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2015 (4) TMI 516 - BOMBAY HIGH COURT

2015 (4) TMI 516 - BOMBAY HIGH COURT - [2015] 375 ITR 270 (Bom) - Consideration for Not to compete and non solicitation - Capital receipt or Revenue receipt - Held that:- 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). It is clarified by the Supreme Court in the case of Guffic Chem (P) Ltd. [2011 (3) TMI 6 - Supreme Court] that section 28(va) of the Act was amendatory and not clarificatory and, there .....

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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 1st April, 2003 and would be covered by the provisions of Section 28(va) of the Act. We are accordingly o .....

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d in the circumstances of the case and in law, the Tribunal erred in holding that the amount received by the Appellant from Thermo was taxable as business income under the provisions of section 28(va) of the Act, despite the fact that the Appellant was not carrying on any business in the relevant previous year ? II. Whether the Appellate Tribunal is correct in holding that carrying on of business is not a pre-condition was chargeability under the head 'profits and gains of business' ? II .....

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Pvt. Ltd. 3. A few facts may be narrated before dealing with the issues in the present appeals- The assessee in both the appeals were directors of one Chemito Technologies Pvt. Ltd. ('Chemito'). On or about 27th May, 2008, Chemito sold one of its divisions to a company Thermo Electron LLS India Pvt. Ltd. ('Thermo'). Vide an agreement dated 2nd June, 2008, the said Thermo entered into agreements of non compete and non solicitation under the which the assessees agreed and undertoo .....

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aggregate period of four (4) years from the Completion Date, Mr.Toshniwal shall not, in any part of the world where Thermo sells the products of the Acquired Business or products similar to those sold by the Acquired Business, without the prior written consent of Thermo, directly or indirectly, whether through Affiliates or otherwise : i) engage in any business, whether for profit or otherwise, involving the production, development, manufacture, sale or distribution of products that are the same .....

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ithout prior consent of Thermo, directly or indirectly engage in any business of the division sold to Thermo for a period of 4 years. In consideration of the said undertaking Thermo would pay to the assessee a sum of ₹ 5 crores and ₹ 2 crores respectively. The Assessing Officer passed an assessment order dated dated 30th September, 2011 under Section 143(3) of the Income Tax Act, 1961 (the Act) stating that the sum received by the appellants were revenue receipts. The assessees appea .....

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, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services: Provided that sub-clause (a) shall not apply to- (i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head C .....

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arrying on business is a sine qua non and taxable Section 28(i) of the Act. The Tribunal was of the view that it is not necessary to carry on the business in order to attract the provisions of Section 28(va) of the Act. 6. Mr.Pardiwalla, learned Senior Advocate appearing on behalf of the appellant contended that the amount received by the appellant could not be termed as revenue receipts, since the appellant received the amount vide agreement for non compete and non solicitation which provides t .....

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efore, submitted that the order of the Assessing Officer and apart from other fact finding authorities are incorrect. 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 .....

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y, the amount of ₹ 25 lacs was paid to the assessee by Goa International School (P) Ltd. since he would be deprived of his business and relatable income. 8. 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 th .....

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r 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. 7. 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 comp .....

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, 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 noncompete 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 re .....

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sment year 2003-04. 8. 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. .....

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