NAYAN C. SHAH, MUMBAI V. DCIT CIR 7(1), MUMBAI

ITA 2857/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55074 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 20-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 12-04-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: T D SINGH
• Assessee Lawyers: VIJAY MEHTA
• Keywords: Capital asset; Business income; Cost of acquisition; Capital receipt
• Section: 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F MUMBAI BEFORE SHRI P.M. JAGTAP (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) ITA NO.2857/MUM/2010 ASSESSMENT YEAR-2006-07 SHRI NAYAN C. SHAH, 21, BEACH VIEW, 5 TH FLOOR, BHULABHAI DESAI ROAD, BREACH CANDY, MUMBAI-400 026 PAN-AAFPS 0892M VS. THE DCIT CIR 7(1), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI VIJAY MEHTA RESPONDENT BY: SHRI T.D. SINGH O R D E R DATE OF HEARING : 20.6.2011 DATE OF PRONOUNCEMENT:30.8.2011 PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER DATED 26.12.2009 PASSED BY THE LD. CIT(A)-13 FOR TH E ASSESSMENT YEAR 2006- 07. 2. THE APPEAL BY THE ASSESSEE IS AGAINST TREATMENT OF RS. 43,14,775/- RECEIVED FROM THE INSURANCE COMPANY MUNICH RE, GERMA NY. THE ASSESSEE HAD TREATED AS A CAPITAL RECEIPT AND OFFERED THE ENTIRE AMOUNT AS CAPITAL GAINS, AS COST OF ACQUISITION FOR NON COMPETE PAYMENT U/S 55( 2)(A) IS NIL. THE AO HAD TREATED IT AS BUSINESS PROFITS. WHEN CALLED UPON TO EXPLAIN THE TRANSACTION THE ASSESSEE, VIDE HIS LETTER DT 16.11.2008 EXPLAINED A S UNDER: I HAD PROMOTED A COMPANY CALLED PARAMOUNT HEALTH CARE MANAGEMENT COMPANY PVT. LTD. (PHMC) FOR THE PU RPOSE OF PROVIDING THIRD PARTY ADMINISTRATION AND MANAGED CA RE SERVICE. ITA NO. 2857/M/10 2 ON ACCOUNT OF MY EXPERIENCE AND EXPERTISE IN PROVID ING SUCH SERVICES, I HAD THE ABILITY TO DO THIS BUSINESS ON MY INDIVIDUAL CAPACITY. MUNICH RE WAS INTERESTED IN BECOMING A SHAREHOLDER OF THE SAID COMPANY. FOR THIS PURPOSE A MEMORANDUM OF UNDERSTA NDING DT. 15 TH OCT. 1999 WAS ENTERED INTO BETWEEN ME AND MUNICH R E. UNDER THE MOU, IT WAS INTERALIA AGREED THAT PHMC WI LL INCREASE ITS SHARE CAPITAL BY ISSUE OF FURTHER SHARES AND MU NICH RE WOULD SUBSCRIBE TO 500000 NO. OF SHARES BEING 33.33% OF T HE SHAREHOLDING IN THE PHMC AND OUR PERCENTAGE HOLDING AND OF OTHERS WILL BE REDUCED TO 66.67% FROM 100%. FURTHE R I WILL GRANT MUNICH RE OPTION TO ACQUIRE 265000 SHARES OF PHMC (17.67% OF INCREASED CAPITAL) AT PAR (RS. 10 PER SH ARE) AT ANY TIME WITHIN NEXT 5 YEARS AFTER THE INCREASE IN SHAR E CAPITAL. THUS EVENTUALLY MUNICH RE WILL HOLD 51% OF INCREASE D SHARE CAPITAL IN PHMC. AS MUNICH RE HAD ACQUIRED 33.33% OF SHARES IN THE P HMC AND HAD THE OPTION TO GO UPTO 51% THEY INSISTED THAT I S HOULD GIVE UP MY RIGHT TO CARRY ON SUCH BUSINESS AS MAY BE CAR RIED ON BY PHMC. SINCE THE AMOUNT WAS RECEIVED IN RESPECT OF RIGHT T O CARRY ON THIS BUSINESS THE ENTIRE AMOUNT OF RS. 43,14,775/- HAS BEEN OFFERED FOR TAX AS CAPITAL GAINS WITH COST OF ACQUI SITION AS NIL IN VIEW OF