2004 (12) TMI 326 - AT - Income Tax

Validity of reopening the assessment u/s 147 - income and expenditure account of the HUF - non-competition fee - capital receipt or a revenue receipt - HELD THAT - We agree with the arguments of the learned counsel for the assessee on this issue and we reject the arguments of the learned DR as without any merit. It cannot be said that the assessee had rendered services to NATCO, for the simple reason that NATCO was never in the picture when in the year 1993 the assessee, through his investigative work, learnt about the existence of Ascorbic Acid Technology and also when TIDCO came into the picture. It is not a case where NATCO had employed the assessee for obtaining certain specified object. By becoming a joint owner along with two others, the assessee cannot be said to have been a simple consultant working for a fee in this case. In fact, he became a joint equal owner and part of the management for the proposed business. The Revenue's contention that only a scientist having specialized knowledge in chemistry can be a potential threat for future business, is to say the least, amusing. A professional management consultant, who is an Engineer and an MBA and who is working for the most well reputed multinational management consultant firms like Price Waterhouse of USA and Anderson Consulting of UK and who had demonstrated his capability by obtaining certain technology which he could, on equal terms, share with multi-national pharmaceutical companies, can obviously do the same with any other business concern. In fact, a pure scientist might not be as much a potential threat as a person of the calibre of the assessee. All these conclusions are imaginations based on each person's perceptions and level of intellect. These do not substitute business acumen and a commercial decision. Possibilities and perceptions cannot form basis of decisions. The complaint filed before the US court by the assessee should be read as a whole. Threat perceptions should be viewed from the angle of NATCO and V.C. Nannapaneni, and not from the angle of revenue collection. Huge sum of money is not parted by NATCO just like that to an unconnected and unrelated person. NATCO recognised the rights of the assessee as well as his capacity to compete by himself or joining or teaming up with somebody else. The doubts entertained by the learned CIT(A) have been effectively answered by the assessee. The amount in question was received by the assessee for giving up some rights that he came into possession due to his long drawn out professional work. By giving up his right to be joint owner in the proposed project, he is permanently deprived of a source of income. His right to ownership and running the proposed company is sterilized as he has extricated himself from the arrangement. The amount is received for relinquishment of the rights. The assessee has also entered into a restrictive covenant. NATCO paid this amount for both transfer of rights as well as to ward off competition. It is settled law that such receipts are capital receipts and are not liable to tax. A person who has been accepted as an equal partner by a Government organisation as well as by a Multinational Pharmaceutical Company, cannot be said to have no capacity. NATCO never appointed him as a consultant for a fee and thus the receipt cannot be said to have been received as fee for services as a professional. Thus, the receipt in question, in our considered opinion, on the facts of the case, is a capital receipt. Even on the issue of the system of accounting, the Assessing Officer had concluded the issue and held that the assessee followed mercantile system of accounting. Extracts of the accounts clearly indicate that the assessee follows mercantile system of accounting. Thus, the claim of the learned DR that the assessee follows cash system of accounting is without any basis. On this count also, the argument of the learned DR fails, though we need not dwell on this issue and the applicability of section 9(1)(vii) and the issue of residential status etc., as it would be of academic value, in the light of our finding that this is a capital receipt not exigible to tax. As the facts of the case clearly indicate, the receipt in question is a capital receipt, we hold that the same is not taxable in the assessment year under consideration. We need not delve into the catena of case laws relied upon by both the parties, as the facts based on which the conclusions are arrived at, do not require discussing the case laws at length. Suffice it to say, each and every judgment is based on given set of facts of that case. Thus, we uphold the contention of the learned counsel for the assessee and allow the appeal of the assessee. In the result, the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of reopening the assessment u/s 147 of the Income-tax Act, 1961.
2. Nature of the amount of Rs. 25,00,000 received by the assessee from Natco Pharma Ltd.'whether it is a capital receipt or a revenue receipt.

Summary of Judgment:

Issue 1: Validity of Reopening the Assessment u/s 147
- The assessee argued that the reopening of the assessment was bad in law, contending that the Assessing Officer (AO) did not provide sufficient reasons for believing that income had escaped assessment.
- The Tribunal upheld the validity of the reopening, stating that processing a return u/s 143(1)(a) cannot be equated with an assessment and that the AO had reason to believe that income chargeable to tax had escaped assessment.
- It was noted that the AO wanted to examine the taxability of the receipt in question, and the sufficiency of the reason is not justiciable. The reopening was based on factual information from the audit party, and the AO had a valid reason to believe that income had escaped assessment.

Issue 2: Nature of the Amount Received
- The assessee contended that the amount of Rs. 25,00,000 received was a capital receipt for relinquishing rights and entering into a non-competition agreement.
- The Tribunal found that the sequence of events demonstrated that the assessee had acquired certain rights due to his investigative and professional work, and the amount received was for surrendering these rights and not for services rendered.
- The Tribunal rejected the arguments of the CIT(A) and the DR, which doubted the genuineness of the documents and suggested collusion without any evidence.
- The Tribunal concluded that the amount received was a capital receipt, as it was for giving up rights and entering into a restrictive covenant, and thus not taxable.
- The Tribunal also upheld that the assessee followed the mercantile system of accounting, and the receipt was not taxable in the assessment year under consideration.

Conclusion:
- The appeal of the assessee was allowed, with the Tribunal holding that the reopening of the assessment was valid but the amount received was a capital receipt and not taxable.