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TMI Blog2007 (6) TMI 526X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiaries, joint venture companies and in India it is in joint venture with M/s TTK and Co. (Joint Venture Company TTK-LIG). London International Group paid 4,99,000 pounds as non-compete fee to M/s TTK Bio-med Ltd. Since TTK Bio-med Limited has merged with the assessee company, the transaction has been claimed by the assessee company for the assessment year 2000-01. The assessee company has claimed that the amount of ₹ 3,44,92,800/- which was received by it from London International Group was not taxable in its hands because the whole structure of the assessee's profit making apparatus, being advantage of an enduring nature and hence the capital asset was given up by the assessee company. It has relied on the following decisions: i) CWT v. Late G.D. Naidu and Ors. ii) CIT, Tamil Nadu v. Saraswathi Publicities iii) P.H. Divecha v. CIT, Bombay iv) Gillanders Arbuthnot and Co. v. CIT, Calcutta v) CIT, Punjab, Haryana, J and K and H.P. v. Prabhu Dayal On the other hand, the Assessing Officer has disallowed the non-compete fee for the following reasons: The assessee was earlier doing condom manufacturing (by TTK Bio-med Ltd.) and mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the initial period and therefore paid the assessee a sum of ₹ 3,44,92,800/- towards non-compete fee. The Commissioner of Income Tax (Appeals) ought to have appreciated that the main purpose of the Non Compete Agreement was to restrain the assessee from carrying on the business and as such any prudent person would certainly insist on forwarding enquiries received by the assessee to the foreign company. TTK Biomed had two divisions, namely, Condoms Division and Gloves Division. TTK Biomed was mainly supplying to Government tenders and to export tenders. There were no brands in TTK Biomed Ltd. The goods were supplied with clients' brands. TTK LIG who is in the same line found assessee was competing with them in Government tenders and tender for export. Hence, LIG London who is joint venture partner in TTK LIG approached assessee to discontinue the business. Non Compete amount was paid to discontinue the business. The payment was for closure of business which resulted in impairment of profit earning capacity of the business. There was no transfer of brands by TTK Biomed Ltd. nor any selling infrastructure. The assessee was permitted to complete only the existi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest in a company. Another person was also negotiating and an agreement was entered with that other person that, in the event of your securing for us the controlling interest and upon your giving up all claims to purchase the same and assigning to us and our associates any interest that you may have acquired therein, we hereby agree to pay you and your colleagues a capital sum of ₹ 6,00,000/- . On these facts, the Hon'ble High Court has held that the same was received not in consideration of refraining from competing in the purchase of controlling interest but as remuneration for services rendered. The above case laws are not applicable on the facts of the present case. 9. We find that in CIT v. Prabhu Dayal (Deed. By legal representation) 82 ITR 804 SC, the Hon'ble Apex Court has held as under: The assessee entered into an agreement for exploitation of kankar deposits. The company agreed to pay commission to the assessee, but it failed to do so. Compromise was arrived at for termination of the agreement. Whether compensation for termination is income or capital? The assessee's activities neither in respect of the services rendered by him in the past n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atus as per the Non Compete Agreement. 13. However, upon a careful perusal of the said agreement, we are of the opinion that there is no basis for the Commissioner of Income Tax (Appeals) coming to the said conclusion. The profit making apparatus which is the subject matter of this agreement has been undoubtedly given up. In this regard, we also place reliance upon Hon'ble Apex Court decision in the case of Oberoi Hotel Pvt. Ltd. v. CIT 236 ITR 903, wherein following was expounded: It may be broadly stated that what is received for loss of capital is a capital receipt: what is received as profit in a trading transaction is a taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Held, reversing the decision of the High Court, that the amount received by the assessee was the consideration for giving up its right to purchase and / or to operate the property or for getting it on lese before it was transferred or let out to other persons. It was not for settlement of rights under a trading contract, but the injury was inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement had resulted in loss of source of the assessee's income. The receipt in the hands of the assessee was a capital receipt. From the above it is also clear that, in order to prove that a particular receipt is in the nature of capital receipt, it is sufficient to prove that a particular source of income has been given up. This is exactly the case in the present appeal. 14. Our view is also fortified by following exposition of Hon'ble Jurisdictional High Court in the case of Commissioner of Income Tax v. Late G.D. Naidu and Ors., wherein the Hon'ble Madras High Court has held that, Payment towards restrictive covenant is Revenue expenditure and allowable . In that case, Assessee and son were partners in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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