Revenue Expenditure: periodic non compete payments held deductible under Section 10(2)(xii) as ordinary business expenses.

Periodic payments made to restrain a rival from competing were treated as revenue expenditure deductible under Section 10(2)(xii) because they were contingent, separable from a prior lump-sum capital consideration for goodwill and seats, and did not create a new asset or add to fixed capital. Applying the durability-of-benefit and capital-versus-revenue tests, the annuity operated as an ordinary business expense to exclude competition and facilitate earning profits in the normal course of trade, and therefore was allowable as a deduction.

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Issues: Whether the sum of Rs. 6,698 paid as periodic annuity to prevent a rival from competing was a revenue expenditure so as to be allowable as a deduction under Section 10(2)(xii) of the Income-tax Act, 1922.

Analysis: Section 10(2)(xii) allows deductions for expenditure not being capital in nature and laid out wholly and exclusively for the purposes of the trade. The payments were made annually as consideration for the recipient refraining from competition and were contingent on receipt of brokerage from a principal client; goodwill and seats had been transferred separately for a capital consideration. The issue focuses on whether these periodical restraint payments created an enduring advantage or an asset of a capital character or were ordinary business expenses incurred to retain/customarily increase trade. Applying established principles distinguishing capital from revenue expenditure, including the durability of benefit test and the factual terms making the annuity contingent and separable from the lump-sum consideration for goodwill and seats, the payments did not bring into existence a new asset or an addition to fixed capital but were payments to exclude competition and thereby facilitate earning of profits in the ordinary course of trade.

Conclusion: The payment of Rs. 6,698 is a revenue expenditure and is allowable as a deduction under Section 10(2)(xii) of the Income-tax Act, 1922. The question is answered in the affirmative in favour of the assessee.

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