2012 (7) TMI 48 - HC - Income Tax

Non-compete fees - whether the same can be presumed to include element of goodwill, when no other consideration is specified in the main agreement for the goodwill - assessee, a private company entered into an agreement with M/s R for transfer of its business as a going concern and also entered into another non-compete agreement - AY 01-02 - Held that - Tribunal was right in holding that the amount received for intangible assets under a separate agreement, is only a non-compete fee, and does not contain any element of goodwill, especially when there is no other consideration specified in the main agreement for the goodwill and there is no evidence to show that the amount received was towards transfer of Goodwill. Therefore, payment received as non-competition fee under a negative covenant is a capital receipt and not taxable under the Act. The same was always treated as a capital receipt till AY 2003-2004 - Substantial question of law is answered against the Revenue

Summary

Issues:
Interpretation of non-compete fee as capital receipt or goodwill transfer

Analysis:
The High Court of Madras heard a Tax Case Appeal against the Income Tax Appellate Tribunal's order regarding the assessment year 2001-2002. The case involved an agreement where one company took over another company's business for a specified consideration, including a non-compete fee. The assessing officer treated the non-compete fee as "Goodwill" for taxation purposes, but the Commissioner of Income Tax and the Tribunal disagreed, considering it a capital receipt. The main issue was whether the non-compete fee was a capital receipt or payment towards goodwill.

The Revenue argued that the non-compete fee was essentially payment for goodwill transfer, supported by the legislative intention to tax such receipts and surrounding circumstances indicating goodwill transfer. On the other hand, the assessee relied on established legal principles that compensation for restrictive covenants is a capital receipt and not taxable. The Court had to determine the true nature of the payment under the non-compete agreement.

Referring to a recent Supreme Court decision, the Court noted that payments under non-compete agreements were historically treated as capital receipts until legislatively made taxable in 2003. The Court emphasized that the specific legislative mandate made such payments taxable as capital receipts from 2003 onwards. The Court also highlighted that compensation under non-compete agreements was considered capital receipts unless there was a loss of the source of business, as in this case.

Ultimately, the Court concluded that the payment received as a non-compete fee was a capital receipt and not towards goodwill transfer. The Court rejected the Revenue's argument that the surrounding circumstances indicated a goodwill transfer, emphasizing that the agreement clearly stated the payment was for the non-compete fee. The Court dismissed the Tax Case Appeal in favor of the assessee, citing the established legal principles and the specific legislative provisions governing such payments.