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2013 (11) TMI 184 - AT - Income TaxTaxability of Non-Compete fees Capital gain vs Business Income or capital receipt not chargeable to tax - Held that - post amendment in Sec. 28 with the insertion of Clause (va) to section 28, the Non compete fee of ₹ 5 crores received by the assessee is liable to be taxed under the head profits and gains of business or profession. - Decided against the assessee. Regarding exemption provided u/s. 28(va) - held that - in the present case, there is no transfer of any capital asset therefore there is no question of the applicability of the exemption provided in sec.28 va therefore the receipt is rightly being taxed under the head capital gains.
Issues Involved:
1. Taxability of Rs. 5 crore received as non-compete fees. 2. Classification of the receipt as capital or revenue. 3. Applicability of Section 28(va) of the Income Tax Act. Detailed Analysis: 1. Taxability of Rs. 5 crore received as non-compete fees: The primary issue is whether the Rs. 5 crore received by the assessee from M/s. Thermo Electron LLS India Pvt. Ltd. should be treated as a revenue receipt taxable under the head "profits and gains of business." The assessee argued that since they were not carrying on any business during the previous year, the amount should not be taxable under Section 28. The Assessing Officer (AO), however, treated the receipt as income from business under Section 28(va) of the Income Tax Act. 2. Classification of the receipt as capital or revenue: The assessee contended that the Rs. 5 crore was compensation for the total destruction of a source of income, making it a capital receipt. They relied on the Supreme Court's decision in Gillanders Arbuthnot & Co. Ltd. v. CIT, which distinguished between compensation for loss of agency (revenue receipt) and compensation for refraining from carrying on a competitive business (capital receipt). The AO, however, classified the receipt as revenue under Section 28(va), which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. 3. Applicability of Section 28(va) of the Income Tax Act: The assessee argued that Section 28(va) should not apply as it only creates a fiction as to the source and does not deem a capital receipt as income. The AO and CIT(A) disagreed, stating that post-amendment, non-compete fees are taxable under Section 28(va). The CIT(A) relied on several judgments, including DCIT Vs Max India Ltd. and John D'Souza Vs CIT, to conclude that the non-compete fee was taxable as business income. Tribunal's Observations: The Tribunal noted that the assessee was a director of Chemito Technologies Pvt. Ltd., which sold a division to M/s. Thermo Electron LLS India Pvt. Ltd. for Rs. 58 crores. The sale agreement included a non-compete clause for four years. A separate non-compete agreement was also made with the assessee, who received Rs. 5 crores. The Tribunal examined Section 28(va) and noted that it applies to any sum received under an agreement for not carrying out any activity in relation to any business. The Tribunal emphasized that Section 28(va) does not require the assessee to be carrying on business during the previous year. The Tribunal further observed that the amendment to Section 28(va) by the Finance Act 2002, effective from April 1, 2003, brought non-compete fees within the purview of taxable income. The Tribunal cited the Supreme Court's decision in Guffic Chem (P.) Ltd. v. CIT, which held that non-compete fees are taxable as business income post-amendment. The Tribunal also referred to the Bombay High Court's decision in John D'Souza Vs CIT, which held that payments for not carrying out any activity in relation to business are assessable under Section 28(va) and not as capital gains. Conclusion: The Tribunal concluded that the Rs. 5 crore received by the assessee as non-compete fees is taxable under the head "profits and gains of business or profession" as per Section 28(va). The Tribunal dismissed the appeal, affirming the CIT(A)'s findings. ITA No. 7032/Mum/2012: The issues in this appeal were identical to those in ITA No. 7034/Mum/2012, and the Tribunal dismissed the appeal for similar reasons. Order Pronouncement: The order was pronounced in the open court on January 16, 2013.
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