2007 (6) TMI 526 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of non-compete fee as revenue receipt.
2. Applicability of Section 10(3) of the Income Tax Act.
3. Retrospective application of Section 28(va) of the Income Tax Act.
4. Complete giving up of profit-making apparatus.

Summary:

1. Treatment of Non-Compete Fee as Revenue Receipt:
The primary issue was whether the non-compete fee received by the assessee should be treated as a revenue receipt. The assessee argued that the amount of Rs. 3,44,92,800/- received from London International Group was a capital receipt, as it involved giving up a capital asset, i.e., the profit-making apparatus. The Assessing Officer, however, treated it as a revenue receipt, taxable u/s 10(3) of the Income Tax Act, citing that it was compensation for the loss of business profit.

2. Applicability of Section 10(3) of the Income Tax Act:
The Assessing Officer held that the non-compete fee was taxable u/s 10(3) as it was not casual and non-recurring in nature. However, the Tribunal found no cogency in this reasoning, stating that the provisions of Section 10(3) did not apply to the sum involved.

3. Retrospective Application of Section 28(va) of the Income Tax Act:
The Assessing Officer argued for the retrospective application of Section 28(va), which was introduced w.e.f. 1.4.2003 to make non-compete fees taxable. The Tribunal, however, held that these provisions are prospective and not retrospective, as established in the case of R.K. Swamy v. Assistant Commissioner of Income Tax.

4. Complete Giving Up of Profit-Making Apparatus:
The Commissioner of Income Tax (Appeals) contended that the assessee had not completely given up its profit-making apparatus as per the Non-Compete Agreement. However, the Tribunal found no basis for this conclusion, stating that the profit-making apparatus had indeed been given up. The Tribunal relied on the Supreme Court's decision in Oberoi Hotel Pvt. Ltd. v. CIT, which clarified that compensation for the loss of a source of income is a capital receipt.

Conclusion:
The Tribunal concluded that the non-compete fee of Rs. 3,44,92,800/- received by the assessee was a capital receipt and not taxable for the relevant assessment year. The appeal by the assessee was allowed, setting aside the orders of the authorities below.