Non-Compete Fee Related To Profession Is Made Taxable Only w.e.f. AY 2017-18: ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that a non-compete fee related to a profession is made taxable only with effect from AY 2017–18, and the non-compete fee in relation to a profession for periods prior to AY 2017–18 would be treated as a capital receipt.

The bench of Astha Chandra (Judicial Member) and Shamim Yahya (Accountant Member) has decided in favor of the Assessee-doctor holding that the department has erred in looking beyond the service agreement entered into by the assessee while construing the receipts in the nature of a non-compete fee and negative covenant for not sharing her goodwill as income under Section 28(i) of the Act, where there is no proper reasoning.

The assessee/appellant is an individual and doctor by profession and was running a hospital under the name and style of Mother and Child New Delhi. A ‘Service Agreement’, was executed between Nova Pulse IVF Clinic Pvt. Ltd. and the assessee, Nalini Mahajan.

As per the agreement, the company engaged the assessee as a consultant, and the assessee has agreed to be exclusively engaged with the company for providing her professional services. The AO noted that the fee payable to the assessee by the company is to be decided by the sub-clause 2 ‘Fees’ of the service agreement executed on October 28, 2012 between Nova Pulse IVF Clinic Pvt. Ltd. and the assessee. After reproducing a certain portion of the agreement, the AO found that the assessee has provided her professional services to Nova Pulse IVF Clinic Pvt. Ltd.

The AO noted that the assessee has increased her capital on account of a payment receipt from the said company, the payment of which is said to be exclusive for engagement goodwill. The AO was of the opinion that the assessee had provided professional services to the company.

The assessee explained that the company has paid the amount because the assessee has transferred her practice and associated goodwill to the company, which cannot be taxed as profits and gains of business or profession.

However, the AO was not in agreement, and he held that the amount was taxable in the hands of the assessee because it was the value of any benefit or perquisite, arising from business or the exercise of a profession.

The assessee appealed before the CIT (A). The CIT(A) held that the assessee has provided professional expertise in the form of professional services that are being utilized by the company, as mentioned in the service agreement. However, by such a method, the assessee gets this money only for her professional services, which are deliberately bifurcated into three parts to evade the tax. The CIT(A) noted the assessee’s objection and, after analyzing it, confirmed the addition under Section 28(i).

The tribunal noted that there is a proper agreement that provides for the non-competition fee/goodwill. The agreement has been turned down by the authorities below as it is a colorable device. The observation is not backed by any proper reasoning.

The tribunal held that a sum received towards undertaking a restrictive covenant of non-imparting service to any other person and not to share associated goodwill of medical practice being in the nature of a non-compete fee is a capital receipt and not taxable under the provisions of the Act. Hence, the assessment by the AO is not sustainable.

Case Title: Nalini Mahajan Versus ACIT

Citation: ITA No.3130/DEL/2018

Date: 06.04.2023

Counsel For Appellant: Gaurav Jain

Counsel For Respondent: Sumit Kumar Verma

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