Satya Sheel Khosla, New Delhi V. ITO, New Delhi

ITA 882/DEL/2015

• Counselvise Citation: 88220114 RSA 2015
• Duration Of Justice: 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-11-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 14-10-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 13-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURJIT KUMA R
• Assessee Lawyers: C S AGGARWAL
• Keywords: Maximum Marginal Rate; Capital receipt
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G NEW DELHI) BEFORE SHRI I.C. SUDHIR AND SHRI O.P. KANT ITA NO. 882/DEL/2015 ASSESSMENT YEAR: 2010-11 SATYA SHEEL KHOSLA, VS. INCOME-TAX OFFICER, VILLA-D, EMPIRE ESTATE, WARD-24(3), SULTANPUR, MEHRAULI, GURGAON RD., NEW DELHI. NEW DELHI. (PAN: AAMPK0236G) (APPELLANT) (RESPONDENT) APPELLANT BY: S/SHRI C.S. A GGARWAL & GAUTAM JAIN, ADV. RESPONDENT BY: SHRI SURJIT KUMA R, DR DATE OF HEARING : 15 .10.2015 DATE OF PRONOUNCEMENT: 10 :11.2015 ORDER PER I.C. SUDHIR: JUDICIAL MEMBER THE ASSESSEE HAS FILED THIS APPEAL AGAINST THE ORD ER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-11, NEW DELHI, CONFIRMING THE ORDER OF THE INCOME-TAX OFFICER, WARD 24(3), NEW DE LHI, THAT THE SUM OF RS. 1,32,00,000 RECEIVED BY THE APPELLANT FROM M/S SUZU KI MOTORCYCLE INDIA PVT. LTD. (SUZUKI INDIA) IS CHARGEABLE TO TAX UND ER SECTION 17(3) OF THE INCOME-TAX ACT, 1961 AS PROFITS IN LIEU OF SALARY , AND REJECTING THE CLAIM OF THE APPELLANT THAT THE SAID SUM WAS NOT CHARGEABLE TO TAX UNDER SECTION 17(3) OR SECTION 28(VA) OR ANY OTHER SECTION OF THE INCOM E-TAX ACT. 2 2. THE FACTS RELEVANT FOR A CONSIDERATION OF THE Q UESTIONS RAISED IN THIS APPEAL ARE THAT THE ASSESSEE WAS A PROMOTER AND DIR ECTOR OF INTEGRA OVERSEAS PVT. LTD. (INTEGRA) ESTABLISHED FOR MANUFACTURING TWO WHEELERS IN INDIA. IN FEBRUARY, 2002 METROMODE TECHNOLOGY LTD, MAURITIUS (METROMODE) BECAME A SHAREHOLDER IN INTEGRA. IN MARCH, 2003, TH E APPELLANT WAS APPOINTED AS MANAGING DIRECTOR OF INTEGRA. IN JUNE, 2004, M/S SUZUKI MOTOR CORPORATION, JAPAN (SUZUKI JAPAN) BECAME A MAJOR SHAREHOLDER IN INTEGRA AND, IN FEBRUARY, 2005, THE NAME OF INTEGRA WAS CHA NGED TO M/S SUZUKI MOTORCYCLE INDIA PVT. LTD. THE APPELLANT CONTINUED AS MANAGING DIRECTOR OF THE RE-NAMED COMPANY. IN MARCH, 2010, THE APPELLANT DECIDED TO TERMINATE HIS RELATIONSHIP AS A JOINT VENTURE PARTNER IN SUZU KI INDIA AND, CONSEQUENTLY, STEPPED DOWN AS MANAGING DIRECTOR OF SUZUKI INDIA. ON 31 MARCH, 2010, THE APPELLANT AND SUZUKI INDIA ENTERED INTO AN AGREEMEN T WHERE UNDER SUZUKI INDIA AGREED TO PAY A SUM OF RS. 1,32,00,000 TO TH E APPELLANT, IN CONSIDERATION OF THE APPELLANT NOT PROVIDING THE B ENEFIT OF HIS KNOWLEDGE OF REGULATORY MATTERS, NEGOTIATING SKILLS AND STRATEGI C PLANNING EXPERTISE TO ANY OTHER PERSON IN INDIA IN THE TWO WHEELER SEGMENT FO R A PERIOD OF TWO YEARS FROM THE DATE OF THE AGREEMENT. 