Revenue Vs Capital Expenditure & Depreciation on Capital Expenditure: The argument continues



Quick Summary
This article explores the distinction between revenue expenditure, such as contract termination payments, which are generally deductible for tax purposes, and capital expenditure that creates enduring benefits or assets. It delves into the concept of depreciation on intangible assets, referencing legal cases to clarify that expenditures resulting in business or commercial rights, like non-compete fees, can be considered intangible assets eligible for depreciation.

By terminating the services of a vendor, an assessee may intend to save the expense that it would have had to incur in the relevant previous year as well as for few more years going ahead. However, it cannot be said that this saving is an enduring benefit or has resulted in creating an asset. Thus, payment made for termination of contract by way of compensation would be an allowable deduction under The Income Tax Act, in computing the total income of assessee as was held in the case of Commissioner of Income Tax V/s. Ashok Leyland Ltd. [(1972) 86 ITR 549 (SC)]. If assessee got rid of its liability to pay the commission it was required to pay under the agreement not only during the accounting year but also for a few years more, the expenditure thus saved undoubtedly swelled the profits of the company and where the termination was on business considerations and as a matter of commercial expediency it cannot be stated that by terminating the agreement, assessee acquired any enduring benefit or any income yielding asset was held in the case of COMMISSIONER OF INCOME TAX – 14, MUMBAI Vs MUSIC BROADCAST PRIVATE LIMITED [2023-VIL-105-BOM-DT].

Revenue vs Capital Expenditure and Depreciation

Now in a case where the contrary is correct, i.e., when an expenditure does result in creating an enduring benefit or a capital asset, the question arises that can depreciation be claimed on this expenditure by taking it as an intangible asset. On perusal of the meaning of the categories of specific ‘intangible assets’ referred to in section 32(1)(ii) of the Income Tax Act, preceding the term "business or commercial rights of similar nature" it is seen that intangible assets are not of the same kind and are clearly distinct from one another. The legislature thus did not intend to provide for depreciation only in respect of the specified intangible assets but also to other categories of intangible assets which may not be possible to exhaustively enumerate. Thus, an assessee who acquires commercial rights to sell products under the trade name and through the network created by the seller for sale in should be entitled to deprecation.

 

Non-compete fees paid to an ex-employee, or any other person creates rights which gives not only enduring benefit but also protects an assesses business against competition. Hence the same must be considered as intangible asset and depreciation be allowed on the same was held by The Bombay High Court in the case of PR. COMMISSIONER OF INCOME TAX – 14, MUMBAI Vs MUSIC BROADCAST PRIVATE LIMITED [2023-VIL-105-BOM-DT]

 

Daily Limit Reached

You have reached your daily limit of 2 Free Articles

Subscribe to CCI PRO for unlimited access

Why Upgrade to CCI PRO?
  • No Ads
  • WhatsApp Community
  • Daily E-Newsletter
  • Unlimited Articles Access
  • Profile Visitors
  • Link Social Profiles
  • Featured Job Posts
  • Pro Badge
  • Expert GST Guidance
  • Unlimited Forum Replies
  • Download Content in PDF
1 Year PLAN
1999
(Excl. of GST ₹359)

BEST VALUE
2 Years PLAN
3499
(Excl. of GST ₹629)

View all CCI PRO benefits

Already a PRO member? Login here for an ad-free experience. 011-411-70713


2599 Views 2 Likes Comment   Share Income Tax   Report


About the Author

DESIGNATED PARTNER

Mr. Vivek Jalan is a FCA, Qualified LL.M (Constitutional Law) and LL.B. He is the Chairman of The Fiscal Affairs and Taxation Committee of The Bengal Chamber of Commerce and Industry. He is the Convenor on Indirect Taxes of the CII- Economic Affairs and Taxation Committee (ER); He is also a visiting faculty for Indirec ... Read more

Comments :

Related Articles


Loading


Popular Articles





CCI Pro

CCI Articles

submit article


Company
20 September 2026
Semi Qualified CA

Navin & Associates

Mumbai

CA Inter

View Details
Company
Featured ARTICLESHIP 06 October 2026
Semi Qualified

AJAY SINGH AND CO LLP

Thane

CA Final

View Details
Company
ARTICLESHIP 07 October 2026
Article assistant

S.K.Bajpai & Co.

Noida

B.Com

View Details
Company
ARTICLESHIP 21 September 2026
CA Article Assistant

KK & Company Chartered Accountant

Pune

CA Inter

View Details
Company
ARTICLESHIP 07 October 2026
Article Assistant

Malhotra Rajesh & Associates

New Delhi

B.Com

View Details
Company
ARTICLESHIP 16 September 2026
Article Assistant

MANUJ SHARMA AND COMPANY

Noida

CA Inter

View Details
Company
ARTICLESHIP 18 September 2026
Industrial Trainee

Twenty Point Nine Five Ventures Private Limited

Noida

CA Inter

View Details
Company
ARTICLESHIP 28 September 2026
Junior Accountant

J S P M & Associates LLP

Pune

B.Com

View Details