Non-competition fee treated as capital expenditure where it secured an enduring benefit by restraining competition for ten years.

A one-time non-competition fee paid under an agreement was treated as capital expenditure because it secured an enduring advantage by restraining the erstwhile management from competing for ten years and from undertaking specified activities. The presence of clauses allowing written approval or modification did not reduce the binding effect of the restrictive covenant. Authorities cited by the assessee were distinguished on their facts, while the enduring-benefit principle supported the Revenue's position. Once characterised as capital in nature, the payment could not alternatively be allowed as deferred revenue expenditure spread over ten years.

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Issues: Whether the non-competition fee of Rs. 6.5 lakh paid under the agreement was revenue expenditure or capital expenditure, and whether it could alternatively be spread over ten years as deferred expenditure.

Analysis: The payment was a one-time lump sum made to restrain the erstwhile management from competing with the assessee for ten years and from engaging in other specified activities. The clauses permitting written approval or modification of restrictions did not dilute the binding effect of the covenant. The payment secured an advantage of enduring nature by eliminating competition over a substantial period, bringing it within the principle that such expenditure is capital in character. The authorities relied on by the assessee were distinguished on facts, while the decisions applying the enduring-benefit test supported the Revenue. Once the payment was held to be capital expenditure, the plea for deferral over ten years could not be accepted.

Conclusion: The non-competition fee was capital expenditure and not allowable as revenue or deferred revenue expenditure.

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