ACIT, CHENNAI V. Shri M.Ranjan Rao, CHENNAI

ITA 1582/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64461 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2002-2003
• Appeal Filed On: 10-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR S MOHARANA
• Assessee Lawyers: S SRIDHAR
• Keywords: Salary income; Capital receipt
• Section: 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI [BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER] I.T.A.NO.1582/MDS/2012 ASSESSMENT YEAR : 2002-03 THE ACIT BUSINESS CIRCLE II CHENNAI VS SHRI M.RANJAN RAO NEW NO.39, OLD NO.17 MYLAI RANGANATHAN STREET T. NAGAR, CHENNAI 17 [PAN AEEPR 3513B] (APPELLANT) (RESPONDENT) APPELLANT BY : DR.S.MOHARANA, CIT/DR RESPONDENT BY : SHRI S. SRIDHAR, ADVOCATE DATE OF HEARING : 31.10.2012 DATE OF PRONOUNCEMENT : 31.10.2012 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A)-VI, CHENNAI, DATED 23.5.2012. 2. THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS OF APPE AL: 1. THE ORDER OF THE LEARNED CIT(APPEALS) IS CONTRA RY TO LAW AND FACTS OF THE CASE. 2. THE LD CIT(A) ERRED IN DELETING THE ADDITION MA DE TOWARDS NON COMPETE. FEE TREATING THE SAME AS PROFI T IN LIEU OF SALARY U/S.17(3) OF THE ACT. I.T.A.NO. 1582 /12 :- 2 -: 2.1 THE LD CIT(A) OUGHT TO HAVE APPRECIATED THAT TH E ASSESSEE WAS EMPLOYED AS DIRECTOR IN THE COMPANY M /S. CITADEL FINE PHARMACEUTICALS LTD.(CFPL) AND BY VIR TUE OF JOINT VENTURE WITH AUROBINDO PHARMA, THE COMPANY M/ S. CITADEL AUROBINDO BIOTECH LTD. WAS FORMED BY CONVERGENCE OF CFPL AUROBINDO PHARMA LTD. 2.2 THE LD CIT(A) OUGHT TO HAVE APPRECIATED THE FAC T THAT THE COMPENSATION PAID TO THE DIRECTOR OF THE COMPA NY WHO IS AN EMPLOYEE OF THE JOINT VENTURE COMPANY IS NOTH ING BUT PROFIT IN LIEU OF SALARY U/S.17(3) OF THE ACT. 2.3 IT IS SUBMITTED THAT THE LD CIT(A) OUGHT TO HAV E APPRECIATED THAT THE ASSESSEE WAS NOT DOING ANY SE PARATE INDEPENDENT BUSINESS TO COMPETE IN THE FIELD OF ET HICAL ALLOPATHIC FORMULATIONS BUSINESS AT THE TIME OF EN TERING INTO JOINT VENTURE WITH AUROBINDO PHARMA LTD. 2.4 IT IS SUBMITTED THAT THOUGH AN AGREEMENT FOR RESTRICTIVE COVENANCE HAS BEEN ENTERED INTO BETWEEN THE PARTIES , THE SAID SUM DOES NOT PARTAKE THE CHARACTER OF NON COMP ETE FEE AS IT CAN BE DEFINED AS PROFIT IN LIEU OF SALAR Y OR GOODWILL U/S.SS(2)(A) OF THE ACT. 2.5 IT IS SUBMITTED THAT THE CIT(APPEALS) FAILED TO APPRECIATE THE FACT THAT THE COMPANY M/S. CITADEL AUROBINDO BIOTECH TERMINATED ITS JOINT VENTURE WIT H CFPL ONLY IN THE FINANCIAL YEAR 2005-06 AND PRESENTLY M/ S. CITADEL AUROBINDO BIOTECH LTD. AND CITADEL FINE PHARMACEUTICALS LTD. ARE SEPARATED. SINCE THE PURPO SE OF RECEIPT OF NON COMPETE FEE ITSELF WAS DEFEATED, ALTERNATIVELY THE SAID SUM HAD TO BE TAXED AS INCOM E FROM OTHER SOURCES. 