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

Citation: [2011] 3 S.C.R. 899 · Decided: 16-03-2011 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Appeal(s) allowed

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Judgment (excerpt)

(2011] 3 S.C.R. 899 
GUFFIC CHEM P. LTD. ETC. 
v. 
C.l.T., BELGAUM & ANR. 
(Civil Appeal No. 2522 of 2011) 
MARCH 16, 2011 
[S.H. KAPADIA, CJI, K.S. PANICKER 
RADHAKRl~h.~.~.N AND SWATANTER KUMAR, JJ.] 
INCOME TAX ACT, 1961: 
A 
B 
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 
0 283 - relied on. 
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. 
1.4. The impugned judgment of the High Court is set 
aside and the order of the Tribunal restored. [Para 8] (905-
D] 
53 ITR 283 
35 ITR 148 
Case Law Reference: 
approved 
referred to 
para 4 
para 7 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 
c 
D 
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 
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 

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