TMI Blog2016 (6) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... for partial impairment of the business activities normally undertaken by the assessee is liable to be treated as a capital receipt. The litmus test is whether the impairment is one of its sources of income or not and if the answer is that the injury has been caused to one of its sources of income, then it is enough to render the compensation received in that process as a capital receipt. At any rate, with effect from 01.04.2003, by virtue of introduction of Section 28(va) to the Act, all monies received pursuant to a negative covenant become liable for the incidence of taxation, thus obliterating the distinction between the two that was available till then. - Decided in favour of assessee. - Tax Case (Appeal) No. 1469 of 2007 - - - Dated:- 1-6-2016 - Nooty Ramamohana Rao And M. V. Muralidaran, JJ. For the Appellant : Mr. M. Swaminathan For the Respondent : Mr. Vijay Raghavan for Mr. Venkat Narayanan JUDGMENT Nooty Ramamohana Rao, J. This appeal under Section 260-A of the Income Tax Act, 1961, (for brevity, henceforth referred to as Act ), was preferred by the Revenue calling in question the correctness of the order passed by the Income Tax Appellate Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its subsidiaries or joint venture companies. TTK Bio-med Limited, inter-alia is engaged in business of manufacturing and marketing rubber contraceptives (condoms) and also gloves. TTK Bio-med Limited was, at that time, in the process of merging with TTK Pharma Limited. It had agreed to discontinue the business of manufacturing and marketing rubber contraceptives (condoms) and not to compete with LIG or their subsidiaries or associates, including the joint venture TTK-LIG. In terms and in accordance with the said agreement, TTK Bio-med Limited agreed to cease to engage itself in the business of manufacturing and marketing rubber contraceptives on and from 01.02.2001 and also agreed to surrender all the know-how received from LIG in the past in relation to the said business. TTK Bio-med has further undertaken that it shall not in any manner whatsoever compete with the business of LIG or its associates, including TTK-LIG insofar as the condom business in India or other countries nor will it associate with any joint venture with any third party in respect of the said business. Bio-med Limited has also undertaken not to engage in the said business directly or indirectly and in case it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Reason is that as provided in Article XVIII of the First Agreement assessee was having an option or right or lien, if owner desired to transfer the hotel or lease or part of the hotel to any other person, the same was required to be offered first to the assessee (operator) or its nominee. This right to exercise its option was given up by a Supplementary Agreement which was executed in September, 1975 between the Receiver and assessee. It was agreed that Receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise and in its return, agreed consideration was as stated above in Clause X. On the basis of the said agreement the assessee has received the amount in question. The amount was received because the assessee had given up its right to purchase and or to operate the property. Further it is loss of source of income to the assessee and that right is determined for consideration. Obviously therefore, it is a capital receipt and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the principle is disclosed : Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leave him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. 7. The aforesaid principle is relied upon in the case of Karam Chand Thapar and Bros's case (supra). Considering the aforesaid principles laid down as per Article XVIII of the Principal Agreement, the amount received by the assessee is for the consideration for giving up his right to purchase and or to operate the property or for getting it on lease before it is transferred or let out to other persons. It is not for sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er information relevant to the rubber contraceptive business which the assessee might receive to enable LIG to further exploit the same. It was also further urged that the payment made by LIG cannot be treated as a compensation towards Non-compete Agreement, inasmuch as, a Non-compete Agreement requires stoppage of the activity completely. On the other hand, TTK Bio-med Limited agreed to cease to engage in the business of rubber contraceptives from a future date namely 01.02.2001 and thus, coupled with the obligation undertaken to forward all further enquiries and information to LIG, the payment made by LIG is liable to be treated only for the service which TTK Bio-med agreed to render to LIG and hence, amounts to a revenue receipt. 10. Sri.Vijay Raghavan, in our considered opinion, has rightly pointed out that, as per Clause (5) of the agreement entered into by and between TTK Bio-med and LIG, LIG has agreed to pay a sum of 4,99,000 pounds so that, TTK Bio-med would not compete with LIG or its associates insofar as rubber contraceptive business is concerned. Covenant No.5 of the agreement is clear, unambiguous and leaves no room to entertain a different opinion thereof. It is p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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