RAMESH D. TAINWALA, MUMBAI V. ITO 8(3)-1, MUMBAI

ITA 3853/MUM/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7298 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 20-09-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 12-05-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: G P TRIVEDI
• Keywords: Capital asset; Business income; Share purchase agreement; Cost of acquisition; Capital receipt
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI T.R.SOOD (A. M) ITA NO.3853/MUM/2010(A.Y. 2007-08) RAMESH D. TAINWALA, 401B, ELEGENT BUSINESS PARK, OFF ANDHERI-KURLA ROAD, ANDHERI (E), MUMBAI 400 059. PAN:AAAPT9296K (APPELLANT) VS. INCOME TAX OFFICER 8(3)-1, MUMBAI. (RESPONDENT) APPELLANT BY : SHRI FARROKH V. IRANI RESPONDENT BY : SHRI G.P.TRIVEDI DATE OF HEARING : 20/09/2011 DATE OF PRONOUNCEMENT : 07/1 0/2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 17/3/2010 OF CIT(A)-18, MUMBAI RELATING TO ASSESSME NT YEAR 2007-08. THE GROUNDS OF APPEAL OF THE REVENUE READ AS FOLLOWS: 1. THE COMMISSIONER OF INCOME TAX (APPEALS) 18, M UMBAI [HEREINAFTER REFERRED TO AS CIT(A)] ERRED IN NOT A PPRECIATING THE FACT THAT THE RECEIPT OF RS. 2 CRORE BY THE APPELLANT DO ES NOT FALL WITHIN THE PURVIEW OF SECTION 28 (VA) OF THE ACT. 2. WITHOUT PREJUDICE TO THE ABOVE THE CIT(A) ERRED IN CLASSIFYING THE RECEIPT OF RS. 2 CRORE AS INCOME FROM BUSINESS U/S. 28(VA) OF THE ACT AND NOT CONSIDERING THE SAME AS PART OF FULL VALU E OF CONSIDERATION RECEIVED U/S. 48 OF THE ACT. 2. THE ASSSESSEE IS AN INDIVIDUAL. HE IS DIRECTOR OF M/S.SAMSONITE SOUTH ASIA PVT. LTD. HE FILED A RETURN OF INCOME F OR A.Y.07-08 DECLARING TOTAL ITA NO.3853/MUM/2010(A.Y. 2007-08) 2 INCOME OF RS.7,29,18,046/-. SUBSEQUENTLY, THE ASSE SSEE HAS FILED LETTER DATED 31.07.2007 SUBMITTED ON 01.08.2007, WHICH IS REPRODUCED AS UNDER :- DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS RECEIVED A SUM OF RS.2,00,00,000/- BEING COMPENSATION FOR AGREEING NOT TO ENGAGE IN THE BUSINESS IN WHICH THE ASSESSEE HAS SOLE EXPERTI SE AND KNOWLEDGE. THE AMOUNT, THEREFORE, REPRESENTS COMPENSATION FOR GIVING UP A SOURCE OF INCOME WHICH IS A CAPITAL RECEIPT AND DOES NOT C ONSTITUTE INCOME IN THE HANDS OF THE ASSESSEE. THE ASSESSEE HAS RELIED ON VARIOUS JUDICIAL PRONOUNCEMENTS ON THIS PRINCIPLE. REFERENCE MAY BE MADE TO V. VENUGOPALA VARMA RAJAH VS. CIT 76 ITR 460 AND GI LLANDERS ARBUTHNOT & CO. LTD. V. CIT 53 ITR 283. THE RETURN OF INCOME FORM DOES NOT PROVIDE FOR ANY DOCUMENTS OR EXPLANATION TO BE ATTACHED TO THE FORM. UNDER THE C IRCUMSTANCES THE ASSESSEE IS CONSTRAINED TO SUBMIT THE ABOVE EXPLANA TION BY WAY OF A SEPARATE SUBMISSION. YOU ARE REQUESTED TO KINDLY CO NSIDER THIS SUBMISSION TO B9.ZN INTEGRAL PART OF THE RETURN OF INCOME FOR A. Y. 2OO7-2OO8. 3. THE FACTS WITH REGARD TO THE RECEIPT OF RS.2 CRO RES AS NON-COMPETE FEE BY THE ASSESSEE ARE AS FOLLOWS: M/S. TAINWALA POLYCONTAINERS LTD., (HEREINAFTER REF ERRED TO AS THE COMPANY) IS IN THE BUSINESS OF MANUFACTURING AND M ARKETING OF BLOW MOULDED HIGH MOLECULAR, HIGH DENSITY POLYETHYLENE C ONTAINERS (HMHDPE) (200-235 LITRES CAPACITY). ANOTHER COMPANY BY NAME TIME PACKAGING LIMITED (HEREINAFTER REFERRED TO AS ACQUIRER) IS ALSO IN THE BUSINESS OF MANUFACTURE OF PLASTIC PRODUCT BUSINESS, INDUSTRIAL PACKAGING PRODUCTS BUSINESSES INCLUDING THE LINE OF PRODUCTS MANUFACTU RED BY THE COMPANY. THE ASSESSEE WAS ONE OF THE PROMOTER OF THE COMPANY . HE TOGETHER WITH THE FOLLOWING PERSONS (HEREINAFTER REFERRED TO AS SELL ERS) HELD SHARES IN THE COMPANY AS FOLLOWS: ITA NO.3853/MUM/2010(A.Y. 2007-08) 3 LIST OF PROMOTER GROUP & PROMOTERS SHAREHOLDING OF TAINWALA POLYCONTAINERS LIMITED BLOCK A COMPRISING OF 4,290,066 EQUITY SHARES AGGRE GATING TO 55.00% OF THE TOTAL PAID UP CAPITAL OF COMPANY AND REFERRE D TO IN THE AGREEMENT AS SALE SHARES. S.NO. L.F.NO. NAME NO. OF SHARES % OF SHARE HOLDI NG --------------------------------------------------- ---------------------------------------- 1. DEMAT RAMESH TAINWALA 984,520 12.62% 2. R0073 RAKESH TAINWALA 871,485 11.17% 3. DEMAT TAINWALA HOLDINGS PVT. LTD. 100,000 1.28% 4. DEMAT KATYAN CONSTRUCTION & DEVELOPERS PVT. LTD. 316,330 4.05% 5. DEMAT SHOBHA TAINWALA 852,400 10.93% 6. A0327 AMISHI TAINWALA 1,013,461 13.00% 7. 10661 DUNGARMAL RAMESH KUMAR HUF 109 ,700 1.41% 8. DEMAT TAINWALA CHEMICALS & PLASTICS (I) LTD. 42,170 0.54% TOTAL (A) 4,290,066 55.00% BLOCK B COMPRISING OF 13,07,328 EQUITY SHARES AGGRE GATING TO 16.76% OF THE TOTAL PAID UP CAPITAL OF THE COMPANY AND REF ERRED TO IN THE AGREEMENT AS OPTIONAL SALE SHARES S.NO. LF NO. NAME NO. OF SHARE % OF SHARE HOLDIN G ------ ------------------------------------------ ---------------------------------------- 1. P000259 PERIWINKLE FASHION PVT. LTD. 4 00,000 5.13% 2. 110 KATYAYAN CONSTRUCTION & DEVELOPERS PVT. LTD. 699,030 8.96% 3. S00530 SHOBHA/RAMESH TAINWALA 2000 00 2.57% 4. DEMAT TAINWALA CHEMICALS & PLASTICS (I) LTD. 8,298 0.10% TOTAL (B) 13,07,328 16.76% GRAND TOTAL (A) + (B) SHARES/ % OF SHARES 55,97, 394 71.76% ITA NO.3853/MUM/2010(A.Y. 2007-08) 4 THE SELLERS AND ACQUIRER AGREED THAT BOTH THE COMPA NY AS WELL AS ACQUIRER HAVE SYNERGIES IN THEIR BUSINESS AND THE CONSOLIDAT ION OF BUSINESS WILL HELP BRING IMPROVED LOGISTICS, COST SAVINGS, HIGHER PROD UCTIVITY AND SHALL RATIONALIZE MARKETING AND DISTRIBUTION TO SERVE THE IR CUSTOMERS MORE COMPETITIVELY, COST EFFECTIVELY & EFFICIENTLY. WIT H THIS OBJECTIVE TO CONSOLIDATE THE OPERATIONS AND ENHANCE THE VALUE OF STAKEHOLDER S OF ACQUIRER AS WELL AS COMPANY THE ACQUIRER HAD APPROACHED THE SELLERS/PRO MOTER FOR PURCHASE OF MAJORITY SHAREHOLDING AND CONSEQUENTLY ACQUIRING TH E CONTROLLING STAKE IN THE COMPANY. ACCORDINGLY THE ACQUIRER AND SELLERS REACHED AN UNDERSTANDING TO TRANSFER THEIR SHAREHOLDING AS WEL L AS OPERATIONS OF COMPANY IN GOOD AND RUNNING CONDITIONS TO ENABLE TH E ACQUIRER TO SMOOTHLY RUN THE OPERATIONS THEREAFTER. THE ENTIRE TRANSACTI ON OF TRANSFER OF SHAREHOLDING AND CONTROL OF COMPANY WAS BASED ON TH E SAID PREMISE AND WAS ESSENCE OF TRANSACTION. SINCE THE COMPANY WAS A LISTED COMPANY THEREFORE THE ENTIRE TRANSACTION WAS SUBJECT TO COM PLIANCE OF SECURITIES EXCHANGE BOARD OF INDIA. (SUBSTANTIAL ACQUISITION O F SHARES AND TAKEOVERS) REGULATION, 1997 OR ANY OTHER APPLICABLE REGULATION S/ GUIDELINES OF SEBI BY THE ACQUIRER AS WELL AS SELLERS. 