I am being paid under a non-compete covenant on the sale of my business. Is that money still a capital receipt?
No, not since assessment year 2003-04. Section 28(va), inserted by the Finance Act 2002 with effect from 1 April 2003, charges as business income any sum received or receivable under an agreement for not carrying out an activity in relation to any business (or, from AY 2017-18, profession), or for not sharing know-how, a patent, a copyright, a trade mark, a licence, a franchise or any other business or commercial right of similar nature. The proviso takes out of sub-clause (a) a sum received on transfer of the right to manufacture, produce or process an article or thing or the right to carry on a business, where that sum is chargeable as capital gains - and s.55(2)(a) then fixes the cost of such a right at nil unless it was bought from a previous owner.
The line is assessment year 2003-04. Clause (va) was inserted in s.28 by the Finance Act, 2002 with effect from 1 April 2003 - the footnote on the departmental page for s.28 records exactly that, and it is the reason the Supreme Court in Guffic Chem held that a non-compete receipt of an earlier year was a capital receipt outside the charge. That decision is in the corpus at guffic-chem-v-cit-non-compete and it is still the authority for years before AY 2003-04 and for the loss-of-agency dichotomy. It is not authority for anything about a receipt after that date, and it is a common error to cite it as if it were.
What the section charges. Section 28(va) brings to tax as profits and gains of business or profession "any sum, whether received or receivable, in cash or kind, under an agreement for- (a) not carrying out any activity in relation to any business; or (b) 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". Note three things about that language. It taxes a sum "received or receivable", so the accrual is enough. It taxes a sum "in cash or kind". And the Explanation defines "agreement" to include "any arrangement or understanding or action in concert", "whether or not such arrangement, understanding or action is formal or in writing" and "whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings" - so an unwritten side understanding is within the clause.
The words "or profession" are current text but are not on the departmental page. The Finance Act 2016 inserted "or profession" after "any business" in sub-clause (a) of s.28(va) and in clause (i) of its proviso, with effect from 1 April 2017, that is from assessment year 2017-18. The Finance Bill 2016 clause 12 reads "in sub-clause (a), after the words 'any business', the words 'or profession' shall be inserted". The version served at incometaxindia.gov.in/w/section-28 still shows the pre-2016 wording, with the amendment footnote going no further than the Finance Act 2002 insertion. So a covenant given by a professional - a doctor, an architect, a consultant - is inside the charge from AY 2017-18, and if you are quoting the clause in a reply, quote the amended words and cite the Finance Act 2016, not the departmental page.
The proviso is the whole battleground. Sub-clause (a) does not apply to "any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head 'Capital gains'" (again, "or profession" added from AY 2017-18), nor to compensation from the multilateral fund of the Montreal Protocol. Two points follow. First, the carve-out is not free-standing: it operates only where the sum is in fact "chargeable under the head 'Capital gains'", so you have to be able to identify a capital asset and a transfer of it. Second, the carve-out is limited to sub-clause (a). A payment for not sharing know-how or a trade mark under sub-clause (b) has no such escape route and is business income whatever else is happening in the transaction.
Section 55(2)(a) then supplies the cost of the right the proviso sends to capital gains. In relation to a capital asset "being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours", the cost of acquisition is, "in the case of acquisition of such asset by the assessee by purchase from a previous owner", the purchase price, "and in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49], shall be taken to be nil". The right to carry on a business was brought into that list by the Finance Act 2002 with effect from 1 April 2003 - the same year as s.28(va) - and "or profession" was added there too by the Finance Act 2016 from 1 April 2017. So for a self-generated right the cost is nil and the whole receipt is the gain. The advantage over s.28(va) is therefore the rate and the availability of the reinvestment sections, not any reduction in the amount taxed.
