The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently, in an appeal filed before it, held that a non-compete fee related to a profession is made taxable only with effect from AY 2017–18 and that the non-compete fee in relation to a profession for periods prior to AY 2017–18, would be treated as a capital receipt.
The aforesaid observation was made by the Delhi ITAT, when an appeal was preferred before it by the assessee, as directed against the order of the CIT (Appeals), New Delhi, dated 31.03.2018, pertaining to the assessment Year 2014-15.
The grounds of the assessee’s appeal are that the CIT (A) has grossly erred in law in holding that Rs. 3.2 Crore received by the assessee from NOVA IF Clinic Pvt. Ltd, as consideration for exclusive arrangement and goodwill for closing down her hospital, is taxable Under section 28(1) of the Income Tax Act, 1961 instead section 28(IV) ,as done by the AO without confronting the assessee about a change of taxable head in income tax Act, 1961, and further that the CIT (A) has grossly erred in Law, in holding that Rs.189,00,000/- received by the assessee, as consideration for not carrying out independently, the professional activities in future, which is exempt under section 28(IVA ) of Income Tax Act, 1961, as a professional income being taxable under section 28(1) of the Income Tax Act, 1961, the brief facts of the case were that the assessee/appellant was an individual and doctor by profession, who was running a hospital under the name and style of Mother and Child New Delhi.
Subsequently, a ‘Service Agreement’ was executed between Nova Pulse IVF Clinic Pvt. Ltd. and the assessee, Nalini Mahajan. And, as per the agreement, the company had engaged the assessee as a consultant, and the assessee had agreed to be exclusively engaged with the company for providing her professional services.
It so happened that the AO noted that the fee payable to the assessee by the company was to be decided by the sub-clause 2 ‘Fees’ of the service agreement executed on October 28, 2012 between Nova Pulse IVF Clinic Pvt. Ltd. and the assessee. Also, after reproducing a certain portion of the agreement, the AO found that the assessee had provided her professional services to Nova Pulse IVF Clinic Pvt. Ltd.
The AO noted that the assessee had increased her capital on account of a payment receipt from the said company, the payment of which is said to be exclusive for the engagement of goodwill. Further, the AO was of the opinion that the assessee had provided professional services to the company.
The assessee explained that the company had paid the amount as the assessee had transferred her practice and associated goodwill to the company, which cannot be taxed as profits and gains of business or profession. However, the AO was not in agreement, based on which, he held that the amount was taxable in the hands of the assessee because it was the value of any benefit or perquisite, arising from a business or the exercise of a profession.
Aggrieved by the same, the assessee appealed before the CIT (A), who thereby, held that the assessee had provided professional expertise in the form of professional services that are being utilized by the company, as mentioned in the service agreement. However, he added that, by such a method, the assessee gets this money only for her professional services, which are deliberately bifurcated into three parts to evade the tax.
The CIT(A) noted the assessee’s objection and, after analysing it, confirmed the addition under Section 28(i), thus leaving the assessee aggrieved to prefer the instant appeal before the Delhi ITAT.
Hearing the opposing contentions of both sides, as submitted by Sh. Gaurav Jain, & Sh. Sudarshan Roy, the Advocates on behalf of the assessee, and by Sh. Sumit Kumar Verma, the Sr. DR, on behalf of the Revenue, and thereby perusing the materials available on record, the Delhi ITAT observed:
“We note that there is a proper agreement which provides for the non-compete fee/goodwill. The agreement has been turned down by the authorities below as it is a colourable device. This observation is not backed by any proper reasoning. The case law relating to the proposition is that the Revenue should only look at the agreement and not look through the binding agreements between the parties.”
“We further note that the AO has made an addition u/s 28(va) of the Act as detailed above. The amendment to bring profession also, into the said clause was brought in w.e.f. AY 2017- 18. Hence, non-compete fee related to profession is made taxable only w.e.f. AY 2017-18 and the non-compete fee in relation to profession for period prior to AY 2017-18 would be treated as capital receipt. Furthermore, the ld. CIT(A) has changed from section 28(va) to section 28(1) of the Act without confronting the assessee. This is a fatal mistake”, the ITAT Panel comprising Astha Chandra (Judicial Member) and Shamim Yahya (Accountant Member), added.
Thus, allowing the assessee’s appeal, the Delhi ITAT held:
“In the background of the aforesaid discussion and precedents, we are of the opinion that a sum of Rs.3.2 cores received towards undertaking restrictive covenant of non-imparting service to any other person and not to share associated goodwill of medical practice being in the nature of the non-compete fee, is a capital receipt and not taxable under the provision of the Act. Hence, assessment by the AO under section 28(va) as noted above is not sustainable and similarly the order of the Ld. CIT(A) whereby he changed the head from section 28(va) to section 28(1) without confronting the assessee, is also not sustainable and the ld. CIT(A)’s view that the same is taxable under the normal professional income is also not sustainable in the background of the aforesaid discussion, the agreement and the case law referred to above. In these circumstances, in the background of aforesaid discussion and precedent, we set aside the orders of the authorities below and delete the addition.”
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