SEC. 55(2)(A) OF THE I.T. ACT. FOR THIS PURPOSE INITIALLY I WAS PAID AN AMOUNT OF U SD 12,50,000 EQUIVALENT TO RS. 5,41,64,055/- IN THE PREVIOUS YEA R RELEVANT TO ASSESSMENT YEAR 2000-01. THIS INCOME HAS BEEN OFFE RED FOR ASSESSED TO TAX IN THAT YEAR ALSO AS LONG TERM CAPI TAL GAIN. 3. THE ASSESSEE CONTENDED THAT THE PAYMENT WAS FOR AGREEING NOT TO CARRY ON THE BUSINESS IN COMPETITION WITH THE INDIAN COMPANI ES PHMS AND PHS INTO WHICH THE GERMAN COMPANY HAS INVESTED. THE PAYMENT OF RS. 43,14,775 WAS AS PER THE AGREEMENT ENTERED INTO ON 15.10.99 AS AM ENDED BY THE AGREEMENT DT 5.4.2000. THE FIRST PAYMENT UNDER THIS AGREEMENT AMOUNTING TO RS. 5.84.78,830/- RECEIVED FROM THE GERMAN COMPA NY DURING AY 2000-01 HAS BEEN ACCEPTED BY DEPARTMENT AS A CAPITAL RECEIP T. THE AMOUNT RECEIVED BY THE ASSESSEE IS ONLY THE SECOND INSTALMENT UNDER THE SAME AGREEMENT PAYABLE AFTER FIVE YEARS. FURTHER, THE PAYMENT IS F OR NOT CARRYING ON ANY BUSINESS AND HENCE PROVISIONS OF SEC 28(VA) WILL NO T BE APPLICABLE, IN VIEW OF ITA NO. 2857/M/10 3 THE PROVISO UNDER THAT SECTION. THE AO DID NOT ACCE PT THE SUBMISSIONS OF THE ASSESSEE AND BROUGHT TO TAX THE ENTIRE AMOUNT AS BU SINESS PROFITS U/S 28(VA). 4. ON APPEAL THE CIT(A) ALSO HELD THAT THE PAYMENT FALLS UNDER SEC 28(VA) AND CONFIRMED THE ACTION OF THE AO, IN TREATING THE ENT IRE RECEIPT OF. RS. 43,14,775/- AS BUSINESS PROFITS. 5. AGGRIEVED THE ASSESSEE IS ON APPEAL BEFORE US. T HE ASSESSEE REITERATED THEIR ARGUMENTS BEFORE THE LOWER AUTHORITIES AND BU TTRESSED THEIR ARGUMENTS WITH CASE LAWS. THE LEARNED AR OF THE ASSESSEE REFE RRED TO PROVISIONS OF SEC 55(2) OF THE ACT, THE RELEVANT PORTION OF WHICH HAS BEEN REPRODUCED AS UNDER: (2) FOR THE PURPOSES OF SECTIONS 48 AND 49(COST OF ACQUISITION. (A) IN RELATION TO A CAPITAL ASSET BEING GOODWILL O F A BUSINESS OR A TRADE MARK OR BRAND NAME ASSOCIATED WITH BUSINESS OR A RIGHT TO MANUFACTURE PRODUCE OR PROCESS ANY ARTICLE OR TH ING OR RIGHT TO CARRY ON ANY BUSINESS TENANCY RIGHTS STAGE CARRI AGE PERMITS OR LOOM HOURS. PROVISIONS OF SEC 28(VA) READS AS UNDER: (VA) ANY SUM WHETHER RECEIVED OR RECEIVABLE IN CAS H OR KIND UNDER AN AGREEMENT FOR (A)NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS OR (B) NOT SHARING ANY KNOW HOW PATENT COPYRIGHT TRADE MARK LICENCE, FRANCHISE OR ANY OTHER BUSINESS OR COMMERC IAL RIGHT OF SIMILAR NATURE OR INFORMATION OR TECHNIQUE LIKELY T O ASSIST IN THE MANUFACTURE OR PROCESSING OF GOODS OR PROVISION FOR SERVICES. PROVIDED THAT SUB CLAUSE (A) SHALL NOT APPLY TO: (I) ANY SUM WHETHER RECEIVED OR RECEIVABLE IN CASH OR K IND ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY ON ANY BUSINESS WHICH IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS. 6. FROM THE COMBINED READING OF BOTH THE ABOVE PROV ISIONS AND SEC 28(VA), IT IS ABUNDANTLY CLEAR THAT IF THE ASSESSEE GIVES UP RIGHT TO CARRY ON ANY ACTIVITY IN RELATION TO BUSINESS THE SAME WOULD BE REVENUE RECEIPT. AS AGAINST THAT IF THE ASSESSEE GIVES UP THE RIGHT TO CARRY ON ANY BUSINESS ITA NO. 2857/M/10 4 THE CONSIDERATION RECEIVED WOULD BE CAPITAL IN NATU RE. THE LEGISLATURE HAS CONSCIOUSLY MADE A DEMARCATION BETWEEN ACTIVITY IN RELATION TO BUSINESS AND BUSINESS. 