2016 (6) TMI 302 - HC - Income Tax

Non-compete amount received - revenue v/s capital receipt - Applying the legal principles enunciated by the Supreme Court in Rai Bahadur Jairam Valji s case, Kettlewell Bullen & Co Ltd 1958 (10) TMI 6 - SUPREME Court , Gillanders Arbuthnot & Co Ltd 1964 (5) TMI 5 - SUPREME Court , Karam Chand Thapar & Bros 1971 (1) TMI 13 - SUPREME Court , Oberoi Hotel (P) Ltd 1999 (3) TMI 2 - SUPREME Court and Guffic Chem (P) Ltd 2011 (3) TMI 6 - Supreme Court the amount equivalent to 4,99,000 pounds paid by the LIG is liable to be treated as a measure of compensation towards the negative covenant of non compete entered into by and between Bio-med Limited and LIG. In our opinion, it is not necessary that the assessee need to shelve all his other sources of income as well, for the receipt of compensation to amount to a capital receipt. Like in the Oberoi Hotel s case where assessee has only lost a right to a particular property only a part of several other business activities which it carries on - compensation received for partial impairment of the business activities normally undertaken by the assessee is liable to be treated as a capital receipt. The litmus test is whether the impairment is one of its sources of income or not and if the answer is that the injury has been caused to one of its sources of income, then it is enough to render the compensation received in that process as a capital receipt. At any rate, with effect from 01.04.2003, by virtue of introduction of Section 28(va) to the Act, all monies received pursuant to a negative covenant become liable for the incidence of taxation, thus obliterating the distinction between the two that was available till then. - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of the non-compete fee as capital receipt or revenue receipt.
2. Interpretation of legal precedents regarding the nature of compensation payments.

Detailed Analysis:

Issue 1: Classification of the Non-Compete Fee
The primary issue in this case is whether the non-compete fee of ?3,44,92,800 received by the assessee from London International Group PIC should be classified as a capital receipt or a revenue receipt. The Assessing Officer and the Commissioner of Income Tax (Appeals) initially classified this amount as a revenue receipt, implying it was taxable. The Income Tax Appellate Tribunal reversed this decision, classifying it as a capital receipt, which is not taxable.

Issue 2: Interpretation of Legal Precedents
The court referred to several Supreme Court judgments to determine the nature of the receipt. Key cases cited include:
- Oberoi Hotel (P) Ltd vs. Commissioner of Income Tax: This case established that compensation received for giving up a right, which results in the loss of a source of income, is a capital receipt.
- Karam Chand Thapar & Bros. P. Ltd. v. Commissioner of Income Tax: The court discussed the distinction between capital and revenue receipts, emphasizing that compensation for loss of an agency or office is typically a capital receipt unless it is within the framework of the business.
- Gillanders Arbuthnot & Co. Ltd vs. CIT: This case differentiated between compensation for loss of agency (revenue receipt) and compensation for a restrictive covenant (capital receipt).
- Guffic Chem (P.) Ltd. Vs. Commissioner of Income Tax: The ruling clarified that compensation for refraining from carrying on competitive business is a capital receipt, especially before the introduction of Section 28(va) of the Income Tax Act in 2003.

Analysis of the Facts:
The court examined the agreement between TTK Bio-med Limited and London International Group PIC, noting that TTK Bio-med agreed to cease its condom business and not to compete with LIG or its associates. The payment of 4,99,000 pounds was made as compensation for this non-compete agreement, which was a negative covenant.

The court found that the non-compete fee was indeed a capital receipt. The rationale was that the payment was made for the loss of a source of income, fitting the criteria established in the cited precedents. The court rejected the Revenue's argument that the payment was for rendering services, emphasizing that the agreement's primary purpose was to prevent competition.

Conclusion:
The court upheld the Income Tax Appellate Tribunal's decision, classifying the non-compete fee as a capital receipt. The appeal by the Revenue was dismissed, confirming that the amount received by the assessee was not taxable. The judgment reinforced the principle that compensation for a negative covenant (non-compete agreement) is a capital receipt, not a revenue receipt, especially in the context of the legal framework before the introduction of Section 28(va) of the Income Tax Act in 2003.