By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi, Chartered Accountants
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Section 28(va)(a) – When compensation is paid for not carrying out any activity in relation to any business which transferor is not carrying on same would be chargeable u/s. 28(va)(a) and not as capital gain.
Facts: Assessee was a chairman of two companies namely, Rassi Cements Ltd. (RCL) and Sri Vishnu Cements Ltd. (SVCL) without any controlling interest. Both these companies were subjected to a hostile takeover by India Cements Ltd. (ICL).
ICL Paid Rs. 11 crore to assessee under Non-compete agreement (NCA). After takeover assessee lost his business and died. Mean while, Search was conducted in the premises of one of the close relatives of the assessee where copy of NCA disclosing Rs. 11 crore paid to assessee were found. Based on the same, AO issued notice u/s. 148 and added the above sum to income of the assessee under the head Capital gain.
Aggrieved by the order of Ld. A.O. legal heirs of the assessee preferred appeal before CIT(A). CIT(A) held that sum was in the nature of capital receipt and not chargeable to tax before insertion of provisions of section 28(va)(a) w.e.f. 01-04-2003. Revenue preferred appeal against order of CIT(A).
Held:
Taxability of amount paid at the time of takeover of business depends upon:
1- Purpose of payment.
2- What was the right transferred by assessee.
When Right to manufacture, produce or process any article or thing is transferred, there is an extinguishment/relinquishment of rights, the same being capital asset chargeable to capital gain tax.
In the instant the case assessee had no controlling interest in the transferred companies. He was associated with business in his managerial capacities and was not carrying on any business directly. Hence, the amount received by assessee under NCA is for “not carrying out any activity in relation to business” which is taxable u/s. 28(va)(a).
