Case Law Details
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 27th May 2008 Chemito sold one of its divisions to Thermo. Vide an agreement dated 02nd 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’?
(iii) Whether on the facts and in the circumstances of the case and in law, the ITAT erred in failing to appreciate that the amount received by the Appellant does not fall within S.28(va) and amounts, at best, to a transfer of a right to manufacture or a right to carry a business, taxable under the head capital gains?
Contention of the Assessee
Learned Senior Advocate appearing on behalf of the appellant contended that the amount received by the appellant could not be termed as revenue receipts, since the appellant received the amount vide agreement for non compete and non solicitation which provides that he would not engage in any business involving production, development, manufacture, sale or distribution of the product similar to those produced by the division which was sold to Thermo. He further submitted that amount in the hands of the assessee was long term capital gains and that order passed under Section 143(3) of the Act after scrutiny was incorrect.
Contention of the Revenue
Learned counsel appearing on behalf of the revenue submitted that the amount is received as compensation for under the agreement of non compete and non solicitation in relation to business activities, which has been transferred by the assessee to the said company Thermo Electron LLS India Pvt. Ltd. In support of his contention, he relied upon the decision in the case of Guffic Chem P. Ltd. V/s. Commissioner of Income Tax and Commissioner of Income Tax & Anr. V/s. Mandalay Investment P. Ltd. reported in [2001] 332 ITR 602 (SC) wherein it was held that prior to 1st April, 2003, a non-compete fee would bear the character of property received. However, after the said date, the same amount is revenue receipt.
Held by the Court
Hon’ble court followed the decision of Supreme court in case sighted by the revenue wherein two questions arose for determination, firstly, whether the amounts received for loss of agency was in normal course of business and, therefore, it constituted revenue receipts and secondly whether the amount received as compensation on the condition not to carry on a competitive business was in the nature of capital receipt. It was held that the payment of amount received as non competition fee under a negative covenant was treated as a capital receipt till the assessment year 2003-04. It is only vide the Finance Act, 2002 which came into effect from 1st April, 2003 the said capital receipt was now taxable under section 28(va). It is clarified by the Supreme Court that section 28(va) of the Act was amendatory and not clarificatory and, therefore, the amount received before the said date was not taxable under Section 28(va) of the Act.
Following the aforesaid decision, in the present case, court was of the view that the amount received by the assessee was taxable under Section 28(va) of the Act. The Court held that it is evident that had the assessee not entered into an agreement of non-compete, he would have earned the amount from the business carried on out of the division which was sold to Thermo Electron LLS India Pvt. Ltd. It is the sale of the said division that has deprived him of the income and part of the sale consideration itself, he was required to execute an agreement of non-compete and the compensation received under the said agreement was relatable on a consideration for sale of the business of the division and therefore, for these reasons also, the amount is taxable under Section 28(va). Furthermore, in the present case, both the assessee had received the amount pursuant to the agreement dated 2nd June, 2008 that is well after 1st April, 2003 and would be covered by the provisions of Section 28(va) of the Act.
