Section 41(2) of the Income Tax Act
Income-tax Act, 2025: s.38
Section 41(2) falls under section 41 of the Income-tax Act, 1961, which corresponds to section 38 (Certain sums deemed as profits and gains of business or profession) of the Income-tax Act, 2025.
Read section 38 of the 2025 Act
Correspondence checked against the ICAI tabular mapping of the two Acts and the BharatTax.co section commentary.
The decision most relied on for Section 41(2) is CIT v. Indo Nippon Chemicals Co. Ltd. (261 ITR 275), cited in 204 of the 53 judgments on BharatTax that turn on this section.
Leading authorities on Section 41(2)
A liability recognized in accordance with the Accounting Standards prescribed by the Institute of Chartered Accountants of India (ICAI) is an allowable expense for income tax purposes.
Compensatory interest or damages paid for a breach of contract, arising in the normal course of business, are allowable as a deduction under section 37(1) as wholly and exclusively incurred for business purposes. This principle extends to indirect taxes paid in the course of business, which are admissible as business expenditure.
When claiming an expenditure under section 37(1), the onus is on the assessee to prove the necessary facts, not on the revenue. Mere production of vouchers is insufficient if the genuineness of payment is doubted.
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.
Depreciation is allowable on a non-compete fee as it constitutes an intangible asset, even if the right acquired cannot be transferred, provided it is treated as part of a block of assets.
Damages or penalties that are compensatory in nature are allowable as a deduction under Section 37(1) of the Income Tax Act, while those that are penal and arise from a breach of law are not allowable as business expenditure.
Depreciation is allowable on non-compete fees when a businessman pays another to restrain them from competing, as this constitutes an intangible asset.
Depreciation is not allowable on non-compete fees if they represent the acquisition of a business or commercial right, rather than an identifiable intangible asset.
Depreciation on non-compete fees paid for acquiring a business is an allowable deduction. This treatment is confirmed even when the issue relates to the acquisition of a company and associated customer contracts.
Depreciation is not allowable on a non-compete fee as it is considered a revenue expenditure and not an intangible asset that is eligible for depreciation.
