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2016 (6) TMI 302 - MADRAS HIGH COURT

2016 (6) TMI 302 - MADRAS HIGH COURT - [2016] 385 ITR 326 - Non-compete amount received - revenue v/s capital receipt - Applying the legal principles enunciated by the Supreme Court in Rai Bahadur Jairam Valji s case, Kettlewell Bullen & Co Ltd [1958 (10) TMI 6 - SUPREME Court], Gillanders Arbuthnot & Co Ltd [1964 (5) TMI 5 - SUPREME Court], Karam Chand Thapar & Bros [1971 (1) TMI 13 - SUPREME Court], Oberoi Hotel (P) Ltd [1999 (3) TMI 2 - SUPREME Court] and Guffic Chem (P) Ltd [2011 (3) TMI 6 - .....

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nly a part of several other business activities which it carries on - compensation received 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 .....

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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 Tribunal Bench- C Chennai in I.T.A No.2713/Mds/2004 dated 20.07.2007. 2. M/s TTK Bio-med Limited was manufacturing Rubber Contraceptives (condoms) and Gloves. It entered into an agreement with London International Group PIC for discontinuing th .....

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e assessee Company with effect from 01.07.1999. The particular transaction, relating to receipt of non-compete money concerning which this appeal is brought forth by the Revenue is for the assessment year 2000-2001. 3. The assessee company has claimed the amount of ₹ 3,44,92,800/- received by it from London International Group PIC as not taxable, treating it as capital receipt. The Assessing Officer, the Assistant Commissioner of Income Tax by his order dated 18.03.2003 assessed the non-co .....

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sing Officer and the CIT(A) and held that the non-compete amount received by the assessee in question is a capital receipt, but not revenue receipt. Hence, this appeal. 4. Heard Sri.M.Swaminathan, learned Standing Counsel for the Income Tax Department and Sri.Vijay Raghavan for Sri.Venkatnarayanan for the respondent-assessee. 5. Before we proceed further, it would only be appropriate to notice the essential facts. London International Group PIC, (for short LIG henceforth) was carrying on busines .....

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ubber 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 .....

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consideration of the above covenants not to compete with LIG or its associates, LIG agreed to pay a sum of 4,99,000 pounds to Bio-med Limited. Accordingly, the payment was made. 6. The question, therefore, that requires to be answered is whether this receipt of money by the assessee is liable to be treated as a capital receipt or revenue receipt. It is not in doubt that, for the relevant assessment year, if the income is to be treated as capital receipt, it cannot suffer the incidence of taxatio .....

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the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. This Court in the case of Karam Chand Thapar & Bros. P. Ltd. v.Commissioner of Income Tax (Central, Calcutta: [1971] 80 ITR 167(SC) discussed and held that in commissioner of Income Tax v. Chari and Chari Ltd : [1965] 57 ITR 400(SC), it was held that ordinarily compensation for loss of an office or agency is regarded as capital receipt, but this rule is subject to an exc .....

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universal application but various workable rules have been evolved for guidance. 4. Applying the aforesaid test laid down by this Court in the present case, in our view the Tribunal was right in arriving at a conclusion that it was a capital receipt. 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 t .....

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ing 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 not a revenue receipt. 5. Learned Counsel for the R .....

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e rights arising under the trading contract would be a revenue receipt and must be referred to the profits which would be made in carrying out of contract. The Court has also observed : "Whether a payment of compensation or termination of an agency is a capital or revenue receipt, it would have to be considered whether the agency was in the nature of capital asset in the hands of the assessee, or whether it was only part of his stock-in-trade." ' 6. The aforesaid judgment was consi .....

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ceived in a given case is compensation for loss of a source of income, or profit in a trading transaction." After considering various decisions it was further held as under: "These cases illustrate the principle that compensation for injury to trading operations, arising from breach of contract or in consequence of exercise of sovereign rights, is revenue. These cases must, however, be distinguished from another class of cases where compensation is paid as a solatium for loss of office .....

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ct 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' .....

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or let out to other persons. It is not for settlement of rights under trading contract, but the injury is inflicted on the capital asset of the assessee and giving up the contractual right on the basis of Principal Agreement has resulted in loss of source of assessee's income." 8. Thus, starting from Rai Bahadur Jairam Valji s case, Kettlewell Bullen & Co Ltd case, Karam Chand Thapar & Bros case, the underlying principle spelt-out was to ascertain from the facts and circumstanc .....

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pt whereas, if the compensation is attributable to a negative/restrictive covenant, then, it would amount to a capital receipt. The Supreme Court in Guffic Chem (P.) Ltd. Vs. Commissioner of Income Tax (2011 (332) ITR 602) examined this very question and in its paragraph 7 held that compensation received for refraining from carrying on competitive business was a capital receipt and that payment received as non-competitive fee under a negative contract was always treated as a capital receipt till .....

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and on the other hand, it had now gained freedom to concentrate all its energy and time in manufacturing and marketing its other products, including gloves. Therefore, it is contended that the impairment suffered by the assessee is not a complete denial of its source of income. It was also urged by Sri.Swaminathan that what has been paid by the LIG is for rendering certain service to it by the assessee, when it has agreed to direct all enquiries and other information relevant to the rubber cont .....

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rd 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 con .....

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manufacture and marketing of rubber contraceptives with effect from 01.02.2001, a subsequent date to that of the agreement. Sri.Vijay Raghavan would contend that this was because the contractual obligations already entered into till then by the TTK Bio-med have got to be met with. It is also true that the TTK Bio-med has agreed to forward all trade information and trade enquiries with regard to rubber contraceptive business to LIG, to enable it to exploit it. Such forwarding the trade enquiries .....

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