7. IT IS FURTHER SUBMITTED THAT IN THE PRESENT CASE THE FIELD OF PROFESSIONAL ACTIVITIES OF THE ASSESSEE IS CONFINED TO RADIOLOGY AND IMAGING ONLY AS HE IS SPECIALISED IN THAT BRANCH OF MEDICAL SCIENCE WHICH HE HAD TO GIVE UP AS COMMITTED IN CLAUSE 1 OF THE NON COMPETE AGREEMENT DATED 15.10.1999. THEREFORE IT WAS SUBMITTED THAT NOTHING OTHERWISE M IGHT BE IMPORTED FROM THE WORDINGS OF THE CLAUSES AS WHAT IS TO BE SEEN I S THE PURPOSE FOR WHICH THE CONSIDERATION WAS RECEIVED. 8. IT IS SUBMITTED THAT THE ISSUE AS TO WHETHER THE WHOLE OF THE BUSINESS HAS BEEN GIVEN UP OR ONLY SOME ACTIVITY OF THE BUSINESS HAS BEEN GIVEN UP HAS TO BE ADJUDGED FROM THE FACT AS TO WHE THER BEFORE SUCH GIVING UP THE ASSESSEE WAS ENGAGED INTO WHICH ACTIVITIES. IF THE ASSESSEE WAS ENGAGED INTO PARTICULAR ACTIVITIES COMPRISING OF TH E BUSINESS AND WHOLE OF SUCH ACTIVITIES HAS BEEN GIVEN UP THERE IS A COMPLE TE IMPAIRMENT OF INCOME GENERATING ASSET AND THE CONSIDERATION RECEIVED THE REFORE WOULD FALL UNDER THE HEAD CAPITAL GAIN. HOWEVER IF ONLY PART OF THE BUSINESS BEING CARRIED BY THE ASSESSEE HAS BEEN GIVEN UP I.E. SOME ACTIVITIES HAVE BEEN GIVEN UP RETAINING THE OTHER ACTIVITIES THERE WOULD NOT BE C OMPLETE CESSATION OF BUSINESS AND THE RECEIPT WOULD FALL INTO REVENUE FI ELD. SINCE THE ASSESSEES ACTIVITIES WERE CONFINED TO THE BRANCH OF RADIOLOGY AND IMAGING AND THAT WAS GIVEN UP FOR WHICH THE CONSIDERATION WAS RECEIVED I T WAS SUBMITTED THAT THE INESCAPABLE CONCLUSION WOULD BE THAT THE RECEIPT TO OK THE COLOUR OF CAPITAL RECEIPT AND THE DEPARTMENT HAS ERRED IN HOLDING OTH ERWISE. 9. IT WAS SUBMITTED THAT IT WOULD BE IMPOSSIBLE TO EXPECT THAT A NON COMPETE AGREEMENT WOULD SUGGEST GIVING UP OF ANY AC TIVITY WHICH IS NOT BEING CURRENTLY UNDERTAKEN BY THE ASSESSEE. THIS IS FOR THE SIMPLE COMMERCIAL REASON THAT THE PARTY MAKING THE PAYMENT OF NON COM PETE FEE WOULD NOT BE INTERESTED IN ANY ACTIVITY NOT BEING CURRENTLY CARR IED OUT BY THE ASSESSEE. NOR ITA NO. 2857/M/10 5 SUCH NON-EXISTENT ACTIVITY WOULD AFFECT EITHER THE AGREEMENT OR REALITY OF THE LIFE IF ALL THE ACTIVITIES WHICH ARE BEING CURRENTL Y CARRIED OUT BY THE ASSESSEE ARE GIVEN UP IRRESPECTIVE OF THE WIDTH OR NARROWNES S OF THE SAME THERE IS A COMPLETE IMPAIRMENT AND THEREFORE THE RECEIPT WOULE BE CAPITAL IN NATURE. 10. AS TO THE POSER OF THE LEARNED DR THAT ASSESSE E HAS NOT GIVEN UP ALL THE ACTIVITIES WHICH HE COULD CONDUCT AS A PROFESSI ONAL DOCTOR, IT WAS SUBMITTED THAT NON COMPETE HAS TO BE ALWAYS WITH RE FERENCE TO EXISTING BUSINESS PROFESSION. IF ASSESSEE MENTIONS GIVING UP OF ACTIVITIES NOT BEING UNDERTAKEN BY HIM THE SAME WOULD BE REDUNDANT. