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of <h1>Non-compete fees taxed as business income, goodwill transfer as capital gains. Key clause not primary consideration.</h1> <h3>Asstt. Commissioner of Income Tax – 12 (3), Mumbai Versus M/s Lemuir Air Express and Vica-Versa</h3> Asstt. Commissioner of Income Tax – 12 (3), Mumbai Versus M/s Lemuir Air Express and Vica-Versa - TMI Issues Involved:1. Treatment of amount received on account of non-compete fees: whether chargeable as business income or capital gains.2. Transfer of business: whether the consideration received is for transfer of goodwill or right to carry on business.Detailed Analysis:Issue 1: Treatment of Non-Compete FeesThe primary issue in contention was whether the amount received by the assessee on account of non-compete fees should be taxed as business income under Section 28(va) of the Income Tax Act, 1961, or as capital gains. The Assessing Officer (AO) argued that the entire consideration received was for non-compete rights and thus taxable as business income. This was based on Clause 3.4 of the Deed of Transfer of Business, which stated that the vendor would not carry on the business post-transfer. The AO's stance was supported by the fact that no tangible assets, staff, or premises were transferred, and the business was essentially an agency business, making the consideration received akin to non-compete fees.The CIT(A) partially agreed with the AO, holding that out of the total consideration of Rs. 54.73 crores, Rs. 4.50 crores was attributable to non-compete fees and taxable as business income, while the remaining amount was considered a capital receipt. The CIT(A) relied on the decision in JCIT vs. Kwality Cafe & Restaurant (P) Ltd., where remuneration was bifurcated into consideration for goodwill and non-compete fees.Issue 2: Transfer of BusinessThe second issue was whether the consideration received was for the transfer of goodwill or the right to carry on business. The AO contended that no tangible assets were transferred and that the business, being an agency business, did not involve the transfer of any concrete property. The AO concluded that the amount received was for non-compete rights and thus taxable as business income.However, the CIT(A) observed that the assessee had transferred intangible assets, including goodwill, customer base, and market standing, which constituted a capital asset. The CIT(A) emphasized that the transferee company had debited the amount paid towards goodwill in its books of accounts, further supporting the view that the consideration was for the transfer of goodwill. The CIT(A) ultimately concluded that Rs. 50.23 crores out of the total consideration was for the transfer of goodwill and taxable as capital gains.Conclusion:The Tribunal, after considering the rival contentions and the material on record, upheld the CIT(A)'s decision. It agreed that the clause prohibiting the vendor from carrying on the business post-transfer was a consequence of the business transfer and not the primary consideration. The Tribunal found that the CIT(A) had rationally attributed Rs. 4.5 crores as non-compete fees taxable under Section 28(va) and the remaining Rs. 50.23 crores as capital receipt for the transfer of goodwill. Consequently, both the appeals of the assessee and the revenue were dismissed.Order Pronounced:The order was pronounced in the open court on 9th October 2015.
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