TMI Blog2023 (4) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... hich provides for the non-compete fee/goodwill. The agreement has been turned down by the authorities below as it is colorable device. This observation is not backed by any proper reasoning. The case laws relating to the proposition is that the Revenue should only look at the agreement and not look through the binding agreements between the parties. For this, the reliance on case laws as mentioned above, which are referred by the ld. Counsel for the assessee is germane and supports the case of the assessee. The various case laws and proposition relied upon by the ld. Counsel for the assessee also supports the case of the assessee. AO has made addition u/s 28(va) - The amendment to bring profession also, into the said clause was brought in w.e.f. AY 2017- 18. Hence, non-compete fee related to profession is made taxable only w.e.f. AY 2017-18 and the non-compete fee in relation to profession for period prior to AY 2017-18 would be treated as capital receipt. Furthermore, the ld. CIT(A) has changed the section from 28(va) to section 28(1) of the Act without confronting the assessee. This is a fatal mistake. The reasoning of the ld. CIT(A) that since the name of the new entity is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 28(1) of Income Tax Act, 1961 instead section 28(IV) as done by the AO without confronting the assessee about change of taxable head in income tax Act, 1961. 2) The Learned CIT (A) has grossly erred in Law in holding that Rs.189,00,000/- received by the assessee consideration for not carrying out independently the professional activities in future which is exempt Us 28(IVA ) of Income Tax Act, 1961 as a professional income and is taxable U/s 28(1) of Income Tax Act, 1961 3) The Learned CIT (A) has grossly erred in law and on the facts of the case that the consideration of Rs. 1.31 crore received as goodwill for her expertise and knowledge and also for closing down her hospital Mother and Child is not Tax Free as per section 55(2) of Income Tax act, 1961 but is a Business Income earned by the assessee form profession and taxable U/s 28(1) Of the Act.. 4) The assessee seeks leave to add or amend any additional grounds of appeal if it is necessary in the interest of justice. 3. Brief facts of the case are that the assessee is an individual and doctor by profession and was running hospital under the name and style of Mother and Child New Delhi. A Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on 28-10-2012, between Nova Pulse IVF Clinic Pvt. Lid. and assessee: The relevant clause of the Service Agreement also states that Company Nova Pulse IVF Clinic Pvt. Ltd. will pay the consideration to the assessee, in consideration of the exclusive engagement, and performances of the Services. Therefore, various payments as mentioned in the Annexure 'B' of the Service Agreement are nothing but, the benefit or perquisite received from Nova Pulse IVF Clinic Pvt. Ltd. by the assessee for carrying out Professional Activity there, for the Nova Pulse IVF Clinic Pvt. Ltd. Therefore Rs. 3,20,00,000/- as received by the assessee from Nova Pulse IVF Clinic Pvt. Ltd. during the relevant assessment year, is added to the total taxable income of the assessee, as profits and gains of business of profession w/s 28(iv) of the IT Act. 4. Upon assessee s appeal, the Ld. CIT(A) confirmed the action of the AO but changed the section under which the said amount is taxable to section 28(1) of the Act. The Ld. CIT(A) referred to the assessee s written submission and opined that the payment towards exclusive engagement and goodwill is subject to the services given by the company. Hence, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived as per agreement could not be considered as perquisite or as an income from other sources as suggested by him. Though, the Assessing Officer has mentioned in the assessment order that this income is to be taxed under section 28(iv) of the Act where the value of any benefit or perquisite, arising from business or the exercise of a profession should be added to the taxable income of assessee, as profits and gains of business or profession. However, from the discussion made supra it is apparent that the said consideration of Rs.3,20,00,000/- is nothing but the professional receipt of the appellant which is taxable under section 28(i) of the Act as per which the profits Gains of any business or profession which was carried on by the assessee at any time during the previous year will be chargeable to income tax under the head Profits Gains of Business or Profession. Considering the relevant clauses of the service agreement it is apparent that the amount received by the appellant is nothing but the professional receipts and whatever expenses the appellant has incurred has already been claimed by her and allowed by the Assessing Officer. However, the Assessing Officer has wrong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, egg freezing, frozen embryo transfers, Uis, etc) in her clinic in Defence Colony, New Delhi ( Doctor's Existing Clinic) shall be transferred to the Clinic of the Company and the Doctor's Existing Clinic shall continue to operate till one year, from the commencement of this agreement, only for the sole purpose of consulting its clients/patients to the Company s clinic. (Para 13 at page 19) 13. Non-compete and Non-solicit During the Term of this Agreement, the Doctor covenants that the Doctor shall not, directly or indirectly, carry on any activity which competes with the Business of the Company nor shall the Doctor solicit customers / clients or employees of the Company for any other purpose. 