The Madras High Court, in a recent case, held that the fee paid by a company for Non-Compete would be considered as a capital receipt, not a revenue receipt for the purpose of Income Tax Law. The Court was considering an appeal filed by the Revenue raising the question of the correctness of the order passed by the Income Tax Appellate Tribunal Bench-‘C’ Chennai dated 20.07.2007. The highlights of the judgment are as follows.
M/s TTK Bio-med Limited was manufacturing Rubber Contraceptives (condoms) and Gloves. It entered into an agreement with London International Group PIC for discontinuing their condom business. London International Group PIC is carrying on a business of manufacturing and selling rubber contraceptives all over the world on its own and also through its subsidiaries and joint venture companies. In India, it is in a joint venture with M/s TTK & Co (Joint venture Company TTK-LIG). London International Group PIC paid 4,99,000 pounds as the non-compete fee to M/s TTK Bio-med Limited for not competing for the condoms business. TTK Bio-med has merged with TTK Healthcare Limited, the assessee Company with effect from 01.07.1999.
The assessee company has claimed the amount of Rs.3,44,92,800/- received by it from London International Group PIC as not taxable, treating it as capital receipt. The Assessing Officer passed an order by considering the fee for non-compete as a revenue receipt since the said amount was received by the assessee company is in consideration of the services rendered/to be rendered. On appeal, the Commissioner of Income Tax (Appeal) confirmed the said order. However, the Income Tax Appellate Tribunal has reversed the order by holding that the non-compete amount received by the assessee in question is a capital receipt, but not revenue receipt. Therefore, the Department filed an appeal before the High Court.
The Division Bench of the High Court comprising Justice Rama Mohana Rao and Justice Muralidaran has upheld the decision of the Appellate Tribunal by declaring that receipt of money by the assessee is liable to be treated as a capital receipt. It was pointed out that, ”in our opinion, it is not necessary that the assessee need to shelve all his other sources of income as well, for the receipt of compensation to amount to a capital receipt. Like in the Oberoi Hotel’s case where an assessee has only lost a right to a particular property – only a part of several other business activities which it carries on compensation received for partial impairment of the business activities normally undertaken by the assessee is liable to be treated as a capital receipt. The litmus test is whether the impairment is one of its sources of income or not and if the answer is that the injury has been caused to one of its sources of income, then it is enough to render the compensation received in that process as a capital receipt. At any rate, with effect from 01.04.2003, by virtue of introduction of Section 28(va) to the Act, all monies received pursuant to a negative covenant become liable for the incidence of taxation, thus obliterating the distinction between the two that was available till then.”
Recently Delhi High Court in a Judgment Priya Desh Gupta vs Deputy Commissioner of Income Tax has also declared that, the Non-compete fee is not a Business Income and also quashed re-assessment proceedings against Assessee.
Read the full text of the Judgment below.
