Non compete fees for giving up right to carry on business is taxable as business income

As regard the provisions of sec.28(va), the Tribunal held that with the insertion of the said provisions w.e.f. 01.40.2003, receipts on account of giving up right to carry on business even if it is capital receipt would now be charged to tax as ‘income from business’. It was held that if the compensation is paid for ‘not carrying out any activity in relation to any business’ which the ‘transferor’ is not carrying on, the same would be chargeable u/s.28(va) of the Act. It was held that if the transferor is not already carrying on business then what he receives as non-compete fees is the consideration only for “not carrying out any activity in relation to any business”, which would be covered by the provisions of sec.28(va) of the Act w.e.f. 01.04.2003. The consideration paid to Dr. B.V. Raju, which is similar to the one involved in the present cases, therefore was held by the Special Bench as falling under the category of payment for “not carrying out any activity in relation to any business” as covered by the provisions of sec.28(va)(a) and since the said provisions were applicable w.e.f. 01.04.2003, the amount received by Shri B.V. Raju as ‘non-compete fees’ in the previous year relevant to A.Y. 2000-01 was held to be not chargeable to tax. In our opinion, the ratio of the decision of the Special Bench in the case of Dr. B.V. Raju is squarely applicable to the facts of the present cases and since the same is binding on us, we respectfully follow the same to hold that the ‘non-compete fees’ received by the assessees in the present cases is chargeable to tax as ‘business income’ as held by the AO and not as ‘capital gains’ as held by the Ld. CIT (A). The impugned orders of the Ld. CIT (A) on this issue passed in the cases of all assesses (except in the case of Ruia Apparels Pvt. Ltd.) are, therefore, set aside restoring back that of the A.O. and the appeals filed by the revenue in these eight cases are allowed. As already noted, the Ld. CIT(A) in the case of Ruia Apparels Pvt. Ltd. however took a view that the non-compete fees was chargeable tax as business income.

 INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No.2793/Mum/2010 – (Assessment year: 2006-07)

Sterling Re-rolling Mills Pvt. Ltd. & Others

Vs

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