A non-compete fee related to a profession is only taxable with effect from the A.Y. 2017–18, according to a decision made by the Delhi Bench of the Income Tax Appellate Tribunal (ITAT). Moreover, a professional’s non-compete fee for periods prior to AY 2017–18 would be considered a capital receipt.
The assessee-doctor won the case after the department made a mistake by interpreting the slips as a non-compete fee and negative contract for not sharing her goodwill as income under Section 28(i) of the Act, where there was no reasonable justification. The bench of Astha Chandra (Judicial Member) and Shamim Yahya (Accountant Member) made the decision.
The assessee is a doctor by profession and was running a hospital for Mother and Child, as its name indicates. There was a ‘Service Agreement’ between Nova Pulse IVF Clinic Pvt. Ltd. and the appellant, Nalini Mahajan.
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According to the agreement, the assessee was occupied with the company as a consultant and agreed to be completely occupied with the company for giving her professional services. It was observed by the AO that the fee to be paid to the appellant by the company is to be decided following the sub-clause 2 ‘Fees’ of the service agreement carried out on October 28, 2012, between Nova Pulse IVF Clinic Pvt. Ltd. and the appellant.
The AO noted that the appellant had raised her capital as a result of receiving payment from the entity stated above, which is claimed to be completely for goodwill. The AO noted that the assessee had provided the organisation with professional services.
According to the appellant, the corporation paid the sum because the services and goodwill have been transferred to the company, which are not taxable as earnings and gains from a trade or profession.
The AO was not in the contract, and he understood that the sum was taxable in the appellant’s hands since it represented the value of any advantage gained from doing business or practising a profession.
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An appeal was filed before CIT (A). The CIT(A) found out that, in accordance with the terms of the service agreement, the assessee has provided the company with professional competence in the form of professional services that are being used by the business. However, by doing this, the assessee only receives payment for her professional services, which are intentionally divided into three parts to evade taxes. The CIT(A) noted that the assessee has an objection and confirmed the addition under Section 28(i).
The tribunal noted that the non-competition fee and goodwill are covered by a solid agreement. Because it is a colourable device, the authorities have reduced the agreement. No reasonable measures can be used to justify the observation.
The tribunal noted that a sum received to carry out a limited contract of not imparting service to any other person and not sharing the associated goodwill of a medical practice—which takes the form of a non-compete fee—is a capital receipt and is not taxable under the Act’s requirements. Therefore, the AO’s assessment cannot be supported.
| Case Title | Mrs. Nalini Mahajan Vs ACIT |
| Citation | ITA No.3130/DEL/2018 |
| Date | 06.04.2023 |
| Assessee by | Sh. Gaurav Jain, Adv. & Sh. Sudarshan Roy, Adv. |
| Revenue by | Sh. Sumit Kumar Verma, Sr. DR |
| Delhi ITAT | Read Order |
