2023 (4) TMI 290 - AT - Income Tax

Nature or receipt - Addition u/s 28(1) or 28(IV) or capital receipt - consideration received for exclusive arrangement and goodwill for closing down own hospital - consideration(s) towards non-compete fee(s) doubted or held as artificial - Doctor moving her medical practice and associated goodwill to the Company - assessee, an individual, is a renowned doctor specializing in the field of IVF, who was running as proprietary nursing home under the name and style of mother Child , since last 40 years and entered into a Service Agreement with an independent/unrelated company Nova specializing in the field of IVF, whereby Nova agreed to engaged the assessee as consultant for rendering exclusive services to it, in the lieu of consideration - whether CIT (A) has grossly erred in Law in holding that amount received by the assessee consideration for not carrying out independently the professional activities in future which is exempt u/s 28(IVA ) of Income Tax Act, 1961 as a professional income and is taxable U/s 28(1) of Income Tax Act, 1961 HELD THAT - There is a proper agreement which provides for the non-compete fee/goodwill. The agreement has been turned down by the authorities below as it is colorable device. This observation is not backed by any proper reasoning. The case laws relating to the proposition is that the Revenue should only look at the agreement and not look through the binding agreements between the parties. For this, the reliance on case laws as mentioned above, which are referred by the ld. Counsel for the assessee is germane and supports the case of the assessee. The various case laws and proposition relied upon by the ld. Counsel for the assessee also supports the case of the assessee. AO has made addition u/s 28(va) - The amendment to bring profession also, into the said clause was brought in w.e.f. AY 2017- 18. Hence, non-compete fee related to profession is made taxable only w.e.f. AY 2017-18 and the non-compete fee in relation to profession for period prior to AY 2017-18 would be treated as capital receipt. Furthermore, the ld. CIT(A) has changed the section from 28(va) to section 28(1) of the Act without confronting the assessee. This is a fatal mistake. The reasoning of the ld. CIT(A) that since the name of the new entity is different than the assessee s clinic called Mother and Child, the agreement is not to be believed. It is noted that it is the doctor and the skill which has got reputation and not the name board of the said clinic. Hence, the ld. CIT(A) s finding fault in the non-user of assessee s own clinic name is not sustainable. Assessee deserves to succeed also on the principle of consistency in as much as for Assessment Years 2013-14, 2015-16 and 2016-17, the same was treated as capital receipt and the same had been accepted by the Revenue. The reference to the decision of Excel Industries 2013 (10) TMI 324 - SUPREME COURT and Radhasoami Satsang Saomi Bagh 1991 (11) TMI 2 - SUPREME COURT is also germane and supports the case of the assessee. A sum received towards undertaking restrictive covenant of non imparting service to any other person and not to share associated goodwill of medical practice being in the nature of non compete fee is a capital receipt and not taxable under provision of the Act. Hence, assessment by the AO u/s 28(va) as noted above is not sustainable and similarly the order of the Ld. CIT(A) whereby he changed the head from section 28(va) to section 28(1) without confronting the assessee is also not sustainable and the ld. CIT(A) s view that the same is taxable under the normal professional income is also not sustainable in the background of the aforesaid discussion, the agreement and the case law referred above. In these circumstances, in the background of aforesaid discussion and precedent, we set-aside the orders of the authorities below and delete the addition. Appeal of the assessee stands allowed.

Summary

Issues Involved:

1. Taxability of Rs. 3.2 Crore received by the assessee under Section 28(1) vs. Section 28(iv) of the Income Tax Act, 1961.
2. Taxability of Rs. 1.89 Crore received as consideration for not carrying out professional activities independently.
3. Taxability of Rs. 1.31 Crore received as goodwill for expertise and knowledge under Section 55(2) vs. Section 28(1) of the Income Tax Act, 1961.

Summary:

Issue 1: Taxability of Rs. 3.2 Crore Received by the Assessee
The assessee, a doctor, received Rs. 3.2 Crore from Nova Pulse IVF Clinic Pvt. Ltd. as consideration for exclusive engagement and goodwill. The Assessing Officer (AO) added this amount to the taxable income under Section 28(iv) of the Income Tax Act, 1961, treating it as a benefit or perquisite arising from the profession. The CIT(A) confirmed the addition but changed the taxable head to Section 28(1), considering it as professional income. The Tribunal held that the agreement between the assessee and Nova Pulse IVF Clinic Pvt. Ltd. was genuine and not a colorable device. The Tribunal concluded that the non-compete fee related to the profession is a capital receipt and not taxable under the Act until the amendment in Section 28(va) effective from AY 2017-18. Hence, the assessment by the AO under Section 28(va) and the CIT(A)'s change to Section 28(1) without confronting the assessee were not sustainable.

Issue 2: Taxability of Rs. 1.89 Crore Received for Not Carrying Out Professional Activities Independently
The AO considered Rs. 1.89 Crore received by the assessee as professional income taxable under Section 28(1). The CIT(A) upheld this view, rejecting the assessee's claim that it was a capital receipt exempt under Section 28(va). The Tribunal, however, found that the non-compete fee for exclusive engagement was a capital receipt and not taxable under the Act before AY 2017-18. The Tribunal emphasized that the Revenue should look at the agreement and not look through it, citing relevant case laws.

Issue 3: Taxability of Rs. 1.31 Crore Received as Goodwill for Expertise and Knowledge
The AO treated Rs. 1.31 Crore received as goodwill for the assessee's expertise and knowledge as business income taxable under Section 28(1). The CIT(A) agreed, stating that no goodwill of the clinic was transferred and the payment was for professional services. The Tribunal disagreed, holding that the amount received for the non-compete clause and goodwill was a capital receipt not taxable under the Act until the amendment in Section 28(va) effective from AY 2017-18. The Tribunal also noted the principle of consistency, as similar receipts in earlier years were treated as capital receipts and accepted by the Revenue.

Conclusion:
The Tribunal set aside the orders of the authorities below and deleted the addition, concluding that the sum of Rs. 3.2 Crore received for the non-compete clause and goodwill was a capital receipt and not taxable under the provisions of the Income Tax Act before AY 2017-18. The appeal of the assessee was allowed.