TaxTMI 
TaxTMI 
2011 (10) TMI 90
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....laring total income of Rs. 7,29,18,046/-. Subsequently, the assessee has filed letter dated 31.07.2007 submitted on 01.08.2007, which is reproduced as under :- 'During the year under consideration, the assessee has received a sum of Rs. 2,00,00,000/- being compensation for agreeing not to engage in the business in which the assessee has sole expertise and knowledge. The amount, therefore, represents compensation for giving up a source of income which is a capital receipt and does not constitute income in the hands of the assessee. The assessee has relied on various judicial pronouncements on this principle. Reference may be made to V. Venugopala Varma Rajah v. CIT 76 ITR 460 and Gillanders Arbuthnot & Co. Ltd. v. CIT 53 ITR 283. The return of income form does not provide for any documents or explanation to be attached to the form. Under the circumstances the assessee is constrained to submit the above explanation by way of a separate submission. You are requested to kindly consider this submission to be an integral part of the return of income for A. Y. 2007-2008." 3. The facts with regard to the receipt of Rs. 2 Crores as Non-Compete Fee by the Assessee are as follows....
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....oved logistics, cost savings, higher productivity and shall rationalize marketing and distribution to serve their customers more competitively, cost effectively & efficiently. With this objective to consolidate the operations and enhance the value of stakeholders of Acquirer as well as Company the Acquirer had approached the Sellers/Promoter for purchase of majority shareholding and consequently acquiring the controlling stake in the Company. Accordingly the Acquirer and Sellers reached an understanding to transfer their shareholding as well as operations of Company in good and running conditions to enable the Acquirer to smoothly run the operations thereafter. The entire transaction of transfer of shareholding and control of Company was based on the said premise and was essence of transaction. Since the Company was a listed Company therefore the entire transaction was subject to compliance of Securities Exchange Board of India. (Substantial Acquisition of Shares and Takeovers) Regulation, 1997 or any other applicable Regulations/ Guidelines of SEBI by the Acquirer as well as Sellers. 4. By an agreement dt.13.3.2006, the acquirer agreed to purchase from the sellers, their shareh....
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....taken due legal advice and consultancy before agreeing to such covenant. 6.3.2. that the Non-compete Period restriction is absolutely reasonable and necessary for Company and the consideration of Rs. 4,00,00,000 paid by Acquirer for the same is adequate 6.3.3. that the continuity of Non-Compete Period shall not be effected by : either a change in the management or ownership of Company or by any restructuring, consolidation and /or amalgamation exercise of Company with Acquirer or any other company 6.3.4 that Acquirer has agreed to pay the Non-compete Amount based on the Non-compete Period representation made by Sellers and the Sellers have no intentions whatsoever to breach the Non-compete Period covenant 6.3.5. that the Acquirer will suffer irreparable harm by a breach of Non-compete covenant, for which monetary damages would not be an adequate remedy. Therefore the Sellers agree that, in the event of a threatened or continuing breach of Non-compete covenant, the Acquirer and Company (post acquisition) shall be entitled, without prejudice to any other available remedy, to immediate injunctive or other equitable relief . 6.3.6. Notwithstanding anything contained here....
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....ore the AO. The AO held that the receipt in question is a fee received for not carrying out any activity in relation to any business and therefore chargeable to tax u/s.28(va) of the Act. The AO did not deal with the alternate contention put forth by the Assessee. 7. On appeal by the Assessee the CIT(A) confirmed the view of the AO. On the alternative claim made by the Assessee before the AO, the CIT(A) held as follows: "5. The fourth ground of appeal is, Notwithstanding and without prejudice to ground number 3 above, the AO erred in not appreciating the fact that even if the sum of Rs. 2 crore is treated as income, it would form part of the sale consideration of shares in Tainwala Poly Containers Limited sold by the appellant during the year, subject of Capital Gains. 5.1 In this ground of appeal the appellant raised alternative plea that even if the amount is taxable it has to be taxed u/s.48 under the head capital gains and not u/s.28(va). The appellant plea is that he covered by the proviso to u/s.28(va) which reads as under: (i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacturer, produce or p....
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.... on or be engaged, concerned or interest in any business which is similar to or competing either directly or indirectly of manufacturing industrial packaging products made of plastic or steel and including drums/barrels, containers, IBCS etc. for a period of 11 years. Para 6.4 of the agreement provides for some exceptions. The Hon'ble Supreme Court in the case of CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11 held on the taxability of non-compete fee as follows: "The House of Lords in Beak v. Robson (1942) 25 Tax Cas. 33. had to consider whether compensation paid for a restrictive covenant was a capital receipt or a revenue receipt. Under a service agreement the respondent therein covenanted in consideration of the payment to him of 7,000 pounds on the execution of the agreement, that if the agreement were determined by notice given by him or by his breach of its provisions, he would not compete directly or indirectly with the company within a radius of fifty miles of its place of business until the five years had expired. The House of Lords held that the said amount was a payment for giving up a right wholly unconnected with his office and operative only after he ceased to ho....
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....income or capital gain. To ascertain in which category they fall the law as laid down by various judicial pronouncements prior to the above statutory amendments would be relevant. If a receipt is considered as payment of compensation with the source remaining intact it would be revenue receipt falling u/s.28(va)(a) of the Act. If the receipt is a payment for sterilization of the source of income then it would be capital receipt nevertheless falling within the ambit of Sec.45 of the Act, subject however to the condition that there results a transfer of capital asset and the machinery for computation of capital gain u/s.48 capable being applied. 12. As can be seen from the proviso to Clause (i) to clause (a) to Sec.28(va) of the Act, if there is a transfer of right to carry on business then the same would be capital gain. Right to carry on business may not have cost of acquisition and therefore the charge to tax may fail and therefore consequential amendment was made to Sec.55(2) of the Act which provides as follows: "For the purposes of sections 48 and 49, "cost of acquisition",-- (a) in relation to a capital asset, being goodwill of a business, or a trade mark or brand nam....