2018 (2) TMI 114 - HC - Income Tax

Non-compete fee - Amount per annum received by the assessee/respondent for two years - compensation received for not providing the benefit of his knowledge of regulatory matters, negotiating skills and strategic planning expertise to any other person in India in the two wheeler segment for a period of two years from the date of the Agreeement - whether was more of a revenue character and was therefore taxable by virtue of Section 17(3) or under Section 28(va) - ITAT held the amounts essentially received as non-compete fee, were capital and not income - Held that - The assessee had a dual role both as shareholder and as Managing Director. As Managing Director, he received only the non-compete amounts for two years. It is quite possible that he could have been given this amount as a capital receipt at one go for whatever reasons and that the amount be spread over two years. Undoubtedly, the Parliament has intervened and deemed that such amounts so far as they relate to consideration for professionals should be treated as income by virtue of the amendment of 2017. However, with respect to the Revenue s contention that regardless of that amendment even in the pre-existing law, this amount had to be treated as receipts and therefore taxable as income, cannot be accepted. It also noted Commissioner of Income Tax v. Sapthagiri Distilleries Ltd. (2014 (11) TMI 1078 - SUPREME COURT) where the Supreme Court had held that compensation received towards loss of source of income and noncompetition fee would be treated only as capital receipts and not liable to tax. Having regard to these decisions and the fact that the view of the ITAT is a plausible one - Decided against revenue

Summary

Issues:
1. Taxability of the amount received by the assessee under Section 17(3) or under Section 28(va) of the Income Tax Act, 1961.

Analysis:
The High Court dealt with the sole question of law concerning the taxability of an amount received by the assessee for two years. The assessee, a promoter and Director of a company, received ?1.32 crores from Suzuki India for not providing certain benefits in the two-wheeler segment. The Revenue argued that the amount was revenue in character and thus taxable. The ITAT held that the amount was not a non-compete fee but a capital receipt, falling outside the ambit of section 28(va) of the Act. The Court referred to previous judgments and emphasized that compensation for a negative/restrictive covenant is a capital receipt, not chargeable to tax under section 28(va).

The Revenue contended that the ITAT erred in treating the amount as capital instead of income. They highlighted the amendment in 2016, which brought such amounts under tax purview, irrespective of the nature of the activity carried out by the payer. The assessee's counsel argued that the ITAT's decision was in line with the law, citing the Supreme Court's ruling in Guffic Chem. P. Ltd. The Court noted that the assessee received the amount for a limited period and had a dual role as a shareholder and Managing Director. It emphasized the fact-dependent nature of such cases and rejected the Revenue's argument that the amount should be treated as income even before the 2017 amendment.

The Court referred to the Gujarat High Court's decision in Commissioner of Income Tax v. Anjum G. Balakhia and the Supreme Court's ruling in Commissioner of Income Tax v. Sapthagiri Distilleries Ltd., which held that compensation for loss of source of income and non-compete fees are capital receipts not liable to tax. Considering these precedents, the Court found the ITAT's view plausible and dismissed the appeal, stating that no question of law arose.