2011 (10) TMI 382 - AT - Income Tax

Capital gain vs Business income transfer of entire shareholding transfer agreement provides for non- compete in business no consideration was assigned towards non-compete fees Held that - Section 28 (va) would be attracted where the assessee was carrying on business and not where assessee only had right to carry on business in the form of capital asset. Further, extinguishment of right to manufacture, produce or process any article or thing or right to carry on any business comes within the ambit of capital gain tax. Thereby, amounts held to be attributable to non compete obligations are taxable as capital gains and not as business income. Decided in favor of the assessee.

Summary

Issues:
1. Correctness of the order passed by CIT(A) under section 143(3) of the Income Tax Act, 1961 for the assessment year 2006-07.
2. Taxability of non-compete consideration in the hands of the assessee under section 28(va) of the Act.

Issue 1: The judgment involves cross-appeals challenging the order passed by the CIT(A) for the assessment year 2006-07. The appeals were heard together due to interconnected issues. The Assessing Officer held that part of the sale consideration was attributable to non-compete fees under section 28(va) of the Act. The CIT(A) partially upheld the action but reduced the amount attributed to non-compete fees. The coordinate bench in a similar case held that amounts attributable to non-compete obligations are taxable as capital gains, not as business income. The judgment concluded that the entire consideration received on the sale of shares should be taxed under the head 'capital gains,' rendering the bifurcation exercise academic and upholding the stand of the assessee.

Issue 2: The judgment analyzed the legal provisions of section 28(va) and section 55(2)(a) of the Act to determine the taxability of non-compete consideration. It highlighted that non-compete fees are taxable as capital gains when the assessee is not actively engaged in business. The judgment emphasized circulars clarifying that receipts for the transfer of rights to carry on business are chargeable to tax under the head of capital gains. Following the precedent set by the coordinate bench, the judgment held that the entire consideration should be taxed as capital gains, rendering the partial relief granted by the CIT(A) academic and upholding the stand of the assessee.

In conclusion, the judgment resolved the issues by holding that the entire consideration received on the sale of shares should be taxed as capital gains, following the legal provisions and precedents set by the coordinate bench. The judgment clarified the taxability of non-compete fees in cases where the assessee is not actively engaged in business, emphasizing the distinction between capital gains and business income for such considerations.