Case Law Details
RELEVANT PARAGRAPH
9. The first item of receipt is that of Rs.5.010 crores towards assignment of marketing rights for local as well as export business. The Assessing Officer held it to be a revenue receipt liable to tax. At this juncture, it will be relevant to consider the distinction between the revenue and capital receipt in the context of the nature of transaction we are concerned with. Albeit there is no conclusive test for drawing a line of demarcation between the capital and revenue receipts, yet certain general principles have been laid down by the Hon’ble Courts which work as guiding light. If the receipt relates to the ‘loss of income’, it has been held to be of revenue character and if, however, it relates to the Moss of source of income’, then it will partake the character of the capital receipt. The Hon’ble Supreme Court in the case of CIT vs. Prabhu Dayal [(1971) 82 ITR 804 (SC) considered a case in which compensation was received by the assessee for the termination of a contract which was income earning asset of the assessee. It was designated as a capital receipt not chargeable to tax. It was held that the “payment for destruction of a capital assets must be considered as capital asset. In the case of CIT v. Amhadi Enterprises Ltd [(2004) 267 ITR 702 (Mad.)] the assessee handed over its trade, manpower and customer network to the other party on termination of distribution. The dispute arose about the nature of the receipt on such transfer. Their Lordships of the Hon’ble Madras High Court held that the source of income was totally given up and the profit earning apparatus could never be utilized by the assessee and therefore, the compensation received was a capital receipt”. Similar view was taken by the Hon’ble Madras High Court in an earlier case of CIT vs. T.I. & M. Sales Ltd. [(2003) 259 ITR 116 (Mad.)] in which the amount received on termination of distributorship of certain companies on principal t0 principal basis and for entering into a restrictive covenant, being compensation for impairment of profit making apparatus of an assessee, was held to be a capital receipt. From the above discussion, it can be clearly noticed that where an amount is received by the assessee towards its income generating assets, then it is a capital receipt. On the other hand, if the receipt is towards the loss of income and not the source of income, then it is of revenue nature attracting the liability to tax.
10. Adverting to the facts of the instant case, we observe that the assessee transferred its `Business’. Not only the distribution network but also eight employees along with the data relating to the business comprising of customer list, sales data, etc. was also transferred. The fixed asset and some of the current assets continued to remain with the assessee but with the clear understanding that the assessee cannot carry on the similar business in India or abroad at its own. Some other current assets were acquired by the Assignee for separate consideration. It is matter of record that the infrastructure remaining available at the assessee’s disposal, was utilized by the Assignee for the production purposes as per its own direction and requirements on payment of job charges to the assessee. Insofar as the assessee is concerned, his Business stood transferred in entirety to the Assignee. The sum of Rs.5.010 crores was received by the assessee on the assignment of the marketing rights for its local as well as export business. In other words the main source of its income, viz, from marketing of the products manufactured by it was impaired. It is not a case where the amount could be attributed towards loss of profit in a trading transaction. Rather what was given in exchange for this amount was the source of income. The facts of the present case are on all fours with Ambadi Enterprises Ltd (supra) in which case also the compensation for termination of the source of income was held to be a capital receipt. In our considered opinion, the learned C1T(A) was correct in holding that receipt of Rs.5.010 crores as a capital receipt. We need not go into the larger question of the taxability or otherwise of the said amount under the head ‘Capital gains’ for the reason that the assessee treated this amount as chargeable to tax under the head “Capital gains’ and claimed deduction u/s. 54EC of the Act by-investing the amount in the eligible securities. The assessee had placed all the details about the claim of deduction before the AO, who had not found any fault in it. We, therefore, approve the view taken by the learned CIT(A) on this aspect of the matter.
