HEMANT PRABHAKAR PRADHAN, THANE V. ACIT CIR-1, THANE

ITA 6794/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2600 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-07-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: H
• Assessment Year: 2011-2012
• Appeal Filed On: 10-11-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RANDHIR GUPTA
• Assessee Lawyers: M C NANIWADEKAR
• Keywords: Capital receipt

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL H BE NCH, MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI C.N. PRASAD, JUDICIAL MEMBER / I .TA NO. 6794/MUM/2014 ( / ASSESSMENT YEAR: 2011-12 HEMANT PRABHAKAR PRADHAN, C-1101, SUNGLOW, SHREEJI VILLE COMPLEX, ALMEIDA ROAD, PANCHPAKHADI, THANE (W)-400 601 / VS. THE ACIT, CIRCLE - 1, R. NO. 22, B-WING, 6 TH FLOOR, ASHAR I.T. PARK, ROAD NO. 16-Z WAGLE INDUSTRIAL ESTATE, THANE-400 604 ./ ./ PAN/GIR NO. AASPP 1387R ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI M.C. NANIWADEKAR / RESPONDENT BY: SHRI RANDHIR GUPTA / DATE OF HEARING :02.06.2016 ! / DATE OF PRONOUNCEMENT :13.07.2016 / O R D E R PER C.N. PRASAD, JM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF THE LD. CIT(A)-II, MUMBAI DATED 09.10.2014 PERTAINING TO A SSESSMENT YEAR 2011-12. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL: ITA NO. 6794/M/2014 2 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTI ON OF THE AO IN BRINGING TO TAX THE AMOUNT OF RS. 2 CRORES RE CEIVED BY THE ASSESSEE FROM M/S COLORCON ASIA PVT. LTD. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN HOLDING THAT THE S AID AMOUNTS CONSTITUTED A REVENUE RECEIPT IN THE HANDS OF THE ASSESSEE U/S 28(VA) . HE FAILED TO APPRECIATE THAT WHEN THE ASSESSEE WAS NOT CARRYING ON ANY BUSINESS AT ALL IN THE RELEVANT PREVIOUS YEAR, THERE COULD BE NO QUESTION OF CHARGEABILITY UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION', AND S. 28(VA) COULD HAVE NO APPLICA TION WHATSOEVER. 3. THE LEARNED CIT(A) ERRED IN FAILING TO APPRECIAT E THAT THE SAID RECEIPT WAS A PURE CAPITAL RECEIPT AND WAS NOT A REVENUE RECEIPT AND WAS NOT CHARGEABLE TO TAX. THE ORDERS OF THE LEARNED CIT(A) AND THE LEARNED AO ARE ERRONE OUS AND CONTRARY TO THE LEGAL POSITION. 3. THE LD. COUNSEL FOR THE ASSESSEE FAIRLY SUBMITS THAT THE ISSUE IN APPEAL IS DECIDED AGAINST THE ASSESSEE BY THE JURIS DICTIONAL HIGH COURT IN THE CASE OF ARUN TOSHNIWAL VS DCIT (375 I TR 270) WHEREIN IT WAS HELD THAT THE NON-COMPETE FEES RECEIVED BY T HE ASSESSEE WAS TAXABLE U/S. 28(VA) OF THE ACT. 4. HEARD RIVAL CONTENTIONS, PERUSED THE ORDERS OF T HE AUTHORITIES BELOW AND THE DECISION OF THE JURISDICTIONAL HIGH C OURT IN THE CASE OF ARUN TOSHNIWAL VS DCIT (SUPRA). AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE JURISDICTIONAL HIGH COURT HOLDING TH AT NON-COMPETE FEES RECEIVED BY THE ASSESSEE IS TAXABLE U/S. 28(VA ) OF THE ACT OBSERVING AS UNDER: 7. MR.PARDIWALLA SUBMITTED THAT IN INCOME TAX APPE AL NOS.96 OF 2012 AND 126 OF 2013 IN THE CASE OF RAMESH D. TAINW ALA V/S. INCOME TAX OFFICER, 8(3)-1 & ANR. AND V/S. DEPUTY C OMMISSIONER OF ITA NO. 6794/M/2014 3 INCOME TAX 8(3) RESPECTIVELY, THIS COURT HAS ADMITTED THE ABOVE APPEALS. ACCORDING TO MR.PARDIWALLA, THE PRESENT CA SE IS NO DIFFERENT AND HE IS ENTITLED TO THE BENEFIT OF LONG TERM CAPITA L GAINS. MR.PARDIWALLA ALSO RELIED UPON THE