9911796707
TMI Blog2000 (5) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... ng shaving blades and other shaving products manufactured by Gillette in U.S.A. The Indian Company known as M/s. Indian Shaving Products Limited (hereinafter referred to as "I.S.P.") was formed thereby of which the assessee remained as a Non-Executive Chairman. However, Gillette continued to remain the major and dominant shareholder of ISP and had full powers to appoint managerial personnel including Managing Director or Chief Executive Officer of ISP. Between 1982 to 1986, the assessee acquired considerable knowledge and expertise in the field of manufacture of shaving blades and other products with special reference to the manufacturing process, sources of raw-materials and the marketing of the products of Gillette. The Assessing Officer discusses in this connection that the assessee was approached by some other concerns to assist and associate with them in setting up a rival unit in India for manufacture of similar products. In fact, the papers produced on our record show that the offer came from one Shri Udayan Bose, Chairman of a London based Company called Credit Capital Finance Corporation Limited (hereinafter referred to as 'Credit') under a private and confidential letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 and also a number of other decisions of different Courts in support of his contention that since the cost of acquisition of the abovementioned intellectual rights was nil the receipt in the hands of the assessee could not be subjected to capital gains tax. 4. The Assessing Officer, however, referred to the provisions of section 2(24) of the Income-tax Act, 1961 and discussed that the definition of 'income' as given therein was merely inclusive and not exhaustive. He furthermore stated that income need not necessarily arise from any business activity, investment, outlay or any enforceable obligation to pay but may even arise out of voluntary payments. The Assessing Officer, after discussing the observations made by the Privy Council in the case of CIT v. Shaw Wallace Co. AIR 1932 PC 138 to the effect that ordinarily compensation for loss of office is to be regarded as capital receipt, however, held that this rule is subject to exception and that the payments received for termination of office would be revenue in nature in a case where the agency/office was one of the many which the assessee held and its termination did not impair income earning structure of the assessee. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot shown as trading receipt in the books of the assessee, there is no bar on the Assessing Officer to treat it so. He stated that the true nature and the quality of the receipt is required to be taken into consideration. By relying on certain decisions of different Courts, he ultimately confirmed the addition of the amount under consideration to the total income of the assessee. 6. When the matter came up before us for hearing, the Id. counsel for the assessee strongly contended that the assessee was never engaged as an Executive of I.S.P. and also did not draw any remuneration from that Company on any account. He thus argued that it could not be said in that way that the amount received from Gillette represents his professional income, inasmuch as, the assessee has never earned any income by exercising his expertise in the field of manufacturing and marketing shaving blades and other related products. He also pointed out that even after execution of the non-compete agreement, the assessee was not put into the charge of any executive operation in I.S.P. He also pointed out that the non-compete agreement does not at all speak of rendering any positive services by the assessee but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (A), (B), (C), (D) merely state the background of the issue. As per the abovementioned main Clause, the assessee undertook that he shall not at any time during the continuance of his office as Chairman of I.S.P. or for three years thereafter engage himself in a rival activity. It is thus clear that the agreement imposes a restraining duty on the assessee and does not expect any positive activity towards rendering of any services by the assessee to Gillette. There is no other clause in the agreement which may lead to a converse decision. From a plain reading of the agreement, therefore, one has got to be come to the conclusion that the payment under consideration is merely for the assessee undertaking the restraining obligations. The Id. counsel for the assessee has relied on a judgment of the Supreme Court in the case of Union of India v. Gosalia Shipping (P.) Ltd. [1978] 113 ITR 307 at page 311. The Supreme Court held in this case that one must have regard to the substance of the matter and, if necessary, tear the veil in order to see whether the true character of a payment was something other than what, by a clever device of drafting, it was made to appear. So far as the insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the conclusion that the receipt represents the compensation for not undertaking any rival activities and in that way is towards restrictive purposes, the next issue for us would be to consider whether the receipt, in the circumstances, can be considered to be of the nature of capital receipt or a revenue one. A large number of decisions have been cited by the Id. counsel for the assessee in support of his argument that a receipt in view of a restrictive clause would be capital in nature. Firstly, reliance has been placed on a judgment of the Chief Court of Sindh in the case of CIT v. Mills Store Co. [1941] 9 ITR 642. In that case, that assessee, besides selling its business and goodwill also undertook a restrictive covenant preventing it from carrying on business in the said line for a particular period. Certain separate payment of Rs. 10,000 per annum for 10 years was made to that assessee in view of the said restrictive covenant. The Court held that the abovementioned sum of Rs. 10,000 was not the direct result of profits or gains accruing to the assessees as a result of business actually carried on by it, and that on the other hand, it was the direct consequence of no busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the assessee. In that case also, it was held that compensation for agreeing to refrain from carrying on competitive business constituted capital receipt not liable to income-tax. The Supreme Court's in the case of CIT v. Bombay Burmah Trading Corpn. [1986] 161 ITR 386 at page 401 has also been relied upon in this case. In that particular case that assessee was prevented from carrying on business of logging and telling trees upon the nationalisation of the forest resources and the consequential acquisition of the residuary rights and assets pertaining to the forest leases belonging to that assessee. It was held that compensation paid to that assessee for residuary rights under the leases in the shape of logs - timber receipt was capita in nature. However, the facts of this case do not seem to have much relevance to those of the present case before us, inasmuch as, in this particular case, the compensation did not relate to any restrictive covenant. Further reliance has also been placed on the judgment of the House of Lords in the case of Higgs (H.M.) Inspector of Taxes v. Olivier [1951] 33 Tax Cases 136. In that particular case, it was held that the payment relating to the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. A capital receipt may be of various nature. When a capital asset is transferred, the receipt arising thereby is of the nature of capital receipt. Such receipt would, however, be taxable by way of being capital gains from transfer of capital assets. When there is a loss of the capital structure of a particular assessee or drying up of a source of income, any compensation received by the assessee for such loss would also have to be treated as capital receipt. A pure voluntary donation received by an assessee also constitutes a capital receipt in his hands. At the same time again, another type of capital receipt would be constituted by receipts arising out of restrictive covenants as in the present case. All the decisions with regard to this type of receipt go to hold that such a receipt cannot be treated as a revenue receipt or even as a casual receipt and hence, cannot be subjected to tax. On the other hand, the receipt being of capital nature would escape the provisions of taxation. So far as the present case is concerned, the receipt of Rs. 8 crores being of the nature of capital receipt, cannot be subjected to tax in the hands of the assessee. We, therefore, reverse the or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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