Condition not to carry on a competitive bussiness a capital receipt?
IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH
The Relevant Text of Judgment are as follows :
14. In Guffic Chem. P. Ltd Vs. Commissioner of Income Tax and another, [2011] 332 ITR 602 (SC), the assessee was carrying on the business of manufacturing, selling and distribution of pharmaceutical and medical preparations. It received ` 50 lakhs from Ranbaxy as non competition fee. It agreed to transfer its trade marks to Ranbaxy and in consideration for such transfer the assessee agreed that it shall not carry on directly or indirectly the business hitherto carried on by it. The agreement was for 20 years. The Tribunal held that the amount was a capital receipt, but the High Court reversed the decision. The Apex Court reversed the decision taken by the High Court holding that prior to April 1, 2003, when Parliament stepped in to specifically tax such receipts, the payment was in the nature of a capital receipt. The relevant para of the judgment reads thus:-
“7. Two questions arose for determination, namely, whether the amounts received by the appellant for loss of agency were in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillanders’ case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the Commissioner of Income-tax (Appeals) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide the Finance Act, 2002 with effect from April 1, 2003 that the said capital receipt is now made taxable (See Section 28 (va)). The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from April 1, 2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under the non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) and that too with effect from April 1, 2003. Hence, the said Section 28 (va) is amendatory and not clarificatory. Lastly, in CIT v. Rai Bahadur Jairam Valji reported in [1959] 35 ITR 148 it was held by this court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both the Commissioner of Income-tax (Appeals) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with Ranbaxy led to loss of source of business; that payment was received under the negative covenant and therefore the receipt of `50 lakhs by the assessee from Ranbaxy was in the nature of a capital receipt. In fact, in order to put an end to the litigation, Parliament stepped in to specifically tax such receipts under non-competition agreement with effect from April 1, 2003.”
15. Learned counsel for the appellant has not been able to show that the findings recorded by the Tribunal are illegal or perverse warranting interference by this Court. Accordingly, question (g) is also answered against the revenue and in favour of the assessee.
16. In ITA No.189 of 2013, additional question as noticed hereinbefore has been claimed by the revenue. It was urged by learned counsel for the assessee that this question of law does not arise. However, we find that even otherwise, the said issue stands concluded by the pronouncement of this Court in ITA No.186 of 2013 (Commissioner of Income Tax, Jalandhar-I Jalandhar Vs. Mis Max India Limited) and connected appeals i.e. ITA Nos.188 and 194 of 2013 dated 6.9.2016. Similarly, in ITA No.191 of 2013, the contention of the learned counsel for the assessee in respect of the additional question was that it is not emanating from the impugned order of the Tribunal. We find that even otherwise, the issue has been set at rest by the decision of this Court in ITA No.190 of 2013 (Commissioner of Income Tax, Jalandhar I Jalandhar vs. Max India Limited), decided on 6.9.2016. The aforesaid additional questions are adjudicated accordingly.
17. In view of the above, all the three appeals are hereby dismissed.
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