GUFFIC CHEM P LTD Vs. CIT

JUDGEMENT

(1.) 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 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 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 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.