11. The second component is a sum of Rs.2.006 crores received by the assessee as non-compete fee for local as well as export business. This amount is also emanating from the above referred agreements entered into by the assessee for assignment of its ‘Business’. As per para 4.1 of the agreement, the assessee agreed not to compete with the assignee in this line of business for a period of five years, for which non-competing fees of Rs.2.006 crores was awarded to the assessee. The assessee claimed this amount to be capital receipt not chargeable to tax. The Assessing Officer held it to be revenue receipt. The learned CIT(A) however, came to the conclusion that this amount was of the same nature as the amount received on assignment of the marketing rights to the tune of Rs.5.010 crores and accordingly held it to be chargeable under the head ‘Capital gains’. It is important to bear in mind that the agreement to combine worldwide textile dyestuff business was entered into the assessee’s holding company with the principals of the Assignee. The assessee the subsidiary company, agreed to abide by the agreement. It is only pursuant to such main agreement entered into abroad, that the assessee company made agreements with the DIL for giving effect to the terms. It is clearly borne out from the two agreements that this amount was paid for non-competing with the assignee for a period of five years. When both the agreements for the assignment of the Business in India as well as abroad, have been accepted by the Assessing Officer as genuine, how a different view can be taken on some clauses of the agreement and that too without any contrary material on record? The Assignee has paid this amount as a quid pro quo for not competing in the similar business and further the amount has been determined on a rational basis on the strength of a valuation report, which fact also finds mention in the body of the assessment order. The Assignee has accepted this amount in the same capacity. It is a settled law that the entire agreement has to be read as a whole. If the genuineness of the agreements is not doubted and rather acted upon by the Assessing Officer in accepting the transfer of Business by the assessee to DIL for the consideration stated therein, there is no reason for inferring that a part of the agreement is not representing the true picture. It is specifically borne out from the agreements that the- amount of Rs. 2.006 crores was on account of non-competing fees with the assignee company for a period of five years. This clause of the agreement, in our considered opinion, could not have been given a shade different from what is specifically mentioned. The learned CIT(A) erred in coming to the conclusion that both the receipts were of same nature. We are not agreeable with this proposition for the reason that the amount of Rs.5.010 crores was towards assignment of the marketing rights being a positive act on the part of the assessee, whereas the non-compete fees of Rs.2.006 crores is not a consideration for the transfer of a particular Business but restricting the assessee from starting competing business. It is a payment towards a negative covenant by which the assessee has bound itself not to commence the competing business for a period of five years. Both the items cannot be described as of the same character.
12. Having come to the conclusion that the payment of Rs.2.006 crores was a non-compete fee, the next question which remains to be answered is its taxability or otherwise. We need not go far away for searching the answer to this query inasmuch as the Hon’ble jurisdictional High Court has recently decided similar matter in CIT Vs. Narendra D.Desai [(2008) 214 CTR (Bom.) 190]. In this case, it has been held that the amount received under non-compete agreement was neither taxable as revenue receipt nor as capital gains. Similar view has been, more recently, taken by the Hon’ble Madhya Pradesh High Court in the case of CIT Vs. Shyam Sundar Chapparia [(2008) 305ITR 181 (MP)] by holding that the receipt of an amount for refraining from taking up any competitive employment in future was a capital receipt not taxable. In view of the foregoing discussion, we are satisfied that the claim of the assessee for treating the amount of non-compete fees as capital in nature and hence not liable to tax at all merits acceptance. We would like to mention that an amendment has been carried out by the Finance Act, 2002, with effect from 1.4.2003 by which clause (va) has been inserted to section 28 to provide that any sum, whether received or receivable, in cash or in kind, under an agreement for not carrying out any activity in relation to any business shall be charged to income tax under the head `Profits and gains of business or profession’. This amendment is obviously prospective and will apply on and from Assessment year 2003-04. As against this, we are dealing with Assessment year 2001-02, in which year it cannot have any opoeration. We, therefore, hold that the non-compete fees in the given circumstances is not chargeable to tax.
Please become a Premium member. If you are already a Premium member, login here to access the full content.