The practical problem is the split. In a business or share sale the buyer commonly pays one price for the shares or the undertaking and a separate sum under a deed of covenant to the promoter. The department's standard attack is that the deed is not a separate bargain at all - that the covenant sum is really part of the consideration for the shares or the undertaking, artificially carved out to reduce tax, and should be added back to the sale consideration or, on the other side of the argument, taxed under s.28(va) rather than as capital gains. Both attacks are on the same fact: whether there were genuinely two bargains. The Supreme Court in Shiv Raj Gupta v. CIT (2020) 425 ITR 420 / 315 CTR 601 (SC) dealt with this. The High Court had held that "the Deed of Covenant cannot be regarded as a separate document" and that the amount "should be assessed as capital gains being a part of the full value of consideration received for the transfer of shares"; the Supreme Court reversed and allowed the covenant to be treated on its own footing. That was an AY 1995-96 case, so the receipt was a capital receipt outside the charge on the itatonline digest's own note - but the reasoning on whether a covenant is a separate bargain travels to current years, where the question is whether s.28(va) or the proviso applies.
What supports the split on the file. The covenant should be a separate instrument with its own recitals, its own consideration and its own operative clauses, executed at the same time but not folded into the share purchase agreement as a schedule. The restriction should be defined - the activities, the territory and the term - and the term should be commercially explicable rather than perpetual. There should be something showing that the buyer actually valued the covenant: a board note, a valuation, correspondence in which the covenant was negotiated as a separate item, or a price adjustment when its scope changed. The covenantor should be a person capable of competing, which is why a covenant from a passive shareholder invites the argument that nothing real was bought. And the accounting on both sides should match the documents - a payer who writes the whole outlay into the cost of the shares has conceded the department's case.
The payer's side is a separate and less settled question. The payment is normally capital in his hands, because what he buys is a lasting freedom from competition rather than a running cost of the business. It is sometimes argued the other way for a covenant of a short and defined term - that a two- or three-year restriction buys something less than an enduring advantage - but no payer-side decision supporting that has been located, so it is an argument from principle and should be pleaded as one rather than as a settled line. HM Publishers, below, did concern a three-year covenant, but it is a recipient-side ruling on s.28(va) and decides nothing about the payer's deduction. Then comes the depreciation argument under s.32(1)(ii), which allows depreciation on "know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature". The Bombay High Court in PCIT v. Piramal Glass Ltd., ITA No. 556 of 2017, decided 11 June 2019, held on the itatonline digest that "the expression 'or any other business or commercial rights of similar nature' used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include non-compete rights - Eligible for depreciation", following PCIT v. Ferromatic Milacron India (P) Ltd. The Delhi High Court took the opposite view in Sharp Business System v. CIT (2026) 484 ITR 496 (Delhi)(HC), where the digest headnote reads "Depreciation-Intangible asset-Non-compete agreement-Right in personam-Not an intangible asset-Depreciation not allowable on non-compete fees". The corpus entry cit-v-smifs-securities-goodwill-depreciation is the Supreme Court authority that the residuary words in s.32(1)(ii) are wide enough to take in goodwill, and it is the natural starting point for the assessee's argument; it does not decide the non-compete point.
On the recipient who is a non-resident, s.28(va) is a charging provision and the treaty then has to be applied to what it charges. In HM Publishers Holdings Ltd., In Re (2018) 405 ITR 441 (AAR), on a covenant expressed to run for three years only, the Authority treated the receipt as business income under s.28(va) - the digest records that "the section applies to any person who has received or is entitled to receive a sum in consideration for agreeing not to carry out any activity" - and then held it not taxable in India in the absence of a permanent establishment, under Article 7 of the India-United Kingdom treaty, there being no transfer of any capital asset to produce a capital gain. That is the order of the argument for a cross-border covenant: charge first, treaty second.
Under the Income-tax Act 2025, the compilation published on itatonline.org maps s.28 of the 1961 Act to s.26 of the 2025 Act. The clause numbering inside that section has not been checked against the bare 2025 Act, so verify the sub-clause before citing it.
A non-compete covenant is negotiated at the end of a deal, when the tax work is thought to be finished, and the sum is often large enough to move the whole economics of the sale. Whether it lands in s.28(va) at slab or corporate rates, or in the proviso and then in capital gains at the long-term rate with reinvestment relief available, is decided by documents drawn months earlier. The department attacks the split from both directions - it will say the covenant sum is really part of the price of the shares, or that a receipt the seller has offered as capital gains is caught by s.28(va) because no right was actually transferred - and the answer to both is on the file or it is nowhere.
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