A two-judge bench of the Bombay High Court has held that the non-competent fee received by the assessee from the sale of the business assets was not assessable as profits of business under Section 29(va), but the same is taxable as long-term capital gain.
The assessee sold its business of manufacturing wheat herbicides for a sale consideration of Rs.30.13 Crores under an agreement. This included a sum of Rs.2 Crores towards non-compete fee. The Assessing Officer held that this amount was Assessee’s income and taxed it accordingly.
On second appeal, the Tribunal granted relief to the assessee by holding that the receipt was capital and it gave rise to long term capital gain. Thereupon, the Revenue has filed this Appeal.
According to the Tribunal, the Non-Compete Agreement was part of the agreement for the sale of the business. Under this Agreement, the Assessee could be seen to have transferred the right to manufacture the product in question. The Tribunal, therefore, was of the opinion that such receipt would not be covered by Section 28(va) of the Income Tax Act. The Tribunal further held that the Assessee was in the business since the year 1997 and that, therefore, the transfer of the capital asset would give rise to long term capital gain.
The division bench comprising Justice Sarang V. Kotwal and Justice Akil Kureshi upheld the view of the Tribunal and held that “In our opinion, the Tribunal was right on both counts. The Non-Compete Agreement was part and parcel of the sale of the business and cannot be seen in isolation. Further, the Assessee was in the business of producing and selling wheat herbicides since the year 1997 and therefore, while selling the business, the Assessee also executed a Non-Compete Agreement, which was part of the sale of assets held by the Assessee in excess of 36 months.”
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