Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1995-96 - Assessee-company was engaged in business of two-wheelers - It entered into a non-compete agreement with 'V', who was an employee of assessee, and 'VCPL', a company promoted by 'V', whereby assessee paid a sum of Rs. 4 crores to 'VCPL' so that 'VCPL' and 'V' would not carry out any business activity with regard to two-wheelers after retirement of 'V' from assessee-company - Assessee claimed said amount as business expenditure - Assessing Officer disallowed claim on ground that expenditure was of capital nature - Whether since assessee did not acquire any capital asset by making payment of non-compete fee and it merely eliminated competition in two-wheeler business, payment of non-compete fee was a business expenditure and not a capital expenditure - Held, yes FACTS The assessee-company was engaged in the business of two-wheelers. A full time employee of the assessee, namely, 'V' had acquired, during the course of his employment, specialized knowledge of technology in the two-wheeler industry as well as of managing the dealership of the market place and other specialized knowledge relating to the two-wheeler business. 'V' had entered into an agreement with a company called 'VCPL' to the effect that he would promote 'VCPL' and collaborate with it to set up manufacturing facilities for two-wheelers upon his retirement from the assessee-company. On coming to know of that, the assessee entered into a non-compete agreement with 'VCPL' and 'V' whereby the assessee paid a sum of Rs. 4 crores to 'VCPL' so that 'VCPL' and 'V' would not carry out any business activity with regard to two-wheelers. The assessee claimed said amount as a business expenditure, but it was disallowed by the Assessing Officer on the ground that the expenditure was of capital nature. The Commissioner (Appeals), however, allowed the appeal of the assessee holding that the expenditure incurred was a business expenditure. The Tribunal dismissed the appeal of the revenue. On appeal : HELD To decide whether an expenditure of this nature is a capital expenditure or not would depend on the facts…

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