The Telangana High Court ruled that the money received by the assessee under an agreement to refrain from competing in business is considered a capital receipt and is not subject to tax.

The Telangana High Court ruled that the money received by the Assessee from an agreement to avoid competing business is considered a Capital Receipt and is not subject to tax. This decision was made in an Income Tax Tribunal Appeal under Section 260A of the Income Tax Act, 1961, brought by the Revenue. A Division Bench, led by Chief Justice Alok Aradhe and Justice J. Sreenivas Rao, stated, “The Tribunal’s conclusion that the amount received is a capital receipt is based on careful evaluation of the evidence. This conclusion cannot be seen as unreasonable. It is established that this Court cannot challenge factual findings under Section 260A unless they are proven to be unreasonable.”

The Appeal concerned the assessment year (A.Y.) 2000-01. It was accepted based on the key legal question: “Is the Income Tax Appellate Tribunal’s finding that the Rs.6 crores received by the Assessee from PFIZER Company is a capital receipt not subject to tax, correct in law, considering the relevant facts evaluated by the Assessing Officer and confirmed by the Appellate Authorities?”

The taxpayer was involved in making and selling the Hepatitis-B Vaccine branded as “Shanvac-B.” They had their own Research and Development team and claimed to be the first in India to create this vaccine. In 2000, they signed a co-marketing deal with PFIZER Ltd. According to this agreement, the taxpayer would produce the vaccine in large amounts for PFIZER, which would handle its promotion, marketing, and sales. The taxpayer received Rs. 6 crores from this co-marketing agreement. They filed their income tax return for the assessment year 2000-01 but received a notice in 2002 under Section 148 of the Income Tax Act. The Rs. 6 crores was classified as a revenue receipt.

Unhappy with this decision, the taxpayer appealed, but the Commissioner of Income Tax (Appeals) upheld the assessment and rejected the appeal. The taxpayer then took the case to the Income Tax Appellate Tribunal (ITAT), which determined that the Rs. 6 crores was not just for transferring capital assets but also for giving up certain enduring rights and accepting specific restrictions. The ITAT concluded that this amount should not be considered a revenue receipt. Consequently, the taxpayer went to the High Court. After reviewing the arguments, the High Court stated that the payment was made because the taxpayer had given up rights to a capital asset, specifically a patent and trademark. The agreement involved a negative or restrictive covenant, and the payment was for the rights surrendered under this agreement.

The Court stated that giving up rights harms the company’s ability to make profits, making it a capital receipt. It concluded, “Thus, the main legal question posed by this Court is answered negatively and in favor of the assessee.” As a result, the High Court rejected the Appeal.

Cause Title: The Commissioner Of Income Tax v. M/s. Satiofi Healthcare India Private Limited