TMI Blog2014 (6) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... y is a revenue receipt whereas the compensation attributable to a negative/restrictive covenant is a capital in nature - the compensation has been paid for loss of source of income and also for non17 competitive fee and it is capital in nature - payment made as non-competition fee under the negative covenant is always treated as a capital receipt and not liable to pay any tax till the AY 2003-04 in view of the amendment to the Finance Act 2002 w.e.f. 1-4-2003 that the capital receipt is now made taxable u/s 28(va) - The amendment is not as the amount received by the assessee is a capital receipt - The Appellate Authority as well as the Appellate Tribunal after considering the matter in detail held that the amount received is a capital receipt and not liable to tax under Section 55(2)(a) of the Act – there was no infirmity in the order – Decided against Revenue. - ITA No.795/2007 - - - Dated:- 7-4-2014 - Dilip B Bhosale And B Manohar, JJ. For the Appellant : Sri K V Aravind, Adv. For the Respondent : Sri S Parthasarathi, Adv. JUDGEMENT:- PER : B Manohar The Revenue has preferred this appeal under Section 260-A of the Income-Tax Act, 1961 (for short 't ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of distillery to M/s. Mc Dowell and Co. Ltd., and Mc Dowell agreed to pay compensation as consideration towards loss to the company's source of income. Further, in view of the dispute between the parties, the matter was referred to the sole Arbitrator and the Arbitrator passed an award fixing the quantum of compensation as Rs.5.31 Crores and to prevent the assessee from carrying on similar business. The said amount cannot be treated as revenue which was received towards the compensation for termination of the business and to prevent the assessee to carry on competitive business. Hence, it is capital in nature. The Assessing Authority after considering the matter and taking into consideration the agreement and other relevant records held that the sum of Rs.5.31 crores received is revenue in nature. However, the assessee has lost the right that he had to manufacture the Mc Dowell products. The entire amount of Rs.5.31 crores was taken as a long term capital gain and taxed accordingly and also imposed penalty and interest thereon by an order dated 27-3-2002. 4. The assessee being aggrieved by the said order preferred an appeal before the First Appellate Authority conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed by the Assessing Authority is contrary to law wherein the Tribunal held that a sum of Rs.5.31 crores received by the assessee from M/s. Mc Dowell as a result of arbitration award cannot be treated as a revenue receipt. The assessee-company was carrying on distillery business in the manufacture of IMFL of various brands of UB products from the year 1986, taking the premises on lease from UB group. As per the agreement entered into between the assessee and UB company, the lease was foreclosed and foreclosure compensation has been paid. The said amount is to be treated as a revenue receipt. Hence, the order passed by the Appellate Authority as well as the Tribunal is contrary to law. The amount received by the assessee falls under Section 28(ii) of the Act. Section 28(ii) contemplates that any compensation or any payment due to or received by any person, by whatever name called, managing the whole or substantially the whole of the affairs of the Indian Company, at or in connection with the termination of its management or the modification of terms and conditions relating thereto. In support of his contention, he relied upon the judgment of the Hon'ble Supreme Court reported i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the order passed by the Assessing Authority and sought for dismissal of the appeal. 9. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned and other relevant records. 10. The records clearly disclose that while assessing the returns of Mc Dowell Co., it was noticed that the Mc Dowell Co., had claimed revenue expenditure of Rs.5.31 crores on account of lease foreclosure payment made to the assessee-company. The assessee-company had filed return on 31-12-1999 declaring net loss from the business. In the scrutiny, the assessee-company brought to the notice of the authority that the assessee-company had discontinued the business from the financial year 1994-95 and as such loss was claimed on account of administrative expenses. However, the assessee-company had not disclosed the receipt of Rs.5.31 crores from Mc. Dowell Co. Accordingly, a notice was issued under Section 142(1) of the Act to the assessee-company calling for necessary information. In pursuance of the said notice, the assessee-company filed detailed objections contending that from the year 1986, the assessee-company was running distiller ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of its source of income. The payment of compensation to SDPL as proposed above shall also be in consideration of SDPL refraining from introducing its own new product competing with Mc Dowell. The compensation payable herein shall be worked out by both the parties on a mutual agreed basis after going through the earning potential and other benefits which accrues to Mc Dowell by this transaction and also after taking into consideration the extent of effect on the future of SDPL. It is agreed that this arrangement shall not create any vested interest on the issue of compensation in favour of the either. 12. Reading of the award of the Arbitrator makes it clear that the amount in question being a compensation towards the loss of source of income and also towards noncompetition fee to prevent the assessee from carrying on the similar business using the knowhow possessed by the assessee as a competitor, the amount of Rs.5.31 crores paid was thus capital in nature. The amount is paid to prevent the assessee from carrying on a competitive business and also preventing the assessee to use the business apparatus or expertise. Accordingly the payment was a capital fee and thus it is on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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