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2015 (4) TMI 516

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..... ered into an agreement of 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 1st April, 2003 and would .....

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..... ut of non compete and non solicitation agreements entered into between the assessees and one Thermo Electron India LLS 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 undertook not to engage in any business directly or indirectly or otherwise be involved in activity which was similar to that of the divi .....

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..... 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 appealed before the Commissioner of Income Tax (Appeals) who vide order dated 11th October, 2012 confirmed the order of the Assessing Officer and held that the non compete fee is taxable as income under the provisions of section 28(va) of the Act and not taxable as capital gains. Section 28(va) of the Act reads as under:- (va) any sum, whether received or receiv .....

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..... e appellant could not be termed as revenue receipts, since the appellant received the amount vide agreement for non compete and non solicitation which provides that he would not engage in any business involving production, development, manufacture, sale or distribution of the product similar to those produced by the division which was sold to Thermo. He submitted that amount in the hands of the assessee was not long term capital gains and that order passed under Section 143(3) of the Act after scrutiny was incorrect. He submitted that the money had been received by the assessee for agreeing not to carry on the specified business for four years. He, therefore, submitted that the order of the Assessing Officer and apart from other fact findin .....

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..... 7; 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. 7. Mr.Chhotaray, learned counsel appearing on behalf of the revenue, on the other hand sub .....

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..... 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. 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. The assessee in that case was dealing with explosives. That agency was terminated and .....

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