REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.2522 OF 2011
(arising out of S.L.P. (C) No. 6081 of 2010)
Guffic Chem P. Ltd. ...
Appellant(s)
versus
C.I.T., Belgaum & Anr. ...
Respondent(s)
WITH
Civil Appeal No.2523 of 2011 (arising out of S.L.P. (C) No.
222 of 2011)
J U D G M E N T
S.H. KAPADIA, CJI
Leave granted.
2. Whether a payment under an agreement not to
compete (negative covenant agreement) is a capital receipt
or a revenue receipt is the question which arises for
determination in this case?
FACTS
3. During the assessment year 1997-98 the assessee
received `50,00,000/- (Rupees Fifty Lakhs only) from
Ranbaxy as non-competition fee. The said amount was
paid by Ranbaxy under an agreement dated 31.3.1997.
Assessee is a part of Gufic Group. Assessee agreed to
transfer its trademarks to Ranbaxy and in consideration of
such transfer 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.
Assessee was carrying on business of manufacturing,
selling and distribution of pharmaceutical and medicinal
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 prohibitive/restrictive covenant in
consideration of which a non-competition fee of `50 lakhs
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.
4. On perusal of the said agreement, the CIT (A) while
overruling the decision of AO observed that the AO had not
disputed the fact that `50 lakhs 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 CIT(A) held that the said sum of `50 lakhs
received by the assessee from Ranbaxy was a capital receipt
not taxable under the Income Tax Act, 1961 (hereinafter for
short `the 1961 Act') 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, Calcutta
53 ITR 283. Against the said decision of the High Court
assessee has come to this Court by way of petition for
special leave to appeal, hence this civil appeal.
DECISION
5. The position in law is 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/restrictive covenant is a capital receipt.
6. The above dichotomy is clearly spelt out in the
judgment of this Court in Gillanders' case (supra) in which
the facts were as follows. The assessee in that case carried
on business in diverse fields besides acting as managing
agents, shipping agents, purchasing agents and secretaries.
The assessee also acted as importers and distributors on
behalf of foreign principals and bought and sold on its own
account. Under an agreement which was terminable at will
assessee acted as a sole agent of explosives manufactured
by Imperial Chemical Industries (Export) Ltd. That agency
was terminated and by way of compensation the Imperial
Chemical Industries (Export) Ltd. paid for first three years
after the termination of the agency two-fifths of the
commission accrued on its sales in the territory of the
agency of the appellant and in addition in the third year full
commission was paid for the sales in that year. The
Imperial Chemical Industries (Export) Ltd. took a formal
undertaking from the assessee to refrain from selling or
accepting any agency for explosives.
7. Two questions arose for determination, namely,
whether the amounts received by the appellant for loss of
agency was in normal course of business and therefore
whether they constituted revenue receipt? The second
question which arose before this Court was whether the
amount received by the assessee (compensation) on the
condition not to carry on a competitive business was in the
nature of capital receipt? It was held that the
compensation received by the assessee for loss of agency
was a revenue receipt whereas compensation received for
refraining from carrying on competitive business was a
capital receipt. This dichotomy has not been appreciated
by the High Court in its impugned judgment. The High
Court has misinterpreted the judgment of this Court in
Gillanders' case (supra). In the present case, the
Department has not impugned the genuineness of the
transaction. In the present case, we are of the view that
the High Court has erred in interfering with the concurrent
findings of fact recorded by the CIT(A) and the Tribunal.
One more aspect needs to be highlighted. Payment
received as non-competition fee under a negative covenant
was always treated as a capital receipt till the assessment
year 2003-04. It is only vide Finance Act, 2002 with effect
from 1.4.2003 that the said capital receipt is now made
taxable [See: Section 28(va)]. The Finance Act, 2002 itself
indicates that during the relevant assessment year
compensation received by the assessee under non-
competition agreement was a capital receipt, not taxable
under the 1961 Act. It became taxable only with effect from
1.4.2003. It is well settled that a liability cannot be created
retrospectively. In the present case, compensation received
under Non-Competition Agreement became taxable as a
capital receipt and not as a revenue receipt by specific
legislative mandate vide Section 28(va) and that too with
effect from 1.4.2003. Hence, the said Section 28(va) is
amendatory and not clarificatory. Lastly, in Commissioner
of Income-Tax, Nagpur v. Rai Bahadur Jairam Valji
reported in 35 ITR 148 it was held by this Court that if a
contract is entered into in the ordinary course of business,
any compensation received for its termination (loss of
agency) would be a revenue receipt. In the present case,
both CIT (A) as well as the Tribunal, came to the conclusion
that the agreement entered into by the assessee with
Ranbaxy led to loss of source of business; that payment
was received under the negative covenant and therefore the
receipt of `50 lakhs by the assessee from Ranbaxy was in
the nature of capital receipt. In fact, in order to put an end
to the litigation, Parliament stepped in to specifically tax
such receipts under non-competition agreement with effect
from 1.4.2003.
8. For the above reasons, we set aside the impugned
judgment of the Karnataka High Court dated 29.10.2009
and restore the order of the Tribunal. Consequently, the
civil appeal filed by the assessee is allowed with no order as
to the costs.
Civil Appeal No.2523 of 2011 (arising out of SLP(C) 222/2011)
9. For the reasons given hereinabove, we affirm the
judgment of the Delhi High Court in CIT Vs. Mandalay
Investment Pvt. Ltd. decided on 29.07.2009 in ITA No.
728/2009. Consequently, we dismiss the civil appeal filed
by the Department against the decision of the Delhi High
Court dated 29.07.09 with no order as to the costs.
...........................................CJI
(S. H. Kapadia)
.............................................J.
(K.S. Panicker Radhakrishnan)
.............................................J.
(Swatanter Kumar)
New Delhi;
March 16, 2011