DECISION OF THIS C OURT IN THE CASE OF JOHN D'SOUZA V/S. CIT REPORTED IN (2009) 226 ITR 5 40 (BOM) WHEREIN THIS COURT HAS HELD THAT THE AMOUNT WAS RECEIVED BY THE ASSESSEE FOR NOT CARRYING ON CERTAIN ACTIVITY. HE HA D RECEIVED COMPENSATION OF RS.25 LACS DURING THE FINANCIAL YEA R 2004-05 IN RESPECT OF CERTAIN PROPERTIES OF WHICH HE WAS THE OWNER AND SOME LAND RELATED TRANSACTION WAS ENTERED INTO WITH M/S. GOA INTERNATIONAL SCHOOL (P) LTD. ACCORDINGLY, THE AMOUNT OF RS.25 LACS WAS PAID TO THE ASSESSEE BY GOA INTERNATIONAL SCHOOL (P) LTD. SINCE HE WOULD BE DEPRIVED OF HIS BUSINESS AND RELATABLE INCO ME. 8. THE ASSESSING OFFICER APPLIED SECTION 28(VA)(A) OF THE ACT SINCE THE AMOUNT WAS CHARGEABLE TO TAX AND SUBMITTED THAT UNDER SECTION 28(VA)(A) , THE ASSESSING OFFICER WAS JUSTIFIED IN HOLDING THAT THE CAPITAL RECEIPT WAS RECEIVED AS COMPENSATION AND WAS NOT CAPITAL RECEIPTS WHICH IS PROVIDED UNDER SECTION 45(1) OF THE ACT. RELYING UPON THE AFORESAID DECISION, MR.PARDIWALLA SU BMITTED THAT AMOUNT OF RS.5 CRORES AND RS.2 CRORES RESPECTIVELY AMOUNTED TO CAPITAL RECEIPTS AND CLAIMED THE BENEFIT OF LONG TER M CAPITAL GAINS. HE FURTHER SUBMITTED THAT IT IS WRONG TO HAVE APPLIED THE PROVISIONS OF SECTION 28(VA) AND LEVIED TAX ON THE AMOUNT OF COMPENSATION PAID FOR NON COMPETE FOR THE REASON THAT THE AMOUNT IS NOT RECEIVED FOR CARRYING ON ANY BUSINESS OR TRANSACTION. ACCORDING TO MR.PARDIWALLA, THE ASSESSING OFFICER, COMMISSIONER OF INCOME TAX (A PPEALS) AND THE TRIBUNAL HAD ERRED IN UPHOLDING THE APPLICATION OF SECTION 28(VA) OF THE ACT. ACCORDINGLY, HE SUBMITTED THAT THE AFORESAID QUESTIONS ARE SUBSTANTIAL QUESTIONS OF LAW, WHICH REQUIRE CONSIDERA TION BY THIS COURT. 9. MR.CHHOTARAY, LEARNED COUNSEL APPEARING ON BEHALF OF THE REVENUE, ON THE OTHER HAND SUBMITTED THAT THE AMOUNT REC EIVED BY THE ASSESSEE WERE TAXABLE IN THE HANDS OF THE ASSESSEE S AS RECEIPTS FROM BUSINESS. ACCORDING TO HIM, THE AMOUNT IS RECEIV ED AS COMPENSATION FOR UNDER THE AGREEMENT OF NON COMPETE AND NON SOLICITATION IN RELATION TO BUSINESS ACTIVITIES, WHI CH HAS BEEN TRANSFERRED BY THE ASSESSEE TO THE SAID COMPANY THERMO ELECTRON LLS INDIA PVT. LTD. IN SUPPORT OF HIS CONTENTION, MR .CHHOTARAY RELIED UPON THE DECISION IN THE CASE OF GUFFIC CHEM P. LTD. V /S. COMMISSIONER OF INCOME TAX AND COMMISSIONER OF INCO ME -TAX & ANR. V/S. MANDALAY INVESTMENT P. LTD. REPORTED IN [ 2001] 332 ITR 602 (SC) WHEREIN IT IS HELD THAT PRIOR TO 1ST APRIL, 2 003, A NON COMPETE FEE WOULD BEAR THE CHARACTER OF PROPERTY RECE IVED. HOWEVER, AFTER THE SAID DATE, THE SAME AMOUNT IS REVENUE RECEI PT. IN THAT CASE, THE HON'BLE SUPREME COURT WAS DEALING WITH THE JUDGMEN T OF THE KARNATAKA HIGH COURT WHEREIN THE HIGH COURT HELD THAT THE COMPENSATION RECEIVED UNDER THE NON-COMPETE AGREEMEN T CAN BE ITA NO. 6794/M/2014 4 TREATED AS A CAPITAL RECEIPT. THE HON'BLE SUPREME CO URT THEN WENT ON TO DETERMINE WHETHER THE PAYMENT UNDER AN AGREEME NT NOT TO COMPETE IS A CAPITAL RECEIPT OR A REVENUE RECEIPT. TWO QUESTIONS AROSE FOR DETERMINATION IN THAT CASE, FIRSTLY, WHETHE R THE AMOUNTS RECEIVED FOR LOSS OF AGENCY WAS IN NORMAL COURSE OF BUSINESS AND, THEREFORE, IT CONSTITUTED REVENUE RECEIPTS AND SECON DLY WHETHER THE AMOUNT RECEIVED AS COMPENSATION ON THE CONDITION NO T TO CARRY ON A COMPETITIVE BUSINESS WAS IN THE NATURE OF CAPITAL R ECEIPT. IT WAS HELD THAT THE PAYMENT OF AMOUNT RECEIVED AS NON COMPETITI ON FEE UNDER A NEGATIVE COVENANT WAS TREATED AS A CAPITAL RECEIPT TILL THE ASSESSMENT YEAR 2003-04. 