2001 (5) TMI 7 - HC - Income Tax

Capital/revenue receipt - non-compete agreement - payment of the amount under the agreement has been paid to the assessee by Gillette Company to refrain from engaging himself whether directly or indirectly in any business which undertakes or is engaged in the manufacture or marketing or distribution of razor blades, shaving systems or shaving preparations. That amount cannot be taxed as revenue receipt, especially when no material has been brought on record by the Assessing Officer to justify that the agreement dated December 15, 1996, is a colourable device Revenue s appeal dismissed

Issues Involved:
1. Whether the sum of Rs. 8,00,00,000 received under the "non-compete agreement" should be treated as a capital receipt or a revenue receipt.
2. Whether the "non-compete agreement" is a colourable device.

Issue-wise Detailed Analysis:

1. Treatment of Rs. 8,00,00,000 as Capital Receipt or Revenue Receipt:

The primary issue in this case is the classification of the sum of Rs. 8,00,00,000 received by the assessee from Gillette Company under a "non-compete agreement." The Income-tax Officer initially treated this amount as a professional receipt, which was upheld by the Commissioner of Income-tax (Appeals). However, the Tribunal, after discussing various decisions, held that the receipt is in the nature of a non-taxable capital receipt.

The Tribunal's decision was influenced by several precedents:
- In CIT v. Best and Co. (Pvt.) Ltd. [1966] 60 ITR 11 (SC), the Supreme Court held that compensation for a non-compete agreement is a capital receipt and not taxable.
- Similarly, in CIT v. Bombay Burmah Trading Corporation [1986] 161 ITR 386 (SC) and CIT v. Saraswathi Publicities [1981] 132 ITR 207 (Mad), the courts held that compensation received for refraining from carrying on competitive business is a capital receipt.
- In CIT v. Automobile Products of India Ltd. [1983] 140 ITR 159 (Bom), compensation received for giving up a manufacturing license was treated as a capital receipt.

The Tribunal also referred to CIT v. Late G.D. Naidu [1987] 165 ITR 63 (Mad), where compensation for not carrying on a bus business was considered a capital receipt.

Based on these precedents, the Tribunal concluded that the amount received by the assessee under the non-compete agreement should be treated as a capital receipt and not taxable as income.

2. Whether the "Non-Compete Agreement" is a Colourable Device:

The Revenue argued that the non-compete agreement was a colourable device and that there was no material on record to prove that the assessee could set up a competitive business against Gillette. However, the Tribunal found that the assessee had substantial expertise and knowledge in the field of manufacturing and marketing shaving products, acquired during his tenure as the non-executive chairman of Indian Shaving Products Ltd. (ISP).

The Tribunal noted that the assessee had been approached by other companies, such as Credit Capital Finance Corporation Ltd., to set up a rival unit in India. A confidential letter dated December 15, 1994, from Credit Capital Finance Corporation, was produced as evidence, indicating that the assessee was indeed in a position to compete with Gillette.

The Tribunal found no material evidence from the Assessing Officer to support the claim that the non-compete agreement was a colourable device. The agreement explicitly stated that the payment was made to prevent the assessee from engaging in any competitive business, which was further corroborated by the assessee's acquired expertise and the approaches from rival companies.

Conclusion:

The High Court upheld the Tribunal's decision, concluding that the payment received under the non-compete agreement was a capital receipt and not taxable as income. The court found no evidence to suggest that the agreement was a colourable device. Consequently, the appeal was dismissed.

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