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TMI Blog2006 (1) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... on 40A(7) is applicable to the assessee and the condition were not fulfilled; 5.Disallowing the amount of compensation of Rs. 16,29,343 by treating the compensation was paid after the closer of the business; and 6.Confirming the levy of interest under sections 234B and 234C which was not proper and for which no specific speaking order was passed by the Assessing Officer, as has been held by various High Courts as well as Supreme Court in the case of CIT v. Ranchi Club Ltd. [2001] 247 ITR 209. 2. Ground Nos. 1 to 3 2.1.1 The appellant is an Individual having Salary income from Eastern Air Products Pvt. Ltd. in which he is the Chairman and Managing Director. The Company was incorporated in 1964 and put up a Factory at Bhopal and started production in 1965. 2.1.2 Over the years, besides Bhopal he was instrumental in setting up several Gas factories at Jabalpur (1974), Indore (1979) and Dhar (1988). These factories were put up for Jabalpur Oxygen Company (JOC), Northern Air Products Pvt. Ltd. (NAP), Dhar Oxygen Pvt. Ltd. (DOPL). In J.O.C. he was Proprietor, in N.A.P. - Managing Director, in D.O.P.L. - Chairman & Managing Director, Besides he was also associated with Eastern Gases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen at a glance. Rs. in lakhs Sales Value Market Value W.D. Value (as per I. Tax) Eastern Air Products Pvt. Ltd. Building (with Furniture & Fitting and Office Equipment) 30.00 22.02 15.82 Machinery 110.00 61.00 48.50 Goodwill 154.00 - - 294.00 83.02 64.32 Oxygen Cylinders etc. 250.00 166.00 - Total 544.00 249.02 64.32 Northern Air Products Pvt. Ltd. Building 13.00 11.13 2.59 Machinery 17.00 11.00 5.02 Goodwill 45.00 - - 75.00 22.13 7.61 Oxygen Cylinders etc. 52.00 33.80 - Total 127.00 55.93 7.61 Jabalpur Oxygen Company Building 20.00 12.80 8.85 Machinery 22.00 10.00 1.13 Goodwill 50.00 - - 92.00 22.80 9.98 Oxygen Cylinders etc. 21.00 13.65 - Total 113.00 36.45 9.98 Dhar Oxygen Pvt. Ltd. Land 15.00 15.00 6.63 Building 10.00 4.80 6.95 Machinery 23.00 10.00 2.84 Goodwill 05.00 - - 53.00 29.80 16.42 Oxygen Cylinders etc. 24.00 15.60 - Total 77.00 45.40 16.42 Central India Gases Pvt. Ltd. Land & Building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of personal rapport with dealers and big customers. (d)Maintenance of good relationship with employees and labourers in the Factory. (e)Establishment of efficient transportation network. (f)Establishment of good marketing system and advertisement. (g)Efficient financial management and good relationship with the financial institutions and banks. 2.2.6 In 2000-01 (Assessment year 2001-02) except for Bhopal Cryogenics Pvt. Ltd., Eastern Electro Chemical Industries and Eastern Gases, remain- ing gas business were sold to Inox Air Products Ltd. a World Renowned Multi-National Company vide agreements dated 10-7-2000 (3), 21-7-2000 (2) and 17-8-2000 (2). Separate Sale Agreements for each Concern were drawn up and entered into with each of the concerned entities. (Copy of agreements on Page Nos. 100 to 333 of the Paper Book) The Sale Price and Goodwill of each Unit was fixed on the basis of its Assets, Business and Profits etc. and each of the concerns were paid as per agreement and the amounts received have been shown in their Income-tax Returns. 2.2.7 He submits further that the detailed valuation of each and every asset which was sold to Inox Air Products Ltd. was worked out by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith Inox Air Products Ltd. has been claimed as "Capital Receipts" not liable to tax on the basis of various decisions of Income-tax Tribunals, High Court and Supreme Court. 2.2.11 Non-compete fee was a capital receipt and was not liable to be taxed. This was the position till assessment year 2003-04. But with a view to make such payments taxable, the Income-tax Act was amended w.e.f. assessment year 2003-04 for specific purpose of making such payments taxable. This being the position, it is obvious that any such payments received prior to 31-3-2002 are not taxable. Since assessee received non-compete fee before this date i.e., during assessment year 2001-02, it obviously is not taxable. 2.2.12 The above case was selected for scrutiny and the Assessing Officer had asked for various details, documents and other papers relating to the various matters for the above years, which were submitted and examined from time to time. 2.2.13 As submitted above, the assessee had received "No compete fees" during the above year amounting to Rs. 319 lakhs which was claimed as capital receipt and hence not taxable. The Assessing Officer had asked for various details and documents which were submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .K. Swamy v. Asstt. CIT [1984] 88 ITD 185 (Chennai) (xi) ITO v. Smt. Sarojben v. Gandhi [2004] 83 TTJ (Ahd.) 716 (xii) Saroj Kumar Poddar v. Jt. CIT [2001] 77 ITD 326 (Cal.) (xiii) Asstt. CIT v. A.S. Wardekar [2001] 77 ITD 405 (Cal.) (xiv) Asstt. CIT v. Ashit M. Patel [2005] 96 TTJ (Mum.) 439 (xv) N. Sandeep Reddy v. Asstt. CIT [2005] 96 TTJ (Hyd.) 315 (xvi) CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC) (xvii) CIT v. Union Saw Mills [1993] 203 ITR 581 (Ker.) 2.3.1 The Ld. DR, on the other hand, places reliance on the orders of the lower authorities and on the decisions followed by them. He submits that the Assessing Officer has rightly held