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TMI Blog2003 (1) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... has, in fact, misconstrued and misunderstood the same] and (d) the circumstances leading to and necessitating payment of the non-compete fee to the appellant as well as the basis of determining the fee. 3. The learned CIT(A) also erred (a) in not affording to the appellant opportunity to rebut his erroneous sequence of thoughts as apparent from his appellate order; (b) in not bringing on record and discussing certain facts given and submissions made by the appellant in the course of hearing such as, the corresponding assessment details of the company that made the payment to the appellant and the amendment proposed td section 28 by the Finance Bill, 2002; (c) in relying upon certain decisions (mentioned by him in his order) that are not relevant for deciding the issue on hand; and (d) in not considering the numerous decisions relied upon by the appellant". 2. The succinct facts of the case are that the assessee filed his return of Income for the assessment year 1997-98 declaring an income of Rs. 1,30,530 and the same was processed under section 143(1)(a) of the Act on 15-3-1999. In the return of income filed the assessee claimed a sum of Rs. 3.2 crores being non-compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a prejudicial eventuality by payment of adequate forbearance fee for it was necessary to maintain the position prevailing then and the growth of the organization. The Board of Directors acknowledged the contributions, achievements, and accomplishments of the assessee as Managing Director of the company and his charitable and religious dispositions as an outstanding personality. Finally the Board acknowledged the fact that but for the immense sacrifices and noble services rendered by the assessee from 1-4-1973, the company would not have attained its statute and strength in the advertisement industry". The Assessing Officer has further extracted in the assessment order from the non-competition agreement dated 29-2-1996 between RK. Swamy/BBDO and the assessee, which reads as under:-- "It is clearly indicated in the agreement that a non-competing fee was paid to the assessee to settle the disputes that have arisen between the assessee and the company. The agreement placed certain restrictive covenants on the assessee for a period of five years from 28-2-1996. In terms of the agreement the assessee agreed to continue as Chairman of the Board of Directors of the company and Chai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for the elaborate analysis of the facts discussed above, I am of the view that the sum of Rs. 3.2 crores is assessable as casual and non-recurring income under section 10(3) of the Income-tax Act subject to the exemption of Rs. 5,000 provided therein". Thus the Assessing Officer treated the receipt of Rs. 3.2 crores being non-competing fees received from the company R.K. Swamy/BBDO Pvt. Ltd. as casual and non-recurring income and made an addition of Rs. 3,19,95,000 [after giving an exemption of Rs. 5,000 under section 10(3)] to the income returned by the assessee. Aggrieved by this the assessee moved the Commissioner (Appeals). 3. Before the learned first appellate authority the assessee's counsel reiterated the same submissions made before the Assessing Officer as his arguments. It was stated that the Assessing Officer having concluded that the amount received by the appellant was a capital receipt, had no reason to conclude that it constituted a casual and non-recurring receipt and in particular when the appellant heavily relied on the ratio of the decision of the Bombay High Court in the case of Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 249 ITR 265 and the Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll aggrieved against this order of the learned first appellate authority, the appellant is in second appeal before this Tribunal with the grounds of appeal extracted elsewhere in this order. 4.1 At the time of hearing the learned counsels for the assessee placed on record a paperbook consisting of around 120 pages comprising therein the various materials mentioned in the index to the said Paperbook. It has also been certified that all the enclosures are true copies of the originals and that all the documents in the said paperbook are already available in the assessment records for the assessment year 1997-98. Placing the above paperbook on record the learned counsels for the assessee apart from reiterating the submissions made before the Revenue authorities, contended, to say in brief that: 4.2 The receipt of non-compete fee of Rs. 3.2 crores was backed by a binding legal document dated 29-2-1996, being non-competition agreement. The said payment was received by the assessee for curtailing activities of the assessee as detailed in the said agreement for a period of five years. 4.3 On a plain reading of the terms of the agreement for non-competition it is clear that the curtai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s trying to substitute its viewpoint for that of the persons actually conducting the business. Moreover, it is incorrect on the part of the department to question a bona fide transaction without understanding a genuine threat to business. It is submitted that elimination of potential competition, avoiding erosion in turnover and increasing the volume of the business in the future were the paramount considerations for entering into the agreement. 4.8 The application of section 28(ii)(a) is totally misconceived. The said provision is applicable to a situation where a person receives compensation at the point of termination or modification of the terms thereto. In the present case the appellant has resigned from the Managing Directorship with effect from 1-2-1996, whereas the non-competition agreement was entered into only on 29-2-1996. Hence in the present case neither was his employment terminated nor was it modified by the company so as to invoke the provisions of section 28(ii)(a) of the Act and it is a fact that the said receipt was only received for business restraints accepted by the appellant. 4.9 The purpose of the said provision has to be understood before applying the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered in the context of premature termination of the employment and the decision in CIT v. D.R. Sondhi [2001] 248 ITR 695 (Delhi) had merely followed the earlier decision hereinbefore referred to. The above two decisions were not rendered in the context of taxability of non-compete fee. 4.16 For the above reasons and the ratio decidendi out of the above case laws, the non-compete fee of Rs. 3.2 crores received by the assessee from the company for the restriction on him from competing with the company or assisting any competing business in the field of advertising and advertisement related business would only be capital receipt not subject to income-tax. 5.1 On the other hand, the learned departmental representative strongly supported the orders of the Revenue authorities and contended, to say in brief, that. 5.2 The anticipated loss of the company on account of Shri R.K. Swamy's levying is not borne by facts. 5.3 The ratio of share holding remained unaltered even after the exit of Shri R.K. Swamy. 