Restraining Business Activity Can Be Taxing

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: With effect from the Assessment Year 2003-04, relevant to the financial year which will end on 31st March, 2003, any sum receivable in cash or kind under an agreement for not carrying out any activity in relation to a business, will be treated as profits or gains of a business or profession under section 28(v)(a) of the Income-tax Act, 1961. Likewise, with effect from the same financial year, where an amount is paid for surrendering a right to carry on any business which is considered to be a capital asset, the cost of acquisition thereof will be treated as nil under section 55(2)(a), so that the full amount received for surrendering such right would be liable to capital gains tax. In fact, section 28(v)(a) has made far reaching amendments to bring within the tax net any amount receivable in cash or kind under an agreement for not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services.

However, where there is transfer of right to manufacture or process any article or to carry on any business which is a capital asset, the full amount would be liable to capital gains tax and would not be treated as business profits. The word “agreement” used in section 28(v)(a) is wide enough to include any arrangement or understanding or action in concert, whether or not such arrangement, understanding or action is oral or in writing; or whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings.

With effect from the aforesaid assessment year 2003-04, the general principle of law which has held the field for more than fifty years has been superseded. In Divecha v CIT (48 ITR 222) where compensation was paid to the assessees for termination of a long-standing agreement under which they were the sole distributors of goods which constituted the preponderant part of their turnover, the Supreme Court held that the agreement was a capital asset and compensation a capital receipt.