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TMI Blog2005 (8) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer also tried to move before the CIT(A) in the case of M/s. Jammu Bottling Co. to prove that the aforesaid amount has, in fact, belong to the company. The Assessing Officer, however, observed that the CIT(A) vide order dated 9-1-2001 did not make addition of the amount of Rs. 1 crore, i.e., the amount received by the directors in the hands of the assessee-company. The findings of the CIT(A) were confirmed by the ITAT, Chandigarh Bench vide order dated 16-7-2004. Therefore, the whole case of the Assessing Officer is demolished. The facts above clearly show that the view of the Assessing Officer was erroneous and as such it was not accepted in the case of M/s. Jammu Bottling Co. The facts in this case clearly show that the assessee has restricted himself from doing business or profession nature because of the experience as explained above in the business of M/s. Jammu Bottling Co., therefore, it was independent restrictive covenant for a specific period. The assessee in lieu of restrictive covenant was paid a sum of Rs. 1 crore and as such the compensation which was attributable to the restrictive covenant was a capital receipt and hence was not taxable. The compensati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Coca Cola and the ld. CIT(A) has erred in rejecting the claim of the assessee that the said amount is not taxable, without there being any material on record. 5. That the assessment was a protective assessment and the ld. Assessing Officer is of the opinion that the same is assessable in the hands of Jammu Bottling Company Private Limited, a Company in which the assessee is a Director, and the matter is before the Hon'ble Tribunal. 6. That the addition of rupees one crore is, therefore, illegal, unjustified and its confirmation by the ld. CIT(A), was therefore not justified. It is prayed that the addition of Rs. 1 crore is deleted. 6A. That proper opportunity to plead the case was not allowed." 2. This appeal was earlier dismissed in default on two occasions but was restored to its original number vide different orders in the M.As. 3. We have heard the learned representatives of both the parties and gone through the observations of the authorities below. 4. The facts on the issue involved in appeal are that the assessee filed return of income on total income of Rs. 80,612. It was processed under section 143(1). Later on, it was selected for scrutiny. The Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, value of all the rights and goodwill to be sold by M/s. Jammu Bottling Co. According to the Assessing Officer since there was nothing further to be sold no further agreement was required to be made either by M/s. Jammu Bottling Co. or by its Directors. The Assessing Officer further observed that the payment of non-compete fee made to oblige the Directors of the Company. The Assessing Officer also observed that business goodwill will include the market reputation, trading style and distribution know-how etc. The Assessing Officer further observed that the goodwill was purchased prior to the purchase of the business. The Assessing Officer further observed that further information and know-how of the business of M/s. Jammu Bottling Co. was already covered by the earlier agreements. Moreover, the said assets cannot be sold twice. The Assessing Officer further observed that the circumstances indicate that whatsoever was paid by the purchaser company, i.e., M/s. Hindustan Coca Cola was simply the purchase price. He has further observed that the Directors were getting salary from this company. The terms and conditions relating to their service were modified when this company sold the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the Co. was not liable to capital gain on this transaction was also not accepted. The Assessing Officer further observed that later on while examining the case of the present assessee, Shri T.S. Manocha, for the assessment year 1999-2000, it was noticed that a sum of Rs. 3.8 crores was received by three Directors which was shown as a non-compete fee. Request was made to the CIT(A) to enhance long-term capital gain by Rs. 3.8 crores because the amount of Rs. 2.8 crores was nothing but the sale proceeds of the assets of the company. The CIT(A) further observed that the appeal of the company M/s. Jammu Bottling Co. was decided by the CIT(A) vide order dated 9-1-2001 in which the CIT(A) observed that the amount of Rs. 3.8 crores received by the Directors was not a part of sale consideration for the transfer of the business assets as it was paid to the Directors individually for accepting the non-compete fee agreement. The Assessing Officer further observed that the department has filed appeal before the ITAT, Amritsar Bench against the order of the CIT(A) dated 9-1-2001 in the case of the company and the appeal is pending. 7. The Assessing Officer in view of the above facts con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the CIT(A) held that said amount has been paid to the Directors individually to avoid competition. Therefore, same decision should be applied in case of assessee (individual). It was submitted that the onus to prove that payment is not real its on the party who claimed it to be so. In this case, the Assessing Officer makes a claim that payment is not real but it failed to prove the same. The working Director of the company entered into separate agreement with M/s. Hindustan Coca Cola Pvt. Ltd. with regard to the non-disclosure of confidential information as also desist from taking up the competitive business. This agreement has been executed at arms length. The Coca Cola Company is known multi-national company and they have taken over 25 plants in India. In all these takeovers non-compete fee has been paid to the working Directors to safeguard the company's interest. Therefore, it was a genuine agreement. It was further submitted that one of the conditions for sale was that the Directors of the said company will not indulge in any business, which is in any way in competition with the business of M/s. Hindustan Coca Cola. It was further submitted that with regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd did not agree with the submissions of the assessee and was of the view that after the execution of the agreements dated 6-8-1998 and 7-12-1998 by M/s. Jammu Bottling Co. with the purchaser, there was nothing left with the company or its directors to be sold to M/s. Hindustan Coca Cola Pvt. Ltd. The CIT(A) accordingly confirmed the findings of the Assessing Officer and dismissed the appeal of the assessee. 10. The assessee is in appeal before us on the grounds mentioned above. The learned counsel for the assessee reiterated the submissions made before the authorities below. He has submitted that non-compete fee was received by the assessee against independent agreement. The assessee has restricted himself from doing similar business or profession for a stipulated period with restrictive conditions. Therefore, it was capital receipt in nature. He has further argued that section 28(ii)( a) of the Income-tax Act is not applicable. The learned counsel for the assessee further argued that the findings of the authorities below are against the law and facts of the case as explained above. He has further submitted that M/s. Hindustan Coca Cola Pvt. Ltd., has entered into an agreement wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon'ble Supreme Court in the case of CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11. In this case, the assessee is a Private Limited Company carrying on a business of agency in innumerable lines. One of such agencies was from the Imperial Chemical Industries (Exports) Ltd., Glasgow (Principal) for distribution and marketing in certain territories in South India of its ammunition, blasting explosives and accessories. The said agency came into existence in 1900. The terms of the agency were not reduced to writing. The rates of commission were paid on terms agreed upon from time to time. The agency was terminable at will, but, because of their mutual confidence, it continued without break till the year 1947, when the principal gave notice to the agency company (assessee) terminating its agency. The agency was ultimately terminated on 31-3-1948 and Principal paid certain amount on the basis of income earned by the Imperial Chemical Industries (India) Ltd., which took over the business from that date. Pursuant to the agreement, the principal paid commission to the assessee for various period i.e., 31-3-1949 to 31-3-1951. During the same year, it was brought to tax and the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restrictive covenant, therefore treated as capital receipt and was apportioned accordingly. (2) The decision of the Hon'ble Madras High Court in the matter of CIT v. Saraswathi Publicities [1981] 132 ITR 207 in which it was held : "The assessee had secured the rights for distribution and exhibition of advertisement films, with a right to enter into agreement with other persons for distribution and exhibition. The assessee entered into an agreement with B which had similar agreements with various firms for the purpose of seeing that the business of each other did not suffer by competition in certain States. The agreements were extended and modified. Under the agreement of 16th May, 1965, the assessee agreed not to represent or otherwise do business in film shorts and any sort of advertisement on the cinema screen for Hindustan Lever Ltd. or Lintas Ltd. in the agreed area. The assessee had agreed also to Blaze "taking over and handling" the said business from April 1, 1966, and further agreed to refrain from carrying on the business with Hindustan Lever Ltd. or handle any film advertising business till the end of 1975. In consideration of these terms, Blaze agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee undertaking the restraining obligations. The provisions of the non-compete agreement were clear enough to convince any one about the real intention of the parties. Neither any where did the agreement spell out any positive services to be rendered by the assessee in favour of the Gillette or even ISP, nor was there anything on record to show that after execution of the said agreement, the assessee started performing such services. On the other hand, the facts of the case were clear enough that the position of the assessee with reference to ISP and Gillette remained the same; even after execution of the non-executive chairman of ISP not taking part in the day-to-day activities of the said company, which fact had been acknowledged by the Assessing Officer himself. There was no room to suspect that in the guise of a restraining clause what Gillette wanted from the assessee was actual performance of any service of professional nature. Thus, the provisions towards receipt of the amount from Gillette being a part of the non-compete agreement and non-compete agreement merely providing certain restrictions on the assessee in the line of non-undertaking any competitive enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assets of the partnership and the compensation paid for restrictive covenant not to carry on similar business for a period of five years was in the nature of a separate transaction unconnected with the business of the assets of the partnership. The Tribunal was right in its view that the total compensation paid by the firms to the old partners was for (a) the share in the assets, (b) the share of the goodwill, and (c) for the restrictive covenant and that the part of the amount referable to the acquisition of the share in the assets and the share of the goodwill would be on capital account as it was in the nature of an initial outgoing and the payment towards the restrictive covenant was on revenue account and it would not amount to an acquisition of an advantage of an enduring nature. The Tribunal was also right in its view that the amount received by the recipients was not liable to tax either as income or capital gain." (8) Chelpark Company Ltd. v. CIT [1991] 191 ITR 249 (Mad.) "Held, that though, under the agreement, the benefit of the restrictive covenant was for a period of five years, from the terms of the dissolution deed as well as from the facts sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave started their own business as they had sufficient knowledge and experience in this line. Such an action on the part of the directors would have given a tough competition to the new company. It was to avoid this competition with the directors that the buyer company had entered a separate agreement with the directors. It may be mentioned here that the company and the directors are separate entities. Any agreement entered into with the company is not binding on the directors individually. Therefore, a separate agreement was signed for a price and the price was paid to the Directors to stop them from entering into any competition. In view of this position, I hold that the amount of Rs. 3.8 crores was not a part of the sale consideration for the transfer of the business assets. It was paid to the directors individually and as such not liable to be included in the sale consideration." 