Capital or revenue receipt- A. Y. 1996-97- Noncompete fee- Goodwill- Assessee transferring technical know-how and other advantages to joint venture company- Payment in lieu of restrictive covenants as to manufacture- Assessee continuing business using its own logo, trade name- No intention to acquire goodwill of assessee- Non-compete fee received is capital in nature

The assessee had two divisions: a transformer division manufacturing power transformers, and a tap changer division. It entered into an agreement with a German Company to sell plant and machinery of its tap changer division. Under the agreement, it undertook not to engage either directly or indirectly in the manufacture of the existing range of products. For the A. Y. 1996- 97, the assessee received a sum of Rs. 6.89 crore as a consideration for cessation of manufacturing activity. The Assessing Officer held that the receipt should be attributed to transfer of goodwill and restrictive covenants. Accordingly, he brought to tax the capital gains on the transfer of goodwill to the extent of Rs. 403.89 lakh adopting the cost of acquisition at Nil. The Commissioner (Appeals) deleted the addition holding that there was no element of goodwill in the agreement entered into by the assessee with the German company and the entire receipt should be attributed to restrictive covenants/noncompete fee. The Tribunal confirmed the decision of the Commissioner (Appeals).

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) The assessee transferred the technical know-how and other advantages to the joint venture company consisting of the assessee and the German company and the assessee continued its business using its own logo, trade name, licenses, permits and approval under an agreement with another company. The Tribunal held that there was no intention to acquire the goodwill of the assessee and, therefore, the non-compete fee received by the assessee could not be treated as payment for goodwill taxable as income. Section 55(2) (a) of the Income-tax Act, 1961, came into effect in the year 1998-99, whereas the assessment year in question was 1996-97. Therefore, there was no basis to fall back on section 55(2). The non-compete fee received by the assessee was capital in nature.”