Restrictive covenant payments held to be capital receipts and not taxable income when no genuine income stream was intended.

Payments received under a restrictive covenant were treated as consideration for agreeing not to compete in the petroleum business, not as commission or salary, because no service, agency, or employment relationship existed. They were also not business profits, as the amounts did not arise from business carried on by the recipient, and not income from other sources, since the arrangement showed no intention to create a true periodic income; the annual instalments merely spread a capital sum over time. The recurring payments were therefore held to be a capital receipt and not chargeable to income-tax under the heads considered.

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Issues: Whether the yearly sum of Rs. 10,000 received under a restrictive covenant was taxable as salary, business profits, income from other sources, or a capital receipt.

Analysis: The payment was held to be consideration for the assessee's agreement to abstain from carrying on competing petroleum business, and not commission, because no service or agency relationship existed. It was also not salary, since salary presupposes an employment or analogous relationship. The amount did not constitute profits or gains of business, as it was not the produce of business carried on by the assessee but arose from the cessation of business activity. Nor was it income from other sources, because the transaction showed no intention to create a periodical income; the annual instalments merely represented a capital sum spread over time for the protection of the payer and as consideration for the restrictive covenant.

Conclusion: The sum of Rs. 10,000 was a capital receipt and was not chargeable to income-tax under the heads considered.

Final Conclusion: The reference was answered in the assessee's favour, holding that the recurring payments were not taxable income.

Ratio Decidendi: A payment made as consideration for a restrictive covenant is a capital receipt, and it is not taxable as income merely because it is paid in periodic instalments unless the transaction is truly intended to produce income.

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