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TMI Blog2022 (2) TMI 878X X X X Extracts X X X X X X X X Extracts X X X X ..... e company and he shall cease and desist from participating in similar business activities as that of the company and not to use his goodwill or expertise in respect of similar business as that of the company. To that extent, in our view it was loss of source of income for him in the future. The agreement, i.e., the deed for negative covenants was an independent obligation undertaken by appellant with the company in same field for a period of ten years.The compensation attributable to restrictive covenant, i.e., 20,00,000 Equity Shares of ₹ 10/- each in the hands of appellant was a capital receipt in as much as it was appellants profit making capabilities for a period of ten years from the date of appellant leaving the employment of the company either on his own or in association with professional competitors. ITAT, CIT and the AO have proceeded on an erroneous footing that the company came into existence only on 22nd June, 2000 and the assessee was inducted into its employment on 30th June, 2000 and therefore it was not feasible and it is inconceivable that appellant can be a privy to the business secrets of the company within a period of eight days of his employment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Aditya Vora i/b Mr. Atul K. Jasani for Appellant/Petitioner. Mr. Sham V. Walve for Respondent-Revenue. P.C. : INCOME TAX APPEAL NO. 950 OF 2009 1. On 29th July, 2009 the following substantial questions of law were framed. a) Whether, on the facts and the circumstances of the case, the Tribunal erred not treating that the amount received under the Deed for restrictive covenant as a Capital Receipt not liable to tax ? b) Whether, on the facts and the circumstances of the case, and in law, the finding of the Tribunal that the Appellant could not be viewed as a threat to the Company s business is perverse, contrary to the material on record and ought to be set aside ? c) Whether the failure on the Tribunal to follow the decision of a Special Bench by citing cases never cited by either party nor raised nor argued during the course of hearing, and contrary to the principle of natural justice and without the issue being put to the Appellant renders the decision bad in law and liable to be set aside ? d) Whether the Tribunal sitting as Division Bench ought to have either followed the larger Special Bench decision or in accordance with judicial prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcement Nevile hereby grants to the company lien in respect of any assets/property of Nevile or amounts due to him that may be lawfully held by the company at the time any breach is committed by Nevile of this agreement till the date of reimbursement. 3. In the assessment framed by respondent for A.Y. 2001-02, respondent invoked the provision of Section 147 read with Section 148 of the Income Tax Act, 1961 (the Act) for the purpose of taxing the said consideration of ₹ 2 Crores which in the opinion of respondent had escaped assessment. Respondent considered the provision of Section 17(1) (iv) read with Section 17(3)(i) of the Act in adding the amount, i.e., value of the equity shares received by way of the agreement to the salary income. The Assessing Officer contended that the threat from appellant to the company if and when he left the employment, was theoretical and not real, as appellant never had a substantial source of income in the previous assessment years. Hence, respondent took up the contention that appellant would never leave the company or there was any constructive interest on the part of appellant to leave the employment. It was only when appellant had lef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now made taxable under Section 28 (va) of the Income Tax Act, 1961. Mr. Kaka submitted that the Finance Act, 2002 itself indicates that during the relevant assessment year compensation received under non-competition agreement was capital receipt not taxable under the Act and it become taxable only with effect from 1st April, 2003 and the Hon ble Apex Court in Guffic Chem P. Ltd. vs. Commissioner of Income Tax (2011) 332 ITR 602 (SC), has held that said Section 28(va) is amendatory and not clarificatory and therefore, as held by the Hon ble Apex Court, compensation received under non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) of the Act and that too with effect from 1st April, 2003. 8. Mr. Walve justified the stand taken by the Assessing Officer, CIT (A) as well as the ITAT. Mr. Walve submitted that by virtue of the definition of the term salary as per Section 17(1)(iv) read with Section 17(3)(i) of the Act receipt of 20,00,000 Equity Shares received by appellant from his employer valued at ₹ 2 Crores would be a profit, gain or advantage in addition to salary though not term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. Whether the amount is received by way of compensation under a restrictive covenant or under a non-competition agreement it would amount to capital receipt in the hands of the recipient. Of course, it would depend on the agreement entered into between the parties. We have considered the agreement and we find that the agreement incorporated restrictive covenant on the right of appellant. 12. The agreement expressly provides that appellant shall not directly or indirectly engage in or be concerned or connected with any business which is similar to and/or in competition with the business of the company in the metro cities of Bombay, Delhi, Ahmedabad and Bangalore and appellant shall not directly or indirectly control or operate or cause to control or operate or participate in any similar business in the metro cities. In fact, the agreement goes to the extent of even stating that appellant shall not associate himself or be an advisor, employee or be a partner in any similar business as that of the company and he shall cease and desist from participating in similar business activities as that of the company and not to use his goodwill or expertise in respect of similar busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of 20,00,000 Equity Shares of ₹ 10/- each. We are informed across the bar that the company is in liquidation process before NCLT and the value of this shares today is practically worthless. 14. Respondents have also proceeded on an erroneous basis that statement of income filed by appellant for A.Y. 2000-01 does not show that appellant had income from business of maintenance and collection of art and sale of art and the assessee was showing only interest income and therefore he cannot be stated to be in a position to compete in any manner with the employer company because he did not have any existing business running. According to respondent for any sum stated to be non-compete fess, the same should be paid to any person from whom the real threat of competition exists and because his return of income for A.Y. 2000-01 does not show any income or business of maintenance and business of collection of art and sale of art, the value of shares received by appellant should be treated as revenue receipt and not capital receipt. In our view, these things really does not matter. All this cannot be the basis for determining whether the amount received by appellant should be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a competitive business was in the nature of capital receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillanders' case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the Commissioner of Income-tax (Appeals) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide the Finance Act, 2002 with effect from April 1, 2003 that the said capital receipt is now made taxable [See: Section 28(va)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non- competition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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