2015 (4) TMI 516 - HC - Income Tax

Consideration for Not to compete and non solicitation - Capital receipt or Revenue receipt - Held that - It is only vide the Finance Act, 2002 which came into effect from 1st April, 2003 the said capital receipt was now taxable under section 28(va). It is clarified by the Supreme Court in the case of Guffic Chem (P) Ltd. 2011 (3) TMI 6 - Supreme Court that section 28(va) of the Act was amendatory and not clarificatory and, therefore, the amount received before the said date was not taxable under Section 28(va) of the Act. In the present case, it is evident that had the assessee not entered into an agreement of non-compete, he would have earned the amount from the business carried on out of the division which was sold to Thermo Electron LLS India Pvt. Ltd. It is the sale of the said division that has deprived him of the income and part of the sale consideration itself, he was required to execute an agreement of non-compete and the compensation received under the said agreement was relatable on a consideration for sale of the business of the division and, therefore, for these reasons also, we are of the view that the amount is taxable under Section 28(va). Furthermore, in the present case, both the assessee have received the amount pursuant to the agreement dated 2nd June, 2008 that is well after 1st April, 2003 and would be covered by the provisions of Section 28(va) of the Act. We are accordingly of the view that no relief can be granted to the appellants. - Decided against the assessee.

Summary

Issues:
1. Taxability of amount received under non-compete agreement as business income under section 28(va) of the Income Tax Act.
2. Interpretation of whether carrying on business is a pre-condition for chargeability under the head 'profits and gains of business'.
3. Determination of whether the amount received under the agreement constitutes a transfer of a right to manufacture or a right to carry on business taxable under capital gains.

Analysis:
Issue 1: The appeals questioned the Tribunal's decision on the taxability of the amount received by the Appellant from Thermo under a non-compete agreement. The Tribunal held it taxable as business income under section 28(va) of the Act, despite the Appellant not carrying on any business in the relevant year. The agreements prohibited the Appellants from engaging in similar activities to the sold division for a specified period. The Commissioner of Income Tax (Appeals) upheld this decision, considering the receipts as revenue and not capital gains.

Issue 2: The Appellate Tribunal's interpretation regarding the necessity of carrying on business as a pre-condition for taxability under the head 'profits and gains of business' was challenged. The Tribunal's view that carrying on business is not a prerequisite for attracting section 28(va) was contested by the Appellant, claiming the amount was not revenue but consideration for refraining from specified business activities.

Issue 3: The Appellant argued that the amount received did not fall under section 28(va) but rather constituted a transfer of a right to manufacture or carry on business, thus taxable under capital gains. The Appellant contended that the Assessing Officer, Commissioner of Income Tax (Appeals), and Tribunal erred in applying section 28(va) and taxing the amount as business income, seeking the benefit of long-term capital gains instead.

The Court analyzed previous judgments and legal provisions to determine the taxability of the amount received under the non-compete agreement. Referring to relevant case laws, the Court concluded that the amount was taxable under section 28(va) of the Act. The Court emphasized that the Appellants received the amount due to the sale of the business division to Thermo, leading to deprivation of potential income. As the agreements were executed after 1st April 2003, falling under the amended provisions of section 28(va), the Court dismissed the appeals, stating no relief could be granted to the Appellants.