2017 (2) TMI 456 - HC - Income Tax

Amount received under the agreement - whether held as a capital receipt not liable to tax or is it a business income? - Held that - There cannot be a set formula or manner in which commercial entities engaged in business can be said to behave. In the present case, the assessee along with other business entities came together. The assessee used to carry on a restaurant business and was also distributing ice cream and related products. The agreement not to engage in the latter meant that it had ceased from doing so for ten years which can by no means of imagination be called temporary. In business parlance ten years can be as permanent as completely excluding oneself given the fast changing nature of the goodsindustry. It is quite likely that at the end of ten years, the assessee might itself not be interested in creating a distribution network and engaging in the same activity or conversely the agreement and compensation might be to defer competition which may deter it from entering into the same business. Whatever be the reasons, its desisting from the business on the one hand and agreeing to receive compensation on the other clearly points to the fact that the sum of ₹ 2 Crores was paid as non-compete fee. Therefore, it fell in the capital stream. - Decided in favour of the assessee

Summary

Issues:
1. Whether the sum received by the assessee is a capital receipt not liable to tax or business income as held by CIT (Appeals)?

Analysis:
The case involved a question of whether a sum of ? 2 Crores received by the assessee under an agreement should be treated as a capital receipt or business income. The assessee declared ? 57,25,510/- as total income and received the amount as compensation under a non-compete agreement with another company. The Assessing Officer initially treated the receipt as goodwill, but the Commissioner (Appeal) considered it as revenue in nature and business income. The ITAT later ruled that the amount fell on the capital side, granting relief to the assessee.

The revenue contended that the agreement did not bar the assessee from conducting its business activities, merely placing restrictions for a period in exchange for a lump sum amount. On the other hand, the assessee argued that the receipt was rightly considered capital, pointing to specific clauses in the agreement and relying on a Supreme Court judgment.

The Court focused on the specific agreement between the assessee and the other party, where the assessee agreed to refrain from selling ice cream and related items for ten years in exchange for ? 2 Crores. The Court noted that the assessee's decision to cease that business activity for a significant period, coupled with the compensation received, indicated a non-compete fee, falling under the capital stream.

The Court rejected the revenue's arguments, emphasizing that the assessee's decision to abstain from the business for ten years was significant in the dynamic business environment. The Court concluded that the sum received was a non-compete fee, falling under the capital category, and ruled in favor of the assessee, dismissing the appeal.