Amount received as Non-Competent Fee is Capital receipt: Delhi HC [Read Judgment]

Non-Competent Fee

The Delhi High Court in the case of PR. Commissioner of Income Tax-11 vs. Satya Sheel Khosla has held that the amount received as non-competent fee towards loss of the source of would be treated only as capital receipts and not liable to tax under the Income Tax Act.

The Revenue, in the instant case, approached the High Court against the order of the ITAT wherein it was held that the said amount shall be treated as capital receipt.

The assessee was promoter cum Director of Integra Overseas Pvt. Ltd. established to manufacture two-wheelers in India. M/s Suzuki Motor Corporation became a major shareholder in Integra and eventually, the company’s name was changed to M/s Suzuki Motorcycle India Pvt. Ltd. The Assessee terminated as a Joint venture partner and stepped down as Managing Director of that company.

Assessee entered into an agreement with Suzuki India to pay 1 crore to him for not providing “the benefit of his knowledge of regulatory matters, negotiating skills and strategic planning expertise to any other person in India in the two-wheeler segment for a period of two years from the date of the Agreement”.

The assessee claimed the aforesaid money as exempted income on the basis of an opinion by a lawyer. The AO was of the opinion that the amounts received were revenue in character and therefore brought them to tax. The CIT (A) rejected the contentions of the assessee and upheld the Revenue’s arguments.

Challenging the ITAT order, Mr. Rahul Chaudhary, the counsel for revenue pressed the relevance of Section 28(va) and submitted that even prior to this amendment through Finance Act of 2016 (effective from 01.04.2017), amounts received towards restraining the recipient for carrying on any business or commercial activity were covered.

Senior counsel for the assessee, Mr. C.S. Aggarwal, with Advocates Ms. Mohna M. Lal, Mr. Madhur Aggarwal and Mr. Uma Shankar, submitted that the law as it stood and it was interpreted by the Supreme Court in Guffic Chem. P. Ltd. (supra) was applied and there is no infirmity to the impugned order.

The Court observed that assessee played a dual role as shareholder and as Managing Director. Eventually, as a Managing Director, he received only the non-compete amounts for two years towards the source of income.

A division bench comprising Justices Ravindra Bhatt and A.K Chawla relied on the case of Commissioner of Income Tax v. Sapthagiri Distilleries Ltd, wherein the Supreme Court had held that compensation received towards loss of the source of income and non-competition fee would be treated only as capital receipts and not liable to tax.

Accordingly, the bench dismissed the appeal and held that said receipt towards loss of the source of income and noncompetition fee must be treated as capital receipt and it won’t be taxable.

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