The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) has held that the non-competitive fee received by the assessee is treated as ‘revenue receipt’ in the hands of the assessee but only post-amendment, i.e., w.e.f. 01.04.2003.
Lyka Labs Ltd, the respondent/assessee company is engaged in the business of manufacture and sale of bulk formulation of pharmaceutical products where the manufacturing units are situated at Mumbai, Valsad, Ankleshwar and Tarapur. The assessee company had filed its return of income dated 31.10.2002, declaring a total loss at Rs.5,59,48,890/- under the normal provisions and book profit under Section 115JB of the Income Tax Act at Rs.5,10,676/-.
The assessee’s case was selected for scrutiny and the assessment order under section 143(3) dated 30.09.2004 was passed by the A.O. determining the total income at Nil after allowing set off of brought forward unabsorbed business loss and depreciation at Rs.12,12,14,358/- and book profit under section 115JB of the Act at Rs.5,10,676/- after making the additions/disallowance.
The assessee appealed before the first appellate authority, challenging the additions made by the A.O. The CIT(A) confirmed the addition of a receipt for non-competent scientific and technical information amounting to Rs. 17,40,00,000/-.
The assessee and the department were in appeal before the Tribunal, challenging the order of the CIT(A), where the Tribunal set aside the issue of receipt on non-competition fee amounting to Rs. 10 crore and upheld the addition of Rs. 7.40 crore on transfer of scientific know-how and technical information. The AO passed the assessment order upholding the addition of non-compete fees of Rs. 10 crores as a ‘revenue receipt’.
The first appellate authority in an appeal filed by the assessee deleted the addition by holding the same to be a ‘capital receipt’ and such receipt was liable to tax only after A.Y. 2003-04 as per the amendment to Section 28(va) of the Finance Act, 2002, w.e.f. 01.04.2003.
The two-member bench of Kavitha Rajagopal (Judicial Member) and Om Prakash Kant (Accountant Member) has observed that the amendment to Section 28(va) of the Finance Act, 2002 is only w.e.f. 01.04.2003 relevant to A.Y. 2004-05 onwards and does not have a retrospective effect for taxing the non-compete fee received before the period.
The payment received as a non-competition fee under a negative covenant was always treated as a capital receipt until FY 2003–04. It was only via the Finance Act, of 2002, that clause (va) was inserted in Section 28 of the Income-tax Act, 1961, with effect from April 1, 2003, that the capital receipt was made taxable.
The bench found that there was no infirmity in the order of CIT(A) in holding the non-compete fee to be like a ‘capital receipt’ for the period before April 1, 2003.
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