9911796707
TMI Blog2011 (10) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant. G.P. Trivedi for the Respondent. ORDER N.V. Vasudevan, Judicial Member This is an appeal by the assessee against the order dated 17/3/2010 of CIT(A)-18, Mumbai relating to assessment year 2007-08. The grounds of appeal of the revenue read as follows: 1. The Commissioner of Income Tax (Appeals) 18, Mumbai [hereinafter referred to as CIT(A) ] erred in not appreciating the fact that the receipt of ₹ 2 Crore by the appellant does not fall within the purview of Section 28(va) of the Act. 2. Without prejudice to the above the CIT(A) erred in classifying the receipt of ₹ 2 Crore as Income from Business u/s. 28(va) of the Act and not considering the same as part of Full Value of Consideration Received u/s. 48 of the Act. 2. The Asssessee is an individual. He is director of M/s. Samsonite South Asia Pvt. Ltd. He filed a return of income for A.Y.07-08 declaring total income of ₹ 7,29,18,046/-. Subsequently, the assessee has filed letter dated 31.07.2007 submitted on 01.08.2007, which is reproduced as under :- 'During the year under consideration, the assessee has received a sum of ₹ 2,00,00,000/- being compens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Demat Katyan Construction Developers Pvt. Ltd. 316,330 4.05% 5. Demat Shobha Tainwala 852,400 10.93% 6. A0327 Amishi Tainwala 1,013,461 13.00% 7. 10661 Dungarmal Ramesh Kumar HUF 109,700 1.41% 8. Demat Tainwala Chemicals Plastics (I) Ltd. 42,170 0.54% TOTAL (A) 4,290,066 55.00% Block B comprising of 13,07,328 Equity Shares aggregating to 16.76% of the total paid up capital of the Company and referred to in the Agreement as Optional Sale Shares Sl.No. LF No. Name No. of share % of share Holding 1. P000259 Periwinkle Fashion Pvt. Ltd. 400,000 5.13% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement dt.13.3.2006 is as follows: 6. NON-COMPETE . 6.1. The Sellers hereby irrevocably undertake and covenant that, during the period commencing from the Effective Date and ending on the expiry of 11 (Eleven) years after Termination of this Agreement (Non-compete Period, they will not directly or indirectly: 6.1.1 carry on, or be engaged, concerned or interested in any business which is similar to or competes either directly or Indirectly of manufacturing industrial packaging products made of plastic or steel and Including drums/barrels, containers, IBC's {intermediate Bulk Containers) (Narrow Mouth, Wide Mouth or Open Mouth) with or without L-Ring/XL-Ring in volume capacities of 135-2000 Ltrs. 6.1.2 interfere with, tender for, canvass, solicit or endeavor to entice away from the Company any employees, except the employees as mentioned under Annexure E annexed herewith, or the business of any person who was a customer, client or agent of the Company, for the Company Business; 6.1.3. supply any product, carry out or undertake or provide any activity or service which is the same as or similar to those with which the Company deals or provide; 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any capacity and also the production of industrial packagings for transportation of liquids, powders and solids in any form only upto 135 Ltrs capacity and not exceeding 135 Ltrs capacity in any manner whatsoever. 5. The sum of ₹ 2 Crores received by the Asssessee pursuant to clause-6 of the Agreement dt.13.3.2006 was not offered to tax by the Assessee in the return of income filed for AY 07-08. As already stated, the Assesee filed a letter dt. 31.7.2008 in which the Assessee claimed that the sum of ₹ 2 crores being compensation for agreeing not to engage in the business in which the Assessee had sole expertise and knowledge is a compensation received for giving up a source of income which is a capital receipt and not income chargeable to tax. The Assessee in this regard relied on the decision of the Hon'ble Supreme Court in the case of Gillanders Arbuthnot Co. Ltd. v. CIT [1964] 53 ITR 283. 6. The AO in the course of assessment proceedings brought to the notice of the Assessee that various courts have held that non-compete fees was a capital receipt not chargeable to tax. The AO further pointed out that to put at rest the controversy with effect from 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived by the directors. In view of the clear clauses mentioned in agreement it is not possible to consider non-compete compensation of ₹ 2 crores as part of sale consideration to suit the convenience of the appellant. In any case, the appellant is not covered by the provisions of Sec. 28(va) which deals with amount received on transactions pertaining to capital assets and which are chargeable under the head capital gains. Hence this ground of appeal is dismissed. 8. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal. 9. We have heard the submission of the learned counsel for the Assessee who primarily focused on the alternative plea put forth before the revenue authorities. He summarized the law as it prevailed prior to enactment of Sec.28(va) of the Act and submitted that a receipt on account of undertaking not to engage in competing business commonly referred to as Non-Compete Fee was capital receipt not chargeable to tax and therefore sum received by the Assessee has to be taxed only as capital gain. In this regard it was submitted by him that the right to carry on business utilizing his knowledge and skill wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the commodities in respect of the agency terminated or for loss of goodwill was prima facie of the nature of a capital receipt. In the present case, the covenant was an independent obligation undertaken by the assessee not to compete with the new agents in the same field for a specified period. It came into operation only after the agency was terminated. It was wholly unconnected with the assessee's agency termination. We, therefore, hold that part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax. 11. With effect from 01.04.2003 vide Finance Act, 2002 a new subsection (va) was inserted in section 28 to bring in the non-compete fess within the preview of section 28 to make it taxable in the hands of the recipient of such income. 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; Provided that sub-clause (a) shall not apply to- (i) any sum, whether received or rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e price ; and (ii) in any other case not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49, shall be taken to be nil ; The question for consideration is as to whether the case of the Assessee falls within the proviso (i) to Sec.28(va)(a) of the Act. According to the learned Counsel for the Assessee, the sum of ₹ 2 Crores received by the Assessee under clause 6 of the share purchase Agreement dt.13.3.2006 is sum, received, in cash, on account of transfer of the right to carry on any business, which is chargeable under the head Capital gains . 13. We are of the view that the claim made by the Assessee cannot be accepted. For proviso(i) to Sec.28(va)(a) to apply there must be transfer of the right to carry on any business. The Assessee in the present case was not carrying on any business on his own but was the promoter and director of the company whose shares were purchased by the Acquirer. Clause-6 of the share purchase agreement dt.13.3.2006 does not transfer any right to carry on any business but merely provides that the Asssessee shall not carry out any activity in relation to business of the Assessee. We may also add that th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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