that when the assessee had already sold the plant, there was no question of payment of non-compete fees in question. He submits further that the assessee was not holding any brand name to fetch the payment of huge amount in the name of non-compete fee. The lower authorities had thus rightly denied the claim of the assessee treating the action as colourable device to avoid the payment of due tax. The decisions relied by him are as under : (i) K. Ramaswamy v. CIT [2003] 261 ITR 358 (Mad.) (ii) KCP Ltd. v. CIT [2000] 245 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the State of Madhya Pradesh and for a period of five years thereafter calculable from the date on which the last of the transfer of business and/or asset in terms of the said agreements is completed or in the event of completion not achieved by 31st December, 2000 and INOXAP terminating the Agreements after giving 90 days notice for a period of five years from the date of such termination of the Agreements : (ii)Each of the Covenantors shall discontinue their respective Industrial and Medical gases manufacturing and selling activities in the State of Madhya Pradesh with effect from 1st September, 2000 or such other date on which INOXAP commences its Industrial and Medical gas manufacturing activities in the State of Madhya Pradesh. (iii)Each of the Covenantors, for a period of five years from the date specified in article 1(1) above, shall not (whether acting alone or with others), in relation to the business of INOXAP be engaged concerned or interested either directly or indirectly and whether on the Covenantor's own behalf or on behalf of any constituent member of the covenantors or on behalf of or in association which others, and in any capacity whatsoever, in carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition under this section. However, it is relating to a company who distributes accumulated profit or it would be taken as release of all or any part of the asset of the company. In the present case before us the amount has not been received by the assessee from a company in which he was shareholder or director. Rather the amount was directly received from another company, who had purchased the total business of the assessee and the company has given this amount by way of non-compete fees, which is definitely a separate amount and cannot be treated as dividend/deemed dividend. Likewise the income defined under section 2(24)(iv ) includes the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has substantial interest in the company, or by relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid. From the above definition it is clear that the payment of non-compete fees will not be covered under section 2(24)( iv) of the Income-tax Act. Admittedly Shri H.L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking whose names have been included in the Schedule-II, forming part of the non-compete agreement between Taneja and Inox are partnership firm or sole proprietary concerns of Taneja Group or parties to non-compete agreement but have not transferred any of the assets to Inox, the reply of the assessee remained that this comment is based on wrong understanding of the practices relating to arrangements concerning non-competition. The arrangement agreed upon can certainly envisage that no competition would be resorted to even by the concerns undertakings left with the recipients after sale of some of his units. We find substance in this contention of the assessee. The observations of the Assessing Officer that the price paid for the goodwill over and above the price recorded in the books of account has also been made without making remarks in the assessment order in regard to the amount shown as income for goodwill by the assessee and accepted as such by the Assessing Officer. 2.4.3 The reliance by the Assessing Officer on the decision of Hon'ble Supreme Court of McDowell & Co. Ltd. v.CTO [1985] 154 ITR 148 that the agreement concerning non compete fee is a colourable device to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is evident that these companies have to clear of all the above liabilities. Restrictive covenants not relevant for the concerns. As restrictive covenant applies only to persons/directors who are running the concerns or business. The technical expertise in a business concern is the persons/directors which is the moving force. The land, plant and machinery etc. in a concern are only the tools for running of a business concern. As such no compete was payable to the appellant only and not to the concerns. (iii)No obligation was impliedly cast upon any member of Taneja Group to pay the said non-compete fee to meet the liabilities of the concerns. Comments : The liabilities has to be paid by the concern from the sale proceeds and goodwill receipts. This was the reason that goodwill was substantial and the sale proceeds were more than market value. (iv)No exercise to work out the net worth of the concerns agreeing to transfer the assets was undertaken. Comments : The net worth of all the concerns could be submitted by the appellant but that was never asked for by the Assessing Officer or CIT (Appeals), as the assets were only sold. (v)The basis of goodwill/non-compete fee which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claiming the payments as revenue expenditure, it mattered little when Taneja Group wanted part of consideration in the disguise of non-compete fee. Comments: The above reason is based purely on presumption, assumption, surmises and having no basis. The buyers have agreed to pay Rs. 8.90 crores for assets, cylinders and goodwill and not Rs. 5.30 crores as stated by learned CIT (Appeals). The market value of these assets were only Rs. 4.11 crores and the amount received by these concerns were Rs. 7.87 crores by way of goodwill. The statement of the learned CIT (Appeals) about the appellant age and health has no relevance in this matter. It is already now 5 years since the business was sold and even the appellant is fully competent to establish a factory and compete with the buyer. In any case this reason is not relevant. Though the buyer has claimed this amount as revenue expenditure, but it was not allowed. 