Non-compete fees- Income or capital- Discontinuation of business pursuant to noncompete agreement- A. Y. 2000-01- Section 28(va) inserted w.e.f. 01/04/2003 is not retrospective- Amount received pursuant to negative covenant is capital receipt-

The assessee was manufacturing condoms and gloves and the LI group was in the business of manufacturing rubber contraceptives all over the world on its own and through its subsidiaries. Assessee entered into a non compete agreement with the LI group for discontinuing its condom business. LI group paid 4,99,000 pounds as noncompete fees to assessee. The assessee claimed the noncompete fees to be capital receipt. The Assessing Officer treated the amount as revenue receipt. The Tribunal held that the amount was capital receipt.

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

“i) The litmus test whether a compensation received by the assessee towards a negative covenant of noncompete clause is whether or not the impairment is one of the assessee’s sources of income and if the answer is that the injury has been caused to one of its sources of income, then it is enough to render the compensation received in that process a capital receipt. At any rate, w.e.f. April 1, 2003, by virtue of introduction of section 28(va) in the Income-tax Act, 1961 all monies received pursuant to a negative covenant become liable for the incidence of taxation, thus obliterating the distinction between the two that was available till then.

ii) The amount of 4,99,000 pounds paid by LI group was liable to be treated as a measure of compensation towards the negative covenant between the assessee and the LI group. It was not necessary that the assessee shelves all its other sources of income as well, for the receipt of compensation to amount to capital receipt.”