2019 (8) TMI 732 - HC - Income Tax

Characterization of income - amount received towards restrictive convenant - revenue or capital receipt - HELD THAT - It was the first time, the Government of India took a decision to permit foreign insurance companies to set up general insurance business in India. The entire matter was regulated by the Government of India under the relevant regulations. Thus, several competing companies in India were desirous of starting insurance business with foreign partnerships / Joint ventures. Therefore, commercial prudence demanded the U.K.Company to restrain the assessee, preventing them from entering into insurance business, which they had not done earlier, secondly, preventing the assessee from entering into an agreement with any other foreign insurance company. The condition is clear and lucid and it is to be treated as a 'restrictive covenant' and merely because the assessee was not in the insurance business is not a ground to read down the condition. Thus, we are of the considered view that the interpretation given by the CIT(A) to the said covenant is just and proper and we do not agree with the finding of the assessing officer as well as the Tribunal in this regard. CIT(A) was fully justified in holding that the amount received by the assessee was a capital receipt and was right in deleting the addition made by the AO. Further, we note that the amount has been credited to the capital receipt account in the balance sheet for the year ending 31.03.2001 and the amount does not come anywhere within the inclusive definition of Income as envisaged in Section 2(24). it will be beneficial to refer to the decision of Hon'ble Supreme Court in GUFFIC CHEM (P) LTD. MANDALAY INVESTMENT P. LTD VERSUS CIT 2011 (3) TMI 6 - SUPREME COURT . The Hon'ble Supreme Court has held that 'payment received as non-competition fee under a negative covenant has to be treated as a capital receipt till the Assessment Year 2003-04'. We are of the clear view that the order passed by the Tribunal dated 31.07.2007 reversing the order passed by CIT(A) calls for interference. In the light of the above, the appeal filed by the assessee is allowed and the order passed by the tribunal is set aside and the order passed by the CIT(A) dated 13.01.2005 is restored and the substantial question of law framed is answered in favour of the assessee.

Summary

Issues:
1. Whether the amount received towards restrictive covenant is a revenue receipt chargeable to tax?
2. Whether the bad debts recovered by the appellant should be taxed in the hands of the appellant?

Issue 1:
The Tax Case Appeal pertains to the assessment year 2001-02 under the Income Tax Act, 1961. The primary issue is whether the amount received towards a restrictive covenant is a revenue receipt chargeable to tax. The appellant, a company engaged in hire purchase financing, received a sum of ?16.80 Crores as compensation for restraining itself from entering the insurance business. The Commissioner of Income Tax [Appeals] held this amount to be a capital receipt, leading to its deletion from the assessment. However, the assessing officer disagreed, arguing that the payment was not directly related to the restrictive covenant. The Tribunal reversed the CIT(A)'s decision, stating the payment was for the exploitation of services and infrastructure, falling under revenue. The High Court disagreed, emphasizing the commercial prudence behind the restrictive covenant and upheld the CIT(A)'s decision, concluding the amount as a capital receipt.

Issue 2:
Regarding the bad debts recovered by the appellant, the Tribunal's decision was not pressed by the appellant for fresh consideration. Therefore, the focus remained on the first issue of the revenue receipt. The High Court's detailed analysis primarily revolved around the interpretation of the restrictive covenant and the nature of the payment received. It highlighted the timing of the payment, the background of the agreement, and the commercial prudence involved in the decision-making process. The Court also referenced a Supreme Court decision supporting the treatment of non-compete fees as capital receipts. Additionally, the Court addressed the Revenue's argument regarding capital subsidy, ultimately ruling in favor of the appellant and setting aside the Tribunal's decision, restoring the CIT(A)'s order.

This comprehensive analysis of the judgment showcases the intricate legal arguments, interpretations, and precedents considered by the High Court in resolving the issues raised in the Tax Case Appeal.