10. IT IS ONLY VIDE THE FINANCE ACT , 2002 WHICH CAME INTO EFFECT FROM 1ST APRIL, 2003 THE SAID CAPITAL RECEIPT WAS NO W TAXABLE UNDER SECTION 28(VA) . ACCORDINGLY, THE COURT HELD THAT THERE IS DICHOTOMY BETWEEN THE RECEIPT OF COMPENSATION BY THE ASSESSEE FOR LOSS OF BUSINESS ARISING OUT OF THE NEGATIVE COVENA NT AND THAT COMPENSATION FOR LOSS OF AGENCY WOULD BE A REVENUE RECEIPT AS NOTED IN THE DECISION IN THE CASE OF GILLANDERS ARBUTHNOT A ND CO. LTD. V/S. CIT [1964] 53 ITR 283. THE ASSESSEE IN THAT CASE WAS D EALING WITH EXPLOSIVES. THAT AGENCY WAS TERMINATED AND BY WAY OF COMPENSATION, IMPERIAL CHEMICAL INDUSTRIES (EXPORT) LTD. PAID TWO FIFTHS OF THE COMMISSION ACCRUED ON PAST SALES AND T OOK A FORMAL UNDERTAKING FROM THE ASSESSEE TO REFRAIN FROM SELLIN G OR ACCEPTING ANY AGENCY FOR EXPLOSIVES. THIS WAS CONSIDERED BY THE SUPREME COURT AND IT WAS HELD THAT THE SAID AMOUNT RECEIVED FOR NON- COMPETE AGREEMENT WAS NOT TAXABLE UPTO 1 ST APRIL, 2003 AND , THEREFORE, IN THAT CASE, THE AMOUNT RECEIVED IS NOT LIABLE TO BE TA XED. IT IS CLARIFIED BY THE SUPREME COURT THAT SECTION 28(VA) OF THE ACT WAS AMENDATORY AND NOT CLARIFICATORY AND, THEREFORE, THE AMOUNT RECE IVED BEFORE THE SAID DATE WAS NOT TAXABLE UNDER SECTION 28(VA) OF THE ACT. 11. FOLLOWING THE AFORESAID DECISION, WE ARE OF THE VIEW THAT IN THE PRESENT CASE, AS WELL THE AMOUNT RECEIVED BY THE A SSESSEE WAS TAXABLE UNDER SECTION 28(VA) OF THE ACT. IN THE PRESENT CASE, IT IS EVIDENT THAT HAD THE ASSESSEE NOT ENTERED INTO AN AG REEMENT OF 10 ITXA1257-13+1 NON-COMPETE, HE WOULD HAVE EARNED THE A MOUNT FROM THE BUSINESS CARRIED ON OUT OF THE DIVISION WHICH WAS S OLD TO THERMO ELECTRON LLS INDIA PVT. LTD. IT IS THE SALE OF THE SA ID DIVISION THAT HAS DEPRIVED HIM OF THE INCOME AND PART OF THE SALE CONSI DERATION ITSELF, HE WAS REQUIRED TO EXECUTE AN AGREEMENT OF NON-COMPE TE AND THE COMPENSATION RECEIVED UNDER THE SAID AGREEMENT WAS R ELATABLE ON A CONSIDERATION FOR SALE OF THE BUSINESS OF THE DIVISI ON AND, THEREFORE, FOR THESE REASONS ALSO, WE ARE OF THE VIEW THAT THE AMO UNT IS TAXABLE UNDER SECTION 28(VA) . FURTHERMORE, IN THE PRESENT CASE, BOTH THE ASSESSEE HAVE RECEIVED THE AMOUNT PURSUANT TO THE AGRE EMENT DATED 2ND JUNE, 2008 THAT IS WELL AFTER 1 ST APRIL, 2003 A ND WOULD BE COVERED BY THE PROVISIONS OF SECTION 28(VA) OF THE ACT. WE ARE ACCORDINGLY OF THE VIEW THAT NO RELIEF CAN BE GRANTE D TO THE ITA NO. 6794/M/2014 5 APPELLANTS. THE APPEALS DO NOT RAISE ANY SUBSTANTIAL QUESTIONS OF LAW AND THE SAME ARE DISMISSED. NO ORDER AS TO COSTS. RESPECTFULLY FOLLOWING THE SAID DECISION OF THE JU RISDICTIONAL HIGH COURT, WE UPHOLD THE ORDER OF THE LD. CIT(A) AND DISMISS THE APPEAL OF THE ASSESSEE. 5. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH JULY, 2016. SD/- SD/- (B.R. BASKARAN ) (C.N. PRASAD ) ' / ACCOUNTANT MEMBER $ %' /JUDICIAL MEMBER MUMBAI; (' DATED 13 TH JULY, 2016 . % . ./ RJ , SR. PS !'#$#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ) ( ) / THE CIT(A)- 4. ) / CIT 5. *+ ,%%-. , -.! , / DR, ITAT, MUMBAI 6. , /01 / GUARD FILE. / BY ORDER, *% //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI