Non-Competition Fee received under Restrictive Covenants Restrains Source of Income: ITAT deletes Addition of Rs. 64 Cr [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) has ruled to delete the addition of Rs. 64 crore after determining that the non-competition fee received under restrictive covenants restrained the source of income.

The assessee filed a detailed reply explaining that this non-compete fee has been received under agreement for restrictive covenant in respect of restrain on the source of income, hence, treated as capital receipt.

It was explained that the assessee and its Chairman and Managing Director Shri Siddharth Shriram entered into non-compete agreements whereby the assessee company and  Siddharth Shriram and his family agreed not to engage directly or indirectly in the manufacturing, selling or repairing of compressors and parts thereof, as would compete with Tecumseh Products Company, TPC Mauritius Holdings, Tecumseh India Pvt Limited and SIEL Compressors Ltd. in any country of the world for a period of 15 years from the date of agreements for which the assessee company and Shri Siddharth Shriram received a sum of Rs. 64.42 crores.

The Assessing Officer formed a strong belief that prior to receipt of non-compete fee, the assessee had already transferred all assets of its compressor limited and, therefore, non-compete fees is not a consideration received for transfer of any asset as all assets were already transferred.

There was no dispute that there is no allegation leveled by the Assessing Officer/ CIT(A) that the receipts for non-compete are attributable to any other source. On the contrary, the Assessing Officer says that it is for future profit.

The two member bench of the tribunal comprising Sakti Jit Dey ( Vice President ) and N.K.Billaiya ( Accountant member) concluded that whereas compensation received for loss of agency is taxable as revenue receipt, however, receipts attributable to the negative covenants for not to carry on a business are capital receipts not liable to tax. Accordingly, the Assessing Officer was directed to delete the same. Appeal of the assessee was allowed.

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