15. The Revenue Department challenged the order of the CIT(A) before the ITAT, Amritsar Bench in ITA No. 111 (ASR.)/2001 in which ground No. 5 is taken to challenge the above findings of the CIT(A). However, at the time of hearing of the appeal, this ground was not agitated before the Tribunal. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xisting terms and conditions of service pursuant to the agreement at the closing. Similarly, it is provided that the company shall deliver to the buyer approved undated non-compete agreements with Shri Harjit Singh Sahni, Shri Jitpal Singh Sahni and Shri T.S. Manocha (assessee) Directors of the seller to be effective and dated as of the closing date. It is also provided that the company shall get the duly dated non-competition agreement in favour of the buyer from the above directors including the assessee to be effective from the closing company. It is so provided in the business purchase agreements, copies of which are filed on pages 27 to 30 of the paper book and, therefore, execution of this agreement clearly provides that M/s. Jammu Bottling Co. not only sold its on going concern as well as goodwill of the company, was also under obligation to get the non-compete agreement to be delivered in favour of the buyer duly executed by its directors including the assessee. These clauses would show that the buyer not only wanted to purchase the business and goodwill of M/s. Jammu Bottling Co. but also wanted that its working directors should also refrain from doing the competitive busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red business undertaking, know-how includes, without limitation, the knowledge of evolving developing and systematically organising the marketing and distribution network for beverages". It is also provided in clause (d) that "At any time after the closing date, covenator shall not do anything which might prejudice carrying on the acquired business undertaking". The learned counsel for the assessee further explained that the assessee is one of the promoters of the company M/s. Jammu Bottling Co. since 1975 and is actively engaged in the running of the business which is of Coca Cola Company of U.S.A. He has further submitted that Coca Cola delivers the special concentrate to be used in their strict control to maintain its integrity and security. Some of the know-how/standard supplied to this company are in the knowledge of the Managing Director and Joint Managing Director of the company. Some of the standards for taking business have been explained. It was, therefore, explained that on account of working experience of the assessee for this company for about 24 years, the assessee had developed a great knowledge about the marketing of this product as per the policies f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal No. 4898 (Delhi) of 1998] in which point for reference was "Whether, on the facts and in the circumstances of the case, the amount of Rs. 6.6 crores received by the assessee from SWC is on account of handing over management and control of CDBI (which were earlier under the management and control of the assessee) to SWC as terminal benefit and is taxable under section 28(ii) of the Income-tax Act or same is exempt as capital receipt being non-competition fee by executing deed of covenant". The Third Member considered the facts of the case decided the point in favour of the assessee. His findings in para 34 are reproduced as under : "34. Now comes the second deed. SWC group realised the importance of assessee who had been in the same business of liquor and beer for more than 35 years and acquired expertise knowledge and specialisation in the same. They evaluated the worth of assessee and agreed to pay Rs. 6.6 crores if assessee undertakes not to come in the business in any manner for a period of ten years. Ld. A.M. rightly observed that it was the perception of a businessman and none else but concerned businessman can be the best judge. Business expediency some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The I.T.A.T. Delhi Bench 'A' in the matter of Sunil Lamba v. Dy. CIT [2004] 83 TTJ (Delhi) 174 held : "The assessee was engaged in the marketing and distribution of ice-cream and other related products. Under an agreement, he assigned his rights of marketing to BBL with the conditions that he will not engage himself directly or indirectly in such activities for a period of 10 years not only in relation to the products of the affiliated concerns but of any other concern. A sum of Rs. 1 crore was received in consideration thereof. Such amount was, therefore, received under a restrictive covenant of not engaging himself directly or indirectly in the activities carried on by it. The amount being not taxable, it cannot be said that the order passed by the Assessing Officer was erroneous insofar as prejudicial to the interest of the revenue. Thus even on merits, the CIT was not justified in assuming jurisdiction under section 263. The order under section 263 is, therefore, quashed." 21. The Assessing Officer held that section 28(ii)( a) of the Income-tax Act is applicable in this case and treated that the compensation received by the assessee was on the termination of his s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the restrictive covenant was a capital receipt and hence was not taxable. The compensation in the case of the assessee is very specific from his independent agreement. The very object of the agreement was to avoid competition in all matters between the assessee and M/s. Hindustan Coca Cola (buyers). Therefore, the assessee lost earning assets for specified period. The decision of the Hon'ble Supreme Court in the case of Best & Co. (P.) Ltd. (supra) is, therefore, directly applicable to the above case alongwith other decisions referred to above in this order. 24. We may remind that the Hon'ble Supreme Court in the matter of CIT v. Durga Prasad More [1971] 82 ITR 540 held that : "though an apparent statement must be considered real until it was shown that there were reasons to believe that the apparent was not the real, in a case where a party relied on self-serving in documents, it was for that party to establish the truth of those recitals : the taxing authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals;" 25. In the present case, the authorities below took the view that the amount of Rs. 1 crore was part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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