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TMI Blog2008 (5) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned receipt and that he erred in holding that the payment was apparently ma4e to retain the services of the assessee so that the continuity of the business and its management remained intact and beneficial to the new company. It is also mentioned that he erred in holding that the so-called non-compete agreement was a collusive and self-serving document prepared with a view to evade income-tax on the impugned receipt. It was also mentioned that various conclusions in this behalf were based on surmises and conjectures and thus, the inclusion of the amount in the total income of the assessee was wrong. Ground Nos. 10 to 12 assail the reopening of assessment under s. 147 of the Act. It is mentioned that the impugned provision was not at all applicable and that there was no material to have a reason to believe that the income had escaped assessment. It is also mentioned that the reassessment proceedings were initiated on mere change of opinion and, thus, the AO lacked jurisdiction to make the reassessment. Ground No. 13 is against inclusion of two sums of Rs. 35,008 and Rs. 14,000 as salary in the income of the assessee. 2. In the assessment order, it is mentioned that the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same line of business in which the OCL was engaged The assessee was an employee-director of the OCL and in this connection he received salary for two months from this company, from 1st April, 1998 to 31st May, 1998. On1st June, 1998, the assessee became the employee of the Bax and thereafter continued to receive salary from this company upto31st March, 1999. Thus, the date of non-compete agreement with the Bax coincided with the date on which he became its employee. The business of the OCL was also closed on1st June, 1998. There was no agreement between the OCL and the Bax placing any restriction on the OCL for carrying out any business in competition with that of the Bax. Since the assessee himself was not carrying out any business on his own, there could not have been any agreement for placing any restriction on his business. Therefore, what the assessee received was nothing but profit in lieu of salary, taxable under s. 17(3)(i). This conclusion was strengthened by the fact that the payment was made by the present employer on1st June, 1998. Thus, this amount was brought to tax as salary income. Apart from that, an amount of Rs. 35,008 was found as credit balance with OCL on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his services with Bax to look after its management. The payment was made when he was in the employment of the Bax, which constituted nothing but salary under s. 17(3)(i). Since the impugned payment was in the nature of salary, there was also no question of examining the provision contained in s. 28(va) of the Act, which came into effect from1st April, 2003, and was not applicable to the instant assessment year. Thus, the assessee's appeal was dismissed. 3. In regard to ground Nos. 10 to 12 regarding the reopening of assessment, the learned counsel for the assessee pointed out before us that he was a promoter of the OCL. The return of income was filed on29th July, 1999declaring total income of Rs. 7,05,510. Along with this return, a detailed note regarding the impugned receipt of Rs. 88 lakhs was attached, which has been placed in the paper book on pp. 45 to 49. It was stated that the assessee had not transferred any capital asset to the Bax and, therefore, the impugned receipt was not liable to be taxed under the head "Capital gains". Further, the amount was received in consideration of the non-competition agreement with the Bax, which was a receipt of capital nature, not liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an company at or in connection with termination of his management or modification of the terms and conditions relating thereto. In view of these facts and the provision, it was mentioned that the income of Rs. 88 lakhs had escaped assessment. For this purpose it was also relevant to take into account the fact that the assessee had paid advance tax on this amount, which was claimed as refund as an afterthought. Accordingly, notice under s. 148 was issued. The case of the learned counsel was that all these facts were contained in the note appended to the return of income filed on29th July, 1999. The AO processed the return, but did not issue notice under s. 143(2) with a view to assess the impugned amount. Therefore, the AO had lost the opportunity to tax the impugned amount under the regular assessment. Afterwards, no new information was received by the AO and, therefore, it can be said that the reassessment proceedings were initiated to cover up that lapse. 