Guffic Chem P. Ltd vs. CIT (Supreme Court)

DATE: (Date of pronouncement)
DATE: March 18, 2011 (Date of publication)

Click here to download the judgement (guffic_non_compete_capital_receipt.pdf)

Pre s. 28(va) inserted w.e.f AY 2002-03, non-compete compensation is a capital receipt

In AY 1997-98 the assessee received Rs. 50 Lakhs from Ranbaxy as a fee for agreeing not to compete for 20 years in the territory of India. The AO assessed the receipt as income though the CIT (A) & Tribunal upheld the assessee’s claim that the receipt was for loss of a source of income and capital in nature. On appeal by the department, the High Court reversed the Tribunal and held the receipt to be revenue in nature. On appeal by the assessee, HELD reversing the High Court:

(i) The position in law is clear and well settled that there is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. While the former is a revenue receipt, the latter is a capital receipt. On facts, as the amount was received for a non-compete covenant, it was capital in nature;

(ii) Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till AY 2003-04. It is only by s. 28(va) inserted by FA 2002 w.e.f. 1.4.2003 that the said capital receipt is now made taxable. S. 28(va) is amendatory and not clarificatory.

Note: Narendra Desai 214 CTR (Bom) 190 is impliedly approved. See Tecumseh India 127 ITD 1 (Del) (SB) for deductibility of non-compete expenditure. On whether non-compete rights are an “intangible asset” for depreciation u/s 32(1)(ii) see Real Image Tech 177 TM 80 (Che) & Medicorp Technologies 30 SOT 506 (Che)

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