By TIOL News Service

NEW DELHI, FEB 06, 2017: THE issue is - Whether compensation received for permanent departure from ongoing business, would clearly render such compensatory non-compete fee as capital receipts. YES is the verdict.

Facts of the case:

The assessee declared Rs. 57,25,510/- as its total income by mentioning about a strategic alliance agreement entered into with Brooke Bond Lipton India Limited. The arrangement included a non-compete agreement entered into on the same date whereby the assessee received Rs. 2 Crores as compensation which was sought to be treated as capital of the assessee. The assessment was originally completed u/s 143(1) but later an assessment notice was issued u/s 147/148 and the AO completed the assessment treating the receipt as goodwill. On appeal, the CIT(A) set aside the AO’s finding and held the receipt to be revenue in nature and, therefore, business income. The ITAT, thereafter, was of the opinion that the amount appropriately fell in the capital side and, therefore, granted relief to the assessee.

On appeal, the HC held that,

++ this Court is of the opinion that the technicalities upon which the revenue’s argument is premised do not further its case. There cannot be a set formula or manner in which commercial entities engaged in business can be said to behave. In the present case, the assessee along with other business entities came together. The assessee used to carry on a restaurant business and was also distributing ice cream and related products. The agreement not to engage in the latter meant that it had ceased from doing so for ten years which can by no means of imagination be called temporary. In business parlance ten years can be as permanent as completely excluding oneself given the fast changing nature of the goods industry. It is quite likely that at the end of ten years, the assessee might itself not be interested in creating a distribution network and engaging in the same activity or conversely the agreement and compensation might be to defer competition which may deter it from entering into the same business. Whatever be the reasons, its desisting from the business on the one hand and agreeing to receive compensation on the other clearly points to the fact that the sum of Rs. 2 Crores was paid as non-compete fee. Therefore, it fell in the capital stream.

(See 2017-TIOL-236-HC-DEL-IT)