2.4.5 From the above comments submitted by the assessee on various observations and reasons given by learned CIT (Appeals), it is quite evident that the basis for arriving that 'No compete fees' received by the appellant was revenue nature and was liable to tax as profit or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covenant, it was a capital receipt not liable to Income-tax. The S.L.P. preferred against this judgment has been dismissed by the Hon'ble Supreme Court reported in 142 ITR (St) 6. In the case of Ambadi Enterprises Ltd. (supra), the Hon'ble Madras High Court was pleased to hold that one test for ascertaining as to whether what was received was a capital receipt or a revenue to receipt is to find out whether the assessee had snapped his link with the profit making apparatus, that was transferred. In this case, in pursuance of termination agreement, the source of income is totally severed whereby the profit earning apparatus could never be utilized by the assessee. In the case of G.D. Naidu (supra), the Hon'ble Madras High Court has held that the amount received by assessee and son is not liable to take either as income or capital gains since in this case the assessee and son partners in firms were carrying on bus business, the new partners to cover the firm and payments by firms were made to the assessee and son for not carrying on bus business for five years. The Hon'ble Madras High Court in the case of P.L. Chemicals Ltd. (supra) held that restriction placed on the assessee not to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the persons concerned with the firm and the company are the same. The genuineness of the transaction was not accepted the Hon'ble Court treated the amount paid as revenue receipts. This is not the position in the present case before us. The assessee is in no way connected with the buyer company (as the brothers were) and also because the assessee cannot do gas business in any manner, whatsoever, while the brothers could and were doing there hotel business through their company. In the case of KCP Ltd. v. CIT [2000] 245 ITR 421 (SC), the matter of accrual of income was related to the trading receipts. It was held that a trading receipt when transferred in a separate account will not alter the nature of receipt. The facts in this case are different as in the present case before us the non-compete fee is involved on account of a restrictive covenant in the agreement. In the case of Neroth Oils Co. Ltd. v. CIT [1987] 166 ITR 418 (Ker.) the judgment is relating to the assessee transferring the licenses, which he was not entitled to sell the licenses as they were obtained by it for its own manufacturing purposes as an actual user and registered exporter. The sale of licences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d compensation. The court observed that the agreement secured to the firm an advantage of an enduring nature and was not an ordinary trading agreement and thus the receipt is capital in nature. In the case of CIT v. Kolhia Hiragdgarh Co. Ltd. [1949] 17 ITR 545 (Bom.), it was held that in all taxable matter greater emphasis must be given to the business aspects of the transactions rather than to its purely legal and technical aspects. It is also not helpful to the revenue in the present case having different facts. In the case of Delhi Stock Exchange v. CIT [1961] 41 ITR 495 (SC), it was held that how an assessee treats any monies received is not decisive of the matter, what is relevant for taxability is the nature of receipt. It is also not helpful to the revenue in the present case having different facts. The decision in the case of RM.AR.AR.RM.AR.AR Ramnathan Chettiar v. CIT [1967] 63 ITR 458 (SC) related to the issue of refund of Estate duty, hence not applicable in the present case. In the case of Chunduri Venkata Reddi v. CIT [1959] 35 ITR 87 (AP), it was held that the cost of oil expellers supplied to the assessee was in the nature of compensation for the termination of agenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. Thus, it was in the interest of business of the other side to enter into such an agreement with the condition and for the same the amount in question has been paid as no compete fees. Till the amendment in sections 58 and 28 read with section 2 with effect from 1-4-2003 i.e. assessment year 2003-04 this practice of payment of non-compete fees was very much recognized. The assessment year under consideration before us is 2001-02. Hence, during this assessment year this practice of payment of non-compete fees was very much allowed within the then prevailing provisions of law. When the wordings of contract between the parties and the very intention behind the