Amount received under non-competing agreement--Held, Capital Receipt

Taxability of payment received by an assessee-confectioner under a non-competition agreement

Where the payment was received by the assessee for ceasing and desisting from carrying on the business of the manufacture and sale of confectionary products in India for a period of 10 years, the receipt constituted a capital receipt not chargeable to tax

ITAT, MUMBAI BENCH ‘B’, MUMBAI
Parke Davis (India) Ltd.
v.
JCIT
ITA NO. 506/HYD/2000
JANUARY 6, 2009

RELEVANT EXTRACTS :

15. As a general proposition, it can be said that the payment for impairment of income earning apparatus, sterilization of a source of income would generally fall in the category of capital receipts. Compensation received for undertaking restrictive covenants of not competing with the business also generally fall in the category of capital receipts. The exception being a case, where such covenants are normal incident of carrying on business. An illustration of the case of exception would be a fee paid to an Advocate for not accepting brief of the opposite party. Such payment are incidental to the legal profession and are revenue receipts chargeable to tax.

17. Learned Departmental Representative placed reliance on the decision of the Mumbai Bench of ITAT in the case of ACIT v. Hinditran Services (P) Ltd., 99 ITD 479 (Mum).

18. We have perused the aforesaid decision and find that the receipt in that case was under a resource transfer agreement or termination of agency. The assessee was acting as agent for 16 foreign companies. One of the principal entered into a Joint Venture with the assessee and one H and transferred all personnel dealing with the foreign principal T to H. The agency with other 15 agencies continued. The agency agreement with T also continued. The consideration received for transfer of personnel and resources was therefore held to be revenue receipt. On facts therefore the decision is clearly distinguishable. We are of the view that the sum of Rs. 6 crores was received by the assessee for ceasing and desisting from carrying on the business of the manufacture and sale in India of confectionery products for a period of 10 years. The receipt constitutes a capital receipt not chargeable to tax. The addition of Rs. 6 crores confirmed by learned Commissioner (Appeals) in this regard is directed to be deleted. Ground No. 1 of the assessee is allowed.