Non-compete annuity payments as revenue expenditure when paid only to restrain competition and not acquire capital assets.

An annual payment made under a non-compete arrangement was treated as revenue expenditure because it was consideration for the recipient refraining from competing in the assessee's exchange brokerage business. The earlier transfer of goodwill and exchange seats was separately compensated by a lump sum, while the recurring annuity was linked only to restraint of competition. As the payment did not create a new asset or an enduring capital advantage, it was held to be incurred wholly and exclusively for business and deductible in computing profits under Section 10(2)(xii) of the Income-tax Act, 1922.

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Issues: Whether the annual payment made to a former competitor under a non-compete arrangement was capital expenditure or revenue expenditure deductible under Section 10(2)(xii) of the Income-tax Act, 1922.

Analysis: The payment was made under the later agreement only as consideration for the recipient refraining from competing with the assessee in its exchange brokerage business. The earlier acquisition of goodwill and seats in the exchange brokers' association was treated as separately compensated by a lump sum, while the annuity was linked to restraint of competition. On the special terms of the arrangement, including the contingent character of the annuity and its business purpose, the payment did not bring into existence a new asset or an enduring advantage of a capital nature. It was an outgoing incurred wholly and exclusively for carrying on the business and for securing trading profits.

Conclusion: The payment was revenue expenditure and was allowable as a deduction under Section 10(2)(xii) of the Income-tax Act, 1922.

Ratio Decidendi: A recurring payment made solely to restrain competition in the course of carrying on business, and not to acquire a capital asset or the business itself, is revenue expenditure deductible in computing business profits.

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