Transfer of right to carry on business by transferee carrying on business would be taxable as capital gain

Brief of the case:

• The ITAT Mumbai in the case of Monsanto India Limited held that when the assessee at the time of transfer of business agrees for a consideration not to carry on same line of business for a certain period of time , then such an arrangement is definitely a transfer(surrender) of right to carry on business . Such right being capital asset would result in capital gain as result of transfer thereof. Henceforth , in such an arrangement the transaction cannot be taxed as business income u/s 28(va).
• Further, since the right to transfer accrues from commencement of business itself , the period of holding of such capital gain would be reckoned from the date of commencement of business. In the present case , since prior to date of transfer assessee was nearly 10 years in its business , the capital gain arising would be taxable as long term.

Contention of the Assessee:

• It was submitted that the non-compete fee was received for giving up right to carry on the Leader business and thus , it is transfer of right to carry on business which is covered by proviso to Sec 28(va) for which the income is assessable as capital gains as per Sec 55(2)(a).
• As regards the issue of determining nature of capital gain i.e. short or long term the assessee contended that since the consideration has been received for transfer of business along with right to not carry on business for a period of 10 years, being a fairly long period, the consideration for non-compete fees is liable to be treated as long term capital gain.

Contention of the Revenue: