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TMI Blog2023 (10) TMI 1282X X X X Extracts X X X X X X X X Extracts X X X X ..... see? (ii) Whether the ITAT was correct in law in holding that an amount of Rs. 8 crores received by the assessee, in the facts and circumstances of the case, was capital receipt, hence not taxable?" 4. Insofar as the first question of law is concerned, it concerns the appeal filed by the respondent/assessee which is ITA No. 1200/2005, while the second question of law, as framed, has been raised by the appellant/revenue in ITA No. 399/2005. 5. Mr Ajay Vohra, learned senior counsel, who appears on behalf of the respondent/assessee, says that if the court were to rule in favour of the assessee insofar as the second question of law is concerned, then it would not be necessary to press the first question of law as it would be rendered academic. 5.1 The statement of Mr Vohra is taken on record. 6. Therefore, we propose to deal with the second question of law as framed by the court via an order dated 10.03.2006. 7. The broad facts in the backdrop of which this question of law arises for consideration are as follows: 7.1 The assessee at the relevant point in time was the Joint Managing Director of an entity going by the name Geep Industrial Syndicate Ltd. [hereafter referred to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A non-compete agreement dated 25.11.1998 executed between WSIL and GISL. Via this agreement, GISL agreed not to engage or participate directly or indirectly in any business in India or any other country in the world which involved manufacturing, trading, selling, marketing and distribution of the products or any components thereof or providing any services in connection therewith for a specified period, which was 10 years. The only exception which was provided was in Clause 5 of the said agreement whereby GISL could manufacture and supply the products referred to in the agreement to WSIL. (vi) Non-compete agreement dated 25.11.1998 executed between the assessee i.e., S.M. Sherwani and WSIL. (vii) Non-compete agreement dated 25.11.1998 executed between Mr S.I. Shervani, who was the Managing Director of GISL at the relevant point in time and WSIL. 9. As would be evident, out of the seven agreements, five agreements were executed between two corporate entities, i.e., GISL and WSIL. The remaining two agreements were executed between individuals, one of whom was the assessee. 10. As noticed above, at the relevant point in time, the assessee was a Joint Managing Director of the GIS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any business in India or any other country in the world which involves manufacture, trading, marketing and distribution of products or providing any services in connection therewith. 14. A plain reading of the clause would show that the negative covenant embedded in the non-competing agreement prevents the assessee from participating both directly and indirectly in his capacity, not only as a shareholder, director, partner, proprietor, member, but also as a Director. The negative covenant is wide enough to include any other capacity apart from the ones which are specifically noticed in the non-competing agreement. 15. Therefore, clearly for ten (10) years, the assessee for a valuable consideration which was received by him i.e., Rs. 8 crores, agreed not to indulge in competing business of any capacity whether directly or indirectly. 15.1 The only exception to this restraint is provided in Clause 4 whereby, the assessee has been given leeway to engage in or carry on business of manufacture of products albeit through GISL at the facilities located at Allahabad and Mysore for the purposes of supplying the products manufactured exclusively to WSIL or its affiliates. This clause i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing agents, shipping agents, purchasing agents and secretaries. The assessee also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an agreement which was terminable at will the assessee acted as a sole agent of explosives manufactured by Imperial Chemical Industries (Export) Ltd. That agency was terminated and by way of compensation Imperial Chemical Industries (Export) Ltd. paid for first three years after the termination of the agency two-fifths of the commission accrued on its sales in the territory of the agency of the appellant and in addition in the third year full commission was paid for the sales in that year. Imperial Chemical Industries (Export) Ltd. took a formal undertaking from the assessee to refrain from selling or accepting any agency for explosives. 6. Two questions arose for determination in Gillanders case [(1964) 53 ITR 283 (SC)], namely, whether the amounts received by the appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this Court was whether the amount received by the assessee (compensat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such receipts under the non-competition agreement with effect from 1-4-2003." [Emphasis is ours] 18. The AO, however, as noticed above, added the compensation received by the assessee on the ground that the business was not being carried out by the assessee, i.e., the individual, but by his employer, i.e., GISL. Therefore, according to the AO, the assessee was not compensated one way or the other for any loss of right. 19. Based on this rationale, the AO concluded that the receipt of Rs. 8 crores was in the nature of revenue receipt. 20. Mr Prashant Meharchandani, learned senior standing counsel, who appears on behalf of the appellant/revenue, relies upon the view of the AO in support of his argument. 20.1 Furthermore, Mr Meharchandani submitted that the entire agreement was a charade. According to him, the compensation for the purchase of two units of GISL located in Mysore was artificially configured to include the compensation for non-compete agreements which was paid to the two individuals referred to hereinabove, i.e., the assessee and Mr S.I. Shervani. 21. According to us, the submission advanced by Mr Meharchandani is untenable. 21.1 Insofar as the argument advanced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is factual position clearly shows that the non compete fees for GISL was part of the sale consideration and was camouflaged as non compete agreement between WSIL and the appellant and that is why I have mentioned this fact in this order." 23. According to us, a bare perusal of what is recorded by the CIT( A) in paragraphs 5.9 and 5.10 of his order would show that the consideration was paid against various agreements, which included the non-compete agreements. 23.1 A plain reading of the extract embedded in the aforementioned proceeding order does not convey that the assessee had conceded, as is sought to be portrayed before us, that the non-compete agreements were sham agreements and the consideration was artificially bifurcated into that which were paid for various assets [both fixed and movable] and transfer of IPR rights. 24. There is, in fact, no elucidation of the note said to have been submitted by the authorized representative of the assessee. 25. The Tribunal, in our view, has applied the correct test, which is that there was no material on record for the CIT(A) to conclude that non- compete fee was a camouflage for payment of money or transfer of business. 26. The rel ..... 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