2.6 IT IS SUBMITTED THAT BASED ON ASSESSEE'S SUBMIS SION THAT THE COMPANY HAD BECOME DEFUNCT, THE CIT(APPEA LS) HELD THAT ENTIRE SUM WAS NOT RECEIVED BY THE ASSESS EE. BUT THE COMPANY HAD NOT BECOME DEFUNCT AS SHRI A K RAMKUMAR, SON OF MR A R KRISHNAMURTHY (BENEFICIARY OF NON COMPETE FEE) IS THE MANAGING DIRECTOR OF CABL W HICH HAS ITS REGISTERED OFFICE AT ARCHANA TOWERS, ST THO MAS MOUNT, CHENNAI.16. I.T.A.NO. 1582 /12 :- 3 -: 2.7 IT IS SUBMITTED THAT THOUGH AN AGREEMENT FOR RESTRICTIVE COVENANCE HAS BEEN ENTERED INTO BETWEEN THE PARTIES, THE SAID SUM DOES NOT PARTAKE THE CHARAC TER OF NON COMPETE FEE AS IT CAN BE DEFINED AS PROFIT IN L IEU OF SALARY OR GOODWILL U/S.55(2)(A) OF THE ACT. 2.8 IT IS SUBMITTED THAT THE DECISION RELIED UPON B Y THE CIT(APPEALS) IS NOT APPLICABLE TO THE FACTS OF THE CASE AS THE RECEIPT OF NON COMPETE FEE WAS REVENUE OR CAPIT AL IS NOT THE ISSUE IN THE PRESENT APPEAL. IN THE ORDER U NDER CONSIDERATION, THE NOMENCLATURE OF RECEIPT ITSELF I S DISPUTED AS TO WHETHER IT WAS A NON COMPETE FEE; 2.9 IT IS SUBMITTED THAT THE DECISION OF THE HON'BL E ITAT RELIED UPON BY THE CIT(APPEALS) IN THE CASE OF SHR I P HARIHARA RAO HAS NOT BECOME FINAL AND APPEAL U/S.26 0A HAS BEEN PREFERRED BY THE DEPARTMENT. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING O FFICER MAY BE RESTORED. 3. AT THE TIME OF HEARING, THE CIT/DR SUBMITTED THAT THE SOLE ISSUE INVOLVED IN THIS APPEAL FILED BY THE REVENUE WAS THAT THE CIT(A) ERRED IN DELETING THE ADDITION MADE TOWARDS NON-COM PETE FEE BY THE ASSESSING OFFICER BY TREATING THE SAME AS PROFIT IN LIEU OF SALARY U/S 17(3) OF THE ACT. 4. THE CIT/DR SUBMITTED THAT WHILE DELETING THE ADDITI ON, THE CIT(A) HAS FOLLOWED THE DECISION OF THE TRIBUNAL IN THE CASE OF ACIT VS SHRI P. HARIHARA RAO IN I.T.A.NO. 1657/MDS/2011, AS SESSMENT YEAR 2002-03, ORDER DATED 30.3.2012, WHEREIN THE TRIBUNA L HAS DISMISSED THE APPEAL OF THE REVENUE ON A SIMILAR ISSUE BY FOL LOWING THE DECISION I.T.A.NO. 1582 /12 :- 4 -: OF THE HON'BLE SUPREME COURT IN THE CASE OF GUFFIC CHEM PVT. LTD VS CIT, [2011] 332 ITR 602(SC). HE SUBMITTED THAT IN THAT CASE THE HON'BLE SUPREME COURT WAS DEALING WITH THE CASE WHE RE THERE WAS LOSS OF SOURCE OF INCOME AND THE HON'BLE SUPREME CO URT HELD THE RECEIPT OF NON-COMPETE FEE AS A CAPITAL RECEIPT. H E SUBMITTED THAT IN