4. BY AN AGREEMENT DT.13.3.2006, THE ACQUIRER AGREE D TO PURCHASE FROM THE SELLERS, THEIR SHAREHOLDING IN THE COMPANY. TH E DISPUTE IN THIS APPEAL CENTRES AROUND A SUM OF RS.2 CRORES RECEIVED BY THE ASSESSEE PURSUANT TO CLAUSE-6 OF THE AGREEMENT DT.13.3.2006 BY WHICH THE SELLERS SOLD THEIR SHAREHOLDING TO THE ACQUIRER AND FURTHER THE SELLER S UNDERTOOK NOT TO ENGAGE DIRECTLY OR INDIRECTLY IN ANY BUSINESS WHICH COMPET ES WITH THAT OF THE ASSESSEE FOR A PERIOD OF 11 YEARS. CLAUSE-6 OF THE AGREEMENT DT.13.3.2006 IS AS FOLLOWS: ITA NO.3853/MUM/2010(A.Y. 2007-08) 5 6. NON-COMPETE . 6.1. THE SELLERS HEREBY IRREVOCABLY UNDERTAKE AND COVENANT THAT, DURING THE PERIOD COMMENCING FROM THE EFFECTIVE DAT E AND ENDING ON THE EXPIRY OF 11 (ELEVEN) YEARS AFTER TERMINATION O F THIS AGREEMENT (NON-COMPETE PERIOD, THEY WILL NOT DIRECTLY OR INDI RECTLY: 6.1.1. CARRY ON, OR BE ENGAGED, CONCERNED OR INTERE STED IN ANY BUSINESS WHICH IS SIMILAR TO OR COMPETES EITHER DIRECTLY OR INDIRECTLY OF MANUFACTURING INDUSTRIAL PACKAGING PRODUCTS MADE OF PLASTIC OR STEEL AND INCLUDING DRUMS/BARRELS, CONTAINERS, IBCS {INT ERMEDIATE BULK CONTAINERS) (NARROW MOUTH, WIDE MOTH OR OPEN MOUTH) WITH OR WITHOUT L-RING/XL-RING IN VOLUME CAPACITIES OF 135- 2000 LTRS. 6.1.2. INTERFERE WITH, TENDER FOR, CANVASS, SOLICIT OR ENDEAVOR TO ENTICE AWAY FROM THE COMPANY ANY EMPLOYEES, EXCEPT THE EMP LOYEES AS MENTIONED UNDER ANNEXURE E ANNEXED HEREWITH, OR THE BUSINESS OF ANY PERSON WHO WAS A CUSTOMER, CLIENT OR AGENT OF T HE COMPANY, FOR THE COMPANY BUSINESS; :6.1.3. SUPPLY ANY PRODUCT, CARRY OUT OR UNDERTAKE OR PROVIDE ANY ACTIVITY OR SERVICE WHICH IS THE SAME AS OR SIMILAR TO THOSE WITH WHICH THE COMPANY DEALS OR PROVIDE; 6.2. IN CONSIDERATION OF THE UNDERTAKINGS AND COVEN ANTS OF. THE SELLERS UNDER CLAUSE 6.1, THE ACQUIRERS AGREE TO PAY TO THE SELLERS RS.4,QQ1001000 (RUPEES FOUR. CRORES ONLY) NON-CMPE TE AMOUNT). THE NON-COMPETE AMOUNT SHALL BE DISCHARGED .TO THE SELLERS IN THE MANNER SET OUT IN CLAUSE 4. AS DESIRED BY. SELLERS THE SAID NON-COMPETE. CONSID ERATION OF RS.400. LACS SHALL BE; PAID BY ACQUIRER ONLY :TO MR. RAMESH TAINWALA .AND MR. RAKESH TAINWALA. IN EQUAL PROPORTION OF I1S200 LACS EACH. AND THE SAID PAYMENT SHALL CONSTITUTE AS. A VALID DISCHARGE OF PAYMENT OF NON- COMPETE CONSIDERATION TO ALL THE PARTIES COMPRISED IN THE DEFINITION OF SELLERS. 6.3 THE SELLERS FURTHER HEREBY AFFIRM AND DECLARE 6.3.1. THAT THEY HAVE FULLY UNDERSTOOD THE RELEVANC E AND CONSEQUENCE OF NON-COMPETE PERIOD COVENANT AND HAVE TAKEN DUE L EGAL ADVICE AND CONSULTANCY BEFORE AGREEING TO SUCH COVENANT. ITA NO.3853/MUM/2010(A.Y. 2007-08) 6 6.3.2. THAT THE NON-COMPETE PERIOD RESTRICTION IS A BSOLUTELY REASONABLE AND NECESSARY FOR COMPANY AND THE CONSIDERATION OF RS.4,00,00,000I- PAID BY ACQUIRER FOR THE SAME IS ADEQUATE 6.3.3. THAT THE CONTINUITY OF NON-COMPETE PERIOD SH ALL NOT BE EFFECTED BY : EITHER A CHANGE IN THE MANAGEMENT OR OWNERSHIP OF COMPANY OR BY ANY