4. The consideration for exclusive engagement with Nova and not to compete/not to carry the activity with any other person and to also not share her goodwill with any other party, the consideration was agreed as per the following: (Page 21...Annexure-B) FEES PAYABLE 1) Consideration for exclusive engagement : In consideration of the Doctor agreeing to be exclusively associated with the Company and as consideration for the Do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee(s) cannot be doubted or held as artificial 8. It is the respectful submission of the assessee that, the CIT(A) completely erred in misconstruing the provisions of the subject service agreement entered between the assessee and NOVA to hold that the impugned amount received was in lieu of services and not in lieu of the restrictive covenant of not engaging or sharing goodwill with any other person. 9. The relevant portion of the clauses 1 and 2 relating to consideration(s) reproduced above, clearly prescribe that the same were paid in consideration of exclusive engagement with the company; in other words, in lieu of restrictive covenant of not engaging with any other person and sharing goodwill of the assessee with any other person. The consideration for rendering services was independently and separately agreed vide clause-3, which was undisputedly offered to tax. The phrase Subject to the Doctor continuing to render Services to the Company' only meant, that the non-compete fee, which was to be paid in installments shall be paid only if, the Doctor/assessee rendered professional services to the Nova and not otherwise. The said phrase has been misconstrued by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... General Stores (P.) Ltd.: 66 ITR 692 (SC) observed as under: It is not disputed that the document in question was intended to be acted upon and there is no suggestion of mala fides or that the document was never intended to have any legal effect. In the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. When the transaction is embodied in a document the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. 13. The aforesaid issue of looking through the non-compete agreement and holding the consideration for services and noncompete fee to be artificial split is squarely covered by the decision of Supreme Court in the case of Shiv Raj Gupta v. CIT: 425 ITR 420 wherein in the similar factual matrix, where the Revenue had held the amount of consideration received by the assessee towards noncompete clause, to be an artificial split, and was nothing but consideration of sale of shares was held to be invalid. To the same effect is the decision of the Delhi High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed by various High Court and Tribunal; a useful reference, however, can be made to the subsequent decision of the Supreme Court in the case of Shiv Raj Gupta v. CIT: 425 ITR 420 18. It would be pertinent to point out that sub-clause (va) was inserted in section 28, prospectively by the Finance Act, 2002 w.e.f. 01.04.2003 and at the time of original insertion it only covered noncompete clause relating to business'. The non-compete fee 'relating to profession' was first time inserted by the Finance Act, 2016 w.e.f. 01.04.2017. The relevant extract of the Memorandum explaining Finance Bill of 2016 is reproduced hereunder for ready reference: ...It is proposed to amend clause (va) of section 28 of the Act to bring the non-compete fee received/receivable( which are recurring in nature) in relation to not carrying out any profession, within the scope of section 28 of the Act i.e. the charging section of profits and gains of business or profession. Further, it is also proposed to amend the proviso to clarify that receipts for transfer of right to carry on any profession, which are chargeable to tax under the head Capital gains , would not be taxable as profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital receipt, not taxable under the provision of the Act; the lower authorities have erred in holding the same to be taxable as a normal professional income, which calls to be reversed and appeal of the assessee deserves to be allowed. 7. Per contra, the ld. DR relied upon the orders of the authorities below. 8. We have heard both the parties and perused the records. First of all, we note that there is a proper agreement which provides for the noncompete fee/goodwill. The agreement has been turned down by the authorities below as it is colorable device. This observation is not backed by any proper reasoning. The case laws relating to the proposition is that the Revenue should only look at the agreement and not look through the binding agreements between the parties. For this, the reliance on case laws as mentioned above, which are referred by the ld. Counsel for the assessee is germane and supports the case of the assessee. The various case laws and proposition relied upon by the ld. Counsel for the assessee also supports the case of the assessee. We further note that the AO has made addition u/s 28(va) of the Act as detailed above. The amendment to bring profession also, i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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