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT REMINDS HIM OF A FAMOUS ANECDOTE ABOUT SOUTH INDIAN RESTAURANT DISPLAYING A BOARD OUTSIDE THE PRE MISES ANNOUNCING THEIR POLICY OF NOT GRANTING CREDIT AS UNDER: WE HAVE ENTERED INTO A NON COMPETE AGREEMENT WITH OUR NEIGHBOURING BRANCH OF STATE BANK OF INDIA. THEY W ILL NOT SELL IDLI WADA AND WE WILL NOT GIVE CREDIT. 11. IT WAS FURTHER SUBMITTED THAT THERE IS A VAST DI FFERENCE BETWEEN THE LANGUAGES OF S. 28(VA) AND SEC 55(2) OF THE ACT WHE REAS SEC 28(VA) OF THE ACT USES THE WORDS ANY ACTIVITY IN RELATION TO ANY BUSI NESS SEC 55(2) OF THE ACT IS COMPOSED OF THE WORDS RIGHT TO CARRY ON ANY BUSINES S IT IS FURTHER SUBMITTED THAT THE ASSESSING OFFICER AND THE LD. CIT(A) HAVE ALSO COMPLETELY IGNORED THE PROVISO TO SEC 28(VA) OF THE ACT WHEREIN IT HAS BEEN STATED IN UNAMBIGUOUS TERM THAT CLAUSE (A) SHALL NOT BE APPLI CABLE IN RESPECT OF THE AMOUNT RECEIVED FOR TRANSFER OF THE RIGHT TO CARRY ON ANY BUSINESS AS SUCH CONSIDERATION WOULD BE CHARGEABLE TO TAX UNDER THE HEAD CAPITAL GAIN. IT IS, THEREFORE SUBMITTED THAT BY VIRTUE OF THE SAID PROV ISO THE LEGISLATURE HAS MAINTAINED THE DEMARCATION BETWEEN THE REVENUE REC EIPT AD CAPITAL RECEIPT EVEN AFTER THE AMENDMENT MADE BY THE FINANCE ACT 20 02 W.E.F. 1.4.2003. 12. IT IS SUBMITTED THAT PRIOR TO THE AMENDMENT EFFE CTIVE FROM A.Y 2003-04 THE CAPITAL RECEIPT ON ACCOUNT OF NON COMPETE FEE W AS NOT LIABLE TO TAX WHEREAS THE REVENUE RECEIPT WAS FULLY TAXABLE THE A MENDMENT HAS BEEN ITA NO. 2857/M/10 6 INTENDED TO BRING TO TAX THE CAPITAL RECEIPT U/S 45 OF THE ACT. THE AMENDMENT TO SEC 28(VA) OF THE ACT IN THAT SENSE IS MERELY CL ARIFICATORY AS THE PARTIAL IMPAIRMENT OF PROFIT MAKING STRUCTURE WAS ALWAYS LI ABLE TO TAX. IT IS THEREFORE SUBMITTED THAT THE AMENDMENT HAS NOT INTENDED NOR I T COULD HAVE INTENDED TO CHANGE THE CHARACTER OF RECEIPT FROM CAPITAL TO REV ENUE OR VICE VERSA. FURTHER THE LEGISLATURE INTENTION IN MAINTAINING TH E DEMARCATION BETWEEN THE REVENUE RECEIPT AND CAPITAL RECEIPT IS VERY MUCH MA NIFEST FROM THE PROVISO TO SEC 28(VA) OF THE ACT. 13. CIRCULAR NO.8 OF 2002 DATED 27.8.2002 ISSUED B Y THE CENTRAL BOARD OF DIRECT TAXES AS AND BY WAY OF EXPLANATORY NOTES ON THE PROVISIONS RELATING TO DIRECT TAXES (258 ITR (ST) 13,32, 40). PARAGRAPHS 26.1 IS IN RESPECT OF CLARIFICATION TO SEC 28(VA) OF THE ACT. SIMILARLY P ARAGRAPH 39.1 AND 39.2 ARE TO EXPLAIN THE AMENDMENT BROUGHT IN SEC 55(2) (A) OF T HE ACT. IN FACT, PARA 26.1 OF THE ABOVE CIRCULAR CLEARLY SUPPORTS THE VIEW TAK EN BY THE ASSESSEE IN THE PRESENT CASE. 14. THE LEARNED AR THEREFORE SUBMITTED THAT CONSID ERING THE ABOVE AND ALSO THE PROCEEDINGS FOR AY 2000-01 WHEREIN THE ISS UE OF TAXABILITY OR OTHERWISE OF THE FIRST PART OF THE CONSIDERATION OF RS 5,84,78,830/- WAS DECIDED IN FAVOUR OF THE ASSESSEE. IT IS SUBMITTED T HAT THE GROUND RAISED IN THE APPEAL BEFORE US MAY ALSO BE RESOLVED ACCORDING LY. THOUGH EACH AND EVERY YEAR OF ASSESSMENT IS INDEPENDENT AND SEPARAT E AND THE PRINCIPLE OF RES- JUDICATE IS NOT APPLICABLE TO INCOME TAX PROCE EDINGS. IT IS ALSO A WELL