2012 (8) TMI 526 - HC - Income Tax

Validity of reopening of assessment subsequent to intimation received u/s 143(1)(a) - AY 94-95 - Held that - Intimation u/s 143(1)(a) could not be treated as an order u/s 143(2) and there was no change of opinion in initiating proceedings u/s 147 r.w.s. 143(2). See CIT Vs Ideal Garden Complex P.Ltd (2011 (9) TMI 731 - MADRAS HIGH COURT) - Decided against assessee. Amount received under restrictive covenant - Revenue receipt vs Capital receipt - Held that - It is observed that agreement of sale between the purchaser company and seller company, in which the assessee was the Director dated back to 1.4.93. Assessee was offered employment vide letter dated 8.10.93, to which assessee submitted acceptance vide letter dated 19.10.93 indicating the acceptance to join the services effective from 1.11.1993 and non-compete agreement was entered into on 15.10.93. Thus, non compete agreement and the employment agreement formed part of the same transactions. Going by the fact that the assessee was offered employment as early as 8.10.93, the restrictive covenant entered into on 15.10.1993 would not be called as independent agreement. Therefore, any amount received under the so called non compete agreement, would only be treated as salary for the purpose of assessment and thus revenue in nature - Decided against assessee.

Summary

Issues Involved:
1. Validity of reassessment under Section 147 of the Income Tax Act for the assessment year 1994-95.
2. Liability for interest under Sections 234B and 234C.
3. Taxability of the sum received under a restrictive covenant agreement.

Detailed Analysis:

1. Validity of Reassessment under Section 147:
The Tribunal upheld the reassessment made under Section 147 of the Income Tax Act for the assessment year 1994-95. The Tribunal reasoned that the intimation under Section 143(1)(a) could not be treated as an order under Section 143(2), and there was no change of opinion in initiating proceedings under Section 147 read with Section 143(2) of the Act. The Tribunal followed the decision of the Allahabad High Court in PRADEEP KUMAR HAR SARAN LAL v. ASSESSING OFFICER, confirming the jurisdiction of the Assessing Officer to make the assessment under Section 147. The High Court also referenced the decision in CIT v. IDEAL GARDEN COMPLEX (P) LTD., affirming the Tribunal's decision and dismissing the appeal on this issue.

2. Liability for Interest under Sections 234B and 234C:
The Tribunal sustained the levy of interest under Sections 234B and 234C, deeming it consequential in nature. The Tribunal did not find merit in the argument that there was no liability for advance tax, and thus no liability for interest, as per Section 208 read with 209(1)(d) of the Act. The High Court upheld this view, affirming the Tribunal's decision on this aspect.

3. Taxability of the Sum Received under the Restrictive Covenant Agreement:
The core issue was whether the sum of Rs.21 lakhs received by the assessee under a restrictive covenant agreement should be treated as a capital receipt or revenue receipt. The assessee argued that the amount was a capital receipt, relying on the restrictive covenant agreement dated 15.10.1993, which prohibited the assessee from engaging in the business of computer software development and marketing. The Assessing Officer, however, treated the amount as a revenue receipt, considering it an addition to the salary.

The Commissioner of Income Tax (Appeals) found that the restrictive covenant was an independent payment unrelated to the monthly salary and treated it as a capital receipt. However, the Tribunal disagreed, noting that the non-compete agreement and the employment agreement formed part of the same transaction, and that the restrictive covenant agreement was not independent. The Tribunal referenced the case of K.RAMASAMY v. CIT, where similar facts led to the conclusion that such sums were revenue receipts.

The High Court examined the agreements and correspondence between the parties, noting that the business transfer was effective from 1.4.1993, and the employment discussions were ongoing from 8.10.1993, with the assessee accepting the employment offer to join from 1.11.1993. The Court concluded that the restrictive covenant agreement and the employment agreement were part of the same transaction, and thus, the sum received under the restrictive covenant was indeed a revenue receipt. The Court affirmed the Tribunal's decision, holding that the amount received was taxable as salary under Section 17(1)(iv) of the Act.

Conclusion:
The High Court upheld the reassessment under Section 147, sustained the levy of interest under Sections 234B and 234C, and confirmed that the sum received under the restrictive covenant agreement was taxable as a revenue receipt. The appeals were dismissed, and the questions of law were answered against the assessee.