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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI B.R. BASKARAN & SHRI C.N. PRASAD
आदेश / O R D E R PER C.N. PRASAD, JM:
This appeal is filed by the assessee against the order of the Ld. CIT(A)-II, Mumbai dated 09.10.2014 pertaining to assessment year 2011-12.
The assessee has raised following grounds of appeal:
“1. The learned CIT(A) erred in confirming the action of the AO in bringing to tax the amount of Rs. 2 crores received by the assessee from M/s Colorcon Asia Pvt. Ltd.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the said amounts constituted a revenue receipt in the hands of the assessee u/s 28(va) . He failed to appreciate that when the assessee was not carrying on any business at all in the relevant previous year, there could be no question of chargeability under the head 'profits and gains of business or profession', and s. 28(va) could have no application whatsoever.
3. The learned CIT(A) erred in failing to appreciate that the said receipt was a pure capital receipt and was not a revenue receipt and was not chargeable to tax. The orders of the learned CIT(A) and the learned AO are erroneous and contrary to the legal position”.
The Ld. Counsel for the assessee fairly submits that the issue in appeal is decided against the assessee by the Jurisdictional High Court in the case of Arun Toshniwal Vs DCIT (375 ITR 270) wherein it was held that the non-compete fees received by the assessee was taxable u/s. 28(va) of the Act.
Heard rival contentions, perused the orders of the authorities below and the decision of the Jurisdictional High Court in the case of Arun Toshniwal Vs DCIT (supra). An identical issue has been decided by the Jurisdictional High Court holding that non-compete fees received by the assessee is taxable u/s. 28(va) of the Act observing as under:
“7. Mr.Pardiwalla submitted that in Income Tax Appeal Nos.96 of 2012 and 126 of 2013 in the case of Ramesh D. Tainwala V/s. Income Tax Officer, 8(3)-1 & Anr. and V/s. Deputy Commissioner of Income Tax 8(3) respectively, this Court has admitted the above appeals. According to Mr.Pardiwalla, the present case is no different and he is entitled to the benefit of long term capital gains. Mr.Pardiwalla also relied upon the decision of this Court in the case of John D'souza V/s. CIT reported in (2009) 226 ITR 540 (Bom) wherein this Court has held that the amount was received by the assessee for not carrying on certain activity. He had received compensation of Rs.25 lacs during the financial year 2004-05 in respect of certain properties of which he was the owner and some land related transaction was entered into with M/s. Goa International School (P) Ltd. Accordingly, the amount of Rs.25 lacs was paid to the assessee by Goa International School (P) Ltd. since he would be deprived of his business and relatable income.
The Assessing Officer applied Section 28(va)(a) of the Act since the amount was chargeable to tax and submitted that under section 28(va)(a), the Assessing Officer was justified in holding that the capital receipt was received as compensation and was not capital receipts which is provided under Section 45(1) of the Act. Relying upon the aforesaid decision, Mr.Pardiwalla submitted that amount of Rs.5 crores and Rs.2 crores respectively amounted to capital receipts and claimed the benefit of long term capital gains. He further submitted that it is wrong to have applied the provisions of Section 28(va) and levied tax on the amount of compensation paid for non compete for the reason that the amount is not received for carrying on any business or transaction. According to Mr.Pardiwalla, the Assessing officer, Commissioner of Income Tax (Appeals) and the Tribunal had erred in upholding the application of Section 28(va) of the Act. Accordingly, he submitted that the aforesaid questions are substantial questions of law, which require consideration by this Court.
Mr.Chhotaray, learned counsel appearing on behalf of the revenue, on the other hand submitted that the amount received by the assessee were taxable in the hands of the assessees as receipts from business. According to him, the amount is received as compensation for under the agreement of non compete and non solicitation in relation to business activities, which has been transferred by the assessee to the said company Thermo Electron LLS India Pvt. Ltd. In support of his contention, Mr.Chhotaray relied upon the decision in the case of Guffic Chem P. Ltd. V/s. Commissioner of Income Tax and Commissioner of Income -Tax & Anr. V/s. Mandalay Investment P. Ltd. reported in [2001] 332 ITR 602 (SC) wherein it is held that prior to 1st April, 2003, a non compete fee would bear the character of property received. However, after the said date, the same amount is revenue receipt. In that case, the Hon'ble Supreme Court was dealing with the judgment of the Karnataka High Court wherein the High Court held that the compensation received under the non-compete agreement can be treated as a capital receipt. The Hon'ble Supreme Court then went on to determine whether the payment under an agreement not to compete is a capital receipt or a revenue receipt. Two questions arose for determination in that case, firstly, whether the amounts received for loss of agency was in normal course of business and, therefore, it constituted revenue receipts and secondly whether the amount received as compensation on the condition not to carry on a competitive business was in the nature of capital receipt. It was held that the payment of amount received as non competition fee under a negative covenant was treated as a capital receipt till the assessment year 2003-04.
It is only vide the Finance Act, 2002 which came into effect from 1st April, 2003 the said capital receipt was now taxable under section 28(va). Accordingly, the Court held that there is dichotomy between the receipt of compensation by the assessee for loss of business arising out of the negative covenant and that compensation for loss of agency would be a revenue receipt as noted in the decision in the case of Gillanders Arbuthnot and Co. Ltd. V/s. CIT [1964] 53 ITR 283. The assessee in that case was dealing with explosives. That agency was terminated and by way of compensation, Imperial Chemical Industries (Export) Ltd. paid two fifths of the commission accrued on past sales and took a formal undertaking from the assessee to refrain from selling or accepting any agency for explosives. This was considered by the Supreme Court and it was held that the said amount received for non-compete agreement was not taxable upto 1 st April, 2003 and, therefore, in that case, the amount received is not liable to be taxed. It is clarified by the Supreme Court that section 28(va) of the Act was amendatory and not clarificatory and, therefore, the amount received before the said date was not taxable under Section 28(va) of the Act.
Following the aforesaid decision, we are of the view that in the present case, as well the amount received by the assessee was taxable under Section 28(va) of the Act. In the present case, it is evident that had the assessee not entered into an agreement of 10 itxa1257-13+1 non-compete, he would have earned the amount from the business carried on out of the division which was sold to Thermo Electron LLS India Pvt. Ltd. It is the sale of the said division that has deprived him of the income and part of the sale consideration itself, he was required to execute an agreement of non-compete and the compensation received under the said agreement was relatable on a consideration for sale of the business of the division and, therefore, for these reasons also, we are of the view that the amount is taxable under Section 28(va). Furthermore, in the present case, both the assessee have received the amount pursuant to the agreement dated 2nd June, 2008 that is well after 1 st April, 2003 and would be covered by the provisions of Section 28(va) of the Act. We are accordingly of the view that no relief can be granted to the appellants. The appeals do not raise any substantial questions of law and the same are dismissed. No order as to costs”. Respectfully following the said decision of the Jurisdictional High Court, we uphold the order of the Ld. CIT(A) and dismiss the appeal of the assessee.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the open court on 13th July, 2016.