3.1 In this connection, reliance was placed on the decision of Hon'ble Delhi High Court in the case of United Electrical Co. (P) Ltd. vs. CIT Ors. (2002) 178 CTR (Del) 192 : (2002) 258 ITR 317 (Del). In that case, the notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had escaped assessment were de hors the record. Further, he relied on the decision of Hon'ble Madras High Court in the case of CIT vs. C. Palaniappan (2006) 284 ITR 257 (Mad). The facts of the case were that the assessee was a co-owner of a building called "KannammaiBuilding". In pursuance to a notice under s. 148, the assessee filed a return of income which was processed under s. 143(1)(a). The assessment was completed under s. 143(3) r/w s. 147. The CIT(A) directed the AO to recompute the income from the building by taking the admissible deduction under s. 24(1)(vi) at Rs. 7,20,000. The Tribunal decided the matter in favour of the assessee by holding that the reopening of the assessment was bad in law. It was agitated before the Hon'ble Court that the Tribunal failed to appreciate the fact that the assessment was earlier completed under s. 143(1) and thereafter the assessment was reopened under s. 147 to consider the correct quantum of interest allowable as deduction in computing the property income, as the assessee had not furnished relevant facts and evidence along with the return. The Hon'ble Court referred to its own decision in the case of CIT vs. M. Chellappan (2005) 198 CT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no notice is issued under s. 143(2), then, the assessment cannot be reopened at all without only fresh information being brought on record. Thus, what is to be seen is whether the AO had reason to believe that any income escaped assessment. He also relied on the decision in the case of ITO vs. Lakhmani Mewal Das 1976 CTR (SC) 220 : (1976) 103 ITR 437 (SC) to the extent it held that the reason to believe cannot be mere pretence and there must be live link between information and reason to believe. Reliance was also placed on the decision in the case of ITO vs. Madnani Engineering Works Ltd. (1979) 12 CTR (SC) 144 : (1979) 118 ITR 1 (SC) to the extent that there must be material on record to come to the "reason to believe". He also relied on the decision in the case of Asoke Kumar Sen vs. CIT (1981) 132 ITR 707 (Del), to the extent it was held that the belief must be an honest one and not merely a pretence. Reliance was also placed on the decision in the case of Bawa Abhai Singh vs. Dy. CIT (2001) 168 CTR (Del) 521 : (2002) 253 ITR 83 (Del) in which it was held that reason must exist for coming to the belief. Reliance was also placed on the decision in Mahesh Kumar Agarwal vs. Dy. Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusive proof of escapement of income to be brought on record at this stage. It was also pointed out that an intimation under s. 143(1)(a) cannot be equated with the order of assessment, which is clear from the fact that such an intimation was deemed to be a notice of demand under s. 156. Thus, so long as ingredients of s. 147 were fulfilled, the AO will be free to initiate reassessment proceedings and failure to take steps under s. 143(3) will not render the AO powerless to initiate reassessment proceedings. It was also pointed out by the learned Departmental Representative that many cases cited by the learned counsel were under old provisions. Under the amended law, the decisions will be applicable only on the issue of "reason to believe". 3.3 We have considered the facts of the case and rival submissions. We are of the view at the outset that the facts of the case are in pari materia with the facts of the case of Mahanagar Telephone Nigam Ltd. The jurisdictional High Court clearly held that non-issuance of notice under s. 143(2) will not in any way disempower the AO from initiating reassessment proceedings if he had reason to believe that the income escaped assessment. Furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 143(2) was issued or served on the assessee in the reassessment proceedings. In this connection, it was pointed out that a specific ground No. 3 to this effect was taken up before the learned CIT(A). which was not adjudicated upon by him. A reference was made to the decision of Hon'ble Delhi High Court in the case of Rohtak Hissar Districts Electric Supply Co. (P) Ltd. vs. CIT (1981) 128 ITR 52 (Del). In that case, questions regarding deduction of depreciation and development rebate were specifically agitated before the AAC, but the AAC did not pass any order in respect of the questions. It was held that in such a circumstance, it would be deemed that the question had been considered and decided against the assessee by the AAC leading to the inference that the provision contained in s. 154(1A) would not apply. Accordingly, it was agitated that this question has been considered and decided by the learned CIT(A) against the assessee. In reply, the learned Departmental Representative referred to p. 53 of the paper book, being a letter dt. 9th bet., 2002 issued by the AO to the assessee in the course of reassessment along with a notice under s. 142(1) of the same date. This lette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjournment on a number of occasions on the ground that similar issue has been referred to a Special Bench in the case of Saurabh Srivastava vs. Dy. CIT in ITA No. 3104/Del/2004. Consequently the adjournments were granted. The question in that case was whether, the non-compete fee received by the assessee from FI Plc.,UK, is not liable to tax being in the nature of capital receipt. The hearing was resumed on passing the order in that case, a copy of which was placed before us by the learned counsel. The order has also been published in (2008) 113 TTJ (Del)(SB) 1. He strongly relied upon this case to support his contentions regarding non-taxability of the impugned receipts. It was held that the amount received by Shri Saurabh Srivastava was capital in nature, not liable to be taxed either as salary or business income. The facts of that case were that the assessee was a promoter, substantial shareholder and the managing director of IIS Ltd. The business of this company was taken over by F.I. Group ofUKand 76 per cent of the subscribed shares, including the shares held by the assessee, were transferred in favour of theUKcompany as per share purchase agreement between the shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. and CIT vs. Kettlewell Bullen Co. Ltd., etc. is that the assessees were carrying on the business. These were not the cases of salaried employees or managing directors, etc. However, the principle emerging from the ratio of the decisions is that where payment was received for impairment of income-earning apparatus, it will generally fall in the category of capital receipt. The facts of the case are that the business of IIS Ltd. was taken over by theUKcompany. The principal shareholders, including the assessee, held 76 per cent of the issued and subscribed capital of IIS Ltd. These shares stood vested in theUKcompany on completion of share purchase agreement on26th Feb., 1988. First instalment of non-compete fee was received on26th Feb., 1998by the assessee along with the sale proceeds of the shares. The assessee also entered into an employment contract with theUKcompany as per terms and conditions stipulated therein. Such continuation in employment was not a part and parcel of share purchase agreement. Although non-compete agreement was dependent upon completion of share purchase agreement, the payment thereunder was not dependent upon his continuing in the employment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be employed in any other company on a temporary or part time basis or offer your services with or without pay to any physical person; legal entity or public authority or to be occupied in your own business without the prior consent of the company. 9. You confirm that you have disclosed fully to the company all of your business interests, whether or not they are similar to or in conflict with the business(es) or activities of the company, and all circumstances in respect of which there is or there might be a conflict of interest between Bax Global and you or any immediate relative. You agree to disclose fully to the company any such interests or circumstances which may arise during your employment immediately upon such interest or circumstances arriving. 10. During the course of your employment and thereafter, you shall maintain total confidentiality of all company related information to which you may have 8ccess to and further you shall not indulge in any activity which will be prejudicial to the interest of the organization." As per Annex. 1 of the agreement, the assessee was to get basic salary of Rs. 19,000 and gross emoluments of Rs. 43,300 per month apart from other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , suppliers, advisors, employees or directors of OCS or the company to cease, restrict or reduce their services to OCS or the company; 3. not to work for any person in any capacity in case the person is, or is likely to become, a competitor of the company, its associates in India or OCS; and 4. not to disclose to any person, during or after the termination of this agreement any information relating to the business affairs or trade secrets or other confidential information which he possesses or may hereafter possess by reason of his long association with OCS/the company during the restricted period in the territory." The case of the learned Departmental Representative was that the OCL was carrying on the business, which was taken over by the Bax. The assessee was not carrying on any business on his own and he also did not have any technical qualification as the business of the OCL was a routine type of business and not the kind of the business conducted by IIS Ltd., which required considerable skills for development of software. As per asset transfer agreement, all the employees were transferred to the Bax, but the non-compete fee was paid only to the shareholders and promoter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not carrying out any business at all. In any case, after taking employment with the Bax on1st June, 1998, he could not have indulged into any competing business with the company. Therefore, the agreement was a devise to avoid taxation of income received from the Bax by the non-compete agreement. Thus, if the substance of the whole case was examined, it would become clear that the amount was taxable in the hands of the assessee as a revenue receipt. Insofar as the head of income is concerned, it was pointed out that the Department was within its right to set up any plea in support of the order of the learned CIT(A), as held in the case of B.R. Bamasi vs. CIT (1972) 83 ITR 223 (Bom). He strongly relied on this case to canvass that if there has been any error in taxation of the income under this or that head, the same may be corrected by the Tribunal, as the amount was otherwise taxable. On merits, he relied on the order of the Tribunal in the case of Rohitsava Chand vs. Dy. CIT in ITA No. 4713/Del/2003 for asst. yr. 2000-01, dt.19th Jan., 2007, a copy of which was filed before us. In that case, it was held that the amount received by that assessee under the non-compete agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , employee, consultant or in any other capacity whatsoever: (a) solicit or interfere with or endeavor in the relevant territory to entice away from the Covenantee Group any person, firm, company or entity who was a client or customer of the Covenantee Group in relation to the relevant business in the months (12) prior to the completion date or becomes a client or customer of the Covenantee Group in relation to the relevant business prior to 31st May, 1999; (b) be concerned with the supply of services or products in the relevant territory to any person, firm, company or entity which is or was a client or customer of the Covenantee Group