2018 (9) TMI 715 - HC - Income Tax

Revision u/s 263 - why the non-compete premium should not be assessed as capital gains in terms of Section 55(2)(a) read with Section 28(v-a) - Held that - Prior to an amendment brought about with effect from April 1, 2003, non-compete premium was judicially regarded as a capital receipt and there is a Supreme Court judgment 2011 (3) TMI 6 - SUPREME COURT confirming such legal position. However, even in such judgment, the Supreme Court noticed that upon the amendment being introduced and sub-section (v-a) being brought into Section 28 of the Act, non-compete premium had to be regarded as a business income or revenue receipt. The show-cause notice issued under Section 263 referred to the Supreme Court judgment but failed to make the distinction in the Supreme Court judgment as to the manner of treatment of any non-compete premium on the basis of whether such premium was received prior to Section 28 of the Act being amended to incorporate sub-section (v-a) therein. It is now sought to be suggested on behalf of the Revenue that in view of the proviso to Section 28(v-a) of the Act the non-compete premium in this case ought to have been chargeable under the head of capital gains. However, such argument cannot be accepted as it was not indicated in the show-cause notice which limited the reasons for issuance thereof in paragraphs 5 and 6 quoted above and referred merely to the Supreme Court judgment without the change of law that was noticed in such judgment. The Tribunal was guided by the same Supreme Court judgment and took into account the change in law upon the introduction of sub-section (v-a) in Section 28 of the Act. On the subject and the Tribunal dealing with the case as made out in the show-cause notice, the order calls for no interference as no substantial question of law arises therefrom.

Summary

Issues:
Assessment of non-compete premium as capital gains under the Income Tax Act, 1961.

Analysis:
The case involved a foreign company that sold its controlling shareholding interest in a tea company to an Indian entity, including a non-compete agreement with a substantial payment. The assessment for the relevant year led to a show-cause notice under Section 263 of the Income Tax Act, 1961, questioning the treatment of the non-compete premium as capital gains. The notice referred to a Supreme Court judgment but failed to distinguish the treatment of non-compete premiums pre and post an amendment to the Act. The Revenue later argued that the premium should be treated as capital gains due to a proviso in the Act, but this argument was rejected as it was not part of the original show-cause notice's reasons. The Tribunal considered the change in law post-amendment and upheld the treatment of the non-compete premium as business income. The Court found no substantial question of law and dismissed the appeals, emphasizing the lack of interference with the Tribunal's order.

This judgment clarifies the treatment of non-compete premiums under the Income Tax Act, emphasizing the importance of correctly applying legal provisions and considering any changes in the law. It highlights the necessity for show-cause notices to clearly state the reasons for challenging a tax treatment to ensure fair and informed proceedings. The decision underscores the significance of legal clarity and adherence to procedural requirements in tax assessments to prevent disputes and ensure consistency in tax treatment.