Court affirms allowance of expenses on shelved projects and non-compete fee as revenue expenditure under Section 37(1) of Income Tax Act, dismissing Revenue's appeal under Section 260A.
In a significant judgment dated October 8, 2026, the Bombay High Court (Division Bench) dismissed the Income Tax Department's appeal against Tata Chemicals Ltd., holding that expenditures incurred on shelved projects aimed at improving existing plants and non-compete fees paid to a Managing Director qualify as allowable revenue expenditures under Section 37(1) of the Income Tax Act, 1961.
The appeal arose from the order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2001-02, which had allowed Tata Chemicals to claim deductions for certain expenses that the Revenue sought to disallow treating them as capital expenditure.
The Court considered two primary issues: first, whether the expenditure on shelved projects, which did not result in the creation of new assets, can be treated as revenue expenditure; and second, whether the non-compete fee paid to the Managing Director under a settlement agreement is deductible as revenue expenditure.
Regarding the shelved projects, the Court relied on its earlier 2024 judgment in the same case and other precedents including the decisions in Idea Cellular, Trigent Software Ltd., and Rediff.com India Ltd. It observed that since the expenditure was for improvement of existing plants without bringing into existence any new capital asset, it rightly qualified as revenue expenditure. The Revenue did not challenge the factual findings of the ITAT on this point.
On the non-compete fee issue, the Court extensively analyzed the Supreme Court's ruling in Sharp Business System v. Commissioner of Income-tax (2025) which clarified the nature of non-compete payments. The Supreme Court held that such payments, aimed at protecting or enhancing business profitability without acquiring capital assets, are revenue expenses. The Bombay High Court adopted this reasoning and rejected the Revenue's contention that the payment spread over three financial years altered its nature. The Court emphasized that the mode or timing of payment does not convert a revenue expense into capital expenditure.
The Court concluded that both questions of law were answered in favor of Tata Chemicals Ltd. and against the Revenue, thereby dismissing the appeal filed under Section 260A of the Income Tax Act.
This ruling reinforces the principle that expenses on abandoned projects improving existing infrastructure and non-compete fees paid as compensation can be deducted as revenue expenses, providing clarity and relief to businesses regarding their tax liabilities.
Bottom Line:
Income Tax - Expenditure incurred on shelved projects for improvement of existing plants, without bringing into existence any new asset, is allowable as revenue expenditure under Section 37(1) of the Income Tax Act, 1961 - Non-compete fee paid to Managing Director under settlement package is also allowable as revenue expenditure; mode of payment in lump sum or installments over different financial years does not alter its revenue character.
Statutory provision(s):
Income Tax Act, 1961 Section 37(1), Section 260A
