2019 (3) TMI 1246 - AT - Income Tax

Nature of receipt - Capital Receipt not chargeable to tax or business income as revenue receipt - sum received on transfer of an asset - sale of business - true consideration for the payment of US dollars to company - scope of coining of the concept - arrangement of non compete Agreement - non-complete by the assessee clause in the business purchase agreement with Trend Micro - as per assessee transfer of an asset is a capital receipt not chargeable to tax since the asset was a self-generated asset - whether amount received by the assessee from Trend Micro USA is towards the sale consideration of a self generated asset by way of a new concept? - HELD THAT - If coining of the concept , as assessee puts it, was indeed so valuable that it would, on standalone basis, fetch the assessee ₹ 10 crores, there could not have been any logic in allowing a company to commercially exploit or develop the same for 7 years, without any royalty, consideration and arrangement for sharing the results of its commercial exploitation. The terms of the provisions of the agreement do not make commercial sense at all. What is being shown in this agreement, in our considered view, not real. Apart from the fact that, as noted earlier, on the face of it, it is an agreement without consideration, it does not appear to be a legally enforceable contract anyway, it is completely at variance with the ground realities of the commercial world. All these facts taken together raise serious doubts about the claim of the assessee with respect to the true consideration for the payment of US 15,75,000. We donot have sufficient material on record to come to the conclusion that this payment was indeed coining of an idea , reproduced earlier, and, in any event, if at all, the assessee had one important and significant right that the assessee gave away in this consideration was his non compete right. As learned CIT(A) has rightly observed, non-complete by the assessee clause in the business purchase agreement with Trend Micro was clear thrust and a significant obligation by the assessee for which impugned payment was made to the assessee. As clause 6.6 of the business purchase agreement clearly states, an original counterpart of the noncompetition agreement duly executed and delivered by Tandon (i.e. the assessee) is a was delivered, contemporaneously with or prior to the execution of business purchase agreement. Clause 9.1 (a) of this agreement further provides unambiguous thrust on non competition agreement by the assessee. It is for the assessee to decide as to what is appropriate for justifying his case, and when he does not file a document, with specific prayer for admission of such additional evidence, he cannot have a grievance about not been given an opportunity to furnish that evidence. In any case, whatever documents have been placed before us donot help us conclude that the amount received by the assessee from Trend Micro USA is towards the sale consideration of a self generated asset by way of a new concept. It is only elementary that the onus is on the assessee to demonstrate that an income is exempt from tax, and that onus is clearly not discharged by the assessee. There is no escape from the taxation of these receipts in the hands of the assessee. The erudite arguments of the learned counsel, therefore, donot come to the rescue of the appellant. We are unable to accept the plea of the assessee that the impugned receipt is in the nature of an exempt income. We are, therefore, in considered agreement with the conclusions arrived at by the learned CIT(A). In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. - Decided against assessee.

Issues Involved:
1. Capital Receipt not chargeable to tax.
2. Computation of the cost of acquisition of the capital asset.
3. Treatment of the sum received on transfer of capital asset as business income.
4. Attribution of the entire receipt towards non-compete fees.
5. Taxation of receipts under the head capital gains.
6. Deduction under section 54F of the Income Tax Act.
7. Classification of the transfer as short-term or long-term capital gains.

Detailed Analysis:

1. Capital Receipt not chargeable to tax:
The assessee claimed that the sum of ?9,70,59,873 received on the transfer of a self-generated asset (a technical concept for website malware monitoring) was a capital receipt not chargeable to tax as it had no cost of acquisition. The Assessing Officer (AO) rejected this claim, noting that the asset was developed with significant investment from the employer, Indusface India, and thus had a cost of acquisition. The AO also argued that the concept was a subject matter of copyright under the Copyright Act, 1957, and the employer was the first owner of the copyright, making the amount received by the assessee taxable.

2. Computation of the cost of acquisition of the capital asset:
The CIT(A) computed the cost of acquisition of the capital asset at Rs. Nil by invoking the provisions of section 55(2)(a) of the Income Tax Act, 1961. The CIT(A) noted that the agreement between the assessee and Indusface India was not at arm's length as the company was controlled by the assessee and his wife. The CIT(A) concluded that the concept was developed during the course of the assessee's employment, making the employer the owner of the concept.

3. Treatment of the sum received on transfer of capital asset as business income:
The CIT(A) treated the sum received on the transfer of the capital asset as business income under section 28(va) of the Act. The CIT(A) observed that the dominant intention of the purchaser, Trend Micro, was to prevent the assessee from engaging in any competing business. The CIT(A) held that the amount received was revenue in nature and taxable as business income.

4. Attribution of the entire receipt towards non-compete fees:
The CIT(A) attributed the entire receipt towards non-compete fees, noting that the sale was completed only after the delivery of a Non-Competition Agreement signed by the assessee. The CIT(A) cited the decision of the Bombay High Court in Arun Toshniwal's case, which held that amounts received for entering into a non-compete agreement are taxable as business income under section 28(va).

5. Taxation of receipts under the head capital gains:
The CIT(A) noted that even if the receipt was considered under the head capital gains, the cost of acquisition of the right to use the concept would be taken as Nil under section 55(2)(a). The CIT(A) concluded that the transfer of the right to use the concept was a short-term capital asset as the reversionary right accrued and was relinquished on the same date.

6. Deduction under section 54F of the Income Tax Act:
The CIT(A) did not direct the AO to allow deduction under section 54F by treating the receipts as income under the head capital gains, as the amount was treated as business income.

7. Classification of the transfer as short-term or long-term capital gains:
The CIT(A) observed that the reversionary right accrued to the assessee only on the date of signing the agreement with Trend Micro and was relinquished on the same date, making it a short-term capital asset. The resultant capital gain was thus chargeable to tax as short-term capital gain.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the amount received by the assessee was taxable as business income under section 28(va) of the Act. The Tribunal noted that the agreement between the assessee and Indusface India lacked commercial substance and was not a legally enforceable contract. The Tribunal also observed that the non-compete agreement with Trend Micro was a significant obligation for which the payment was made. The appeal was dismissed, and the conclusions of the CIT(A) were approved.

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