2015 (3) TMI 408 - HC - Income Tax

Goodwill v/s non compete fee - Tribunal held that no part of the consideration should be apportioned towards goodwill, and that the entire amount should be treated as non compete fee contrary to the ruling of this Court in the case of G.D.Naidu (1985 (11) TMI 5 - MADRAS High Court) - Held that - The admitted fact in this case is the assessee company has transferred the technical know how and other advantages to the joint venture company consisting of the assessee company and MR and the assessee continued its business using its own logo, trade name, licenses, permits and approval under an agreement with another company. The Tribunal came to hold that there was no intention to acquire goodwill of the assessee and therefore, non-compete fee received by the assessee could not be treated as goodwill and it is not taxable as income.We find, on facts, that there is no reason to differ with the said finding. The reliance placed by the Assessing Officer on Section 55(2)(a) of the Income Tax Act was repelled by the Tribunal rightly on a plea that the said provision came into effect in the year 1998-99, whereas the assessment year in the present case is 1996-97. Therefore, there was no basis to fall back on the said provision. As has been recorded by the Commissioner of Income Tax (Appeals) and the Tribunal, we find, in the facts of the present case, that the non-compete fee received by the assessee is capital in nature. See Guffic Chem. P. Ltd. V. Commissioner of Income-Tax 2011 (3) TMI 6 - Supreme Court - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of consideration received for goodwill and non-compete fee.
2. Taxability of receipt as capital or revenue.

Issue 1: Interpretation of consideration received for goodwill and non-compete fee

The case involved a Tax Appeal filed by the Revenue against an order regarding the assessment year 1996-97. The dispute arose from an agreement between the assessee company and a German company for the sale of plant and machinery related to a specific division. The Revenue contended that the consideration received should be attributed to the transfer of goodwill and restrictive covenants. However, the Commissioner of Income Tax (Appeals) accepted the assessee's argument that the entire receipt should be attributed to restrictive covenants/non-compete fee, thereby deleting the addition made by the Assessing Officer. The Tribunal, following precedent, dismissed the appeal, stating that the non-compete fee received by the assessee was not taxable as goodwill. The Tribunal's decision was based on the absence of intention to acquire goodwill and the nature of the receipt as capital in the given circumstances.

Issue 2: Taxability of receipt as capital or revenue

The Tribunal's decision was challenged by the Revenue, leading to the present Tax Appeal. The High Court analyzed the case in light of a Supreme Court judgment involving a similar issue. The Supreme Court's ruling emphasized the capital nature of compensation received under a non-competition agreement until legislative changes made it taxable under specific provisions. The High Court applied this principle to the present case, noting that the relevant provision of the Income Tax Act came into effect after the assessment year in question. Therefore, the High Court held in favor of the assessee, stating that the non-compete fee received was capital in nature and not taxable as income. The Court highlighted the principle that a liability cannot be created retrospectively, further supporting the capital treatment of the receipt.

In conclusion, the High Court dismissed the Tax Appeal, ruling in favor of the assessee and against the Revenue, based on the capital nature of the receipt and the legislative provisions applicable during the assessment year in question.