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TMI Blog2018 (11) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. Therefore, the same cannot be brought to taxation under any of the provisions of Income-tax Act. Accordingly, the order of the CIT(Appeals) is confirmed on this issue. Non-compete fee as a part of the family settlement - When the CIT(Appeals) found that the compensation received by the assessee is not taxable under Income-tax Act, it is not known why the non-compete fee received by the assessee is to be taxed under the Income-tax Act. This Tribunal is of the considered opinion that even though it was referred as non-compete fee, it is only a part of family settlement to settle the dispute once for all and to bring peace in the family . They anticipated that allowing the assessee to establish another cement factory in the near future may create a friction in the family and therefore, certain amount in cash was paid. This Tribunal is of the considered opinion that what was paid to the assessee is only a part of family settlement arising out of agreement dated 12.08.2009, therefore, the same also cannot be brought to taxation. In other words, what was paid to the assessee is consequent to the family settlement dated 12.08.2009. Hence, the same is not liable for taxatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;) on 13.06.2014. Consequent to the notice issued under Section 148 of the Act, the assessee has not filed any new return. The assessee requested the Assessing Officer to treat the return originally filed as return for the reopened assessment. The Assessing Officer, therefore, issued a show cause notice calling upon the assessee why the amount received consequent to the family settlement, including the so-called noncompete fee, should not be brought to tax? The assessee filed his objections primarily claiming that since the entire amount, including the non-compete fee, was paid to the assessee consequent to the family arrangement / settlement, it is not taxable in the hands of the assessee. 5. Smt. Ruby George, the Ld. D.R. submitted that the so-called family arrangement cannot be construed as family arrangement at all. According to the Ld. D.R., the entire family members are not party to the so-called family arrangement / settlement. Moreover, the properties, which were subject matter of so-called family arrangement are individual properties of the assessee and his brother Shri N. Srinivasan. Therefore, according to the Ld. D.R., there was no Hindu Undivided Family. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess in future. Moreover, according to the Ld. D.R., the non-compete fee is to restrain the assessee from engaging himself in doing business for a period of five years. Therefore, according to the Ld. D.R., the CIT(Appeals) has rightly confirmed the order of the Assessing Officer. However, the assessee has filed cross-objection in respect of the non-compete fee. 8. On the contrary, Sh. N. Devanathan, the Ld.counsel for the assessee, submitted that there was a family arrangement between the assessee and his brother. According to the Ld. counsel, it is not in dispute that India Cements Ltd. was promoted by Shri T.S. Narayanaswami, the father of the assessee and Shri Sankaralinga Iyer (of Sanmar Group). In other words, there are two groups involved in promoting India Cements Ltd. One group is by the assessee s father and another group by Shri Sankaralinga Iyer . On the demise of the assessee s father, according to the Ld. counsel, the assessee and his brother Shri N. Srinivasan succeeded Shri T.S. Narayanaswami. Similarly, on the death of Shri Sankaralinga Iyer, his sons, namely, Shri N. Sankar and Shri N. Klumar succeeded the said Shri Sankaralinga Iyer. According to the Ld. cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settlement. Placing reliance on the judgment of Apex Court in K.K. Modi v. K.N. Modi (1998) 3 SCC 573, the Ld.counsel submitted that when the agreement is arrived at between two groups belonging to the same family regarding division of assets, the Apex Court held that the Court should not lightly interfere with it especially when it has been substantially acted upon by the parties. In this case also, according to the Ld. counsel, the parties have acted upon the family agreement and no one is disputing the family settlement. Therefore, according to the Ld. counsel, the Assessing Officer being the taxing authority, cannot doubt the family settlement . According to the Ld. counsel, the matter would stand differently in case any one of the family members disputed the arrangement arrived at between the assessee and his brother. The dispute pending before Company Law Board was also settled in terms of the family arrangement / settlement dated 12.08.2009. 10. Sh. N. Devanathan, the Ld.counsel for the assessee, further submitted that the very same family settlement dated 12.08.2009 came for consideration before the Administrative Commissioner under Section 263 of the Act in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t dealt with the details. Since the source of investment was found to be the family settlement, according to the Ld. counsel, the Administrative Commissioner after examining the family arrangement / settlement dated 12.08.2009, found that the assessee explained the source and dropped the proceeding under Section 263 of the Act in respect of the investments made in Results Investments Pvt. Ltd. Therefore, according to the Ld. counsel, the Assessing Officer is not justified in reopening the assessment by issuing notice under Section 148 of the Act. 12. Sh. N. Devanathan, the Ld.counsel for the assessee, further submitted that Shri Justice S.H. Kapadia, the former Chief Justice of India, also examined this agreement, namely, family settlement dated 12.08.2009 and gave opinion saying that the agreement dated 12.08.2009 is an arrangement between the family members, therefore, it is not a transfer within the meaning of Section 2(47) of the Act. Since it is not a transfer, the former Chief Justice found that the settlement dated 12.08.2009 read together with the settlement earlier in the year 1990, do not constitute a transfer. Accordingly, the same is not liable for taxation. The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as High Court in Kay Aar Enterprises (supra) was dismissed by the Supreme Court in 306 ITR 5. The Ld.counsel further submitted that the receipt of share premium is not income at all, therefore, the same also is not liable for taxation. 14. Sh. N. Devanathan, the Ld.counsel for the assessee, further submitted that the non-compete fee received by the assessee is only consequent to the family settlement, therefore, the Assessing Officer cannot say that it is a business arrangement. To settle dispute among the family members, the assessee agreed not to engage himself in the business of cement manufacturing for five years. According to the Ld. counsel, this agreement is only to bring peace in the family and to have amicable solution to the existing misunderstanding among the family members. Therefore, according to the Ld. counsel, the CIT(Appeals) is not justified in bifurcating the money received towards compensation for inequalities in the family settlement as non-compete fee. A mere reference in the family settlement as non-compete fee may not alter the character of receipt. Hence, according to the Ld. counsel, noncompete fee is also part of family settlement, therefore, the CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and his brother Shri N. Srinivasan that the entire business is the family business of the assessee and his brother Shri N. Srinivasan. Therefore, it is not correct to contend at this stage by the Revenue that the properties are individual properties of the assessee and the assessee had no common fund for making investment. 17. The next contention of the Revenue is that all the family members are not party to the agreement dated 12.08.2009. When the assessee was examined on 07.02.2014, he replied as follows with regard to his two sisters as answer to question No.15:- After my father passed away, the family consisted of my mother, brother and two sisters. My mother, brother and I got the sisters married and whatever had to be given to them as per my mother s wishes was done. Subsequently, my mother allowed my brother and myself to run the business and so we were only the two people as part of this family settlement. This explanation of the assessee was not properly appreciated by the Assessing Officer. When the assessee and his brother Shri N. Srinivasan got the two sisters married as per their mother s wishes and gave whatever their mother wished, it mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequence of a family settlement agreement dated 12.08.2009 between Shri N. Ramachandran and Shri N. Srinivasan. The total payment is reflected in the balance sheet of M/s Prince Holdings (Madras) Pvt. Ltd. Thus, the capital raised by the assessee of ₹ 125 Crores stands explained. The issue with regard to the sources of share capital of ₹ 125 Crores is dropped. From the above observation of the Administrative Commissioner in his order dated 05.02.2014 under Section 263 of the Act in the case of Results Investments Pvt. Ltd., clearly establishes that Commissioner examined the agreement dated 12.08.2009 and found that the source for investment was explained. Therefore, it may not be correct to the Assessing Officer to say that the Administrative Commissioner has not examined the agreement. At para 9.2 of the order of the Administrative Commissioner under Section 263 of the Act dated 05.02.2014, he further observed as follows:- 9.2 I have carefully gone through the provisions of Section 56(2)(vii), 56(2)(viia), 56(2)(viib) and Rule 11U 11UA. It is found that the argument of the Counsel for the assessee is correct. 6250 shares were allotted by the assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er passed by the Assessing Officer has no leg to stand, hence the same is quashed. 20. We have carefully gone through the legal opinion given by Mr. Justice S.H. Kapadia, former Chief Justice of India, a copy of which is available from pages 74 to 92 of the paper-book Vol.1. After extracting the facts of the case and case laws on the subject, the former Chief Justice of India has opined as follows:- For above reasons, I am of the view that the said overall settlement dated 12.08.2009 read with 1990 FS do not result into transfer under Section 2(47) of the ITA. Apart from genuineness of the share premium which cannot be challenged as held in the case of Green Infra (supra), section 56(2)(viib) introduced by FA 2012, w.e.f. 01.04.2013 has no application to the OS of 2009. Hence, the Department is not entitled to rely on the said subsection. 21. We have also carefully gone through the opinion of Shri K. Parasaran, the former Attorney General of India. After extracting the facts of the issue and case laws on the subject, the former Attorney General of India expressed his opinion as follows:- Query A. Whether the various items [enlisted under (i) to (iii)] re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived by the assessee is to be taxed under the Income-tax Act. This Tribunal is of the considered opinion that even though it was referred as non-compete fee, it is only a part of family settlement to settle the dispute once for all and to bring peace in the family . They anticipated that allowing the assessee to establish another cement factory in the near future may create a friction in the family and therefore, certain amount in cash was paid. This Tribunal is of the considered opinion that what was paid to the assessee is only a part of family settlement arising out of agreement dated 12.08.2009, therefore, the same also cannot be brought to taxation. In other words, what was paid to the assessee is consequent to the family settlement dated 12.08.2009. Hence, the same is not liable for taxation. Moreover, as found earlier at para 19, the reopening of assessment after the order of the Administrative Commissioner under Section 263 of the Act is invalid. Hence, we are unable to uphold the orders of the lower authorities. Accordingly, orders of both the authorities below in respect of the so-called non-compete fee is set aside and the addition made by the Assessing Officer is dele ..... X X X X Extracts X X X X X X X X Extracts X X X X
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