2000 (5) TMI 164 - AT - Income Tax

Non-compete agreement payment deemed capital receipt, not taxable as revenue income.

The Tribunal held that the receipt of Rs. 8 crores by the assessee from Gillette under a non-compete agreement constituted a capital receipt for ... Income Issues Involved:1. Whether the receipt of Rs. 8 crores by the assessee from Gillette constitutes income or should be treated as a capital receipt.Summary:Issue 1: Nature of Receipt (Income vs. Capital Receipt)- The primary issue is whether the receipt of Rs. 8 crores from Gillette by the assessee should be considered as income or a capital receipt. The assessee received this amount under a non-compete agreement dated 18-1-1996, which restricted him from engaging in any business competing with Gillette for a specified period. - The Assessing Officer (AO) argued that the receipt should be treated as revenue income, stating that the definition of 'income' u/s 2(24) of the Income-tax Act, 1961, is inclusive and not exhaustive. The AO held that the payment did not impair the income-earning structure of the assessee and was a colorable device to claim the amount as a capital receipt, relying on the Supreme Court's judgment in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 1482.- The CIT(A) upheld the AO's decision, stating that the true nature and quality of the receipt must be considered, regardless of how it is shown in the books.- The Tribunal analyzed the non-compete agreement and concluded that the payment was for the assessee undertaking restrictive obligations and not for rendering any positive services to Gillette. The Tribunal relied on various judgments, including Union of India v. Gosalia Shipping (P.) Ltd. [1978] 113 ITR 307 and CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11, which held that compensation for restrictive covenants constitutes a capital receipt.- The Tribunal also noted that the receipt did not arise from any professional services rendered by the assessee and that the non-compete agreement did not involve any transfer of intellectual rights or active performance of services.- The Tribunal concluded that the receipt of Rs. 8 crores was a capital receipt arising out of a restrictive covenant and not subject to taxation. The orders of the lower authorities were reversed, and the AO was directed not to tax the amount of Rs. 8 crores.Conclusion:- The appeal filed by the assessee was allowed, and the receipt of Rs. 8 crores from Gillette was held to be a non-taxable capital receipt.