SHAMIM YAHYA, A.M.: ORDER This appeal by assessee is directed against order of CIT(A)-III, Chennai-34 dt. 6th Aug., 2004 and pertains to asst. yr. 2000-01. 2 . issue raised is that CIT(A) erred in confirming action of AO in treating non-compete fee as revenue receipt. 3. facts of case are briefly stratified as under : M/s TTK Bio-med Ltd. was merged with TTK Healthcare Ltd. (formerly known as TTK Pharma Ltd.) w.e.f. 1st July, 1999. M/s TTK Bio-med Ltd. was manufacturing condoms and gloves and they entered into non-compete agreement with London International Group for discontinuing their condom business. London International Group is in business of manufacturing and selling rubber contraceptives all over world on its own and through its subsidiaries, joint venture companies and in India it is in joint venture with M/s TTK & Co. (joint venture company TTK-LIG). London International Group paid 4,99,000 pounds as non-compete fee to M/s TTK Bio-med Ltd. Since TTK Bio- med Ltd. has merged with assessee company, transaction has been claimed by assessee company for asst. yr. 2000-01. assessee company has claimed that amount of Rs. 3,44,92,800 which was received by it from London International Group was not taxable in its hands because whole structure of assessee s profit-making apparatus, being advantage of enduring nature and hence capital asset was given up by assessee company. It has relied on following decisions : (i) CWT vs. G.D. Naidu (1965) 58 ITR 301 (Mad); (ii) CIT vs. Saraswathi Publicities (1981) 132 ITR 207 (Mad); (iii) P.H. Divecha vs. CIT (1960) 38 ITR 209 (Bom); (iv) Gillanders Arbuthnot & Co. vs. CIT (1970) 76 ITR 160 (Cal); (v) CIT vs. Prabhu Dayal (1968) 67 ITR 138 (P&H). On other hand, AO has disallowed non-compete fee for following reasons : "The assessee was earlier doing condom manufacturing (by TTK Bio-med L t d . ) and marketing (by TTK Pharma Ltd. which now renamed as TTK Healthcare Ltd.) business and non-compete fee received by it was compensation for loss of business profit in next few years. It is taxable in its hands as receipts under s. 10(3) of IT Act. said receipts were not casual and non-recurring in nature and were taxable under s. 10(3). Reliance can be placed on Hon ble Supreme Court judgment in case of Ram Kumar Agarwalla & Bros. vs. CIT (1967) 63 ITR 622 (SC) as well as Hon ble Madras High Court s decision in case of CIT vs. Mineral Mining Co. (P) Ltd. (1991) 96 CTR (Mad) 24 : (1992) 194 ITR 258 (Mad) wherein similar issue has been decided in favour of Department. It may also be mentioned that said intention of legislature has been incorporated in IT Act by introducing s. 28(va) w.e.f. 1st April, 2003 whereby non-compete fee has been made as taxable income." 4 . Upon assessee s appeal learned CIT(A) relied upon same decisions as quoted by AO. Apart from above, learned CIT(A) further noted that assessee company has not completely given up whole structure of its profit-making apparatus as per cls. (iv) and (vii) of non- compete agreement. Accordingly, learned CIT(A) upheld AO s action. Aggrieved by aforesaid order, assessee is in appeal before us. 5. We have heard rival contentions and perused relevant records. learned Departmental Representative vehemently supported order of authorities below. He vehemently contended that there was no destruction of profit-making apparatus. 6. On other hand, assessee s submissions are as under : CIT(A) erred in brushing aside terms of agreement which CIT(A) erred in brushing aside terms of agreement which clearly stipulate that foreign company has paid Rs. 3,44,92,800 towards non- compete fee. CIT(A) ought to have held that non-compete fee is capital receipt and not assessable to capital gains on basis of various decisions furnished before him. CIT(A) ought to have appreciated that foreign company had apprehended that if assessee were to start competing business it would adversely affect their business in initial period and therefore paid assessee sum of Rs. 3,44,92,800 towards non-compete fee. CIT(A) ought to have appreciated that main purpose of non- compete agreement was to restrain assessee from carrying on business and as such any prudent person would certainly insist on forwarding enquiries received by assessee to foreign company. TTK Bio-med had two divisions, namely, condoms division and gloves division. TTK Bio-med was mainly supplying to Government tenders and to export tenders. There were no brands in TTK Bio-med Ltd. goods were supplied with clients brands. TTK LIG who is in same line found assessee was competing with them in Government tenders and tender for export. Hence, LIG London who joint venture partner in TTK LIG approached assessee to discontinue business. Non-compete amount was paid to discontinue business. payment w s for closure of business which resulted in impairment of profit-earning capacity of business. There was no transfer of brands by TTK Bio-med Ltd. nor any selling infrastructure. assessee was permitted to complete only existing contracts within year and as incidental point they said assessee may pass on enquiries received by them. In actuality, there was no such enquiry passed on. Further, learned counsel of assessee placed reliance upon Hon ble apex Court decision in case of Oberoi Hotel (P) Ltd. vs. CIT (1999) 152 CTR (SC) 474 : (1999) 236 ITR 903 (SC). 