Non-compete fees paid to a retiring partner to insulate the business from competition are deductible as revenue expenditure under Section 37(1) when they protect existing business operations rather than creating new capital assets.

आदेश / ORDER

PER DR. MANISH BORAD, ACCOUNTANT MEMBER :

The captioned appeal at the instance of assessee pertaining to A.Y.2020-21 is directed against the order dated 15.09.2025 framed by National Faceless Appeal Centre, Delhi arising out of Assessment Order dated 24.09.2022 passed u/s. 143(3) r.w.s.144B of the Income Tax Act, 1961 (in short ‘the Act’).

2. Assessee has raised seven grounds of appeal but they all are against the disallowance of expenditure of Rs.2.00 crore claimed by the assessee towards Non-compete Fee paid to the Retiring Partner Mr. Ratilal Bora.

3. Brief facts of the case are that the assessee is a partnership firm engaged in manufacturing and Export of Sesame seeds and processing and trading of other oil seeds and spices. Income of Rs.33,19,08,030/- declared in the return of income for A.Y. 2020-21 e-filed on 02.02.2021. Case of the assessee selected for scrutiny to examine “Large squared up loans during the year and Low capital gains with respect to sale consideration”. Statutory notices were validly served on the assessee. So far as the issue under appeal is concerned, ld. Assessing Officer observed that during the year under consideration, Mr. Ratilal Bora who was involved from the date of inception of the company retired during the year. It is submitted by the assessee during the course of assessment proceedings that since Mr. Ratilal Bora was having all the In and Out of the firm and post some family dispute the continuing partners in order to stop Mr. Ratilal Bora from entering into a competition, gave a Non-compete Fee of Rs.2.00 crore. However, ld. Assessing Officer observed that the retiring partner is a close relative of the assessee and has given his assets and knowhow to their children and close relatives and further the retiring partner has become old and therefore such payment made to the relatives, is in violation of provisions of section 40A(2)(b) of the Act and therefore such expenditure under the had Non-compete Fee paid to the retiring partner at Rs.2.00 crore is not allowable. Against the disallowance of the Non-compete Fee by the Assessing Officer, assessee preferred appeal before ld.CIT(A) but ld.CIT(A) affirmed the action of the Assessing Officer observing as follows :

“Ground Nos. 2 to 6: Disallowance of Non-Compete Fee of Rs. 2,00,00,000/-

These grounds are interconnected and pertain to the disallowance of Rs. 2,00,00,000/- paid as non-compete fee to Shri Ratilal Bora, a retiring partner, claimed as revenue expenditure under section 37(1) of the Act.

The Appellant has submitted that the firm was established in 1996, with Shri Ratilal Bora as a founding partner. He retired during the year due to disputes with other partners (his nephews: Mr. Satish Bora, Mr. Rajendra Bora, and Mr. Ajit Bora). The fee was paid to restrain him from competing in the same line of business for 5 years, protecting the firm's interests, given his knowledge of operations, suppliers, customers, and technical know-how.

It is stated that the Section 37(1) of the Act allows any expenditure (not being capital or personal) laid out or expended wholly and exclusively for the purposes of the business or profession as a deduction in computing business income, provided it is substantiated with evidence. Non-compete fees, when paid under a binding agreement to protect existing business from competition, can be treated as revenue expenditure, as they safeguard ongoing operations without creating a new asset.

However, the onus under section 37(1) of the act lies on the assessee to prove the expenditure's genuineness and business nexus through documentary evi