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2021 (10) TMI 1008 - AT - Income TaxCharacterization of income - non-compete fee on account of executing of negative covenant - whether consideration received by the assessee as non-compete fee was capital receipt not liable to tax - HELD THAT - As evident from the aforesaid clauses of Sale and Purchase Agreement, the assessee was paid sum that assessee will not for a period of two years from the closing date, directly or indirectly or otherwise carry out any business or activity in any manner similar to the business which was transferred. Thus, there was a clear cut negative covenant for which assessee had received non-compete fee. Since the payment of non-compete fee has been made in assessment year 1998-99, therefore, same is prior to the amendment brought to section 28 (va). Hon ble Supreme Court in the case of Shiv Raj Gupta vs. CIT 2020 (7) TMI 544 - SUPREME COURT wherein their Lordship following the principle laid down in the case of Guffic Chem vs CIT 2011 (3) TMI 6 - SUPREME COURT held that prior to the amendment brought by the Finance Act 2002 w.e.f. 1.4.2003 in section 28(va), the compensation received by the assessee under non compete agreement was a capital receipt not taxable. Thus, issue as raised in the cross objection is squarely covered by the judgment of Hon ble Apex Court. Accordingly, we hold that the payment of non-compete fee received by the assessee company has not compete fee is a capital receipt and not liable to be taxed. - Decided in favour of assessee.
Issues Involved:
1. Taxability of non-compete fee as capital receipt. 2. Admissibility of new claims in cross objections before the Tribunal. 3. Application of legal precedents in adjudicating new claims. Detailed Analysis: 1. Taxability of Non-Compete Fee as Capital Receipt: The primary issue was whether the ?1,50,00,000/- received by the assessee as a non-compete fee should be treated as a capital receipt not liable to tax. The Tribunal initially dismissed the cross objection, stating that the issue was not raised before the Assessing Officer (AO) or the first appellate authority. However, upon reconsideration, the Tribunal admitted the claim, citing the judgment of the Hon’ble Supreme Court in Guffic Chem (P) Ltd. vs. CIT (332 ITR 602), which held that prior to the amendment in section 28 w.e.f. 1.4.2003, any payment received under a negative covenant was a capital receipt and not taxable. The Tribunal observed that the non-compete fee in question was paid under a negative covenant in a sale and purchase agreement dated 1.8.1997, thus falling under the pre-amendment period. The Tribunal concluded that the non-compete fee was a capital receipt and not liable to tax, following the Supreme Court's principles in Guffic Chem and Shiv Raj Gupta vs. CIT (425 ITR 420). 2. Admissibility of New Claims in Cross Objections Before the Tribunal: The Tribunal initially rejected the assessee's cross objection on the grounds that new issues could not be raised for the first time in cross objections. However, the assessee filed a miscellaneous application under section 254(2), arguing that this finding was contrary to the principle laid down by the Hon’ble Delhi High Court in PCIT vs. Silverline (383 ITR 455). The High Court had held that the Tribunal could permit the assessee to raise an additional ground challenging the validity of the reassessment order for the first time in a cross objection. The Tribunal, upon reviewing this precedent and the Supreme Court's decision in NTPC vs. CIT (229 ITR 383), recalled its earlier order and admitted the cross objection, recognizing it as a purely legal issue that could be raised at any stage. 3. Application of Legal Precedents in Adjudicating New Claims: The Tribunal's recall of its earlier order was based on the non-consideration of binding judicial precedents. The Tribunal cited the Supreme Court's decision in Asstt. Commissioner of Income Tax vs. Saurashtra Kutch Stock Exchange Ltd. (305 ITR 227), which held that non-consideration of a jurisdictional High Court or Supreme Court decision constitutes a mistake apparent from the record. Thus, the Tribunal acknowledged that its initial dismissal of the cross objection without considering the Delhi High Court's ruling in Silverline was a mistake. Consequently, the Tribunal allowed the cross objection, emphasizing that the non-compete fee received by the assessee was a capital receipt not liable to tax, in line with the Supreme Court's rulings. Conclusion: The Tribunal allowed the cross objection of the assessee, holding that the ?1,50,00,000/- received as a non-compete fee was a capital receipt and not liable to tax. This decision was based on the legal principles established by the Supreme Court in Guffic Chem and Shiv Raj Gupta, and the procedural precedent set by the Delhi High Court in Silverline. The Tribunal's order was pronounced on 13/10/2021.
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