2023 (10) TMI 1282 - HC - Income Tax

Nature of receipt - non- compete fee - capital or revenue receipt - assessee had been restrained both directly and indirectly from undertaking any business which would compete with the business of WSIL - as per CIT(A) non- compete fee was a camouflage for payment of money or transfer of business - HELD THAT - According to us, a bare perusal of what is recorded by the CIT( A) of his order would show that the consideration was paid against various agreements, which included the non-compete agreements. A plain reading of the extract embedded in the aforementioned proceeding order does not convey that the assessee had conceded, as is sought to be portrayed before us, that the non-compete agreements were sham agreements and the consideration was artificially bifurcated into that which were paid for various assets both fixed and movable and transfer of IPR rights. There is, in fact, no elucidation of the note said to have been submitted by the authorized representative of the assessee. Tribunal, in our view, has applied the correct test, which is that there was no material on record for the CIT(A) to conclude that non- compete fee was a camouflage for payment of money or transfer of business. Tribunal, in brief, is seeking to convey is that because the assessee had executed a non-compete agreement with WSIL, the conversation the CIT(A) had with the assessee could not be used to vary, add or subtract from the obligations contained in the said agreement. Assessee had been restrained both directly and indirectly from undertaking any business which would compete with the business of WSIL. Clearly, for the period in which the non-compete agreement was to operate, which in this case was 10 years, the assessee s source of income had been clamped and, therefore, compensation received by him could only be treated as capital receipt. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of proceedings under Section 147 read with Section 148 of the Income Tax Act, 1961.
2. Taxability of Rs. 8 crores received by the assessee as a capital receipt or revenue receipt.

Summary:

Issue 1: Validity of Proceedings under Section 147/148

The first issue concerns the appeal filed by the respondent/assessee regarding the initiation of reassessment proceedings under Section 147 read with Section 148 of the Income Tax Act, 1961. However, this issue was rendered academic and not pressed by the assessee, as the court ruled in favor of the assessee on the second issue.

Issue 2: Taxability of Rs. 8 Crores as Capital Receipt or Revenue Receipt

The second issue pertains to the appeal filed by the appellant/revenue, questioning whether the Rs. 8 crores received by the assessee under a non-compete agreement was a capital receipt and hence not taxable. The assessee, who was the Joint Managing Director of Geep Industrial Syndicate Ltd. (GISL), received this amount from Wilkinson Swords India Ltd. (WSIL) under a non-compete agreement dated 25.11.1998.

The Tribunal had ruled in favor of the assessee, concluding that the Rs. 8 crores received was a capital receipt, not taxable. The Tribunal's decision was based on the nature of the non-compete agreement, which restrained the assessee from engaging in any competing business for ten years, thereby closing his source of income.

The High Court upheld the Tribunal's decision, emphasizing that the non-compete agreement was genuine and the compensation received was indeed for the loss of source of income, making it a capital receipt. The court referenced the Supreme Court judgment in Shiv Raj Gupta v CIT, which supports the view that compensation for a negative/restrictive covenant is a capital receipt.

The court rejected the appellant/revenue's argument that the agreement was a charade and that the compensation was artificially configured. The court found no material evidence to support this claim and noted that the agreements between WSIL and the assessee were legitimate and enforceable.

Consequently, the court answered the second question of law in favor of the assessee and against the revenue, affirming that the Rs. 8 crores received was a capital receipt and not taxable.

Given the resolution of the second issue, the first issue regarding the validity of the reassessment proceedings became academic and was not pressed by the assessee. The appeals were disposed of accordingly.