Non-Compete Fees received on sale of business after 01/04/2003 is taxable as Business income u/s 28(va)

Brief Facts of the case

The issues involved in the appeal was arose out of non-compete and non-solicitation agreements entered into between the assessees and Thermo Electron India LLS Pvt. Ltd. (‘Thermo’). The assessees in both the appeals were directors of M/s Chemito Technologies Pvt. Ltd. (‘Chemito’). On 27^th May 2008 Chemito sold one of its divisions to Thermo. Vide an agreement dated 02^nd June 2008, the Thermo entered into agreements of non-compete and non-solicitation under which the assessee agreed and undertook not to engage in any business directly or indirectly or otherwise be involved in activity which was similar to that of the division sold to Thermo. The assessee also agreed that for a period of four years from the appointed date, the assessee shall not without prior consent of Thermo, directly or indirectly engage in any business of the division sold to Thermo. In consideration of said undertaking Thermo paid to the assessee a sum of Rs.5 Crore and Rs.2 Crore respectively. The A.O. vide an assessment order passed u/s 143(3) treat the sum received as revenue receipts. The assessee appealed before the CIT(A) who also confirmed the order of the A.O. and held that non compete fee is taxable as income under the provisions of section 28(va)of the Act and not taxable as capital gains. Being aggrieved by the order of CIT(A), the assessee filed the appeal before appellate tribunal which by dismissing the appeal held that carrying on the business is a sine qua non and taxable u/s 28(i) of the Act. The Tribunal was of the view that it is not necessary to carry on the business in order to attract the provisions of section 28(va) of the Act. Following substantial question of law arises before the Court.

“(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in holding that the amount received by the Appellant from Thermo was taxable as business income under the provisions of section 28(va) of the Act, despite the fact that the Appellant was not carrying on any business in the relevant previous year?

(ii) Whether the Appellate Tribunal is correct in holding that carrying on of business is not a pre-condition was chargeability under the head ‘profits and gains of business’?

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