7 . Upon giving careful consideration of submissions above, we adjudicate matter as under : Firstly, AO has held that sum involved is taxable in hands of assessee under s. 10(3) of IT Act as said sum is not casual and non- recurring in nature. We find that extant provisions of s. 10(3) read as under : "(3) any receipts which are of casual and non-recurring nature, to extent such receipts do not exceed five thousand rupees in aggregate : Provided that where such receipts relate to winnings from races including horse races, provisions of this clause shall have effect as if for words five thousand rupees , words two thousand five hundred rupees had been substituted : Provided further that this clause shall not apply to (i) capital gains chargeable under provisions of s. 45; or (ii) receipts arising from business or exercise of profession or occupation; or (iii) receipts by way of addition to remuneration of employee." Upon careful reading of aforesaid, we are unable to find any cogency in reasoning that sum involved is taxable under s. 10(3) of IT Act. 8. decisions relied upon by Revenue are dealt as under : In case of CIT vs. Mineral Mining Co. (P) Ltd. (1991) 96 CTR (Mad) 24 : (1992) 194 ITR 258 (Mad), Hon ble Madras High Court has held that, "where assessee was carrying on business of prospecting and mining, assessee and another corporation were trying to get mining lease and assessee entered into agreement with corporation that assessee would cease effort to get lease and hand over prospecting report to corporation. amount paid by corporation could not be said to be compensation for loss of enduring capital asset". In Ram Kumar Agarwalla & Bros. vs. CIT (1967) 63 ITR 622 (SC), Hon ble Madras High Court (sic-Supreme Court) was considering case where assessee and another person were having joint negotiations to purchase controlling interest in company. Another person was also negotiating and agreement was entered with that other person that, "in event of your securing for us controlling interest and upon your giving up all claims to purchase same and assigning to us and our associates any interest that you may have acquired therein, we hereby agree to pay you and your colleagues capital sum of Rs. 6,00,000". On these facts, Hon ble High Court (sic-Supreme Court) has held that same was received not in consideration of refraining from competing in purchase of controlling interest but as remuneration for services rendered. above case law are not applicable on facts of present case. 9 . We find that in CIT vs. Prabhu Dayal (Deed. by LRs.) 1972 CTR (SC) 112 : (1971) 82 ITR 804 (SC), Hon ble apex Court has held as under : "The assessee entered into agreement for exploitation of Kankar deposits. company agreed to pay commission to assessee, but it failed to do so. Compromise was arrived at for termination of agreement. Whether compensation for termination is income or capital ? assessee s activities neither in respect of services rendered by him in past nor towards accumulated commission due to him. It was paid because he gave up his right to get commission in future to which he was entitled under agreement. It was price paid for surrendering valuable right which was capital asset." 1 0 . Again in CIT vs. Best & Co. (P) Ltd. (1966) 60 ITR 11 (SC), Hon ble apex Court has held that, "While IT authorities have to gather relevant material to establish that compensation given for loss of agency was taxable income, adverse inference could be drawn against assessee if he had suppressed documents and evidence, which were exclusively within his knowledge and keeping loss of agency by assessee was only normal trading loss; covenant was independent obligation under taken by assessee not to compete with new agents in same field for specified period. It came into operation only after agency was terminated. It was wholly unconnected with assessee s agency termination therefore, that part of compensation attributable to restrictive covenant was capital receipt and hence not assessable to tax." 11. From above exposition, it is clear that sums paid pursuant to restrictive covenant as non-compete fee are not taxable as revenue receipts. fact that sum involved in this case is non-compete fee has also been accepted by AO. However, AO has proceeded on premise that in order to bring into ambit of taxation amount as involved in this case, that provision has been incorporated in IT Act by introducing s. 28(va) w.e.f. 1st April, 2003 whereby non-compete fee has been made as taxable income. Thus, it is not case of AO that sum involved is not (non) compete fee; rather he is making case for retrospective operation of s. 28(va) which was incorporated w.e.f. 1st April, 2003. However, this view is not sustainable. This Tribunal, in case of R.K. Swamy vs. Asstt. CIT (2004) 88 TTJ (Chennai) 940 : (2004) 88 ITD 185 (Chennai) has clearly held that these provisions are prospective and not retrospective. Hence, this plank of argument of AO clearly fails. 12. Another aspect held against assessee by CIT(A) is that assessee company has not completely given up whole structure of its profit- making apparatus as per non-compete agreement. 13. However, upon careful perusal of said agreement, we are of opinion that there is no basis for CIT(A) coming to said conclusion. profit-making apparatus which is subject-matter of this agreement has been undoubtedly given up. In this regard, we also place reliance upon Hon ble apex Court decision in case of Oberoi Hotel (P) Ltd. vs. CIT (supra), wherein following was expounded : "It may be broadly stated that what is received for loss of capital is capital receipt: what is received as profit in trading transaction is taxable income. But difficulty arises in ascertaining whether what is received in given case is compensation for loss of source of income, or profit in trading transaction. Where on consideration of circumstances, payment is made to compensate person for cancellation of contract which does not affect trading structure of his business, nor deprive him of what in substance is his source of income, termination of contract being normal incident of business, and such cancellation leaves him free to carry on his trade (freed from contract terminated) receipt is revenue : Where by cancellation of agency trading structure of assessee is impaired, or such cancellation results in loss of what may be regarded as source of assessee s income, payment made to compensate for cancellation of agency agreement is normally capital receipt. assessee company was operating, managing and administering many hotels belonging to others for fee at several places. As per Memorandum of Association of company, it was authorised to run hotels on its own account and also to operate, manage and administer hotels belonging to others for fee. In terms of agreement dt. 2nd Nov., 1970, company agreed to operate hotel known as Hotel Oberoi Imperial for which assessee company was to receive certain fee called management fee which was calculated on basis of gross operating profits as provided in agreement. agreement was to run for initial period of ten years; assessee had option to ask for renewal of said agreement for two further periods of 10 years each by mutual agreement. Article XVIII of said agreement gave assessee right to exercise option of purchasing hotel in case its owners desired to transfer same during currency of agreement. Thereafter on 14th Sept., 1975, supplementary agreement was executed between assessee and receiver who had been appointed for property. right to exercise its option was given up by assessee. It was agreed that receiver would be at liberty to sell or otherwise dispose of said property at such price and on such terms as he may deem fit and was not under any obligation requiring purchaser thereof to enter into any agreement with operator (assessee) for purpose of operating and managing hotel or otherwise and in its return agreed consideration was to be paid to assessee. On basis of agreement, assessee received amount of Rs. 29,47,500 and claimed that it was capital receipt. ITO rejected claim but CIT(A) and Tribunal upheld it. High Court arrived at conclusion that it was revenue receipt assessable to income-tax as business income for asst. yr. 1979-80. On appeal to Supreme Court : Held, reversing decision of High Court, that amount received by assessee was consideration for giving up its right to purchase and/or to operate property or for getting it on lease before it was transferred or let out to other persons. It was not for settlement of rights under trading contract, but injury was inflicted on capital asset of assessee and giving up contractual right on basis of principal agreement had resulted in loss of source of assessee s income. receipt in hands of assessee was capital receipt." From above it is also clear that, in order to prove that particular receipt is in nature of capital receipt, it is sufficient to prove that particular source of income has been given up. This is exactly case in present appeal. 14. Our view is also fortified by following exposition of Hon ble jurisdictional High Court in case of CWT vs. G.D. Naidu (supra), wherein Hon ble Madras High Court has held that, "payment towards restrictive covenant is revenue expenditure and allowable". In that case, assessee and son were partners in firms carrying on bus business. Entirely new partners took over firms. Payments by firms to assessee and son for not carrying on bus business for five years was held to be not liable to tax either as income or capital gains. 1 5 . Again, Hon ble Madras High Court in case of CIT vs. Saraswathi Publicities (supra) has held that, "Compensation for agreeing to refrain from carrying on competitive business is capital receipt not liable to tax". In that case, assessee had secured rights for distribution and exhibition of advertisement films, with right to enter into agreement with other persons for distribution and exhibition. assessee entered into agreement with B which had similar agreements with various firms for purpose of seeing that business of each other did not suffer by competition in certain States. agreements were extended and modified. Under agreement of 16th May, 1965, assessee agreed not to represent or otherwise do business in film shows and any sort of advertisement on cinema screens for Hindustan Lever Ltd. or Lintas Ltd. in agreed area. assessee had agreed also to Blaze "taking over and handling" said business from 1st April, 1966 and further agreed to refrain from carrying on business with Hindustan Lever Ltd. or handle any film advertising business till end of 1975. In consideration of these terms, Blaze agreed to pay assessee sum of Rs. 1,50,000. assessee s claim that this amount was capital receipt not liable to tax was negatived by ITO but upheld by AAC and Tribunal. On reference : "Held, that as receipt was referable to restrictive covenant, it was capital receipt not liable to income-tax." 1 6 . In background of above discussion, we are of considered opinion that sum of Rs. 3,44,92,800 received by assessee in this case pursuant to restrictive covenant amounts to non-compete fee which was not taxable for relevant assessment year. Hence, we set aside orders of authorities below and decide issue in favour of assessee. 17. In result, this appeal by assessee is allowed. *** TTK HEALTHCARE LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX