Non-compete payment linked to concept transfer treated as business income, with capital gains plea rejected.

Receipt arising from transfer of a concept developed in the course of employment, together with a non-compete covenant, was treated as business income because the payment was in substance for restraint on competition and protection of the purchaser's goodwill, not for a standalone self-generated asset. Even on the alternative characterisation as a capital receipt, the related right was described as a reversionary intangible or a right to use and develop the concept, with nil cost of acquisition under section 55(2)(a). The alternative capital gains claim was therefore rejected, and the amount remained taxable principally under section 28(va).

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Issues: Whether the receipt arising from transfer of the concept and the associated non-compete covenant was taxable as business income under section 28(va) of the Income-tax Act, 1961, or as capital gains under section 45 of the Income-tax Act, 1961, including the assessee's claim that the asset had no ascertainable cost of acquisition.

Analysis: The receipt was held to arise from the assessee's employment-linked development of the concept and, in substance, from the covenant not to compete embedded in the business sale documentation. The surrounding circumstances, the employment terms, the closely related nature of the parties, and the commercial terms of the transfer showed that the payment was not for a standalone self-generated asset sold on an independent footing. Even on the alternative footing that some capital right was transferred, the right was characterised as a reversionary intangible right or a right to use and develop the concept, for which the cost of acquisition was nil under section 55(2)(a). The Tribunal also found that the dominant purpose of the payment was to secure non-competition and protect the purchaser's goodwill, bringing the receipt within section 28(va).

Conclusion: The receipt was chargeable to tax in the hands of the assessee, principally as business income under section 28(va), and the alternative capital gains plea was rejected.

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