2003 (1) TMI 283 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of non-compete fee.
2. Classification of the non-compete fee as capital receipt or business income.
3. Applicability of section 28(ii)(a) of the Income-tax Act, 1961.
4. Applicability of section 10(3) of the Income-tax Act, 1961.
5. Impact of section 28(va) introduced by the Finance Act, 2002.

Summary:

1. Taxability of Non-Compete Fee:
The assessee received a non-compete fee of Rs. 3.20 crores from R.K. Swamy/BBDO Advertising Pvt. Ltd. The Assessing Officer initially treated this amount as a capital receipt but later classified it as casual and non-recurring income u/s 10(3) of the Income-tax Act, 1961. The Commissioner (Appeals) held it as taxable business income u/s 28(ii)(a) of the Act.

2. Classification of Non-Compete Fee:
The assessee argued that the non-compete fee was a capital receipt, not subject to tax, supported by various Supreme Court and High Court decisions. The Assessing Officer, after considering the facts and case laws, initially agreed but later treated it as capital gains chargeable u/s 45 of the Act. The Commissioner (Appeals) dismissed the assessee's appeal, treating the amount as business income u/s 28(ii)(a).

3. Applicability of Section 28(ii)(a):
The Tribunal examined whether the non-compete fee could be taxed u/s 28(ii)(a), which applies to compensation received at the termination or modification of employment terms. The Tribunal found that the assessee had already resigned as managing director before the non-competition agreement was signed, thus the receipt could not be considered as compensation for modifying employment terms.

4. Applicability of Section 10(3):
The Tribunal noted that the Assessing Officer's classification of the non-compete fee as casual and non-recurring income u/s 10(3) was incorrect. The Tribunal emphasized that the receipt was a capital receipt, supported by case laws, and not taxable as casual income.

5. Impact of Section 28(va):
Section 28(va), introduced by the Finance Act, 2002, effective from 1-4-2003, taxes sums received under non-compete agreements. However, the Tribunal held that this provision was prospective and did not apply to the assessment year 1997-98. The Tribunal cited several case laws where non-compete fees were treated as capital receipts not subject to income tax.

Conclusion:
The Tribunal concluded that the non-compete fee of Rs. 3.20 crores received by the assessee was a capital receipt arising from a restrictive covenant and not taxable as income. The appeal filed by the assessee was allowed.