ACCEPTED PROPOSITION THAT WHERE THE FACTS AND CIRCU MSTANCES OF THE CASE ARE EXACTLY IDENTICAL THE SETTLED ISSUES CANNOT BE MADE UNSETTLED. NEEDLESS TO STATE BOTH THE SEGMENTS OF THE AGGREGATE AMOUNT OF CONSIDERATION OF RS 627,93,605/-EMANATE FROM THE SAME NON COMPETE AGREE MENT DATED 15.10.1999 AND THEREFORE THE TREATMENT WHICH HAS BE EN GIVEN TO THE FIRST PART OF THE CONSIDERATION REQUIRES TO BE METED OUT TO TH E OTHER PART AS WELL. ITA NO. 2857/M/10 7 15. HEARD BOTH THE PARTIES. CLAUSE OF THE NON COMPE TE AGREEMENT ON THE BASIS OF THE PAYMENTS HAVE BEEN MADE, IMPOSE THE FO LLOWING OBLIGATIONS ON THE ASSESSEE (RECIPIENT): 1. IN CONSIDERATION OF AMOUNTS PAID BY MR TO NS SP ECIFIED BELOW. NS CONVENANTS THAT, FROM THE DATE OF EXECUTION OF THIS AGREEMENT, HE ( WHETHER ALONE OR JOINTLY WITH ANY OTHER PERSON, AND WHETHER DIRECTLY OR INDIRECTLY QRAND WHETHER AS A SHAREHOLDER, PARTICIP ATING PARTNER, PROMOTER, DIRECTOR, OFFICER, AGENT, MANAGER, EMPLOY EE OR CONSULTANT OF IN OR ANY OTHER PERSON OR IN ANY OTHER SIMILAR POSI TION) WILL NOT DIRECTLY OR INDIRECTLY) A) COMPETE WITH PHMC IN ANY BUSINESS AS MAY BE CARRIED OUT BY PHMC IN FUTURE. B) SOLICIT OR ENDEAVOUR TO ENTICE AWAY FROM OR DISCOUR AGE FROM OR DEALING WITH PHMC ANY PERSON WHO WAS AT ANY TIME CU STOMER OR CLIENT OF PHMC, C) SOLICIT OR ENDEAVOUR TO ENTICE AWAY FROM OR DISCOUR AGE FROM BEING EMPLOYED BY PHMC ANY PERSON WHO IS AN OFFICER OR EM PLOYEE OF PHMC WHETHER OR NOT SUCH PERSON WOULD COMMIT A BREA CH OF CONTRACT BY REASON OF LEAVING SERVICES, D) EMPLOY, ENGAGE OR ATTEMPT TO EMPLOY OR ENGAGE OR NE GOTIATE OR ARRANGE THE EMPLOYMENT OR ENGAGEMENT BY ANY OTHER P ERSON, FIRM OR COMPANY OF ANY PERSON WHO WAS AT ANY TIME EMPLOY EE OR OFFICER OF PHMC, E) CARRY OUT HIS PROFESSIONAL RADIOLOGY PRACTICE OR AN Y OTHER INDEPENDENT PRACTICE AS A SPECIALIST IN MAGNETICALL Y RESONANCE IMAGINE, MAMMOGRAPHY ETC. AND WILL DEVOTE FULL TIME IN THE ACTIVITIES OF PHMC UNLESS PERMITTED BY THE BOARD OF DIRECTORS 16. THE PAYMENT TO BE MADE BY MR TO THE ASSESSEE CO NSISTS OF TWO PARTS. THE FIRST ONE IS THE INITIAL PAYMENT OF US$1.25 MIL LION AS PER CLAUSE 2 OF THE NON COMPETE AGREEMENT. THE CLAUSE READS AS UNDER: MR AGREES TO PAY AN AMOUNT OF US$ 1,250,000(US DO LLARS ONE MILLION AND TWO HUNDRED FIFTY THOUSAND) SUBJECT TO AND ON T HE FULFILLMENT OF THE FOLLOWING CONDITIONS: A) MUTUAL SIGNATURE OF THE MOU B) MUTUAL SIGNATURE OF THIS AGREEMENT; AND ITA NO. 2857/M/10 8 C) OBTAINING THE COMPLETE WRITTEN APPROVAL FROM THE FI PB TO TAKE STAKE IN PHCM BY MR FOR WHICH AN APPLICATION H AS ALREADY BEEN SUBMITTED TO THE FIPB. SUBJECT TO THE ABOVE, MR AGREES TO PAY A SUM OF US $ 100,000 (US DOLLARS ONE HUNDRED THOUSAND) TO NS ON SIGNING THIS AGREEMENT AND THE MOU. THE BALANCE AMOUNT OF US $ 1,150,000 WILL BE PAID BY MR TO NS ONLY UPON AND AFTER THE ABOVE THREE CONDIT IONS HAVE BEEN FULFILLED 17. AGAIN THERE IS AN ADDITIONAL PAYMENT CONTEMPLAT ED UNDER CLAUSE 3 OF THE NON COMPETE AGREEMENT WHICH READS AS UNDER: DEPENDING ON THE ANNUAL BUSINESS SUCCESS OF PHMC MR HAS TO PAY AN ADDITIONAL TOTAL AMOUNT OF US$ 100,000 MINIM UM (US DOLLARS ONE HUNDRED THOUSAND) UPTO US$ 500,000 MAXI MUM (US DOLLARS FIVE HUNDRED THOUSAND) TO NS AFTER FIV E YEARS FROM SIGNING THE SHARE HOLDERS AGREEMENT 18. THEREAFTER THE AGREEMENT CONTAINS COMPLICATED B UT DETAILED METHOD OF COMPUTATION OF THE COMPENSATION PAYABLE UNDER CLAUS E 3. THERE IS AN ADDENDUM TO THIS AGREEMENT ENTERED INTO IN APRIL 20 00, WHICH PROVIDES THAT PAYMENT UNDER CLAUSE 3 OF THE NON COMPETE AGREEMENT IS DUE ONLY AFTER 5 YEARS FROM 1 ST APRIL 2000. IT IS THE COMPENSATION UNDER CLAUSE 3 O F THE AGREEMENT DETERMINED AT US$ 100,000/-, THE MINIMUM UNDER THAT CLAUSE, WHICH HAS BEEN RECEIVED BY THE ASSESSEE DURING THE YEAR UNDER APPEAL AND IT IS THE TREATMENT OF THIS AMOUNT WHICH IS UNDER APPE AL. 19. A READING OF THE NON COMPETE AGREEMENT GIVES US THE IMPRESSION THAT MR AND THE ASSESSEE HAD AGREED UPON TWO TYPES OF PA YMENT (I) US$ 1.25 MILLION ON THE FIRST YEAR FOR THE ASSESSEE NOT TO U NDERTAKE VARIOUS ACTIVITIES PROVIDED IN CLAUSE 1 OF THE NON COMPETE AGREEMENT. AND (II) A FURTHER COMPENSATION TO THE ASSESSEE, WHO IS ALSO THE MD OF THE JV COMPANIES, BASED ON THE BUSINESS RESULTS OF THE COMPANY TO BE COMPUTED ON THE BASIS OF THE FORMULA GIVEN IN THE NON COMPETE AGREEMENT, WHI CH IS BASED ON THE PERFORMANCE AND PROFITABILITY FOR A PERIOD OF 5 YEA RS. THUS THE PAYMENT MADE DURING THE YEAR CAN BE CONSIDERED ONLY AS PAYMENT M ADE FOR THE SERVICES ITA NO. 2857/M/10 9 RENDERED BY THE ASSESSEE TO THE NON-RESIDENT TRANSF EREE, BASED ON THE PERFORMANCE/ PROFITABILITY. THUS THE PAYMENT HAS BE EN RIGHTLY ASSESSED AS REVENUE RECEIPT. 20. EVEN IF THE ENTIRE AGREEMENT IS CONSIDERED AS A SINGLE ONE AND THE PAYMENT IS PART OF THE NON COMPETE FEE PAID, THE IS SUE HAS TO BE CONSIDERED IN THE CONTEXT OF SECTION 28(V)(A) INTRODUCED WITH EFFECT FROM 01.04.2003. THE SUPREME COURT IN THE CASE OF GUFFIC CHEM PVT LI MITED V CIT (332 ITR 602) HAS HELD THAT ANY PAYMENT FOR RESTRICTIVE COVE NANT IS CAPITAL RECEIPTS, THE SAME HAS TO BE CONSIDERED IN THE LIGHT OF THE AMEND MENT AND INTRODUCTION OF SECTION 28(V)(A). THE COMPENSATION ACCRUES AND IS R ECEIVABLE ONLY UNDER THE YEAR IN APPEAL. THEREFORE THE TAXABILITY OF THE AMO UNT IS TO BE CONSIDERED AS PER THE PROVISIONS OF LAW PREVAILING FOR THIS YEAR. HENCE THE RECEIPT SHOULD BE ANALYSED IN THE CONTEXT OF SECTION 28(V)(A), WHICH READS AS UNDER:- (VA) ANY SUM WHETHER RECEIVED OR RECEIVABLE IN CASH OR KIND UNDER AN AGREEMENT FOR (A)NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS OR (B) NOT SHARING ANY KNOW HOW PATENT COPYRIGHT TRADE MARK LICENCE, FRANCHISE OR ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF SIMILA R NATURE OR INFORMATION OR TECHNIQUE LIKELY TO ASSIST IN THE MANUFACTURE OR PR OCESSING OF GOODS OR PROVISION FOR SERVICES. PROVIDED THAT SUB CLAUSE (A) SHALL NOT APPLY TO: (I) ANY SUM WHETHER RECEIVED OR RECEIVABLE IN CASH