TMI Blog2011 (7) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the Income Tax Appellate Tribunal dated 2.2.2001 in I.T.A.No.593/Mds/2000. 2. Even though the grounds of appeal contain two substantial questions of law, since at the admission stage itself the substantial question of law is restricted as regards only one question, this Tax Case Appeal is decided on the first issue. 3. This Tax Case relates to the assessment year 1996-97. 4. The assessee herein is a company which was carrying on business in manufacturing mosquito repellents and selling it in the name and style of Banish Mats , a patent owned by its sister concern. The assessee also had an agreement with M/s.Bayer India Limited on 16.9.1994, for manufacture and sale of insecticides, including household insecticides (mats/mosquito destroyer), at an agreed price. It is seen from the facts projected before this Court that upto the year 1995-96, the assessee was selling its products manufactured under its trademark, apart from the agreement with Bayer India Limited to manufacture and sell mats under contract basis. Under agreement dated 24.5.1995 with Transelektra Domestic Products Limited, (hereinafter referred to as TDP Limited), the assessee agreed to receive non-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the agreement between the assessee and TDP Limited, placed reliance on the decision of the Andhra Pradesh High Court reported in [1984] 148 ITR 546 (Coromandel Fertilizers Ltd. Vs. Commissioner of Income Tax), and submitted that considering the nature of covenant restricting the business of the assessee for a period of five years alone, there being no loss of enduring nature, the receipt has to be assessed only as a revenue receipt. Learned Standing Counsel also placed reliance on the decision reported in [1998] 234 ITR 23 (Chemplant Engineers (P) Ltd. Vs. Commissioner of Income Tax), wherein, this Court considered the decision reported in [1966] 60 ITR 11 (Commissioner of Income Tax, Madras Vs. Best Company) and pointed out that when the assessee company before us was permitted to manufacture as before and sell the same, as evident from the contract with Bayer India Limited, there was no loss of source of income, much less of an enduring nature, as had been contended by the assessee. He also referred to the decision of the Commissioner of Income Tax (Appeals), pointing out to the difference between the two sub clauses on the non-compete clauses under the agreement which enable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that no exception could be made to the reasoning given by the Tribunal in this regard. 7. Before going into the merits that were referred to, the clauses over which there has been much of a controversy raised by the parties herein in the non-compete agreement dated 24.5.1995 needs to be seen. The definition clause of the term "Business" reads as follows: "Business" shall mean the business of the manufacture, marketing, distribution or sale of mosquito repellent mats and mat heater machines. " 8. Clause (iii) therein, namely the covenant- the non-compete clause reads as follows: " (iii) Covenant: PLC hereby agrees with TDP that, during the period, PLC shall not, without TDP's prior written consent, directly or indirectly own, manage, operate, join, have an interest in, control or participate in the ownership, management, operation or control of, or be otherwise connected in any manner with, any body corporate, partnership, proprietorship, trust, estate, association or other business entity which directly or indirectly engages, as a commercial activity anywhere in the Territory, in the Business that PLC shall not in any manner whatsoever manufacture, sell, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selling as before even after 24.5.1995 but without its trademark affixed. 12. The non-compete agreement entered into in 1995 thus made the fact very clear that the assessee was left with only one source of activity to manufacture and sell on contract basis without using its trademark. However, as far as manufacturing and marketing of the products under its trade name is concerned, the assessee had to put a stop from carrying on its business activity for a period of five years. As rightly contended by the learned counsel appearing for the assessee, with one source of income by exploiting its trademark and the goodwill thus no longer available to the assessee, but the loss that the assessee suffered could not be called just the loss of income, but loss of an income generating aspect of the business; thus the compensation received in this loss of source of income makes the receipt a capital receipt at the hands of the assessee. 13. The controversy as to whether the non-compete fee is revenue or capital was resolved by the Parliament by insertion of Clause Va to Section 28 of the Finance Act 2002 with effect from 1.4.2003. Referring to the said amendment in Section 28, the Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income. This Court pointed out therein to the agreement not to carry on the same business. It is well established that the compensation received for the mere loss of profits will be a revenue receipt, while the compensation received for the loss of a source of income would be capital receipt. In the said circumstances, this Court held that the receipt of compensation was a revenue receipt assessable under the provisions of the Act. The facts now projected herein stands on a totally different footing. The other decisions relied on by the learned Standing Counsel appearing for the Revenue, reported in [1987] 165 ITR 63 (Commissioner of Income Tax Vs. Late G.D.Naidu and others by Lrs. G.D.Gopal and another), [2004] 269 ITR 177 (Parry and Co. Ltd. Vs. the Deputy Commissioner of Income Tax, Special Range IV, and the Assistant Commissioner of Income Tax) and [2010] 326 ITR 474 (Commissioner of Income Tax Vs. Hindustan Zinc Ltd.) are all relatable to capital expenditure, a yardstick which cannot be extended for understanding the issue herein which necessarily has to be decided in terms of the agreement. 16. In the light of the above, we have no hesitation in rejecting the case of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
