1. Introduction
Taxability of non-compete fee has been a bone of contention in
several acquisitions. Prior to 2003, the Income-Tax Act
("Act") did not provide for taxing of non-compete fee,
and it was judicially established that any compensation received
owing to a negative or restrictive noncompete covenant was a
"capital receipt", and thus, tax exempt.1
Interestingly, till date, the Act does not define capital receipt.
However, in 2003, clause (va) was added to Section 28 of the Act.
It provides that any sum, whether received or receivable in cash or
kind under an agreement for not carrying out any activity in
relation to business or profession shall be treated as profit or
gain from business or profession, thereby, being taxable as
"business receipt" at applicable rates. Further, S.
28(va) does not apply to any receipt for transfer of the right to
manufacture, produce or process any article, or right to carry on
any business that otherwise is taxable as "capital
