of a non-compete fee, even if it does not alter the assessee's business structure, impairs the carrying on of their activity, constituting a loss of a source of income.
A non-compete fee paid as part of a business acquisition or transaction constitutes an intangible asset, eligible for depreciation under Section 32(1)(ii) of the Income-tax Act.
Expenditure incurred for the elimination of business competition, such as non-compete fees, is classified as either revenue or capital expenditure based on whether it creates an enduring benefit for the assessee's business.
A non-compete fee, being a capital expenditure, is not allowable as a deduction from income and does not qualify for depreciation under Section 32(1)(ii) of the Income-tax Act, 1961.
