2011 (7) TMI 168 - HC - Income Tax

Capital gains - Non-competition agreement - Provision of section 28(va) is amendatory and not clarificatory - Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide the Finance Act, 2002 with effect from April 1, 2003 that the said capital receipt is now made a taxable See section 28(va) . The Finance Act, 2002, itself indicates that during the relevant assessment near compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act - It became taxable only with effect, from April 1, 2003. It is well settled that a liability cannot be created retrospectively.compensation received under the non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide section 28(va) and that too with effect from April 1, 2003, Hence, the said section 28(va) is amendatory and not clarificatory . Amendment of section 55(1)(b)(1) and section 56(2)(a) - Section 55 is not a charging section and it deals with right to manufacture, produce or process any article or thing - The assessee is not the person who has transferred the assets of the companies and the firms in which he was actively involved - The present agreement no doubt came to be executed contemporaneously on the same day - But, the consideration paid under this agreement is to the assessee not to compete with the purchaser in respect of the subject matter of the other agreement, on the first place, the assessee has not transferred any capital asset to the purchaser - It has not transferred any right to produce or manufacture any article. The consideration paid to him is not to compete. Therefore, the case would not fall under section 55(2) of the Act - It is because it was not falling u/s 55(2) and was not falling under any other provisions of the Act, the Parliament thought it fit to insert the aforesaid new provision by way of an amendment - Therefore, only from 1-4-2003 the consideration received under a non-competition agreement is chargeable to tax under the heading of profits and gains of business - Decided in favour of assessee.

Summary

Issues:
1. Taxability of amount received under non-competition agreement as capital gains.
2. Interpretation of relevant provisions under the Income Tax Act.
3. Application of section 55(2)(b) and section 28(va) to determine tax liability.

Issue 1: Taxability of amount received under non-competition agreement as capital gains:
The case involved a dispute over whether the amount received by the assessee under a non-competition agreement constituted capital gains and was liable to tax. The Tribunal set aside the Commissioner of Appeals' finding that the amount was taxable as capital gains. The revenue contended that the amount should be treated as business income under section 28(va) from 1-4-2003. However, the assessee argued that there was no transfer of a capital asset, and the amount received was not taxable before the said date. The Tribunal's decision was based on the absence of a provision to tax such income before 1-4-2003, as clarified by a Supreme Court judgment. The Tribunal held that the amount was not taxable as capital gains before the relevant amendment.

Issue 2: Interpretation of relevant provisions under the Income Tax Act:
The judgment analyzed the provisions of section 28(va) inserted by the Finance Act, 2002, effective from 1-4-2003. It highlighted that the amendment made such amounts taxable under the head "Profits and gains of business or profession." The court emphasized that the legislative intent was to tax such income only from 1-4-2003, as there was no prior provision for taxation. The judgment referenced a Supreme Court decision to support the view that the amendment was amendatory and not clarificatory, affirming that the amount was not taxable as capital gains before the specified date.

Issue 3: Application of section 55(2)(b) and section 28(va) to determine tax liability:
The application of section 55(2)(b) was crucial in determining the taxability of the amount received under the non-competition agreement. The court examined the nature of the agreement and the absence of a transfer of capital assets by the assessee. It concluded that the consideration received was for refraining from competition and not for the transfer of assets, hence falling outside the scope of section 55(2)(b). The judgment emphasized that the amendment under section 28(va) was necessary to tax such amounts, making it chargeable only from 1-4-2003. Consequently, the Tribunal's decision to set aside the order of the Appellate Authority was upheld, ruling in favor of the assessee and against the revenue.

Overall, the judgment clarified the tax treatment of amounts received under non-competition agreements, emphasizing the legislative timeline for taxation and the specific provisions applicable to determine tax liability in such cases.