RESTRUCTURING, CONSOLIDATION AND /OR AMALGAM ATION EXERCISE OF COMPANY WITH ACQUIRER OR ANY OTHER COMPANY 6.3.4 THAT ACQUIRER HAS AGREED TO PAY THE NON-COMPE TE AMOUNT BASED ON THE NON-COMPETE PERIOD REPRESENTATION MADE BY SE LLERS AND THE SELLERS HAVE NO INTENTIONS WHATSOEVER TO BREACH TH E NON-COMPETE PERIOD COVENANT 6.3.5. THAT THE ACQUIRER WILL SUFFER IRREPARABLE HA RM BY A BREACH OF NON- COMPETE COVENANT1 FOR WHICH MONETARY DAMAGES W OULD NOT BE AN ADEQUATE REMEDY THEREFORE THE SELLERS AGREE THAT, I N THE EVENT OF A1 THREATENED OR CONTINUING BREACH OF NON-COMPETE COVE NANT, THE ACQUIRER AND COMPANY (POST ACQUISITION) SHALL BE EN TITLED, WITHOUT PREJUDICE TO ANY OTHER AVAILABLE REMEDY, TO IMMEDIA TE INJUNCTIVE OR OTHER EQUITABLE RELIEF . 6.3.6. NOTWITHSTANDING ANYTHING CONTAINED HEREIN TH E ACQUIRER MAY NOTIFY ANY. FUTURE OR THIRD PARTY, ABOUT THE EXISTE NCE OF NON-CONIPETE COVENANT MADE BY THE SELLERS. 6.4 NOTWITHSTANDING ANYTHING CONTAINED HEREINABOVE, THE SELLERS ARE EXPRESSLY PERMITTED TO MANUFACTURE OR DEAL IN ANY O THER MANNER IN ROTO MOULDED CONTAINERS ONLY FOR STORAGE PURPOSES A PPLICATION (NOT PACKAGING AND TRANSPORTATION) OF ANY CAPACITY AND A LSO THE PRODUCTION OF INDUSTRIAL PACKAGINGS FOR TRANSPORTATION OF LIQU IDS, POWDERS AND SOLIDS IN ANY FORM ONLY UPTO 135 LTRS CAPACITY AND NOT EXCEEDING 135 LTRS CAPACITY IN ANY MANNER WHATSOEVER. 5. THE SUM OF RS.2 CRORES RECEIVED BY THE ASSSESSEE PURSUANT TO CLAUSE- 6 OF THE AGREEMENT DT.13.3.2006 WAS NOT OFFERED TO TAX BY THE ASSESSEE IN THE RETURN OF INCOME FILED FOR AY 07-08. AS ALREAD Y STATED, THE ASSESEE FILED A LETTER DT.31.7.2008 IN WHICH THE ASSESSEE CLAIMED THAT THE SUM OF RS.2 CRORES BEING COMPENSATION FOR AGREEING NOT TO ENGAG E IN THE BUSINESS IN ITA NO.3853/MUM/2010(A.Y. 2007-08) 7 WHICH THE ASSESSEE HAD SOLE EXPERTISE AND KNOWLEDGE IS A COMPENSATION RECEIVED FOR GIVING UP A SOURCE OF INCOME WHICH IS A CAPITAL RECEIPT AND NOT INCOME CHARGEABLE TO TAX. THE ASSESSEE IN THIS REG ARD RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF GILLAND ERS ARBUTHNOT & CO. LTD. VS. CIT 53 ITR 283 (SC). 6. THE AO IN THE COURSE OF ASSESSMENT PROCEEDINGS B ROUGHT TO THE NOTICE OF THE ASSESSEE THAT VARIOUS COURTS HAVE HELD THAT NON-COMPETE FEES WAS A CAPITAL RECEIPT NOT CHARGEABLE TO TAX. THE AO FURTH ER POINTED OUT THAT TO PUT AT REST THE CONTROVERSY WITH EFFECT FROM 01.04.200 3 VIDE FINANCE ACT 2002 A NEW SUBSECTION (VA) WAS INSERTED IN SECTION 28 TO BRING IN THE NON-COMPETE FESS WITHIN THE PREVIEW OF SECTION 28 TO MAKE IT TA XABLE IN THE HANDS OF THE RECIPIENT OF SUCH INCOME. THE ASSESSEE HOWEVER REI TERATED HIS STAND THAT THE RECEIPT IN QUESTION WAS A CAPITAL RECEIPT NOT CHARG EABLE TO TAX. ALTERNATIVELY THE ASSESSEE SUBMITTED THAT THE RECEIPT, IF AT ALL IT IS HELD TO BE TAXABLE, HAS TO BE TAXED AS CAPITAL GAIN U/S.45 BY TREATING IT A S PART OF THE SALE OF SHARES AND NOT INCOME FROM BUSINESS U/S.28(VA) OF THE ACT. IT HAS TO BE MENTIONED HERE THAT IF THE ALTERNATE CLAIM IS ACCEPTED THEN T HE RECEIPT IN QUESTION WILL SUFFER A LESSER RATE OF TAX. IT IS IN THIS CONTEXT THAT THE ALTERNATE CLAIM OF THE ASSESSEE, ASSUMES IMPORTANCE. IN FACT, THE ONLY PL EA OF THE ASSESSEE BEFORE US IS ON THE ALTERNATE CLAIM MADE BEFORE THE AO. T HE AO HELD THAT THE RECEIPT IN QUESTION IS A FEE RECEIVED FOR NOT CARRY ING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS AND THEREFORE CHARGEABLE T O TAX U/S.28(VA) OF THE ACT. THE AO DID NOT DEAL WITH THE ALTERNATE CONTEN TION PUT FORTH BY THE ASSESSEE. 7. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED T HE VIEW OF THE AO. ON THE ALTERNATIVE CLAIM MADE BY THE ASSESSEE BEFOR E THE AO, THE CIT(A) HELD AS FOLLOWS: ITA NO.3853/MUM/2010(A.Y. 2007-08) 8 5. THE FOURTH GROUND OF APPEAL IS, NOTWITHSTANDING AND WITHOUT PREJUDICE TO GROUND NUM BER 3 ABOVE, THE AO ERRED IN NOT APPRECIATING THE FACT THAT EVEN F T HE SUM OF RS. 2 CRORE IS TREATED AS INCOME, IT WOULD FORM PART OF THE SAL E CONSIDERATION OF SHARES IN TAINWALA POLY CONTAINERS LIMITED SOLD BY THE APPELLANT DURING THE YEAR, SUBJECT OF CAPITAL GAINS. 5.1 IN THIS GROUND OF APPEAL THE APPELLANT RAISED A LTERNATIVE PLEA THAT EVEN IF THE AMOUNT IS TAXABLE IT HAS TO BE TAXED U/ S.48 UNDER THE HEAD CAPITAL GAINS AND NOT U/S.28(VA). THE APPELLANT PLE A IS THAT HE COVERED BY THE PROVISO TO U/S.28(VA) WHICH READS AS UNDER: (I) ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN CAS H OR KIND, ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURER, P RODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY ON A NY BUSINESS, WHICH IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS. 5.2 AS MENTIONED IN THE EARLIER PARAS CLAUSE-3 OF S HARE PURCHASE AGREEMENT CLEARLY DEALS WITH THE SALE PRICE OF THE SHARE AT RS.40/- PER EQUITY SHARE. CLAUSE-4 AND CLAUSE-6 DEALS WITH NON- COMPETE COMPENSATION RECEIVED BY THE DIRECTORS. IN VIEW OF THE CLEAR CLAUSES MENTIONED IN AGREEMENT IT IS NOT POSSIBLE TO CONSID ER NON-COMPETE COMPENSATION OF RS.2 CRORES AS PART OF SALE CONSIDE RATION TO SUIT THE CONVENIENCE OF THE APPELLANT. IN ANY CASE, THE APPE LLANT IS NOT COVERED BY THE PROVISIONS OF SEC. 28(VA) WHICH DEALS WITH A MOUNT RECEIVED ON TRANSACTIONS PERTAINING TO CAPITAL ASSETS AND WHICH ARE CHARGEABLE UNDER THE HEAD CAPITAL GAINS. HENCE THIS GROUND OF APPEAL IS DISMISSED. 8. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 9. WE HAVE HEARD THE SUBMISSION OF THE LEARNED COUN SEL FOR THE ASSESSEE WHO PRIMARILY FOCUSED ON THE ALTERNATIVE PLEA PUT F ORTH BEFORE THE REVENUE AUTHORITIES. HE SUMMARIZED THE LAW AS IT PREVAILED PRIOR TO ENACTMENT OF ITA NO.3853/MUM/2010(A.Y. 2007-08) 9 SEC.28(VA) OF THE ACT AND SUBMITTED THAT A RECEIPT ON ACCOUNT OF UNDERTAKING NOT TO ENGAGE IN COMPETING BUSINESS COMMONLY REFERR ED TO AS NON-COMPETE FEE WAS CAPITAL RECEIPT NOT CHARGEABLE TO TAX AND THEREFORE SUM RECEIVED BY THE ASSESSEE HAS TO BE TAXED ONLY AS CAPITAL GAIN. IN THIS REGARD IT WAS SUBMITTED BY HIM THAT THE RIGHT TO CARRY ON BUSINES S UTILIZING HIS KNOWLEDGE AND SKILL WAS A CAPITAL ASSET WHICH WAS GIVEN UP BY THE ASSESSEE AND THEREFORE THE GAIN IN QUESTION WILL BE CAPITAL GAIN AND NOT BUSINESS INCOME AS IT IS NOT A PAYMENT FOR LOSING A SOURCE OF INCOM E. THE LEARNED D.R. REITERATED THE STAND OF THE REVENUE AS REFLECTED IN THE ORDERS OF THE REVENUE AUTHORITIES. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE S HALL FIRST RECAPITULATE THE FACTS OF THE CASE. THE ASSESSEE IS AN INDIVIDU AL. HE WAS PROMOTER OF THE COMPANY AND HE TOGETHER WITH OTHER PROMOTERS OF THE COMPANY HELD SUBSTANTIAL SHARES. THE SHARES WERE SOLD BY THE PR OMOTERS TO THE ACQUIRER. THE ACQUIRER WITH A VIEW TO ENSURE THAT THE PROMOTE RS AFTER SALE OF THE SHARES DO NOT INDULGE IN COMPETING BUSINESS AND KNO WING FULLY WELL THAT THE PROMOTERS HAD EXPERTISE, ENTERED INTO A NON-COMPETE AGREEMENT WHEREBY THE ASSESSEE WAS PAID RS.2 CRORES FOR AGREEING NOT TO C ARRY ON OR BE ENGAGED, CONCERNED OR INTEREST IN ANY BUSINESS WHICH IS SIMI LAR TO OR COMPETING EITHER DIRECTLY OR INDIRECTLY OF MANUFACTURING INDUSTRIAL PACKAGING PRODUCTS MADE OF PLASTIC OR STEEL AND INCLUDING DRUMS/BARRELS, CO NTAINERS, IBCS ETC. FOR A PERIOD OF 11 YEARS. PARA 6.4 OF THE AGREEMENT PROV IDES FOR SOME EXCEPTIONS. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. BE ST & CO. 60 ITR 11 (SC) HELD ON THE TAXABILITY OF NON-COMPETE FEE AS FOLLOW S: THE HOUSE OF LORDS IN BEAK V. ROBSON (1942) 25 TAX CAS. 33. HAD TO CONSIDER WHETHER COMPENSATION PAID FOR A RESTRICTIV E COVENANT WAS A CAPITAL RECEIPT OR A REVENUE RECEIPT. UNDER A SERVI CE AGREEMENT THE RESPONDENT THEREIN COVENANTED IN CONSIDERATION OF T HE PAYMENT TO HIM ITA NO.3853/MUM/2010(A.Y. 2007-08) 10 OF 7,000 POUNDS ON THE EXECUTION OF THE AGREEMENT, THAT IF THE AGREEMENT WERE DETERMINED BY NOTICE GIVEN BY HIM OR BY HIS BREACH OF ITS PROVISIONS, HE WOULD NOT COMPETE DIRECTLY OR IN DIRECTLY WITH THE COMPANY WITHIN A RADIUS OF FIFTY MILES OF ITS PLACE OF BUSINESS UNTIL THE FIVE YEARS HAD EXPIRED. THE HOUSE OF LORDS HELD THA T THE SAID AMOUNT WAS A PAYMENT FOR GIVING UP A RIGHT WHOLLY UNCONNEC TED WITH HIS OFFICE AND OPERATIVE ONLY AFTER HE CEASED TO HOLD THAT OFF ICE, AND, THEREFORE, IT WAS NOT TAXABLE UNDER SCHEDULE E OF THE INCOME TAX ACTS. THIS COURT IN GILLANDERS ARBUTHNOT AND CO. LTD. V. COMMISSIONER OF INCOME-TAX 53 I. T. R. 283 (S. C.) ACCEPTED THE SAI D PRINCIPLE AND HELD THAT THE COMPENSATION PAID FOR AGREEING TO REFRAIN FROM CARRYING ON COMPETITIVE BUSINESS IN THE COMMODITIES IN RESPECT OF THE AGENCY TERMINATED OR FOR LOSS OF GOODWILL WAS PRIMA FACIE OF THE NATURE OF A CAPITAL RECEIPT. IN THE PRESENT CASE, THE COVENANT WAS AN INDEPENDEN T OBLIGATION UNDERTAKEN BY THE ASSESSEE NOT TO COMPETE WITH THE NEW AGENTS IN THE SAME FIELD FOR A SPECIFIED PERIOD. IT CAME INTO OPE RATION ONLY AFTER THE AGENCY WAS TERMINATED. IT WAS WHOLLY UNCONNECTED WI TH THE ASSESSEE'S AGENCY TERMINATION. WE, THEREFORE, HOLD THAT PART O F THE COMPENSATION ATTRIBUTABLE TO THE RESTRICTIVE COVENANT WAS A CAPI TAL RECEIPT AND HENCE NOT ASSESSABLE TO TAX. 11. WITH EFFECT FROM 01.04.2003 VIDE FINANCE ACT 2 002 A NEW SUBSECTION (VA) WAS INSERTED IN SECTION 28 TO BRING IN THE NON-COMP ETE FESS WITHIN THE PREVIEW OF SECTION 28 TO MAKE IT TAXABLE IN THE HAN DS OF THE RECIPIENT OF SUCH INCOME. 