Law: Income Tax Act, 1961

Section: 28(va)

Section 28(va) of the Income-tax Act, 1961 - Business income - Non-compete fee (Applicability of) - Assessee was directors of one 'C' Ltd. - 'C' sold one of its divisions to a company 'T' - 'T' entered into a non-compete agreements in terms of which assessee agreed and undertook not to engage in any business activity similar to that of division sold to 'T' - Revenue authorities opined that non-compete fee received by assessee was taxable as income under section 28(va) - It was undisputed that had assessee not entered into an agreement of non-compete, he would have earned amount from business carried on out of division which was sold to 'T' - Moreover, compensation received under non-compete agreement was relatable to consideration for sale of business and, for said reason also, amount was taxable under section 28(va) - Whether in view of aforesaid, impugned order passed by authorities below was to be confirmed - Held, yes [Para 11] [In favour of revenue] FACTS â–  The assessee was director of one 'C' Ltd. ('Chemito'). 'C' sold one of its divisions to a company 'T' Ltd. The said 'T' entered into agreements of non-compete and non-solicitation under which the assessee agreed and undertook not to engage in any business directly or indirectly or otherwise be involved in activity which was similar to that of the division sold to 'T'. â–  The Assessing Officer passed an assessment order under section 143(3) holding that the sum received by the assessee under non-compete agreement was revenue receipt liable to tax. â–  The Commissioner (Appeals) held that the non-compete fee was taxable as income under the provisions of section 28(va). â–  On second appeal: HELD â–  In the instant case, the amount received by the assessee was taxable under section 28(va). It is evident that had assessee not entered into an agreement of non-compete, he would have earned the amount from the business carried on out of the division which was sold to 'T' Ltd. It is the sale of the said division that has deprived him of the income and for a part of the sale consideration itself, he was required to execute an agreement of non-compete and the compensation received…

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