2009 (7) TMI 811 - HC - Income Tax

Transfer of business Amount received for not competing with transferee - appellate authorities were in error in holding that the sum of Rs. 20,00,000 received by the assessee as non-competition fee should be treated as capital receipt and not as revenue receipt - Decided in favor of revenue.

Summary

Issues Involved:
1. Whether the sum of Rs. 20 lakhs received by the assessee as non-competition fee should be treated as a capital receipt or revenue receipt.
2. Whether the transfer of one business activity by the assessee, which did not result in cessation of the rest of the business nor created a loss of any enduring trading asset, should be treated as non-taxable.

Issue-Wise Detailed Analysis:

Issue 1: Classification of Non-Competition Fee
The primary issue was whether the Rs. 20 lakhs received by the assessee as a non-competition fee from Titan Industries Limited should be treated as a capital receipt or revenue receipt. The Assessing Officer initially treated this amount as revenue receipt. However, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal (ITAT) held it as a capital receipt, not liable for income-tax.

The court examined the nature of the non-competition fee using precedents. The Supreme Court in Gillanders Arbuthnot and Co. Ltd. v. CIT held that if the profit-making structure of the assessee is not affected by such transfer and does not involve a loss of an enduring trading asset, the income is to be treated as revenue. The court applied this principle, concluding that the compensation paid for agreeing to refrain from carrying on business is revenue receipt if it does not affect the trading structure or result in the loss of an enduring asset.

The court noted that the assessee continued its business activities and that the sale of one unit did not impair the trading structure. Thus, the Rs. 20 lakhs received was deemed revenue receipt, not capital.

Issue 2: Impact of Transfer on Business Continuity
The second issue was whether the transfer of one business activity, which did not result in cessation of the rest of the business nor created a loss of any enduring trading asset, should be treated as non-taxable. The court observed that the assessee's business turnover increased post-transfer, indicating no loss of income or enduring asset.

The court referenced Kettlewell Bullen and Co. Ltd. v. CIT, which distinguished between compensation for cancellation of a contract affecting the trading structure (capital receipt) and compensation for a normal business incident (revenue receipt). The court found that the assessee's transfer did not result in a loss of an enduring asset or affect the trading structure, thus classifying the non-competition fee as revenue receipt.

Conclusion:
The appellate authorities erred in treating the Rs. 20 lakhs as a capital receipt. The court allowed the appeal, holding that the amount received by the assessee as non-competition fee should be treated as revenue receipt and thus taxable. The questions of law were answered in favor of the Revenue and against the assessee.