THE PRESENT CASE, THE ASSESSEE WAS THE DIRECTOR OF THE COMPANY, M/S CITADEL FINE PHARMACEUTICALS LTD(CFPL) FROM WHOM TH E ASSESSEE WAS RECEIVING SALARY INCOME. WHEREAS THE NON-COMPETE F EE WAS RECEIPT FROM M/S CITADEL AUROBINDO BIOTECH LTD(CABL) AND HE NCE, THERE WAS NO LOSS OF SOURCE OF INCOME TO THE ASSESSEE AND TH EREFORE, THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF GU FFIC CHEM PVT. LTD (SUPRA) WAS NOT APPLICABLE TO THE CASE OF THE ASSE SSEE. HE, THEREFORE, SUBMITTED THAT THE ORDER OF THE CIT(A) SHOULD BE RE VERSED AND THE ORDER OF THE ASSESSING OFFICER SHOULD BE RESTORED. 5. ON THE OTHER HAND, THE A.R OF THE ASSESSEE FILED B EFORE US A COPY OF THE ORDER OF THE TRIBUNAL IN THE CASE OF SH RI P. HARIHARA RAO (SUPRA) AND SUBMITTED THAT ON IDENTICAL SET OF FACT S, WHEREIN ANOTHER DIRECTORS OF THE COMPANY WHO HAD RECEIVED NON-COMPE TE FEE OF ` 6 CRORES FROM CABL ON A SIMILAR AGREEMENT ENTERED INT O WITH THEM, WAS TAXED BY THE ASSESSING OFFICER AS PROFIT IN LIEU OF SALARY U/S 17(3) OF THE ACT AND DELETED BY THE CIT(A) FOLLOWING THE DEC ISION OF HON'BLE I.T.A.NO. 1582 /12 :- 5 -: SUPREME COURT IN THE CASE OF GUFFIC CHEM PVT. LTD ( SUPRA) WAS UPHELD BY THE TRIBUNAL AND APPEAL OF THE REVENUE WAS DISMI SSED. THE A.R OF THE ASSESSEE ALSO FILED BEFORE US A COPY OF THE OR DER OF THE TRIBUNAL IN THE CASE OF SHRI LATE A.R.KRISHNAMURTHY VS ACIT I N I.T.A.NO. 496/MDS/2010 FOR ASSESSMENT YEAR 2002-03, ORDER DAT ED 24.2.2012, WHEREIN THE ASSESSING OFFICER PASSED ORDER U/S 143( 3) R.W.S 147 31.12.2007, AND ON 27.12.2007 HE HAS RECORDED AS UN DER: GOING THROUGH THE DETAILS FILED, AND I.V.O. AGREEM ENT AND ALSO INTRODUCTION OF SEC.28(VA) W.E.F 1.4.2003, NON-COMPETITION FEE IS CAPITAL RECEIPT IN NATURE. HENCE RETURNED INCOME IS ACCEPTED. A.O. DICTATED. 6. THE CIT-X, CHENNAI, WHILE EXERCISING HIS POWER U/ S 263 OF THE ACT PASSED ORDER ON 31.3.2010 HOLDING THE ORDER PASSED BY THE ASSESSING OFFICER AS ERRONEOUS AND PREJUDICIAL TO T HE INTERESTS OF THE REVENUE ON THE GROUND THAT THE ASSESSING OFFICER HA S NOT LOOKED INTO THE DETAILS BY PROPER APPLICATION OF MIND AND SET A SIDE THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTI ON TO THE ASSESSING OFFICER TO RECONSIDER THE ISSUE IN ACCORDANCE WITH LAW. THE ASSESSEE APPEALED AGAINST THIS 263 ORDER PASSED BY THE CIT T O THE TRIBUNAL AND THE TRIBUNAL VIDE ITS ORDER DATED 24.12.2012 IN I.T .A.NO. 496/MDS/2010, QUASHED THE ORDER OF THE CIT PASSED U/S 263 OF THE ACT. THUS, IT WAS THE SUBMISSION OF THE A.R OF TH E ASSESSEE THAT ON A I.T.A.NO. 1582 /12 :- 6 -: SIMILAR SET OF FACTS, THE TRIBUNAL HAS HELD THAT TH E NON-COMPETE FEE RECEIPT BY THE ASSESSEE WAS CAPITAL RECEIPT NOT LI ABLE TO TAX AND FOLLOWING THE SAID ORDERS OF THE TRIBUNAL, THE ORDE R OF THE CIT(A) IN THE CASE OF THE ASSESSEE SHOULD BE UPHELD AND THE APPE AL OF THE REVENUE SHOULD BE DISMISSED. HE ALSO MADE A STATEMENT AT T HE BAR THAT BESIDES THE ASSESSEE, OTHER SIX DIRECTORS OF THE C OMPANY M/S CFPL HAD ALSO RECEIVED SIMILAR NON-COMPETE FEE BASED ON SIMILAR AGREEMENTS ENTERED INTO WITH M/S CABL. HE SUBMITTE D THAT IN THE CASE OF THREE DIRECTORS, THE ASSESSING OFFICER HIMS ELF HAD TREATED THE RECEIPT OF NON-COMPETE FEE AS CAPITAL RECEIPT AND N OT TAXED THE SAME. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE, THE ASSESSEE WAS A DIRECTOR IN THE C OMPANY, M/S CFPL. ANOTHER COMPANY IN THE NAME, M/S CABL ACQUIRED THE ETHICAL ALLOPATHIC PHARMACEUTICAL BRANDS OF SEVERAL COMPANI ES VIZ. M/S CITADEL FINE PHARMACEUTICALS LTD., M/S CITADEL FINE PHARMAC EUTICALS AND M/S C.F.PHARMACEUTICALS (P) LTD. THEREAFTER, THE SAID COMPANY, M/S CABL, ENTERED INTO AGREEMENT BY VIRTUE OF WHICH THE ASSE SSEE WAS TO RECEIVE ` 10 CRORES WITHIN THE NEXT SEVEN YEARS IN CONSIDERA TION OF RESTRAINING HIM FROM DOING THE BUSINESS IN THE LINE OF ETHICAL ALLOPATHIC PHARMACEUTICAL BUSINESS IN INDIA AND NEPAL. THE P AYMENT WAS I.T.A.NO. 1582 /12 :- 7 -: REFERRED TO AS NON-COMPETE FEE BY THE ASSESSEE. THE ASSESSEE FILED RETURN OF INCOME FOR ASSESSMENT YEAR 2002-03 WHEREI N THE ASSESSEE APPENDED A NOTE TO THE COMPUTATION OF INCOME CLAIMI NG THE RECEIPT AS CAPITAL RECEIPT NOT LIABLE TO TAX AND THE SAID NOTE READS AS UNDER: (II) THE ASSESSEE HAS ENTERED INTO A NON COMPET E AGREEMENT ON 27 TH MARCH, 2002 WITH M/S CITADEL AUROBINDO BIOTECH LIMITED ACCORDING TO WHICH THE ASSESSEE HAS FOR A PERIOD OF TEN (10) YEARS CONSENT ED NOT TO COMPETE WITH M/S CITADEL AUROBINDO BIOTECH LIMIT ED IN THE FIELD OF ETHICAL ALLOPATHIC BRANDED FORMULATION BUSINESS. IN CONSIDERATION THEREOF, M/S CITADEL AU ROBINDO BIOTECH LIMITED HAS AGREED TO PAY THE ASSESSEE A N ON- COMPETE FEE OF ` TEN CRORES AND DURING THE YEAR, HAS PAID ` 1.20 CRORES. THE SAME BEING A CAPITAL RECEIPT, IS CLAIMED AS NOT TAXABLE. 8. THE ASSESSING OFFICER TREATED THE AMOUNT OF ` 10 CRORES AS PROFIT IN LIEU OF SALARY AND TAXED THE SAME U/S 17 (3) OF THE ACT. 9. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) AND THE CIT(A) DELETED THE ADDITION BY FOLLOWING TH E ORDER OF THE TRIBUNAL IN THE CASE OF SHRI P.HARIHARA RAO (SUPR A) BY OBSERVING AS UNDER: 4. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE AR AND ALSO PERUSED THE REPORTS OF THE AO AND THE J OINT CIT. I FIND THAT FACTS OF THE CASE OF THE APPELLANT IS IDENTICAL TO THAT OF SHRI P. HARIHARA RAO WHEREIN THE NON-COMPETE FEES WAS BROUGHT TO TAX U/S 17(3) A S PROFIT IN LIEU OF SALARY BY THE AO WHICH WAS DELETE D BY THE CIT(A) AND THE ORDER OF CIT(A) WAS CONFIRMED BY HON'BLE ITAT. THEREFORE, THE DECISION OF HON'BLE IT AT CITED BY THE AR IS DIRECTLY APPLICABLE TO THE FACTS OF THE I.T.A.NO. 1582 /12 :- 8 -: CASE OF THE APPELLANT AND HENCE RESPECTFULLY FOLLOW ING THE DECISION OF THE HON'BLE ITAT I DELETE THE ADDITION MADE ON THIS GROUND. 10. THE CIT/DR CONTENDED BEFORE US THAT THE TRIBUNAL D ECIDED THE ISSUE IN THE CASE OF SHRI P. HARIHARA RAO IN FA VOUR OF THE ASSESSEE BY FOLLOWING THE DECISION OF THE HON'BLE SUPREME CO URT IN THE CASE OF GUFFIC CHEM PVT. LTD (SUPRA) AND AS PER THE CIT/DR, THE SAID DECISION IS DISTINGUISHABLE ON THE FACTS OF THE CASE OF SHR I P. HARIHARA RAO. THUS, IN THE OPINION OF THE CIT/DR, THE TRIBUNAL SH OULD NOT HAVE FOLLOWED THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF GUFFIC CHEM PVT. LTD (SUPRA) AS FOLLOWED BY IT. WE FIND THAT IT IS NOT IN DISPUTE THAT THE FACTS OF THE INSTANT CASE ARE EXAC TLY THE SAME WHICH WERE IN THE CASE OF SHRI P. HARIHARA RAO. SHRI P. HARIHARA RAO AND THE ASSESSEE BOTH WERE DIRECTORS OF M/S CITADEL FI NE PHARMACEUTICALS LTD. AND IN THE SIMILAR CIRCUMSTANCES, BOTH RECEIVE D COMPENSATION FROM THE VERY SAME COMPANY, NAMELY, M/S CITADEL AUR OBINDO BIOTECH LTD. UNDER SIMILAR AGREEMENT. IN THE CASE OF SHRI P. HARIHARA RAO, THIS TRIBUNAL HAS ALREADY HELD THAT THE AMOUNT SO RECEIV ED FROM M/S CITADEL AUROBINDO BIOTECH LTD. IS CAPITAL RECEIPT NOT LIABL E TO TAX. THE CIT/DR COULD NOT POINT OUT ANY DISTINGUISHING FEATURES IN THE INSTANT CASE FROM THE CASE OF SHRI P. HARIHARA RAO. FURTHER, NO MATE RIAL WAS BROUGHT BEFORE US TO SHOW THAT THE DECISION OF THE TRIBUNAL IN THE CASE OF SHRI I.T.A.NO. 1582 /12 :- 9 -: P. HARIHARA RAO WAS VARIED OR STAYED BY ANY HIGHER AUTHORITY. IN THE CIRCUMSTANCES, WE, RESPECTFULLY FOLLOWING THE DECIS ION OF THE TRIBUNAL IN THE CASE OF SHRI P. HARIHARA RAO (SUPRA), DO NOT FI ND ANY ERROR IN THE ORDER OF THE CIT(A) WHICH IS CONFIRMED AND THE GRO UNDS OF APPEAL OF THE REVENUE ARE DISMISSED. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 31 ST OF OCTOBER, 2012, AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER DATED: 31 ST OCTOBER, 2012 RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR