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