2008 (10) TMI 391 - AT - Income Tax

Non-compete fee ruled capital receipt, not taxable as revenue.

Assistant Commissioner of Income-tax, Circle 22(1), New Delhi Versus Ashok Mehra

Assistant Commissioner of Income-tax, Circle 22(1), New Delhi Versus Ashok Mehra - [2009] 27 SOT 15 (DELHI) Issues Involved:1. Deletion of addition of Rs. 42 lakhs by CIT(A) treating non-compete fee as revenue receipts.2. Determination of non-compete fee as capital receipt and its taxability.3. Validity of the non-compete agreement and whether it was a sham agreement.4. Consideration of the agreement's execution details such as dates and notarization.Detailed Analysis:1. Deletion of Addition of Rs. 42 Lakhs by CIT(A):The revenue appealed against the CIT(A)'s order deleting the addition of Rs. 42 lakhs, which the Assessing Officer had treated as revenue receipts. The CIT(A) held that the non-compete fee received by the assessee was a capital receipt and not chargeable to tax. The CIT(A) found that the agreement clearly indicated that the assessee, having detailed financial, technical, and commercial knowledge of SIEL Ltd., was in a position to use this information detrimentally against SIEL Ltd. if employed by a competitor.2. Determination of Non-Compete Fee as Capital Receipt:The CIT(A) concluded that the non-compete fee was a capital receipt based on the terms of the agreement, which restricted the assessee from undertaking any employment or consultancy in competing businesses. The CIT(A) noted that the payment was made due to the assessee's potential to use his acquired knowledge against SIEL Ltd. The CIT(A) referenced the ITAT Chandigarh Bench's decision in ACIT v. Tarun Kumar Ghai, which held that compensation for restrictive covenants was a capital receipt not chargeable to tax.3. Validity of the Non-Compete Agreement:The CIT(A) determined that the Assessing Officer had not provided evidence to prove that the non-compete agreement was a sham. The CIT(A) emphasized that the agreement was executed due to genuine business concerns and threats from competition, and there was no indication that the payment was disguised as salary. The CIT(A) also highlighted that the amendment to tax such receipts under section 17(3)(iii) was effective from 1-4-2002, indicating that the non-compete fee in the assessment year 2001-02 was not taxable.4. Consideration of Agreement's Execution Details:The revenue argued that the agreement was unsigned, undated, and not notarized, suggesting it was a sham. However, the CIT(A) found these claims insufficient to disregard the agreement, as the necessity and rationale for the agreement were adequately explained by SIEL Ltd. The CIT(A) noted that the Assessing Officer did not disprove the agreement's contents or provide evidence of continued services by the assessee to SIEL Ltd. after termination.Conclusion:The Tribunal upheld the CIT(A)'s order, affirming that the non-compete fee was a capital receipt not chargeable to tax. The Tribunal referenced the ITAT Special Bench's decision in Saurabh Srivastava v. Dy. CIT, which supported the view that non-compete fees are not taxable under the head 'Salary' and are capital receipts. The Tribunal also cited the Delhi High Court's decision in Rohitasava Chand v. CIT, which held that non-compete fees impairing a source of income are capital receipts. Consequently, the appeal by the revenue was dismissed.