2019 (2) TMI 734 - HC - Income Tax

Nature of receipt - Transfer of business as a going concern for consideration - as per AO non-compete clause in the agreement, the receipt could be the assessee s income in terms of Section 28(va) - capital receipt OR business income - Held that - No perversity is pointed out in this approach of the Commissioner of Income Tax (Appeals). What however, the Revenue argued is that the entire amount was attributable to the non-compete agreement which is clearly an incorrect proposition. The assessee which was engaged in highly specialized business, transferred the entire business for valuable consideration. Non-compete clause in such agreement was merely a part of the understanding between the parties. What purchaser received under such agreement was entire business of the assessee along with non-compete assurance. We notice that Clause (va) of Section 28 pertains to any sum whether received or receivable, in cash or kind, under an agreement, inter alia for not carrying out any activity in relation to any business or profession. A non-compete agreement would therefore fall in this clause. Proviso to said clause (va), however, provides that the said clause would not apply, to any sum whether received or receivable, in cash or kind, on account of transfer of right to manufacture, produce or process any article or thing or right to carry on any business or profession which is chargeable under the head Capital Gains . The assessee s receipt attributable to the transfer of business was correctly taxed by the CIT (Appeals) as confirmed by the Tribunal as giving rise to capital gain. It was only residual element of receipt relatable to the non-compete agreement which was brought within fold of Clause (va) of Section 28 of the Act.- Decided against revenue.

Summary

Issues:
Interpretation of tax treatment for receipt from business transfer including non-compete clause.

Analysis:
The appeal before the High Court of Bombay involved the tax treatment of a sum received by a partnership firm from transferring its international cargo business to another entity. The main issue was whether the sum of ?54.73 crore received by the assessee should be treated as a capital receipt liable to be taxed as capital gain or as business income under Section 28(va) of the Income Tax Act.

The Assessing Officer contended that due to a non-compete clause in the transfer agreement, the receipt should be considered business income under Section 28(va). However, the Commissioner of Income Tax (Appeals) disagreed, attributing ?4.5 crore to the non-compete clause and the remaining ?50.23 crore as capital receipt taxable as capital gains. The Commissioner's decision was based on an apportionment considering the profit of the firm from the business in the previous years.

On appeal, the Tribunal upheld the Commissioner's decision, stating that the entire business was transferred, and the non-compete clause was a consequence of the transfer. The High Court agreed with the Tribunal's view, emphasizing that the entire sale consideration could not be solely attributed to the non-compete clause. The Court noted that the non-compete clause was just a part of the agreement, and the purchaser acquired the entire business along with the non-compete assurance.

The Court referred to Section 28(va) of the Income Tax Act, which includes sums received under agreements for not carrying out certain activities related to business or profession. However, the proviso to this clause excludes sums received on account of the transfer of the right to carry on any business, which falls under capital gains taxation. The Court concluded that the Commissioner correctly taxed the receipt attributable to the business transfer as capital gain, while the residual amount related to the non-compete agreement fell under Section 28(va).

In the final judgment, the Court dismissed the appeal, stating that no question of law arose from the case. The decision highlighted the distinction between the amounts attributable to the business transfer and the non-compete agreement, affirming the tax treatment applied by the Commissioner and upheld by the Tribunal.