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2005 (8) TMI 581 - AT - Income TaxReceipt of non-compete fee - Nature of receipt Capital or Revenue - Taxable under u/s 28(ii)(a) - Business income - protective assessment - compensation received under the agreement - HELD THAT - We find that the Assessing Officer considering all the three agreements was of the view that the compensation received by the assessee through agreement dated 25-2-1999 not a non-compete fee which was essentially a part of the cost price paid by M/s. Hindustan Coca Cola Pvt. Ltd. for the purchase of business and other rights of M/s. Jammu Bottling Co. The Assessing Officer was also of the view that it should be added in the hands of the company M/s. Jammu Bottling Co. as it was a part of the sale consideration of the business by the said company. The Assessing Officer was also of the view that the amount paid by way of non-compete fee was, in fact, the sale consideration and was paid in the guise of this method to accommodate profits of the company. The Assessing Officer also tried to move before the CIT(A) in the case of M/s. Jammu Bottling Co. to prove that the aforesaid amount has, in fact, belong to the company. The Assessing Officer, however, observed that the CIT(A) vide order dated 9-1-2001 did not make addition of the amount of Rs. 1 crore, i.e., the amount received by the directors in the hands of the assessee-company. The findings of the CIT(A) were confirmed by the ITAT, Chandigarh Bench vide order dated 16-7-2004. Therefore, the whole case of the Assessing Officer is demolished. The facts above clearly show that the view of the Assessing Officer was erroneous and as such it was not accepted in the case of M/s. Jammu Bottling Co. The facts in this case clearly show that the assessee has restricted himself from doing business or profession nature because of the experience as explained above in the business of M/s. Jammu Bottling Co., therefore, it was independent restrictive covenant for a specific period. The assessee in lieu of restrictive covenant was paid a sum of Rs. 1 crore and as such the compensation which was attributable to the restrictive covenant was a capital receipt and hence was not taxable. The compensation in the case of the assessee is very specific from his independent agreement. The very object of the agreement was to avoid competition in all matters between the assessee and M/s. Hindustan Coca Cola (buyers). Therefore, the assessee lost earning assets for specified period. The decision of the Hon ble Supreme Court in the case of Best Co. (P.) Ltd. 1965 (11) TMI 23 - SUPREME COURT is, therefore, directly applicable to the above case alongwith other decisions referred to above in this order. In the present case, the authorities below took the view that the amount of Rs. 1 crore was part of the sale proceeds of on going concern M/s. Jammu Bottling Co. In that garb it was observed that because of execution of the agreement for sale of business concern and goodwill, M/s. Jammu Bottling Co. had nothing to sale further. The authorities below, therefore, were of the view that the amounts should be taxed in the hands of M/s. Jammu Bottling Co. However, the findings of the authorities below were not approved by the CIT(A) and the Appellate Tribunal in the case of M/s. Jammu Bottling Co. The authorities below as such even on giving adverse finding against the assessee could not find out other meaning of the agreement against the assessee. Thus, following rule of consistency, we are of the view that the authorities below have failed to prove that it was a case of collusive transaction. The receipt in the hands of the assessee is treated as capital receipt and as such the findings of the authorities below are set-aside, addition is deleted. As a result, the appeal of the assessee is accordingly allowed.
Issues Involved:
1. Rejection of the assessee's appeal. 2. Confirmation of the addition of Rs. 1,00,00,000. 3. Applicability of section 28(ii)(a). 4. Taxability of the non-compete fee received from Hindustan Coca Cola. 5. Nature of the assessment as protective and its impact. 6. Legality and justification of the addition of Rs. 1 crore. 7. Denial of proper opportunity to plead the case. Issue-wise Detailed Analysis: 1. Rejection of the Assessee's Appeal: The assessee appealed against the order of the CIT(A), which was rejected. The CIT(A) confirmed the addition of Rs. 1 crore as taxable income, considering it not as a non-compete fee but as part of the sale consideration of the business and other rights from M/s. Jammu Bottling Co. The CIT(A) held that after the sale agreements dated 6-8-1998 and 7-12-1998, there was nothing left with the company or its directors to be sold to Hindustan Coca Cola Pvt. Ltd. 2. Confirmation of the Addition of Rs. 1,00,00,000: The Assessing Officer (AO) observed that the Rs. 1 crore received by the assessee from Hindustan Coca Cola Pvt. Ltd. was not a non-compete fee but part of the sale consideration for the business and other rights of M/s. Jammu Bottling Co. The AO noted that the payment was made to oblige the directors of the company and reduce tax liability. The CIT(A) upheld this view, confirming the addition. 3. Applicability of Section 28(ii)(a): The AO applied section 28(ii)(a) of the Income-tax Act, which taxes compensation received by a person managing the whole or substantially the whole of the affairs of an Indian company at or in connection with the termination of his management or modification of the terms and conditions relating thereto. The AO concluded that the Rs. 1 crore received by the assessee fell under this section, as it was compensation for the modification of terms and conditions relating to the assessee's service. 4. Taxability of the Non-Compete Fee: The assessee argued that the Rs. 1 crore received was a non-compete fee and thus a capital receipt, not taxable. The assessee cited decisions from the Hon'ble Supreme Court and various High Courts supporting the view that compensation for restrictive covenants is a capital receipt. The CIT(A) and AO, however, did not accept this argument, considering the payment as part of the sale consideration. 5. Nature of the Assessment as Protective and Its Impact: The AO noted that the assessment was protective, with the primary assessment being in the hands of M/s. Jammu Bottling Co. The CIT(A) in the case of M/s. Jammu Bottling Co. held that the Rs. 3.8 crores received by the directors was not part of the sale consideration but paid individually for accepting the non-compete fee agreement. This finding was confirmed by the ITAT, Chandigarh Bench, indicating that the Rs. 1 crore received by the assessee should not be taxed as part of the sale consideration. 6. Legality and Justification of the Addition of Rs. 1 Crore: The assessee contended that the addition was illegal and unjustified. The CIT(A) and AO's findings were based on the view that the payment was part of the sale consideration. However, the ITAT found that the agreement between the assessee and Hindustan Coca Cola Pvt. Ltd. was independent and had restrictive covenants, making the payment a capital receipt. The ITAT concluded that the authorities failed to prove any collusion or that the transaction was not genuine. 7. Denial of Proper Opportunity to Plead the Case: The assessee claimed that proper opportunity to plead the case was not allowed. The ITAT considered all submissions and facts, including the nature of the agreement and the independent legal character of the assessee and M/s. Jammu Bottling Co. It concluded that the payment was a capital receipt, not taxable under the Income-tax Act. Conclusion: The ITAT allowed the appeal of the assessee, setting aside the findings of the CIT(A) and AO. It held that the Rs. 1 crore received by the assessee was a capital receipt under a restrictive covenant agreement and not taxable. The ITAT emphasized the independent nature of the agreement and the lack of evidence for collusion or a non-genuine transaction.
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