Madras HC rules non-compete receipts of ₹9 crore not taxable as business income under pre-amendment law, relying on Mohan Breweries and Guffic Chem.
Madras HC: Non-Compete Receipts Not Taxable as Business Income
The Madras High Court dismissed the Revenue’s appeal against the deletion of a ₹9 crore addition for non-compete fee receipts, holding that such income does not qualify as 'business income' under the pre-amended provisions of the Income Tax Act.
Relying on Commissioner of Income-Tax v. Mohan Breweries & Distilleries (P) Ltd. and the Supreme Court’s decision in Guffic Chem Pvt. Ltd. v. CIT, the Court held that non-compete payments are capital in nature if linked to transfer of goodwill or business rights, not routine trading receipts. The transaction was part of a larger asset sale and did not indicate repetitive commercial activity.
This reaffirms the capital vs revenue distinction in sale-related covenants. Taxpayers receiving non-compete fees as part of business transfers can invoke judicial precedents to argue against business income classification. Legal teams should structure agreements clearly to demonstrate non-recurring nature to avoid reassessment.
Citations
- CIT v. Mohan Breweries (1996) 222 ITR 29 (SC)
- Guffic Chem Pvt. Ltd. v. CIT (2022) 139 taxmann.com 120 (SC)