5.4 Considering the income returned by Shri R.K. Swamy and considering the findings mentioned in the order of the Commissioner (Appeals), there is no way to agree with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been interpreted has one common factor running through them all, that is compensation is regarded as an equivalent or recompense which makes good the lack of variation of something else. Flowing from the concept enlargement of the meaning of this expression takes in that which compensates for loss or provision, amends remunerates or recompenses". 5.7 In the light of the above discussion and following the ratio of above decisions it is to be held that the amount received by the appellant is to be brought to income-tax under section 28(ii)(a) of the Act as profits and gains of business or profession. The receipt cannot be certainly considered as salary or profit in lieu of salary, if one takes into account the salary received by the appellant before the date of agreement or the pension he was entitled to subsequently. In other words it is difficult to link even on estimate basis the amount paid to the services rendered. It is also not in the nature of casual and non-recurring income if one takes into account the amount of deliberation and thinking that had gone into the drafting of the agreement. 5.8 The Commissioner (Appeals) has considered the ratio of the case laws cited by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect from 1-1-1996 is also evidenced by the letter dated 17-1-1996 from Srinivasan K. Swamy, joint managing director, addressed to Mr. David Sia of Bangkok. In the minutes of the meeting of the Board of Directors of RK Swamy/BBDO Advertising Pvt. Ltd., held on 28-2-1996 the facts and the circumstances leading to the necessity of entering into the non-competition agreement had been explained by the Board. Only after the approval by the Board, which was conscious about the damage that would be faced by the company if the assessee severred connection with the company, the non-competition agreement was entered into between the assessee and the company. From the letter dated 17-1-1996 written by Shri Srinivasan K. Swamy to Mr. David Sia it transpires that some earlier employees of the company and others who had set up independent shops in the last few years were also ready to utilise the services of Shri R.K. Swamy in any manner he wished to offer them and that if it was allowed to happen it could seriously affect the growth of the company. The Board of Directors of the company in the minutes of the meeting held on 23-2-1996 have considered the matter of resignation by the assessee, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in his order. The Commissioner (Appeals) has treated the amount under consideration as taxable income under section 28(ii)(a). Now we are called upon to adjudicate whether the Commissioner (Appeals) was correct in treating the amount received by the assessee as income taxable under section 28(ii)(a). The assessee's contention is that the said provision is applicable to a situation where a person receives compensation at the time of termination or modification of the terms and conditions of his appointment, whereas in this case on hand the assessee had already resigned as managing director with effect from 1-2-1996, whereas the agreement was entered into on 29-2-1996 after a thorough study of the situation by the Board of directors at its meeting held on 28-2-1996 for the reasons stated in the minutes and also in the agreement. In such circumstances by no stretch of imagination the said receipt can be treated as having been received for the modification of the terms of the appointment. We find force in the above contention of the learned counsel for the assessee. The provision of section 28(ii)(a) is meant for termination of managing agency or modification of terms or modes of appoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtained from the document itself, it is not permissible to go outside the words there set down and to substitute for those a guess as to what the parties might have intended in the circumstances". Does the Tax Court have a larger jurisdiction in this regard? "No Court of law would deny the propriety of looking at an agreement between the parties as a whole. But that does not mean that because it is a tax case, the Court can rewrite the agreement and substitute for the terms upon which the parties agreed, either terms as to which they have not even been consulted". The Supreme Court of India has held in the case of CIT v. Dwarkadas Khelan Co. [1961] 41 ITR 528 at 533 that 'it is not the province of a Court to make a new agreement for the parties'. The Supreme Court in the case of CIT v. Delhi Flour Mills Co. Ltd. [1959] 35 ITR 15, on the basis of this principle held that the provision for deduction of taxes for ascertaining the divisible profits for remunerating managing agents would include Excess Profits Tax in view of the plain language of the agreement to include all taxes though this tax was never contemplated as it was not in existence then. The Rules observed by Courts as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, let us now consider whether the non-compete fee received by the assessee from R.K. Swamy/BBDO is taxable as income in its hands for the relevant assessment year. Sub-clause (va) to section 28 was introduced by the Finance Act, 2002 with effect from 1-4-2003, which reads as under:-- "28. The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession'.-- (va) any sum, whether received or receivable in cash or kind under an agreement for- (a) not carrying out any activity in relation to any business; or (b) not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or technique likely to assist in the manufacture or processing of goods or provision for services: Provided that sub-clause (a) shall not apply to- (i) any sum, whether received or receivable in cash or kind on account of transfer of the right to manufacture, produce or process any article or thing or right to carryon any business, which is chargeable under the head 'Capital gains'. (ii) any sum received as compensation from the multilateral fund of the Montreal Protocol on substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a specified period. As far as the loss of agency was concerned, it was only a normal trading loss and the income received on that account was only a revenue receipt. But, with reference to the loss on account of the restrictive covenant, after referring to the decision in Gillanders Arbuthnot Co. Ltd.'s case, the Supreme Court reiterated that the restrictive covenant was an independent obligation undertaken by the assessee not to compete with the new agent in the same field and that part of the compensation attributable to the restrictive covenant was a capital receipt, not assessable to tax". In Saraswathi Publicities'case the Madras High Court has held that: "the amount of consideration referable to the restrictive covenant was a capital receipt not liable to income-tax", Again, the Madras High Court in Late G.D. Naidu's case has held that: "the compensation relatable to the restrictive covenant was a capital receipt not liable to capital gains tax". 6.5 From the above discussion we are of the considered opinion that the amount received by the assessee Shri R.K. Swamy in the sum of Rs. 3.20 crores from RK. Swamy/BBDO Advertising Pvt. Ltd., was the outcome of the non-compet ..... X X X X Extracts X X X X X X X X Extracts X X X X
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