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TREATMENT OF COMPENSATION ATTRIBUTABLE TO A NEGATIVE COVENANT UNDER INCOME TAX ACT 1961

Income Tax - Direct Tax Code - DTC - By: - Mr. M. GOVINDARAJAN - Dated:- 21-7-2016 - The question whether the receipt is capital or revenue is to be determined by drawing the conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. Ordinarily compensation for loss of an office or agency is regarded as capital receipt, but this rule is subject to an exception that payment received even .....

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Court has brought out a dichotomy between receipt of compensation by an assessee for loss of agency and receipt of compensation attributable to the negative/restrictive covenant. If the compensation is received for the loss of agency, it is to be treated as a revenue receipt, whereas, if the compensation is attributable to a negative/restrictive covenant then it would amount to a capital receipt. In Commissioner of Income Tax V. TTK Health Care Limited - 2016 (6) TMI 302 - MADRAS HIGH COURT Lond .....

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nue the business of manufacturing and marketing rubber contraceptives and not compete with LIG or other subsidiaries or associates including the joint venture TTK-LIG. It is also agreed to surrender all the know-how received from LIC and undertake that it shall not in any manner whatsoever compete with the business of LIC or its associates. Further it also undertakes not to engage in the said business directly or indirectly and in case it receives any further enquiries or other information relat .....

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assessing Officer. The Tribunal reversed the findings of the Assessing Officer, as upheld by Commissioner (Appeals). Against this order the Revenue filed appeal before the Madras High Court. The Revenue submitted the following- The assessee has not lost the entire source of income by virtue of agreement entered into with LIG and on the other hand, it had gained freedom to concentrate all its energy and time in manufacturing and marketing its other products, including gloves; The impairment suffe .....

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vity 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 with TTK Bio-Med Limited agreed to render to LIG and hence, amounts to a revenue receipt. The assessee contended the following- As per clause (5) of the agreement ente .....

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regard to the said business with any other third parties at any later point of time; TTK Bio-med has agreed to cease from engaging itself in the business of manufacture and marketing of rubber contraceptives with effect from 01.02.2001, a subsequent date of the agreement; 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 is only an obligation more towards .....

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