in relation to the relevant business in the months (12) prior to the completion date or becomes a client or customer of the Covenantee Group in relation to the relevant business prior to 31st May, 1999, where such services or products are identical or similar to or in competition with those services or products supplied by the Covenantee Group; (c) solicit or interfere with or endeavor in the relevant territory to entice away from the Covenantee Group any person, firm, company or entity who is or was a supplier of services or goods to the Coven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as pointed out that after effectuating the transfer, the assessee was unable to exercise voting right attached to the share and he was to appoint any person nominated by M/s Mugneeram Bangur Co. to attend and vote for them at any meeting of the company. It was held that it would he difficult to regard such a transaction as a trading transaction, being one of surrender of rights of the appellant in the managing agency so that the corresponding rights may arise in favour of M/s Mugneercun Bangur. In other words, the decision ofHon'ble Courtwas that the impugned transfer caused a hole in the existing profit making apparatus of the assessee. However, at p. 273, it was pointed out that payment of compensation for loss of office is not always regarded as capital receipt. Where compensation is payable under the terms of the contract which is determined, the payment is in the nature of revenue and, therefore, taxable. In this case, we have seen that the assessee had interest not only in the company but in seven concerns and organizations of which he was shareholder, director or managing director. The assessee was not carrying on any business on his own. On acquisition of all the shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount paid to compensate for loss of agency need not always be a capital loss. What is to be seen is whether the contract affected profit making structure of the assessee or it merely deprived the assessee of a trading avenue, leaving it free to devote its energies after cancellation of the agency to carry on the rest of the business, and to replace the contract lost by a similar contract. In such a situation, the compensation will not be a capital receipt. On consideration of the facts of this case again, we find that there was no question of any dent being made in the profit making apparatus of the assessee. After loss of office and the restrictions placed by the agreement, the assessee was free to devote his energies to carry out rest of his employments and also replace the lost right by a similar contract. Therefore, in view of the express decision of the Hon'ble Supreme Court on the issue, we are of the view that the payment received is revenue in nature, more so when the restriction was placed only for a short period of one and half year. The other cases relied upon by the learned counsel merely follow the aforesaid decisions of Hon'ble Supreme Court and their ratios fall in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y agreed conditions. It provides inter alia for not taking up any employment etc. with any other business entity with or without pay, without the consent of the Bax, to maintain confidentiality of the business information and full disclosure of any interest, present or future, which may come in conflict with the business of the Bax. The non-compete agreement also contains clauses prohibiting, soliciting the business competing with the business of the Bax, encouraging its clients, customers, etc. from restricting or ceasing to deal with the Bax, competing with its business and disclosure of business information. Thus, the employment agreement overlaps with non-compete agreement in many material respects. Therefore, the facts of the case are different from the facts of the case of Saurabh Srivastava, in which it was found as a matter of fact that the non-compete agreement was a stand alone agreement, independent of the employment agreement or the share transfer agreement. It may be mentioned that in that case, the shares of IIS Ltd. were transferred to theUKcompany and, thus, it became the subsidiary of theUKcompany. In the case before us, the business of the OCL has been transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case, we have to examine true intent of three interrelated documents. If we do that, we find that there was no impairment in the business of the assessee, which did not exist. The asset transfer agreement secured the interest of the Bax in terms of transfer of business, continued employment of the assessee and other employees and non-competition from OCL, which comprised of none other than its members. In such circumstances. it is not feasible to come to the conclusion that assessee would be any threat to the business of the Bax. Coming to the argument regarding perception of the Bax, it may be mentioned that Revenue authorities will be at least entitled to examine whether there was at all any basis for the same. Facts show that there was no such basis. Therefore, it will be difficult to hold that the receipt was capital in nature. At best what could be said is that the payment was made to secure the loyalty of the assessee as an employee for a further period of 5 years, as in any case he was required to be under the employment of the assessee (sic) for five years as per asset transfer agreement. Admittedly, there is no bar in statute on the AO to tax this amount under a head dif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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