2011 (8) TMI 454 - AT - Income Tax

Amount received against right to carry on business would amount to Capital receipt which COA is NIL u/s 55(2)(a) or not. - Held that - The amount received by the assessee can be considered either as compensation for the Assessee agreeing not to carry out any activity in relation to any business (attracting Clause (a) of sec 28(va)) or the payment is for the services rendered by the Assessee for the Non-resident computed on the basis of the profitability of the venture for the 5 years. Either way it is revenue receipt in the hands of the Assessee. Decided against Assessee.

Issues Involved:
1. Treatment of Rs. 43,14,775 received from an insurance company as capital receipt or business profits.
2. Application of Section 28(va) and Section 55(2)(a) of the Income Tax Act.
3. Nature of non-compete agreement and its impact on taxability.

Issue-wise Detailed Analysis:

1. Treatment of Rs. 43,14,775 received from an insurance company as capital receipt or business profits:
The assessee received Rs. 43,14,775 from Munich Re, Germany, and treated it as a capital receipt, offering the entire amount as capital gains with a cost of acquisition as NIL under Section 55(2)(a) of the Income Tax Act. The Assessing Officer (AO) treated it as business profits under Section 28(va). The CIT(A) upheld the AO's decision.

2. Application of Section 28(va) and Section 55(2)(a) of the Income Tax Act:
The assessee argued that the payment was for agreeing not to carry on business in competition with Indian companies in which Munich Re had invested. The payment was part of an agreement dated 15.10.1999, amended on 05.04.2000. The first payment under this agreement was treated as a capital receipt by the department in AY 2000-01. The assessee contended that the payment was for not carrying on any business, and hence, the provisions of Section 28(va) would not apply due to the proviso under that section. The AO and CIT(A) disagreed, treating the entire receipt as business profits under Section 28(va).

3. Nature of non-compete agreement and its impact on taxability:
The assessee reiterated arguments before the lower authorities, emphasizing that the payment was for giving up the right to carry on business, making it a capital receipt. The assessee cited Section 55(2) and Section 28(va) to argue that the payment for giving up the right to carry on any business should be considered capital in nature. The Tribunal analyzed the non-compete agreement, which included two types of payments: an initial payment of US$1.25 million and additional compensation based on business performance over five years. The Tribunal concluded that the payment received during the year could be considered as payment for services rendered to the non-resident transferee based on performance/profitability, thus rightly assessed as revenue receipt.

The Tribunal held that the payment under the non-compete agreement did not amount to the transfer of the right to carry on any business. It was a self-imposed restriction not to compete with the non-resident company. The Tribunal cited the Amritsar Tribunal case, which held that such restrictive covenants do not constitute a transfer of business rights. Consequently, the payment was classified under Section 28(va) as a sum received for not carrying out any activity in relation to any business, making it a revenue receipt.

Conclusion:
The Tribunal dismissed the assessee's appeal, upholding the treatment of Rs. 43,14,775 as business profits under Section 28(va) and not as a capital receipt. The amount was considered either as compensation for agreeing not to carry out any activity in relation to any business or as payment for services rendered, making it a revenue receipt in the hands of the assessee.

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