2018 (1) TMI 319 - AT - Income Tax

Non-compete fee - nature of receipt - revenue or capital receipt - Held that - Insertion of the term or profession in the statutory provision, viz. Sec. 28(va)(a) makes its abundantly clear beyond any scope of doubt that prior to AY 2017-18 the applicability of Sec. 28 (va)(a) was restricted only in context of amounts which were received or receivable by way of non compete fees in relation to any business, and was not applicable where such sum was received or receivable under an agreement for not carrying out any activity in relation to a profession. We have given a thoughtful consideration to the issue before us, and are of the considered view that the CIT(A) had rightly observed that the provision of Sec. 28(va)(a) were not applicable to the amount of ₹ 40.50 crore which was received by the assessee by way of non-compete fees from PWC and others, in terms of the agreement dated 25.07.2007 for not practising the profession of a Chartered Accountant for a period of 5 years. The non-compete fee received by the assessee pursuant to the agreement dated 25.07.2007, which therein refrained him from practising the profession as a chartered accountant for a period of 5 years, is a Capital receipt , which however, in the backdrop of our aforesaid observations would not be exigible to tax under Sec. 28(va) of the Act . That as we have held that the non-compete fee of ₹ 40.50 crore received by the assessee is a Capital receipt , therefore, the issue raised before us as to whether the same was rightly held by the CIT(A) as chargeable to tax as LTCG, thus, does not survive. Addition under Section 14A r.w.r. 8D - Held that - In the present case it can safely be concluded that the A.O had failed to arrive at a satisfaction that having regard to the accounts of the assessee, as placed before him, it was not possible for him generate the requisite satisfaction with regard to the correctness of the claim of the assessee that no expenditure had been incurred by him in respect of the exempt income. We therefore in the backdrop of our aforesaid observations are thus unable to persuade ourselves to uphold the disallowance of ₹ 7,60,656/- made by the A.O under Section 14A r.w.r. 8D, which thereafter had been sustained by the CIT(A). We thus set aside the order of the CIT(A) on the issue under consideration and delete the addition

Summary

Issues Involved:
1. Taxability of non-compete fees.
2. Applicability of Section 28(va) vs. Section 45.
3. Validity of revised return of income.
4. Disallowance under Section 14A read with Rule 8D.

Detailed Analysis:

1. Taxability of Non-Compete Fees:
The assessee received ?40.50 crore as non-compete fees, which he initially offered under the head Long-Term Capital Gain (LTCG). The assessee later claimed this amount as a capital receipt not liable to tax. The Assessing Officer (A.O.) rejected this claim, holding the amount as taxable under Section 28(va) as business income. The CIT(A) concurred that the amount was a capital receipt but taxable under LTCG. The ITAT held that non-compete fees received under a negative covenant are a capital receipt, as per the Supreme Court's judgment in Guffic Chem P. Ltd. vs. CIT, and thus not taxable under Section 28(va) since it applies only to business income, not professional income.

2. Applicability of Section 28(va) vs. Section 45:
The A.O. contended that the non-compete fees should be taxed as business income under Section 28(va). However, the CIT(A) and ITAT concluded that Section 28(va) applies only to business income, not professional income. The ITAT noted that the amendment to include "profession" in Section 28(va) was made effective from 01.04.2017, indicating that prior to this, the section did not cover professional income. Therefore, the ?40.50 crore received by the assessee was not taxable under Section 28(va).

3. Validity of Revised Return of Income:
The assessee filed a revised return claiming the non-compete fees as a capital receipt not liable to tax, which was beyond the time limit under Section 139(5). The A.O. and CIT(A) rejected this revised return as non-est. However, the ITAT, referencing the Bombay High Court's judgment in CIT vs. Pruthvi Brokers & Shareholders Pvt. Ltd., held that an assessee can raise additional claims before appellate authorities even if not claimed before the A.O., provided the claims arise from the facts on record. Thus, the ITAT entertained the assessee's claim.

4. Disallowance under Section 14A read with Rule 8D:
The A.O. made a disallowance of ?7,60,656/- under Section 14A read with Rule 8D for the exempt dividend income of ?48,67,603/-. The CIT(A) upheld this disallowance. However, the ITAT found that the A.O. did not record a proper satisfaction regarding the correctness of the assessee's claim that no expenditure was incurred to earn the exempt income. The ITAT, following the Supreme Court's judgment in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT, held that without such satisfaction, the disallowance under Section 14A read with Rule 8D is not justified. Therefore, the ITAT deleted the disallowance of ?7,60,656/-.

Conclusion:
The ITAT allowed the assessee's appeal, holding that the non-compete fees of ?40.50 crore were a capital receipt not taxable under Section 28(va) and not chargeable under LTCG. The ITAT also deleted the disallowance of ?7,60,656/- under Section 14A read with Rule 8D. The revenue's appeal was dismissed.