July 2008
Sum received under non-compete agreement — Capital receipt.
By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
Reading Time 3 mins
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36 (2008) 300 ITR (AT) 113 (Delhi) (SB)
Saurabh Srivastava v. DCIT
ITA No. 3014 (Delhi) 2004
A.Y. 1998-99. Dated : 7-12-2007
S. 17(2)(v); S. 17(3)(i) and S. 28(ii)
Sum received under non-compete agreement — Held, that it is
capital receipt.
Facts :
The assessee, a computer engineer associated with software
and information technology, was the promoter, founder and the managing director
of a software company holding 866,450 shares therein. The company was taken over
by a U.K. group whereby 76% of the subscribed equity capital was agreed to be
transferred in favour of the U.K. company. In addition to share transfer
agreement, the U.K. group also entered into a non-compete agreement with the
assessee, whereby the assessee received a sum of Rs.1,07,36,570 as non-compete
fee for F.Y. 1997-98. Thereafter, under a new service agreement, the assessee
was employed as the managing director of the U.K. company and received salary
accordingly. The assessee claimed exemption of non-compete fees as being a
capital receipt.
The AO taxed the non-compete fee as revenue receipt
u/s.28(ii). The CIT(A) upheld the order of AO.
On appeal to ITAT, the Hon’ble Tribunal held that the said
non-compete fee is a capital receipt, not liable to tax and referred to the
following :
1. The non-compete agreement was independent, distinct and
separate from the service agreement.
2. It was not dependent on his continuing in employment
with the company.
3. It did not arise from employer-employee relationship.
4. The fee was received for accepting restrictive
covenants, as the assessee was restrained from carrying out any software
development activity for any other person who directly or indirectly competed
with the U.K. group.
5. Thus, the same was not taxable u/s.17.1
6. The assessee was not carrying on any business and the
non-compete fee did not arise in the course of business and hence was not
taxable as business income.
7. The same was also not liable to tax as capital gains or
as income from other sources.
Cases referred to :
(i) CIT v. Saroj Kumar Poddar, [(2005) 279 ITR 573
(Cal.)];
(ii) CIT v. A. S. Wardekar, [(2006) 283 ITR 432
(Cal.)];
(iii) Swamy (R.K.) v. Asst. CIT, [(2004) 88 ITD 185
(Chennai)] and others.
1 Clause (iii) of Ss.(3) of S. 17 was inserted w.e.f. the
Finance Act, 2001 and not with retrospective effect and hence was not
applicable for A.Y. 1998-99. However, the said amount, if received subsequent
to the introduction of the said sub-section may stand on a different footing
as compared to that, in the case discussed.
