The main legal point established in the judgment is that the non-compete fee received by the assessee is capital in nature and not taxable as income. The court emphasized the principle that liability cannot be created retrospectively and applied the provision under Section 55(2)(a) which applies only from the assessment year 1998-99.

R. Sudhakar, J.

1. This Tax Case (Appeal) filed by the Revenue as against the order dated 5.10.2007 made in I.T.A.No.1183/Mds/2002 on the file of the Income Tax Appellate Tribunal Madras 'A' Bench for the assessment year 1996-97 was admitted on the following substantial question of law:

“i) Whether on the facts and circumstances of the case, the Tribunal was right in holding that no part of the consideration should be apportioned towards goodwill, and that the entire amount should be treated as non compete fee contrary to the ruling of this Court in the case of G.D. Naidu (165 ITR 63)?”

2. The brief facts of the case in a nutshell are as follows:

The assessee company entered into an agreement with Machinenfabrik Reinhausen GmBH Germany (MR) to sell plant and machinery in respect of Tap Changer Division of the company. The business of the assessee company consisted of two division, viz., Transformer Division manufacturing power transformers and Tap Changer Division. As per the agreement, the assessee undertook not to engage either directly or indirectly in the manufacture of existing range of products. On the basis of the agreement for cessation of the manufacturing activity, especially “D” and “V” type tap changers including MA2 and MA9 drive mechanism, a sum of Rs.6.89 crores (approx.) was received by the assessee as a consideration for complying with the terms of agreement and claimed the same as exempt as capital receipt. However, the Assessing Officer held that there was absolute transfer of business's independent unit with all tangible and intangible asset. The Assessing Officer further held there was a separate consideration received for the sale of plant and machinery and related equipments, and hence, the receipt should be attributed to transfer of goodwill and restrictive covenants. Accordingly, the Assessing Officer brought to the tax the amount from capital gains in respect of the transfer of goodwill to the extent of 403.89 lakhs by adopting the cost of acquisition at nil.

3. Aggrieved by the said order of the Assessing Officer, the assessee pursued the matter before the Commissioner of Income Tax (Appeals), who accepted the contention of the assessee, thereby allowed the appeal holding that there was no element of goodwill in the agreement entered into by the assessee with MR in regard to the transfer of business and non-compete clause in the agreement and hence, the entire receipt should be attributed to restrictive covenants/non-compete fee. Accordingly, the Commissioner of Income Tax (Appeals) deleted the addition.

4. Not satisfied with the order of the Commissioner of Income Tax (Appeals), the Revenue pursued the matter before the Income Tax Appellate Tribunal.

5. The Tribunal, by following the decision in the case of DCIT V. Indian Syntans Investments (P) Ltd. (2007) (106) TTJ 388), dismissed the appeal holding as follows:

“3. In this case there is no dispute that the assessee company has transferred the technical know-how or any other advantage to the joint venture comprising the assessee company and MR. Under similar circumstances this Tribunal, to which one of us the Accountant Member was a party, has held in the case of DCIT vs. Indian Syntans Investments (P) Ltd. (2007) (106 TTJ 388) held that the assessee company surrendered all its trade names, customers list, suppliers list, licenses, permits, approval under an agreement with another company, and the latter having continued the business using its own logo and trade names, there was no intention to acquire the goodwill of the assessee and therefore, the non-compete fee received by the assessee cannot be treated as goodwill and it is not taxable as income. The recourse to sec.55(2) can be made only from the Asst. year 1998-99 in respect of consideration received for the transfer thereof, which includes extinguishment or curtailment of such right. In this connection the ld. Counsel for the assessee has relied on the CBDT Instruction No.1964 dated 17-0