same is apparent, as discussed above, the lower authorities are not justified to go beyond the terms of agreement to treat the amount paid as non-compete fees as revenue in nature. The judgments of the Hon'ble Supreme Court, High Courts and Income-tax Appellate Tribunal, relied on by the Ld. AR which we have already discussed above, support the case of the assessee that non-compete fees will be treated as capital receipt and will not be liable to income-tax. In a recent judgment in the case of Saroj Kumar Poddar (supra), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls [1993] 203 ITR 581 (Ker.) in which it has been held that the liability accrued to the assessee and closure of the business simultaneously resulted ere just two events that happened at the same time. That would not make any difference. The assessee was entitled to deduction of the gratuity liability. He submits that there was an agreement between the appellant and its workers on 11th November, 2000 at Jabalpur, according to which all workers will retire voluntarily on 15th November, 2000 and they will be paid gratuity according to the rules prevalent at this time. If the workers were not paid gratuity according to the labour laws then the assessee would have been in great trouble. The assessee has to maintain proper goodwill and better relationship with the workers who were with the company for the last so many years. It was due to business expediency and expenditure was incurred wholly and exclusively for the business of the assessee. He submits further that statements giving the names of the workers, their designations, date of joining, total service, salary and the amount of gratuity paid to them were available with the assessee. The payments were made to all the workers by ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced by the parties and have gone through the orders of the lower authorities as well as the judgments relied by them. It appears from the records that the payment of gratuity amount were made on the following dates : 16-12-2000 6,75,023 31-3-2001 25,390 29-9-2001 32,232 26-10-2001 18,032 Total 7,50,947 The facts of the case of the assessee are thus different from those relied on by lower authorities, since in the present case, the aforesaid gratuity amount was paid during the above year and has been calculated on the basis of the rules prescribed under the Payment of the Gratuity Act. In the present case no provision for gratuity was made hence, also the judgments relied on by the lower authorities are not applicable. In the case of Union Saw Mills (supra) relied on by Ld. AR, it has been held that the liability accrued to the assessee and closure of the business simultaneously resulted are just two events that happened at the same time. That would not make any difference and the assessee was entitled to the deduction of the gratuity liability. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed after selling the entire business to the buyer. 4.2.1 In support of this ground, the Ld. AR submits that it was agreed upon that all the workers opting for voluntary retirement will be paid compensation of 40 days for each completed year of service as on 15th November, 2000. It was also agreed that all the workers who have signed this agreement will be covered by the scheme provided they opted for voluntary retirement in writing. The Officers and senior staff of the company were not covered by this scheme. If the workers were not paid compensation according to the labour laws, then the assessee would have been in great trouble. He has to maintain proper goodwill and better relationship with the workers who were with the company for the last so many years. This step was taken and they were paid gratuity as well as amount of compensation as per rules. It was due to the business expediency and the expenditure was incurred wholly and exclusively for the business. The Ld. AR refers copy of the agreement placed in the paper book filed by the assessee. He also refers vouchers giving the receipts from the workers as well as the letter received from them for voluntary retirement. He po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he undertaking was there during the continuance of business but before actual transfer. 4.2.2 The Ld. DR, on the other hand, justifies the orders of the lower authorities and places reliance on the judgments relied on by them. 4.3.1 The orders of the lower authorities and the material available on record have been perused in view of the aforesaid arguments advanced by the parties and the judgment cited by them have been gone through. We find substance in the submissions of the ld. AR that the facts of the present case are distinguishable from those of the cases relied on by the lower authorities. Admittedly, the retrenchment of workers for which compensation claimed to have been paid in the present case was not due to closure of the business or due to some external problem but under a scheme option was sought for from the workers who were willing to discontinue their services with new management. It is not a case of retrenchment simplicitor that a workman who had rendered continuous services for a prescribed minimum period should not be retrenched at the sweet will of the employer without letting him have compensation therefor, nor is it a part of an arrangement for the purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X
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