Supreme Court holds non-compete fees to be revenue expenditure; allows interest deduction on borrowings for acquisition of controlling stake

This Tax Alert summarizes a Supreme Court (SC) decision dated 19 December 2025 in a batch of appeals, with the lead case being Sharp Business System v. CIT^[1] . The issues before the SC were two-fold: (a.) Whether non-compete fees paid were in the nature of revenue or capital expenditure. (b.) Deductibility of interest on borrowed funds used for acquiring controlling stake in a sister concern. 

On the first issue, the SC held that payment for non-compete fees is revenue expenditure, allowable as deduction under the Indian Tax Laws (ITL). The SC held that non-compete fees which do not create any monopoly are made to protect or enhance business profitability by protecting the payer from competition, which facilitates the carrying on of business more efficiently and profitably. The SC further held that non-compete fees do not result in the creation of any new capital asset or accretion to the profit-earning apparatus of the business, nor is there any enduring advantage in the capital field. 

The SC further observed that a negative covenant restraining competition does not confer ownership of any transferable or exploitable right on the payer. The benefit obtained is protective and operational in nature, aimed at preserving the existing business structure rather than expanding or replacing it. Accordingly, non-compete fees paid wholly and exclusively for business purposes qualify as revenue expenditure, irrespective of the duration of the restraint.

On the issue of interest on borrowings, the SC noted the findings of the Income Tax Appellate Tribunal (Tribunal) and the High Court (HC) that borrowings were utilized for investment in the shares with the objective of acquiring or having a controlling interest in the subsidiary and was as a measure of commercial expediency. Following its ratio in S.A. Builders v. CIT^[2] , the SC affirmed the Tribunal and HC decisions which allowed deduction for interest under the ITL. The SC further observed that even interest-free advances to directors and sister group/concern were driven by considerations of commercial expediency and are allowable as deduction.

^{[1] [TS-1685-SC-2025]
[2] [288 ITR 1]}