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Extinguishing of right to carry out a speciality business
Facts of the case:
Assessee-company divested its shareholding in Max Atotech Limited to M/s. Atotech BV, Netherlands for Rs. 13.58 crores. Along with the signing of the agreement for sale of shares, assessee had undertaken negative covenants of not entering into market of plating chemicals and processes during the period 29-6-2001 to 28-6-2004 in lieu of receipt of consideration which was claimed as capital receipt not liable to tax. AO held that since assessee extinguished its right to re-enter the market of plating chemicals and process for general metal finishing and electronics plating for consideration, the same amounted to transfer of right to carry on business and therefore, the amount of consideration received was liable to be taxed under the head capital gains.
An identical issue was considered by the Tribunal in assessee’s own case for the assessment year 1998-99 and Tribunal held that taking over a restrictive obligation did not amount to transfer of right in any business and therefore, non-compete fee could not be considered as resulting in capital gains. Even section 55(2)(a) which was prospective in nature was not held to be applicable to the facts of the present case in the absence of any capital asset being transferred by assessee in lieu of which assessee had received the impugned amount of non-compete fee.