2012 (2) TMI 660 - AT - Income Tax

Summary

Issues Involved:
1. Whether the non-compete fee of Rs. 6.00 crores was a revenue receipt or a capital receipt.

Summary:

Issue 1: Non-Compete Fee - Revenue vs. Capital Receipt

The Revenue filed an appeal against the order of the CIT(A) XII, Chennai, which treated the non-compete fee of Rs. 6.00 crores received by the assessee from M/s. Citadel Aurobindo Biotech Ltd. as a capital receipt, contrary to the Assessing Officer's treatment of it as a revenue receipt. The Revenue argued that similar cases involving non-compete fees from the same company had been restored to the CIT(A) for fresh adjudication, citing the cases of DCIT v. Shri M. Ranjan Rao and ACIT vs. Shri P. Rajendra Rao. The assessee did not object to this submission.

After considering the rival submissions and reviewing the lower authorities' orders, the Tribunal noted that in the case of Shri M. Ranjan Rao, the facts were identical, and the matter had been restored to the CIT(A) for fresh adjudication. The Tribunal quoted the detailed reasoning from the case of ACIT v. Shri P. Rajendra Rao, where it was concluded that the non-compete fee could either be treated as taxable capital gains or as salary, depending on the nature of the agreement and the relationship between the parties.

The Tribunal observed that the CIT(A) had accepted the assessee's plea that the non-compete fee did not fall within the inclusive definition of income u/s 2(24) of the Income Tax Act and that there was no employer-employee relationship between the assessee and CABL. The CIT(A) also applied the real income theory, noting that only Rs. 20 lakhs had been received out of the Rs. 4 crores agreed upon, and the balance was not recoverable as the company had become defunct.

However, the Tribunal found procedural violations as the Assessing Officer was not confronted with new material submitted at the first appeal stage, violating Rule 46A of the I.T. Rules. Consequently, the Tribunal set aside the CIT(A)'s order and restored the matter to the CIT(A) for fresh adjudication, following the directions given in the case of ACIT v. Shri P. Rajendra Rao.

The appeal of the Revenue was allowed for statistical purposes, and the CIT(A) was directed to provide a reasonable opportunity of hearing to both parties before adjudicating the issue afresh.

Order pronounced at the close of the hearing in the presence of the parties on 15.02.2012.