OR K IND ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY ON ANY BUSINESS WHICH IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS. THEREFORE, SECTION 28(V)(A) DEEMS THAT PAYMENT FOR CERTAIN RESTRICTIVE COVENANTS WOULD BE IN THE NATURE OF BUSINESS INCOME / REVENUE RECEIPT. THE EXCEPTION TO THIS WOULD BE ANY AMOUNT RECEIVED ON A CCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICL E OR THING OR RIGHT TO CARRY ON ANY BUSINESS WHICH IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS. 21. IN THE PRESENT CASE, THE ASSESSEE HAS AGREED NOT TO DO ANY BUSINESS IN COMPETITION WITH M/S. MUNICH RE. AT THE SAME TIME H E HAS CONTINUED TO DO BUSINESS WHICH HE WAS CARRYING ON EARLIER, FOR THE FOREIGN COMPANY. ITA NO. 2857/M/10 10 22. THE LEARNED AUTHORIZED REPRESENTATIVE ARGUED TH AT PROFESSIONAL ACTIVITIES OF RADIOLOGY AND IMAGING OF THE ASSESSEE HAS BEEN GIVEN UP IN VIEW OF NON COMPETE AGREEMENT AND THAT SHOULD BE CONSIDE RED AS GIVING UP HIS RIGHT TO CARRY ON ANY BUSINESS. BUT IT IS A FACT TH AT EVEN AFTER THE NON COMPETE AGREEMENT THE ASSESSEE IS CONTINUING WITH THE SAME ACTIVITIES FOR GERMAN COMPANY. THEREFORE, WHETHER THIS RESTRICTIVE COVENA NT AGREED TO BY THE ASSESSEE WOULD AMOUNT TO TRANSFER OF RIGHT TO CARRY ON ANY BUSINESS IS TO BE SEEN. 23. THE FIRST ASPECT IS THAT THE ASSESSEE HAS NOT T RANSFERRED ANY RIGHT TO DO BUSINESS. IT IS ONLY SELF IMPOSED RESTRICTION HIMSEL F NOT TO ENTER INTO BUSINESS IN COMPETITION WITH THE NON-RESIDENT. THE AMRITSAR TRIBUNAL IN THE CASE OF DCIT VS MAX INDIA LIMITED REPORTED IN (112 TTJ 726) HAS HELD THAT WHEN THE ASSESSEE SIGNED THE NEGATIVE COVENANT NOT TO CARRY ON MANUFACTURE OR TRADE IN PRODUCT FOR CERTAIN PERIOD OF TIME, IT AMOUNTED ONLY TO SELF IMPOSED RESTRICTION AND NOT A TRANSFER. THE RIGHT TO MANUFA CTURE OR TRADE REMAINED INTACT AFTER THE PERIOD FOR WHICH NEGATIVE COVENANT S WERE SIGNED. EVEN THOUGH THE TRIBUNAL IN THAT CASE HELD IN FAVOUR OF THE ASSESEE AS IT RELATED TO THE YEAR PRIOR TO 2003-04, THE RATIO THAT MERE REST RICTION NOT TO CARRY OUT MANUFACTURE OR TRADE IN COMPETITION WOULD NOT AMOUN T TO TRANSFER OF RIGHT TO CARRY ON ANY BUSINESS, WOULD BE APPLICABLE TO THE I NSTANT CASE. 24. IN THE CIRCUMSTANCES, IT CANNOT BE SAID THAT THE ASSESSEE HAS TRANSFERRED COMPLETELY IT RIGHT TO CARRY ON ANY BUS INESS; IN FACT THE ASSESSEE HAD CONTINUED TO DO HIS ACTIVITY IN THE SAME LINE E VEN AFTER ENTERING INTO THIS NON COMPETE AGREEMENT. AGREEMENT NOT TO COMPETE WIT H THE 3 RD PARTY IN THE BUSINESS WILL NOT ENCOMPASS TOTALITY OF RIGHT TO CA RRY ON ANY BUSINESS. THE RIGHT TO CARRY ON ANY BUSINESS IS LARGER IN SCOPE A ND RANGE AND AGREEMENT NOT TO COMPETE WITH THE BUSINESS OF A PARTICULAR PERSON IS ONLY PART OF ITS RIGHT. THE AGREEMENT NOT TO COMPETE WITH THE PARTICULAR PE RSON IN HIS BUSINESS DOES NOT PREVENT THE ASSESSEE FROM CARRYING ON THE SAME BUSINESS IN A MANNER WHICH WILL NOT COMPETE WITH THE BUSINESS OF THAT PE RSON. THEREFORE, IN OUR ITA NO. 2857/M/10 