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Judgment
The Court : No question of law of any significance is raised by the Revenue, particularly, in the context of the show-cause notice issued by it and the
specific reasons given in the show-cause notice for the issuance thereof. The assessee in this case is a foreign company. The assessee sold its
controlling shareholding interest in a tea company to an Indian entity against valuable consideration. Along with the share purchase agreement that
was executed between the two parties, there was also a non-compete agreement that was signed which provided for substantial payment to the tune
of about Rs. 7,50,000 being paid by the Indian acquirer of the shares to the assessee herein.
The assessment in respect of the relevant year was completed by an order of December 24, 2010. A show-cause notice was thereafter issued to the
assessee under Section 263 of the Income Tax Act, 1961 on November 14, 2012 for the assessee to indicate why the non-compete premium should
not be assessed as capital gains in terms of Section 55(2)(a) read with Section 28(v-a) of the Act. Extracts from the show-cause notice of November
14, 2012 are quoted in the Appellate Tribunal’s order of March 16, 2016 assailed by the Revenue herein. Paragraphs 5 and 6 of such show-cause
notice, which indicated the reasons for the notice, are of some relevance:
“5. The aforementioned amount of Non-Compete Premium is chargeable to tax under the head ‘income from Capital Gains’ in accordance
with the provisions of section 55(2)(a) of the Act. In the case under review, it is found that there was an agreement “Not-ToCompete†with the
purchaser according to the specific terms as provided in the Non-Compete Agreement, for which M/s. Mcleod Russel India Ltd was required to pay
the Non-Compete Premium of M/s. Mcleod Russel India Ltd British £ 7,50,000 i.e. converted in Indian Rupees to Rs.6,05,25,000/-. The SPA thus
contained a prohibitory/restrictive covenant in the form of the Non-compete Agreement and the compensation in the form of Non-Compete Premium
of British £ 7,50,000 is thus clearly a capital receipt. This sum of capital receipt is required to be charged to tax under the head ‘income from
Capital Gains’. Support for the above contention is drawn from the judgement of the Hon’ble Supreme Court of India in the case of Gufic
Chem P. Ltd. reported in 332 ITR 602 [2011], wherein the Apex Court has held that payments received as noncompetition fee under a negative
covenant is in the nature of capital receipts.
“6. The above mentioned amount of Rs.6,05,25,000/- is therefore taxable under the head capital gains inasmuch as the cost of acquisition of such
right to carry on any business or right to manufacture, produce or process any article or thing is to â€" be treated as nil in accordance with the
provisions of section 55(2)(a) of the Act.â€
Prior to an amendment brought about with effect from April 1, 2003, non-compete premium was judicially regarded as a capital receipt and there is a
Supreme Court judgment reported at 332 ITR 602 confirming such legal position. However, even in such judgment, the Supreme Court noticed that
upon the amendment being introduced and sub-section (v-a) being brought into Section 28 of the Act, non-compete premium had to be regarded as a
business income or revenue receipt.
The show-cause notice issued under Section 263 of the Act referred to the Supreme Court judgment but failed to make the distinction in the Supreme
Court judgment as to the manner of treatment of any non-compete premium on the basis of whether such premium was received prior to Section 28 of
the Act being amended to incorporate sub-section (v-a) therein.
It is now sought to be suggested on behalf of the Revenue that in view of the proviso to Section 28(v-a) of the Act the non-compete premium in this
case ought to have been chargeable under the head of capital gains. However, such argument cannot be accepted as it was not indicated in the show-
cause notice which limited the reasons for issuance thereof in paragraphs 5 and 6 quoted above and referred merely to the Supreme Court judgment
without the change of law that was noticed in such judgment.
The Tribunal was guided by the same Supreme Court judgment and took into account the change in law upon the introduction of sub-section (v-a) in
Section 28 of the Act. In the light of the detailed discussion on the subject and the Tribunal dealing with the case as made out in the show-cause
notice, the order calls for no interference as no substantial question of law arises therefrom. ITAT No.345 of 2016 and GA No.3345 of 2016 are
dismissed. There will be no order as to costs.