Non compete fees cannot be taxed under the head income from salary

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH: D: NEW DELHI

BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT

AND

SHRI I. C. SUDHIR, JUDICIAL MEMBER

ITA No. 4348/Del/2011

Assessment Year: 2007- 2008

ACIT

Circle-37(1),

Room No. 401,

N. Block, Vikas Bhawan,

I.P. Estate, New Delhi.

(Appellant)

Vs.

Kanwaljit Singh,

75, Friends Colony

New Delhi-110 002.

AAXPS6495A

 (Respondent)

Appellant by: Shri R.S. Negi, Sr. DR

Respondent by:  Shri Vinod Kr. Bindal, Ms. Sweety Kothari, CAs

ORDER

PER I.C. SUDHIR, JUDICIAL MEMBER

The revenue has impugned the first appellate order on the following ground:-

“On the facts and circumstances of the case, Ld. CIT(A)- XXVIII, New Delhi erred in deleting the addition of ` 1,54,90,828/- as a question of law in involved in this case i.e., whether non-compete fee/commission is to be assessed as business income or salary income in view of specific provisions of section 17 which states that any fee, wages, commission, bonus and perquisite in lieu of salary is included in the definition of salary.”

2. At the outset of hearing Ld. AR pointed out that an identical issue under similar facts has been decided by the Tribunal in favour of the assessee in the assessment years 2003-04 to 2005-06 in ITA No. 2311 to 2313/D/2007 vide order dated 16th January, 2009 and in asstt. Year 2006- 07 in ITA No. 2022/D/2009 vide order dated 8.1.2010. Thus the issue raised in the ground during the year is fully covered in favour of the assessee.

3. Ld. DR did not dispute the above facts. He however placed reliance on the assessment order.

4. Having gone through the above cited orders of the Tribunal we find that the issue raised in the ground under similar facts has been decided by the Tribunal in favour of the assessee in the assessment year 2003-04 to 2006-07. The relevant facts are that during the year the AO made an addition of ` 1,54,90,828/- being the non-compete fees receivable by the assessee from M/s. Uzind Corporation and offered for taxation as business income following cash system of accounting . The AO alleged the claimed business income as salary. The assessee contended that the said amount was not receivable because of employer-employee relationship but as non- compete fees in lieu of not taking away the business of the said firm in terms of the agreement dated 15.3.2002. It was contended that the non compete fee has to be taxed under the head “business income” and that the assessee was having an option to adopt cash or mercantile system of accounting for its business income. Without prejudice to these submissions it was also contended that even if amount receivable from Uzind Corporation is taxable as salary on due basis, then the amount of ` 2,12,42,850/- declared as business income by the assessee on receipt basis following cash method of accounting should be reduced from the total income as the said income pertained to the preceding assessment year because an amount cannot be taxed in the two different years under different heads of income following different methods of accounting. The Ld. CIT(A) referring order of the Tribunal in the case of assessee on an identical issue for the assessment years 2003-04 to 2005-06 has decided the issue in favour of the assessee with this finding that the non-compete fees receivable in pursuant to the agreement dated 15.3.2002 is assessable as “business income” and the assessee is free to adopt cash method of accounting for his business income and the addition made by the AO of the said amount as salary was deleted. The Ld. CIT(A) has also given reference of the order of the Tribunal on the issue in the case of assessee for the assessment year 2006-07. For a ready reference the relevant para No. 17 of the order dated 16.1.2009 of the Tribunal in the case of the assessee in the assessment years 2003-04 to 2005-06 is being reproduced hereunder :-

17. “Now coming to the issue in question about the head of taxability, the provisions of Section 28(va) have been narrated above. Except from raising general argument about colourable device, lower authorities have not disputed the arguments of the assessee about applicability of Section 28(va), CIT(A) has considered the argument of the assessee and at the end held that this is a colourble device and the income is assessable under the head as salary income without commenting on inherent merits and scope of Section 28(Va). In our view, provisions of Section 28(va) are applicable to assesee’s case as a special provision derive light from the following observations of Hon’ble Supreme Court in the case of N.L. Mehta Cinema Enterprises, 208 ITR 975.”

5. Under the above circumstances we do not find reason to interfere with the first appellate order on the issue as the same is fully covered by the decision of the Tribunal in the case of the assessee itself for the earlier assessment years. The First appellate order in this regard is thus upheld.

6. The ground is accordingly rejected.

7. Consequently the appeal is dismissed.

The order is pronounced in the open court on 24th August, 2012.

                                                           Sd/-                           Sd/-

                                               (G.D. AGRAWAL)    (I.C. SUDHIR)

                                             VICE PRESIDENT   JUDICIAL MEMBER

Dated 24.8.2012

*Veena

Copy of order forwarded to:

1. Appellant

2. Respondent

3. CIT(A)

4. CIT

5. DR

By Order

Deputy Registrar, ITAT