GUFFIC CHEM P. LTD. ETC.versusC.L.T., BELGAUM & ANR.

                   (2011] 3 S.C.R. 899


              GUFFIC CHEM P. LTD. ETC.                      A
                            v.
                 C.l.T., BELGAUM & ANR.
             (Civil Appeal No. 2522 of 2011)
                    MARCH 16, 2011
                                                            B
         [S.H. KAPADIA, CJI, K.S. PANICKER
  RADHAKRl~h.~.~.N AND SWATANTER KUMAR, JJ.]


    INCOME TAX ACT, 1961:
    C~pital receipt -Assessment year 1997-98 -Payment C
received under an agreement not to compete (negative
covenant) -Held: Compensation attributable to a negative!
restrictive covenant during the relevant assessment year was
a capital receipt not taxable under the Act -It became taxable
only w. e.f. 1. 4. 2003 -A liability cannot be created D
restrospectively-s.28 (va) is a mandatory and not
clarificatory.
     During theassessment year 1997-1998, the assessee
received Rs. 50 lakhs as non-competition fee in E
consideration of an agreement that contained prohibitive/
restrictive covenant. The assessee agreed to transfer its
trade marks to transferee company and in consideration
of such transfer on the terms and conditions appearing
in the agreement, the assessee agreed that it would not F
carry on directly or directly business that was being
carried on by it till that time. The Commissioner of Income
Tax (Appeals) while overruling the decision of the AO held
that the amount received by the assessee from transferee
company was a capital receipt not taxable under the
Income Tax Act, 1961. The decision was affirmed by the G
Tribunal: The High Court reversed the judgment of the
Tribunal.
    In the appeal filed by the Revenue, the question for
                           899                              H
    900      SUPREME COURT REPORTS              (2011] 3 S.C.R.

A consideration before the Court was: whether a payment
  under an agreement not to compete (negative covenant
  agreement) is a capital receipt or a revenue receipt.

          Allowing the appeal, the Court

B     HELD: 1.1. 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
C loss of agency is a revenue receipt whereas the
  compensation attributable to a negative/restrictive
  covenant is a capital receipt. [Para 5) [903-D-E]

        Gil/anders Arbuthnot and Co. Ltd. v. CIT, Calcutta 53 ITR
    283 - relied on.
0
       1.2. The High Court has misinterpreted the judgment
  of this Court in Gil/anders' case. In the instant case, the
  Department has not impugned the genuineness of the
  transaction. The High Court has erred in Interfering with
E the concurrent findings of fact recorded by the CIT (A)
  and the Tribunal. [Para 7) [904-D-E]
         1.3. One more aspect needs to be highlighted.
   Payment received as non-competition fee under a
F negative covenant was always treated as a capital receipt
   till the assessment year 2003-04. In order to put an end
   to such litigations, Parliament stepped in to specifically
   tax such receipts under non-competition agreement with
   effect from 1.4.2003. It is only by Finance Act, 2002 with
G effect from 1.4.2003 that the said capital receipt is now
   made taxable [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
H
 GUFFIC CHEM P. LTD. ETC. v. C.l.T., BELGAUM & 901
                    ANR.

from 1.4.2003. It is well settled that a liability cannot be A
created retrospectively. In the instant case,
compensation received under Non-Competition
Agreement became taxable as a capital receipt and not
as a revenue receipt by specific legislative mandate by
s. 28(va) and that too with effect from 1.4.2003. Therefore, B
the said s. 28(va) is amendatory and not clarificatory.
[Para 7] [904-E-H]

     Commissioner of Income-Tax, Nagpur v. Rai Bahadur
Jairam Valji, 35 ITR 148 -referred to.
                                                                  c
     1.4. The impugned judgment of the High Court is set
aside and the order of the Tribunal restored. [Para 8] (905-
D]
                     Case Law Reference:
                                                                  D
     53 ITR 283                  approved             para 4
     35 ITR 148                  referred to          para 7
    CIVIL APPELLATE JURISDICTION : Civil Appeal No.
2522 of 2011                                                      E

     From the Judgment & Order dated 29.10.2009 of the High
Court of Karnataka, Circuit Bench at Dharwad in ITA No. 985
of 2006.

     B. Bhattacharya, ASG, Porus, F. Kaka, R.P. Bhatt, Manish
                                                                  F .
Kanth, Rustom B. Hathikhanawala, Fuzail Ahmad Ayyubi,
Naresh Kaushik, Arijit Prasad, Ajay Singh, B.V. Bairam Das,
Ajay Singh, K. Sampath and Rani Chhabra for the appearing
parties.
                                                                  G
     The Judgment of the Court was delivered by
     S.H. KAPADIA, CJI. 1. Leave granted.
    2. Whether a payment under an agreement not to compete
(negative covenant agreement) is a capital receipt or a revenue   H
    902      SUPREME COURT REPORTS                   (2011) 3 S.C.R.

A   receipt is the question which arises for determination in this
    case?

    FACTS
       3.During the assessment year 1997-98 the assessee
B received Rs. 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
C 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
D 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
E in consideration of which a non-competition fee of Rs. 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.
F      4.0n perusal of the said agreement, the CIT (A) while
  overruling the decision of AO observed that the AO had not
  disputed the fact that Rs. 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
G 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
H entered into an agreement with the assessee restricting the
  GUFFIC CHEM P. LTD. ETC. v. C.l.T., BELGAUM &               903
           ANR. [S.H. KAPADIA, CJI.]

 assessee from manufacturing the drugs mentioned in the               A
 Schedule and consequently the CIT(A) held that the said sum
 of Rs. 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.         B
 However, the High Court reversed the decision of the Tribunal
 by placing reliance on the judgment of the Supreme Court in
 the case of Gil/anders 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      c
 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             D
 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.                                                E
        6. The above dichotomy is clearly spelt out in the judgment
  of this Court in Gil/anders' 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 F
 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. G
 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 H
    904     SUPREME COURT REPORTS                    [2011] 3 S.C.R.

A 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
8 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
C 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
D has misinterpreted the judgment of this Court in Giflanders' 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
E 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:
F 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
G 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
H and not clarificatory. Lastly, in Commissioner of Income-Tax,
 GUFFIC CHEM P. l TD. ETC. v. C.l.T., BELGAUM & 905
          ANR. [S.H. KAPADIA, CJI.]
Nagpur v. Rai Bahadur Jairam Valji reported in 35 ITR 148 it A
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 B
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 c
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. D
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 E
Investment P•t. 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.
R.P.                                           Appeal allowed.