28. THE FOLLOWING INCOME SHALL BE CHARGEABLE TO IN COME TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION': (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 BU SINESS; PROVIDED THAT SUB-CLAUSE (A) SHALL NOT APPLY TO- (I) ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN CAS H OR KIND, ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY O N ANY ITA NO.3853/MUM/2010(A.Y. 2007-08) 11 BUSINESS, WHICH IS CHARGEABLE UNDER THE HEAD 'CAPIT AL GAINS'; THUS PAYMENTS RECEIVED AS NON-COMPETE FEE ARE CHARG EABLE TO TAX U/S.28(VA)(A) OF THE ACT. THE PROVISO (I) TO SECTI ON 28(VA)(A) PROVIDES FOR EXCEPTION TO CASES WHERE SUCH RECEIPTS ARE TAXABLE AS CAPITAL GAIN VIZ., WHERE ANY SUM IS RECEIVED FOR TRANSFER OF A RIGHT TO CARR Y ON ANY BUSINESS WHICH IS CHARGEABLE TO TAX AS CAPITAL GAIN. RECEIPTS ON ACC OUNT OF GIVING UP RIGHT TO CARRY ON BUSINESS CAN AGAIN BE CONSIDERED AS CAPITA L RECEIPT OR REVENUE RECEIPT, DEPENDING ON WHETHER IT IS COMPENSATION PA ID WITH THE SOURCE OF INCOME BEING INTACT OR A COMPENSATION FOR STERILIZA TION OF THE SOURCE OF INCOME. WITH THE CHANGE IN LAW THE RECEIPTS ARE TA XABLE, EITHER AS BUSINESS INCOME OR CAPITAL GAIN. TO ASCERTAIN IN WHICH CATE GORY THEY FALL THE LAW AS LAID DOWN BY VARIOUS JUDICIAL PRONOUNCEMENTS PRIOR TO THE ABOVE STATUTORY AMENDMENTS WOULD BE RELEVANT. IF A RECEIPT IS CONS IDERED AS PAYMENT OF COMPENSATION WITH THE SOURCE REMAINING INTACT IT WO ULD BE REVENUE RECEIPT FALLING U/S.28(VA)(A) OF THE ACT. IF THE RECEIPT I S A PAYMENT FOR STERILIZATION OF THE SOURCE OF INCOME THEN IT WOULD BE CAPITAL RECEI PT NEVERTHELESS FALLING WITHIN THE AMBIT OF SEC.45 OF THE ACT, SUBJECT HOWE VER TO THE CONDITION THAT THERE RESULTS A TRANSFER OF CAPITAL ASSET AND THE M ACHINERY FOR COMPUTATION OF CAPITAL GAIN U/S.48 CAPABLE BEING APPLIED. 12. AS CAN BE SEEN FROM THE PROVISO TO CLAUSE(I) TO CLAUSE(A) TO SEC.28(VA) OF THE ACT, IF THERE IS A TRANSFER OF RIGHT TO CARR Y ON BUSINESS THEN THE SAME WOULD BE CAPITAL GAIN. RIGHT TO CARRY ON BUSINESS MAY NOT HAVE COST OF ACQUISITION AND THEREFORE THE CHARGE TO TAX MAY FAI L AND THEREFORE CONSEQUENTIAL AMENDMENT WAS MADE TO SEC.55(2) OF TH E ACT WHICH PROVIDES AS FOLLOWS: FOR THE PURPOSES OF SECTIONS 48 AND 49, 'COST OF ACQUISITION',-- ITA NO.3853/MUM/2010(A.Y. 2007-08) 12 (A) IN RELATION TO A CAPITAL ASSET, BEING GOODWILL OF A BUSINESS, OR A TRADE MARK OR BRAND NAME ASSOCIATED WITH A BUSINESS OR A RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THIN G OR RIGHT TO CARRY ON ANY BUSINESS, TENANCY RIGHTS, STAGE CARRIAGE PER MITS OR LOOM HOURS, -- (I) IN THE CASE OF ACQUISITION OF SUCH ASSET BY THE ASSESSEE BY PURCHASE FROM A PREVIOUS OWNER, MEANS THE AMOUNT OF THE PURC HASE PRICE ; AND (II) IN ANY OTHER CASE NOT BEING A CASE FALLING UND ER SUB-CLAUSES (I) TO (IV) OF SUB-SECTION (1) OF SECTION 49, SHALL BE TAK EN TO BE NIL ; THE QUESTION FOR CONSIDERATION IS AS TO WHETHER THE CASE OF THE ASSESSEE FALLS WITHIN THE PROVISO (I) TO SEC.28(VA)(A) OF THE ACT . ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE SUM OF RS.2 CRORES RE CEIVED BY THE ASSESSEE UNDER CLAUSE 6 OF THE SHARE PURCHASE AGREEMENT DT.1 3.3.2006 IS SUM, RECEIVED, IN CASH, ON ACCOUNT OF TRANSFER OF THE RI GHT TO CARRY ON ANY BUSINESS, WHICH IS CHARGEABLE UNDER THE HEAD 'CAPIT AL GAINS'. 13. WE ARE OF THE VIEW THAT THE CLAIM MADE BY THE ASSESSEE CANNOT BE ACCEPTED. FOR PROVISO(I) TO SEC.28(VA)(A) TO APPLY THERE MUST BE TRANSFER OF THE RIGHT TO CARRY ON ANY BUSINESS. THE ASSESSEE I N THE PRESENT CASE WAS NOT CARRYING ON ANY BUSINESS ON HIS OWN BUT WAS THE PRO MOTER AND DIRECTOR OF THE COMPANY WHOSE SHARES WERE PURCHASED BY THE ACQU IRER. CLAUSE-6 OF THE SHARE PURCHASE AGREEMENT DT.13.3.2006 DOES NOT TRAN SFER ANY RIGHT TO CARRY ON ANY BUSINESS BUT MERELY PROVIDES THAT THE ASSSES SEE SHALL NOT CARRY OUT ANY ACTIVITY IN RELATION TO BUSINESS OF THE ASSESSE E. WE MAY ALSO ADD THAT THE PROVISIONS OF SEC.45 OF THE ACT WOULD GET ATTRA CTED ONLY WHEN THERE IS A CAPITAL GAIN ARISING AS A RESULT OF TRANSFER OF A C APITAL ASSET. THE DEFINITION OF TRANSFER IS GIVEN IN SEC.2(47) OF THE ACT. IN THE PRESENT CASE, THE AGREEMENT BY WHICH THE ASSESSEE AGREES TO REFRAIN FROM INDULG ING IN A BUSINESS COMPETING WITH ANOTHER IS INDEPENDENT BY ITSELF THO UGH IT IS INCLUDED IN THE AGREEMENT FOR TRANSFER OF SHARES. IN SUCH AGREEMEN TS THERE CAN BE NO ITA NO.3853/MUM/2010(A.Y. 2007-08) 13 TRANSFER IN ANY OF THE MODES SET OUT IN SEC.2(47) O F THE ACT. AGREEMENT TO REFRAIN FROM CARRYING ON COMPETING BUSINESS DOES NO T FALL WITHIN ANY OF THE MODES OF TRANSFER AS GIVEN IN THE DEFINITION OF TRA NSFER U/S.2(47) OF THE ACT. IF THE AGREEMENT TO REFRAIN FROM INDULGING IN COMPETIT ION IS PART AND PARCEL OF THE AGREEMENT FOR TRANSFER OF A BUSINESS AND THE TR ANSFEROR AGREES NOT TO INDULGE IN COMPETITION, THEN IT CAN BE SAID THAT RI GHT TO CARRY ON SAME OR SIMILAR BUSINESS WAS TRANSFERRED ALONGWITH THE BUSI NESS. IN THE PRESENT CASE WHAT WAS TRANSFERRED WAS SHAREHOLDING BY THE PROMOT ERS. IN SUCH A SITUATION THERE IS NO QUESTION OF TRANSFER OF A RIG HT TO CARRY ON BUSINESS. THEREFORE PAYMENTS ON ACCOUNT OF NON-COMPETE FEES C ANNOT BE BROUGHT TO TAX U/S.45 OF THE ACT. WE THEREFORE HOLD THAT IN T HE PRESENT CASE THE PROVISO(I) TO SEC.28(VA)(A) OF THE ACT WILL NOT APP LY. THE PROVISIONS OF SEC.28(VA)(A) WOULD APPLY AND CONSEQUENTLY THE RECE IPT IN QUESTION WOULD BE CHARGEABLE TO TAX AS BUSINESS INCOME AND NOT UNDER THE HEAD CAPITAL GAIN. WE DO NOT FIND ANY GROUNDS TO INTERFERE WITH THE OR DER OF THE CIT(A). CONSEQUENTLY THE APPEAL BY THE ASSESSEE IS DISMISSE D. 14. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS D ISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 7 TH DAY OF OCT. 2011. SD/- SD/- (T.R.SOOD ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 7 TH OCT.2011 ITA NO.3853/MUM/2010(A.Y. 2007-08) 14 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RD BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.3853/MUM/2010(A.Y. 2007-08) 15 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 3/10/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 4/10/11 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. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER