2008 (3) TMI 16 - HC - Income Tax

Revenue Receipt versus Capital Receipt - taxability of non-compete fees - non-compete agreement incorporates a restrictive covenant on the right of the Assessee to carry on his activity of development of software - receipt in the hands of the Assessee was certainly a capital receipt.

Summary

Issues Involved:
1. Whether the non-compete fee received by the Assessee was a capital receipt or a revenue receipt.
2. Validity of reopening the assessment under Section 148 of the Income Tax Act, 1961.
3. Applicability of the rule of consistency in tax treatment for different assessment years.

Issue-wise Detailed Analysis:

1. Nature of Non-Compete Fee:
The primary issue was whether the non-compete fee received by the Assessee under the agreement dated 4th December 1997 was a capital receipt or a revenue receipt.

- Facts and Tribunal's View: The Assessee, a director and shareholder in IIS Infotech Ltd., entered into a non-compete agreement with F.I. Group Plc, U.K., agreeing not to engage in software development activities. The Tribunal concluded that the second installment of the non-compete fee was a revenue receipt, reasoning that the Assessee did not own any profit-making apparatus and was merely an employee, thus the payment was for loss of office.

- High Court's Analysis: The High Court disagreed with the Tribunal, referencing several precedents, including *Commissioner of Income Tax v. Best and Co. (Pvt). Ltd.* and *Commissioner of Income Tax v. Saraswathi Publicities*. The Court noted that compensation for restrictive covenants is generally considered a capital receipt as it represents a loss of a source of income and impairs the Assessee's profit-making capabilities. The non-compete agreement was seen as an independent obligation that restricted the Assessee from carrying on his software development activities, thus affecting his income source enduringly.

- Conclusion: The High Court concluded that the non-compete fee was a capital receipt, overturning the Tribunal's decision.

2. Validity of Reopening the Assessment:
The second issue was whether the reopening of the assessment under Section 148 of the Income Tax Act, 1961, was valid.

- Tribunal and CIT (A) Findings: Both the Commissioner of Income Tax (Appeals) [CIT (A)] and the Tribunal upheld the reopening of the assessment. The CIT (A) concluded that the principles of res judicata did not apply and that the reopening was valid.

- High Court's Stance: The High Court did not issue any notice on the correctness of the reopening, implicitly agreeing with the lower authorities' findings. The Court emphasized that the reopening having been validated, the question of consistency in tax treatment for different years does not arise.

3. Rule of Consistency:
The Assessee argued that the rule of consistency should apply since the non-compete fee was treated as a capital receipt in the assessment year 1998-99.

- High Court's Decision: The High Court rejected this argument, stating that the reopening of the assessment for the year 2000-2001 was upheld, and thus, the rule of consistency could not be applied. The Court asserted that accepting the consistency argument would indirectly challenge the validity of the reopening, which was not permissible.

Conclusion:
The High Court answered the substantial question of law in favor of the Assessee, concluding that the non-compete fee was a capital receipt and not taxable as income. The appeal was disposed of accordingly.