Facts of the Case

The assessee, Mr. Satya Sheel Khosla, was the promoter and Director of Integra Overseas Pvt. Ltd., a company engaged in manufacturing two-wheelers in India. Subsequently, Suzuki Motor Corporation became the major shareholder, and the company was renamed Suzuki Motorcycle India Pvt. Ltd.

After exiting the joint venture and stepping down as Managing Director, the assessee entered into an agreement under which Suzuki agreed to pay ₹1.32 crore per annum for two years in consideration of the assessee not extending his regulatory knowledge, negotiating expertise, and strategic planning support to any other player in the two-wheeler segment in India.

The assessee treated the amount as a capital receipt not chargeable to tax, whereas the Revenue treated it as taxable income.

Issues Involved

  1. Whether compensation received under a restrictive covenant for not sharing expertise amounts to non-compete fee.
  2. Whether such receipt is taxable under Section 28(va).
  3. Whether such compensation can be taxed under Section 17(3) as profits in lieu of salary.
  4. Whether such receipt retains the character of capital receipt under the law prevailing before the 2017 amendment.

Petitioner’s Arguments (Revenue)

  • The Revenue argued that the compensation was in substance a non-compete fee and therefore taxable.
  • It contended that Section 28(va) already covered restrictive covenants relating to business activities even before the amendment.
  • The Revenue emphasized that the amount was revenue in nature and should be taxed accordingly.

Respondent’s Arguments (Assessee)

  • The assessee argued that the payment was not for carrying on or refraining from business competition but merely for withholding personal knowledge and expertise.
  • It was contended that Section 28(va), prior to amendment, applied to business and not professional restrictions.
  • Reliance was placed on Supreme Court judgments treating such compensation as capital receipts.

Court Findings / Order

The Delhi High Court held that:

  • The nature of such receipts is fact-dependent and cannot be determined by a rigid formula.
  • The assessee had dual capacity as shareholder and Managing Director.
  • The payment under the restrictive covenant was in the nature of capital receipt.
  • Prior to the 2017 amendment, compensation for professional restrictive covenants was not taxable under Section 28(va).
  • The ITAT’s view was legally plausible and supported by judicial precedents.

Accordingly, the appeal of the Revenue was dismissed.

Important Clarification

The Court clarified that prior to the Finance Act, 2016 amendment (effective 01.04.2017), compensation received under restrictive covenants concerning professional expertise was outside the tax net under Section 28(va). After the amendment, such professional restrictive covenant receipts are taxable.

Sections Involved

  • Section 28(va) – Taxability of non-compete fee / restrictive covenant receipts
  • Section 17(3) – Profits in lieu of salary
  • Section 260A – Appeal before High Court
  • Finance Act, 2016 Amendment (effective from 01.04.2017)

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:654-DB/SRB29012018ITA2892016.pdf

Top of Form

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.