2001 (2) TMI 302 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of Rs. 2.70 crores received as non-competitive fee.
2. Nature of the receipt: Capital or Revenue.

Summary:

Issue 1: Taxability of Rs. 2.70 crores received as non-competitive fee

The assessee, a limited company, appealed against the order of the Commissioner of Income-tax (Appeals)-XI, Chennai (CIT(A)), dated 31-1-2000, for the assessment year 1996-97. The primary issue was the taxability of Rs. 2.70 crores received as a non-competitive fee. The assessee had entered into a non-competition agreement with M/s. Transelektra Domestic Pvt. Ltd. (TDP) on 24-5-1995, agreeing to discontinue the marketing, sale, and distribution of mosquito repellents, mats, and mat heater machines for five years. The Assessing Officer (AO) treated the amount as revenue income, arguing that the agreement did not affect the assessee's business since it continued manufacturing for Bayer (India) Ltd. (BIL) under a separate agreement.

Issue 2: Nature of the receipt: Capital or Revenue

The CIT(A) upheld the AO's decision, noting that the assessee's right to manufacture continued and only the marketing and distribution rights were restricted. The CIT(A) concluded that the non-competition fee was revenue income. The assessee contended that the amount received was a capital receipt, arguing that the non-competition agreement effectively curtailed its main source of income by preventing it from marketing and distributing its products, thereby creating a vacuum in the market that benefited TDP.

The Tribunal examined the facts and agreements in detail. It noted that the assessee had a pre-existing right to market, distribute, and sell its products, which was surrendered to TDP. The Tribunal distinguished the case from the Madras High Court decision in Chemplant Engineers (P.) Ltd. v. CIT [1998] 234 ITR 23, where the compensation received was for loss of commission and deemed revenue in nature. The Tribunal concluded that the non-competition fee received by the assessee was for surrendering its profit-earning apparatus, making it a capital receipt.

The Tribunal also referred to the Board's Instruction No. 1964, dated 17-3-1999, which clarified that compensation for agreed absence of competition or restrictive covenants was capital in nature up to the assessment year 1997-98. Consequently, the Tribunal held that the amount of Rs. 2.70 crores received by the assessee was a capital receipt and not liable for capital gains tax.

Conclusion:

The appeal of the assessee was allowed, and the amount of Rs. 2.70 crores received as a non-competitive fee was deemed a capital receipt, not subject to tax.