Compensation for refraining from carrying on competitive business is capital receipt till AY 2003-04

CIT Vs M. Ranjan Rao (Madras High Court)

 The Supreme Court in Gillanders Arbuthnot & Co. Ltd vs. CIT [ 1964] 53 ITR 283 has brought out a dichotomy between receipt of compensation by an assessee for loss of agency and receipt of compensation attributable to the negative/restrictive covenant. If the compensation is received for the loss of agency, it is to be treated as a revenue receipt whereas, if the compensation is attributable to a negative/restrictive covenant, then, it would amount to a capital receipt. The Supreme Court in Guffic Chem (P.) Ltd. Vs. CIT [2011] 332 ITR 602/198 Taxman 78/10 taxmann.com 105 examined this very question and in its paragraph 7 held that compensation received for refraining from carrying on competitive business was a capital receipt and that payment received as non-competitive fee under a negative contract was always treated as a capital receipt till the assessment year 2003-2004, i.e. till the introduction of Section 28 (va) by way of an amendment to the Act with effect from 01.04.2003.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

Challenging the order passed in I.T.A.No.1582/Mds/2012 in respect of the assessment year 2002-03 on the file of the Income Tax Appellate Tribunal, Chennai, “B” Bench, the Revenue has filed the above appeal.

2. The above appeal was admitted on the following substantial questions of law:

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