2007 (6) TMI 272 - AT - Income Tax

Summary

Issues Involved:
1. Whether the non-compete fee received by the assessee is a revenue receipt or a capital receipt.
2. Applicability of section 10(3) and section 28(va) of the Income-tax Act on the non-compete fee.

Summary:

Issue 1: Non-Compete Fee as Revenue or Capital Receipt

The primary issue raised is whether the Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in treating the non-compete fee as a revenue receipt. The assessee argued that the amount of Rs. 3,44,92,800 received from London International Group was not taxable as it represented a capital asset given up, relying on several judicial decisions including CWT v. G.D. Naidu, CIT v. Saraswathi Publicities, and Oberoi Hotel (P.) Ltd. v. CIT. The Assessing Officer, however, treated the non-compete fee as compensation for loss of business profit, taxable u/s 10(3) of the Income-tax Act, and cited cases like Ramkumar Agarwal & Bros. and Mineral Mining Co. Pvt. Ltd. in support.

Upon review, the Tribunal found that the non-compete fee was indeed a capital receipt, not taxable as revenue. The Tribunal emphasized that the payment was for the closure of business, resulting in the impairment of profit-earning capacity, and thus, it was a capital receipt. The Tribunal also noted that the Assessing Officer's reliance on section 28(va), introduced with effect from 1-4-2003, was misplaced as the provision is prospective and not retrospective.

Issue 2: Applicability of Section 10(3) and Section 28(va)

The Tribunal examined the applicability of section 10(3) and found that the sum involved did not qualify as taxable under this section. The Tribunal also addressed the argument regarding the retrospective application of section 28(va) and concluded that the provision is prospective, as held in the case of R.K. Swamy v. Asstt. CIT.

The Tribunal further analyzed the Non-Compete Agreement and concluded that the assessee had indeed given up the profit-making apparatus, thus supporting the claim that the non-compete fee was a capital receipt. The Tribunal relied on the decision in Oberoi Hotel (P.) Ltd., which established that compensation for giving up a source of income is a capital receipt.

Conclusion:

The Tribunal concluded that the non-compete fee of Rs. 3,44,92,800 received by the assessee was a capital receipt and not taxable for the relevant assessment year. The order of the authorities below was set aside, and the appeal by the assessee was allowed.