[Gufic Chem P. Ltd. v. CIT, (2011) 332 ITR 602 (SC)]
During the A.Y. 1997-98 the assessee received Rs.50,00,000 from Ranbaxy as non-competition fee. The said amount was paid by Ranbaxy under an agreement dated 31st March, 1997. The assessee was a part of the Guffic group. The assessee had agreed to transfer its trade marks to Ranbaxy and in consideration of such transfer the assessee agreed that it shall not carry on directly or indirectly the business hitherto carried on by it on the terms and conditions appearing in the agreement. The assessee was carrying on the business of manufacturing, selling and distribution of pharmaceutical and medical preparations including products mentioned in the list in schedule A to the agreement. The agreement defined the period, i.e., a period of 20 years commencing from the date of the agreement. The agreement defined the territory as territory of India and rest of the world. In short, the agreement contained prohibitory/ restrictive covenant in consideration of which a non-competition fee of Rs.50 lakh was received by the assessee from Ranbaxy. The agreement further showed that the payment made to the assessee was in consideration of the restrictive covenant undertaken by the assessee for a loss of source of income.
On perusal of the said agreement, the Commissioner of Income-tax (Appeals) while overruling the decision of the Assessing Officer observed that the Assessing Officer had not disputed the fact that Rs.50 lakh received by the assessee from Ranbaxy was towards non-competition fee; that under the said agreement the assessee agreed not to manufacture, itself or through its associate, any of the products enlisted in the schedule to the agreement for 20 years within India and the rest of the world; that the assessee and Ranbaxy were both engaged in the business of pharmaceuticals and to ward off competition in manufacture of certain drugs, Ranbaxy had entered into an agreement with the assessee restricting the assessee from manufacturing the drugs mentioned in the schedule and consequently the Commissioner of Income-tax (Appeals) held that the said sum of Rs.50 lakh received by the assessee from Ranbaxy was a capital receipt not taxable under the Income-tax Act, 1961 during the relevant assessment year. This decision was affirmed by the Tribunal. However, the High Court reversed the decision of the Tribunal by placing reliance on the judgment of the Supreme Court in the case of Gillanders Arbuthnot and Co. Ltd. v. CIT, (1964) 53 ITR 283. Against the said decision of the High Court the assessee went to the Supreme Court by way of petition for special leave to appeal.
The Supreme Court held that the position in law was clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt, whereas the compensation attributable to a negative covenant is a capital receipt. The above dichotomy is clearly spelt out in the judgment of this Court in Gillanders’ case (supra).
The Supreme Court observed that this dichotomy had not been appreciated by the High Court in its impugned judgment. The High Court misinterpreted the judgment of this Court in Gillanders’ case (supra). In the present case, the Department had not impugned the genuineness of the transaction. In the present case, the High Court had erred in interfering with the concurrent finding of the fact recorded by the Commissioner of Incometax (Appeals) and the Tribunal. According to the Supreme Court one more aspect needed to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt prior to the A.Y. 2003-04. It is only vide the Finance Act, 2002 with effect from 1st April, 2003 that the said capital receipt was made taxable [see section 28(va)]. The Finance Act, 2002 itself indicated that during the relevant assessment year compensation received by the assessee under non-compensation agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1st April, 2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under the non-compensation agreement was in the nature of a capital receipt and not a revenue receipt. The said section 28(va) was amendatory and not clarificatory.
For the above reasons, the Supreme Court set aside the impugned judgment of the Karnataka High Court dated 29th October, 2009, and restored the order of the Tribunal. Consequently, the civil appeal filed by the assessee was allowed with no order as to the costs.
