Non-compete fee received/receivable for not carrying on a profession chargeable under the head “Profits and gains of business or profession” [Section 28(va)]

Related amendment in section: 55
Effective from: A.Y.2017-18

(i) Section 28(va) brings to tax any sum received or receivable, in cash or in kind, under an agreement for not carrying out any activity in relation to any business; or not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services as business income.

(ii) The proviso to section 28(va) clarifies that receipts for transfer of right to manufacture, produce or process any article or thing or right to carry on any business, which are chargeable to tax under the head “Capital gains”, would not be taxable as profits and gains of business or profession.

(iii) However, so far, non-compete fee received/receivable for not carrying on a profession was not covered under these provisions.

(iv) Clause (va) of section 28 has been amended to bring the non-compete fee received/receivable (which are recurring in nature) in relation to not carrying out any profession, within the scope of profits and gains of business or profession.

(v) Further, the proviso to section 28(va) has been amended to clarify that receipts for transfer of right to carry on any profession, which are chargeable to tax under the head “Capital gains”, would not be taxable as profits and gains of business or profession.

(vi) Any receipt arising out of transfer of any business or commercial rights is taxable under the head “Capital gains”. The amount of capital gains chargeable to tax is computed according to section 48. For this purpose, ‘cost of acquisition’ and ‘cost of improvement’ are defined under section 55.

(vii) Section 55 has also been amended to provide that, for the purposes of sections 48 and 49, the cost of acquisition and cost of improvement in relation to a capital asset, being right to carry on any profession, shall also be taken as Nil. However, in the case of acquisition of such asset by the assessee by purchase from a previous owner, the amount of purchase price would be the cost of acquisition for the purpose of section 48 and 49.