11 OPINION, THE AGREEMENT NOT TO COMPETE WITH THE BUSI NESS OF THE PERSON WOULD NOT AMOUNT TO RESTRICTION OF CARRYING ON ANY BUSINE SS AND MUCH LESS CONSTITUTE A TRANSFER OF RIGHT TO CARRY ON ANY BUSI NESS. 25. THEREFORE WHEN THE ASSESSEE ENTERED INTO AN AGR EEMENT NOT TO CARRY ON ANY BUSINESS IN COMPETITION WITH THE TRANSFEREE, THE CONSIDERATION FOR THE NEGATIVE COVENANT OF NON COMPETITION WILL FALL WITH IN THE SUB-CLAUSE (2) OF SECTION 28(VA) I.E. SUM RECEIVED FOR NOT CARRYING O N ANY ACTIVITIES IN RELATION TO ANY BUSINESS AND CANNOT FALL WITHIN THE EXCLUSIO N CONTEMPLATED IN THE PROVISO VIZ., NOT TRANSFER OF RIGHT TO CARRYING ON ANY BUSINESS. THUS, WE HOLD THAT THE PAYMENT RESTRICTION FOR NOT TO COMPETE GER MAN COMPANY CAN BE CLASSIFIED ONLY AS AGREEMENT NOT TRANSFER OF A RIGH T TO CARRY ON ANY ACTIVITIES IN RELATION TO ANY BUSINESS AND WILL NOT FALL UNDER TR ANSFER OF RIGHT TO CARRY ON BUSINESS. 26. ALTHOUGH THE IMPUGNED PAYMENT MADE TO THE ASSES SEE IS TO BE CONSIDERED AS A PART OF THE NON COMPETE AGREEMENT, IN OUR OPINION IT CANNOT BE CONSIDERED AS PAYMENT MADE TO THE ASSESSEE FOR T RANSFER OF THE RIGHT TO CARRY ON ANY BUSINESS DURING THE YEAR. WE CANNOT AG REE THAT THIS PAYMENT MADE AFTER 5 YEARS, ON THE BASIS OF THE PERFORMANCE AND PROFITABILITY OF THE COMPANY FOR THE PAST 5 YEARS IS ALSO PART OF THE CO MPENSATION FOR THE ASSESSEE FOR REFRAINING FROM CARRYING ON ANY BUSINE SS. IT IS IN THE NATURE OF SHARE OF PROFITS EARNED BY THE JV IN EXCESS OF THE ESTIMATED PROFITS. THAT IS WHY THE PAYMENT IS MADE AFTER 5 YEARS TAKING INTO A CCOUNT PERFORMANCE OF THE COMPANY FOR ALL THE 5 YEARS. 27. THEREFORE THE AMOUNT OF RS. 43,14,775/- RECEIVE D BY THE ASSESSEE DURING THE YEAR, CAN BE CONSIDERED EITHER AS COMPEN SATION FOR THE ASSESSEE AGREEING NOT TO CARRY OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS (ATTRACTING CLAUSE (A) OF SEC 28(VA)) OR THE PAYMENT IS FOR THE SERVICES RENDERED BY THE ASSESSEE FOR THE NON-RESIDENT COMPUTED ON THE BASIS OF THE PROFITABILITY OF THE VENTURE FOR THE 5 YEARS. EITHER WAY IT IS REVENUE R ECEIPT IN THE HANDS OF THE ASSESSEE. IN THIS VIEW OF THE MATTER, WE HOLD THAT T HE AMOUNT OF RS. ITA NO. 2857/M/10 12 43,14,775 (US$ 100,000/-) RECEIVED BY THE ASSESSEE HAS BEEN PROPERLY ASSESSED AS REVENUE RECEIPT IN THE HANDS OF THE ASS ESSEE. 28. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE I S DISMISSED. ORDER PRONOUNCED ON THIS 30 TH DAY OF AUGUST, 2011 SD/- SD/- (P.M. JAGTAP) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 30 TH AUGUST, 2011 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR F BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 2857/M/10 13 DATE INITIALS 1. DRAFT DICTATED ON: 18.8.2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 22.8.2011 SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. ORDER PRONOUNCED ON: SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: SR. PS/PS 9. DATE ON WHICH FILE GOES TO AR 10. DATE OF DISPATCH OF ORDER: