ITAT: Non-Compete Fee Related to Profession is Taxable only with effect from Assessment Year 2017-2018

ITAT: Non-Compete Fee Related to Profession is Taxable only with effect from Assessment Year 2017-2018

The Income Tax Appellate Tribunal (ITAT), Delhi by its division bench of Astha Chandra (Judicial Member) and Shamim Yahya (Accountant Member) held that, non-compete fee related to profession is made taxable only with effect from Assessment Year (AY) 2017-18 and the non-compete fee in relation to profession for period prior to AY 2017-18 would be treated as capital receipt.

In the present case, the assessee/appellant- Mrs. Nalini Mahajan, is an individual and doctor by profession and was running a hospital under the name and style of Mother and Child New Delhi. A ‘Service Agreement,’ was executed between Nova Pulse IVF Clinic Pvt. Ltd. and the assessee, Nalini Mahajan.

As per the agreement company (Nova Pulse IVF Clinic Pvt. Ltd. and the assessee. After reproducing a certain portion of the agreement, the Assessing Officer (AO) found that the assessee has provided her professional services to Nova Pulse IVF Clinic Pvt. Ltd. and the assessee.

The AO noted that the assessee has increased her capital by Rs. 3,20,00,000 on account of payment receipt from the said company the payment said to be for exclusive for engagement goodwill. The AO opined that the assessee had provided professional services to the company. The assessee explained that the said company had paid the amount of Rs.3,20,00,000 because the assessee had transferred her practice and associated goodwill to the company which cannot be taxed as profits and gains of business or profession.

However, the AO was not in agreement and held that the said amount was taxable in the hands of the assessee under Section 28(va) of the Income Tax Act (the Act) being value of any benefit or perquisite, arising from business or the exercise of a profession.

The assessee appealed before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) held that the assessee had provided professional expertise in the form of professional services which was being utilized by the company which was mentioned in clause 1(a), 2(a) and clause 3 of the service agreement. CIT held that however, by such method, the assessee was getting this money for her professional services only which was deliberately bifurcated into three parts to evade the tax. Thereafter, the ld. CIT(A) noted the assessee’s objection and after analyzing and without confronting to the same to the assessee, it confirmed the addition under Section 28(i) of the Act.

The ITAT on perusal of the records, noted that first there was a proper agreement which provided for the noncompete fee/goodwill. The agreement was turned down by the authorities below as it was colorable device.

“This observation was not backed by any proper reasoning. The case laws relating to the proposition was that the Revenue should only look at the agreement and not look through the binding agreements between the parties,” the bench commented.

The ITAT further observed that a sum received towards undertaking a restrictive covenant of non-imparting service to any other person and not to share associated goodwill of medical practice being in the nature of a non-compete fee is a capital receipt and not taxable under the provisions of the Act. Hence, the assessment by the AO was not sustainable.