I-T - Non-compete fee - Legislature knowingly restricted applicability of Sec 28(va) to sums received in relation to any 'business' and not a 'profession': ITAT
By TIOL News Service
NEW DELHI, JAN 04, 2018: THE issue is - Whether the Legislature knowingly restricted the applicability of Sec 28(va) to non-compete fee received in relation to any 'business' and not a 'profession'. And the ITAT verdict is YES.
Facts of the case
The Assessee, an individual is a CA and CEO of Ambit Corporate Finance Pvt. Ltd.. For the AY under consideration the Assessee filed his return of income and the case was taken up for scrutiny assessment u/s 143(2) of the Act. During the course of the assessment proceedings it was observed by the A.O that the Assessee besides drawing salary income from Ambit Corporate Finance Pvt. Ltd. was also having income from consultancy and income from investments. The A.O observed that the Assessee had in his computation of income disclosed Non Compete Compensation under the head LTCG, which was set off by him against loss on sale of shares of Ambit investments. The Assessee had in his computation of income for the year under consideration claimed to had received an amount on sale of his partnership interest in the concern M/s RSM & Company. On being asked, it was submitted by the Assessee that pursuant to an agreement entered into between him and PWC and others, he had relinquished his right to practice as a CA and Financial consultant in India for a period of 5 years, as well as foregone all his interests in RSM and therefore, in lieu that he was in receipt of such amount by way of noncompete fees from PWC. The Assessee contended that such amount being in the nature of a Capital receipt was not taxable at all.
Thereafter, the Assessee filed a revised return of income, wherein such receipt was claimed by him as not taxable for the reason that the same as per him was a capital receipt. However, the AO was of the view that the revised return filed by the Assessee was beyond the time limit contemplated u/s 139(5). The AO further held that such revised return of income was filed by the Assessee only after the final show cause notice was served upon him, therefore, the attempt of the Assessee to manoeuvre his tax liability on the basis of an afterthought could not be facilitated by allowing recourse to section 139(5). The AO thereafter, concluded that such amount received by the Assessee was a revenue receipt and not a capital receipt and accordingly, chargeable to tax u/s 28(va).
On Assessee's appeal, the CIT(A) upheld the decision of the AO. However, the CIT(A) was of the view that where a capital asset is in the nature of "right to carry on business", then the same would be liable to be brought to tax under the head 'Capital gain'. Accordingly, the CIT(A), relying on the order of the ITAT in the case of Savita M. Mandhana concluded that the AO was not justified in characterising the receipt of noncompete fees as the business income of the Assessee u/s 28(va) of the Act and directed him to assess the same under the head 'Capital gains'.
After hearing the parties, the Tribunal held that,
++ the provision of Section 28(va) very clearly provides that the same would be applicable in a case where any sum was received or receivable under an agreement for not carrying out any activity in relation to any business. The conscious, purposive and intentional absence of the term 'Profession' in the said statutory provision reveals the clear legislative intent, as per which the said statutory provision was designed to exclusively cater to taxing of the amounts which were received by an assessee in relation to any business. The mandate of the said statutory provision, viz. Sec. 28(va) has to be gathered from the plain and simple language used therein. As held by the High Court in the case J.K. Choksi , now when for the Income tax Act, the terms 'business' and 'profession' are separate and distinct, and business does not include profession, therefore, the Tribunal is unable to adopt the interpretation accorded by the A.O, which had been vehemently stressed and relied upon by the Counsel for the Revenue. The applicability of Sec. 28(va) was only restricted to a case where the amount had been received in relation to any 'business' and was not applicable to the extent the same was received in relation to a 'profession', can be well gathered from the fact that the legislature in all its wisdom had vide the Finance Act, 2016, with effect from 01.04.2017 made available the term 'or profession' in Sec. 28(va)(a) of the 'Act'. The such prospective insertion of the term 'or profession' in the statutory provision, viz. Sec. 28(va)(a) makes its abundantly clear beyond any scope of doubt that prior to AY: 2017-18 the applicability of Sec. 28 (va)(a) was restricted only in context of amounts which were received or receivable by way of non compete fees in relation to any business, and was not applicable where such sum was received or receivable under an agreement for not carrying out any activity in relation to a profession. Therefore, the CIT(A) had rightly observed that the provision of Sec. 28(va)(a) were not applicable to the amount of Rs.40.50 crore which was received by the assessee by way of non-compete fees from PWC and others, in terms of the agreement dated 25.07.2007 for not practicing the profession of a Chartered Accountant for a period of 5 years.
(See 2018-TIOL-27-ITAT-MUM)
