Categorisation of ₹38 Lakh Non-Compete Fee as Revenue Expenditure: ITAT Allows Deduction to Real Estate Firm [Read Order]

The bench of the Income Tax Appellate Tribunal, Ahmedabad, has allowed the deduction of non-compete expenditure claimed by a real estate firm, ruling that the payment made to a retiring partner was revenue in nature and thus allowable under the Income Tax Act, 1961.

The appellant, Samkeet Arya Homes LLP, challenged the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [CIT(A)], for Assessment Year (A.Y.) 2017-18. The dispute arose when the Assessing Officer (AO) disallowed an expenditure of ₹38,00,000/-, treating it as a non-business expenditure. The assessee had entered into a non-compete agreement with its retiring partner, Paras Pandit, agreeing to pay him ₹76,00,000/- split across two years, ₹38,00,000/- in A.Y. 2017-18 and the remaining in A.Y. 2018-19 recorded under “Release of Right” expenses.

The AO disallowed the claim on the ground that the restriction clause of two kilometers was commercially insignificant, no valuation report or supporting evidence was furnished, and the assessee had no substantial income history to justify such a large out-go. The CIT(A) upheld the disallowance.

Represented by Sunjal Shah, the Assessee argued that the payment was made as part of a genuine business decision, intended to protect its ongoing real estate project from potential competition by the retiring partner, who possessed considerable industry experience and goodwill.

It was submitted that business prudence lies with the partners, and tax authorities cannot substitute their judgment for that of the assessee. Reliance was placed on the Tribunal’s order in the Assessee’s own case for A.Y. 2018-19, where the identical issue had been decided in favour of the assessee, treating the expenditure as revenue in nature.

Represented by B.P. Srivastava, the Revenue reiterated that the Assessing Officer had rightly treated the expense as non-business in nature. He contended that the clause restricting the retiring partner’s activity to a two kilometer radius was commercially irrelevant in a large city like Ahmedabad.

The Bench comprising Dr. B.R.R. Kumar, Vice President, and Siddhartha Nautiyal, Judicial Member held that the payment was in the nature of revenue expenditure. It observed that the Tribunal had already allowed the claim for A.Y. 2018-19 in the assessee’s own case- ITA No. 249/Ahd/2024 on identical facts, noting that the non-compete fee was paid to safeguard the business from a person with considerable expertise and reputation in the same industry.

The bench relied on judicial precedents, including the Supreme Court’s ruling in Shiv Raj Gupta (2020), to hold that non-compete payments linked to the protection of business operations fall within the ambit of revenue expenditure. The Tribunal further noted that the tax department had not suffered any loss since the retiring partner had duly offered the receipt to tax in his individual return.

Accordingly, the disallowance of ₹38,00,000 was set aside.

Thus, the appeal of the assessee was allowed on this ground.

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