A division bench of Delhi High Court held that, Payment of compensation in lieu of the non-compete agreement by the Respondent would amount to capital receipt on which no income tax could be leviable under the provisions of the Income Tax Act, 1961.
The Respondent Assessee – Mrs. Tara Sinha, was working as the President of M/s Tara Sinha McCann Erickson Pvt. Ltd., an advertising agency. She also held 51% shares of the said company, and McCann Erickson Worldwide Inc. (MEW) held 40% of the shares of TSME. The remaining 9% shares were held by Associated Corporate Consultants Pvt. Ltd. Later she retired from the company and received Rs.3,15,31,750/- towards entering into a Non-Compete Agreement with MEW on 10th March, 1995.
The division bench comprising of Justice S.Muralidhar and Justice Prathibha M. Singh observed that,
The bench also observed that, “The CIT (A) and ITAT have rightly held that the non-compete fee is not a taxable income”.
The `real nature of the transaction’ is that it is a Non-Competition Agreement wherein the Assessee agreed –
In lieu of these covenants and undertakings, she was paid an amount of US dollars 996,500 i.e. Rs.3,15,31,750/- at the prevalent exchange rates. The Assessee, as clearly ascertainable from the record, was a lady who enjoyed a stature in the advertising industry and the Non-Competition Agreement, by which she agreed not to compete in India with MEW, was clearly not a sham, the bench said.
While dismissing the appeal, the bench also held that, “this Court is persuaded to follow the decisions in Guffic Chemical Pvt. Ltd, Khanna and Annadhanam and Rohitasava Chand to hold that the Non-Competition Agreement is genuine and the payment made thereunder is indeed a noncompete fee”.
Read the full text of the Order below.
