2005 (5) TMI 34 - HC - Income Tax

Income or Capital - (a) Whether, sum of Rs. 1.75 crores received by the assessee for entering into a restrictive covenant of not entering into a competing business was receipt by the assessee in the nature of a capital receipt or whether it was a revenue receipt? (b) Whether said receipt of Rs. 1.75 crores is not capital gain chargeable to capital gains tax but merely capital receipt not chargeable to any tax whether tax or capital gains tax at all? (c) Whether, Tribunal was justified in law in deleting the addition of Rs. 1,74,95,000, made by the Assessing Officer as per the provision of section 10(3)? held that it would be illogical and against the language of section 56 to hold that everything that is exempted from capital gains by the statute could be taxed as a casual or non-recurring receipt under section 10(3) read with section 56

Issues Involved:
1. Nature of receipt - capital or revenue?
2. Taxability of the receipt under capital gains tax.
3. Justification of deletion of addition under section 10(3) of the Income-tax Act, 1961.

Issue 1: Nature of Receipt - Capital or Revenue?
The case involved a sum of Rs. 1.75 crores received by the assessee for entering into a restrictive covenant with United Breweries group. The Revenue contended whether the receipt was a capital or revenue receipt. The Tribunal held that the receipt was not casual and was received due to a restrictive covenant, thus outside the purview of income. The Commissioner of Income-tax (Appeals) also upheld this view, stating that the amount was specifically paid for the restrictive covenant and not connected to employment compensation. The High Court, referring to a similar case, concluded that the payment was made to refrain the assessee from engaging in a competing business, thus a capital receipt not taxable as income.

Issue 2: Taxability under Capital Gains Tax
Regarding the taxability under capital gains tax, the Tribunal and the High Court held that since the sum of Rs. 1.75 crores was a "capital receipt" without a cost of acquisition, it could not be taxed under section 45 of the Income-tax Act, 1961. Citing precedents, the courts established that if the cost of acquisition could not be determined, the amount cannot be brought under the purview of section 48 for taxation as capital gains. Therefore, the sum received pursuant to the restrictive clause was deemed not chargeable to capital gains tax.

Issue 3: Deletion of Addition under Section 10(3)
The question of whether the deletion of the addition under section 10(3) of the Income-tax Act, 1961 was justified was examined. The High Court referred to a Supreme Court judgment establishing that certain receipts, like tenancy rights, are capital assets and their surrender would attract section 45 for taxation. It was emphasized that such receipts cannot be treated as casual or non-recurring under section 10(3) and subjected to tax under section 56. Therefore, the deletion of the addition under section 10(3) was upheld in favor of the assessee.

In conclusion, the High Court dismissed the appeal, affirming that the sum received for the restrictive covenant was of a capital nature, not taxable under capital gains tax, and not subject to addition under section 10(3) of the Income-tax Act, 1961. The judgment was based on established legal principles and precedents, ensuring fair treatment and tax implications for the parties involved.

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