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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Nature of Business

Nila Ltd, an Indian company, plans to sign an agreement under which it receives Rs 2 crore from a competitor for not carrying out a business activity, with no transfer of any right to manufacture or carry on business. A planner suggests that, being a negative covenant, the sum is not business income. Which view is correct under section 26 of the Income-tax Act, 2025?

The Rs 2 crore is business income. Section 26 includes any sum received or receivable, in cash or kind, under an agreement for not carrying out any activity in relation to a business. The capital gains exception applies only to transfer of the right to carry on the business, which is absent here.

  1. AThe sum is not taxable as it is not for any service rendered
  2. BThe sum is business income, since sums received under an agreement for not carrying out any activity in relation to business are includedCorrect
  3. CThe sum is business income only if it is received in cash and not in kind
  4. DThe sum is capital gains because it relates to a business right

Explanation

Section 26(2)(h)(i) includes any sum received or receivable, in cash or in kind, under an agreement for not carrying out any activity in relation to a business. The capital gains exclusion applies only where the sum is for transfer of the right to manufacture, produce, process or carry on a business, which is not the case here. The cash-only view is wrong because kind is also covered.

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