3. IN THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2010-11, THE ASSESSEE CLAIMED EXEMPTION IN RESPECT OF THE SUM RS. 1,32,00 ,000 RECEIVED BY HIM 3 FROM SUZUKI INDIA. IN SUPPORT OF THE CLAIM FOR EXEM PTION, THE AUTHORISED REPRESENTATIVE OF THE APPELLANT FILED, IN THE COURS E OF THE ASSESSMENT PROCEEDINGS, AN OPINION DATED 7 OCTOBER, 2011 GIVEN BY SHRI O. P. BHARDWAJ, SENIOR PARTNER, ASSOCIATED LAW ADVISERS. THE SAID OPINION, WHICH HAS BEEN REPRODUCED IN THE ASSESSMENT ORDER, IS TO THE EFFECT THAT THE SUM OF RS. 1,32,00,000 RECEIVED BY THE APPELLANT FR OM SUZUKI INDIA IS NOT CHARGEABLE TO INCOME-TAX UNDER SECTION 17(3) OR SEC TION 28(VA) OR ANY OTHER SECTION OF THE INCOME-TAX ACT. 4. BEFORE MAKING HIS SUBMISSIONS, THE LEARNED SENI OR ADVOCATE, SHRI C. S. AGGARWAL, APPEARING ON BEHALF OF THE APPELLANT, PROVIDED TO US AND TO THE DEPARTMENTAL REPRESENTATIVE A SYNOPSIS CONTAINING T HE RELEVANT FACTS, THE ISSUES FOR CONSIDERATION AND THE ARGUMENTS IN SUPPO RT OF THE GROUNDS IN APPEAL. IN HIS ORAL SUBMISSIONS, SHRI AGGARWAL HAS URGED THAT THE CONCLUSION BY THE I.T.O. AND CIT (A) THAT THE APPELLANT WAS AN EMPLOYEE OF SUZUKI INDIA IS IN COMPLETE DISREGARD OF THE FACTS. SHRI A GGARWAL URGED THAT THE FOLLOWING WHEREAS CLAUSES OF THE AGREEMENT BETWEEN SUZUKI INDIA AND THE APPELLANT ARE VERY SIGNIFICANT:- WHEREAS SUZUKI MOTOR CORPORATION, JAPAN (SMC) AN D MR. SHEEL HAVE BEEN JOINT VENTURE PARTNERS IN THE COMPANY; 4 AND WHEREAS PURSUANT TO A JOINT VENTURE AGREEMENT BETWEEN MR. SHEEL AND SMC, MR. SHEEL WAS APPOINTED AS THE MANAG ING DIRECTOR OF THE COMPANY BY VIRTUE OF HIS BEING THE INDIAN JOINT VENTURE PARTNER; AND WHEREAS MR. SHEEL WISHES TO STEP DOWN AS MANAG ING DIRECTOR OF THE COMPANY AS HE IS NO LONGER THE JOINT VENTURE PARTNER OF SMC; ACCORDING TO SHRI AGGARWAL, THE SECOND WHEREAS CLAU SE CLEARLY ESTABLISHES THAT THE APPELLANT WAS APPOINTED AS MA NAGING DIRECTOR OF THE COMPANY BY VIRTUE OF HIS BEING THE INDIAN JOINT VEN TURE PARTNER. THE THIRD WHEREAS CLAUSE STATES THAT THE APPELLANT WISHES TO STEP DOWN AS MANAGING DIRECTOR OF THE COMPANY AS HE IS NO LONGER THE JOINT VENTURE PARTNER OF SMC. SHRI AGGARWAL URGED THAT THESE WHE REAS CLAUSES ARE, IN THEMSELVES, CONCLUSIVE EVIDENCE OF THE FACT THE APP ELLANT WAS NOT AN EMPLOYEE OF SUZUKI INDIA. 5. SHRI AGGARWAL FURTHER URGED THAT IF THE APPELLA NT WAS AN EMPLOYEE OF SUZUKI INDIA, THERE WOULD HAVE BEEN A SERVICE AGREE MENT BETWEEN SUZUKI INDIA AND THE APPELLANT, LAYING DOWN THE TERMS OF H IS EMPLOYMENT, INCLUDING THE SALARY, PERQUISITES AND BENEFITS TO BE PAID AND PROVIDED TO HIM; THE DURATION OF HIS EMPLOYMENT; THE CIRCUMSTANCES IN WH ICH THE EMPLOYMENT COULD BE TERMINATED; AND THE AMOUNT PAYABLE ON RETI REMENT FROM OR TERMINATION OF EMPLOYMENT. THE FACT THAT THERE WAS NO SUCH SERVICE AGREEMENT AND THAT THE APPELLANT WAS NOT PAID OR PR OVIDED ANY SALARY, PERQUISITES, OR BENEFITS DURING HIS ENTIRE TERMS AS MANAGING DIRECTOR FROM 5 MARCH, 2003 TO MARCH, 2010 REINFORCES THE CONCLUSIO N THAT THE APPELLANT WAS NOT AN EMPLOYEE OF SUZUKI INDIA. 6. SHRI AGGARWAL INVITED OUR ATTENTION TO THE REPL Y OF SUZUKI INDIA IN RESPONSE TO THE I.T.O.S LETTER DATED 20 NOVEMBER, 2012 ASKING SUZUKI INDIA TO STATE THE SECTION UNDER WHICH TAX WAS DEDUCTED F ROM RS. 1,32,00,000 PAID TO THE APPELLANT, WHERE IT IS STATED THAT TAX WAS DEDUCTED UNDER SECTION 194J; HOWEVER, TO AVOID ANY FUTURE DISPUTE WE DEDUC TED THE MAXIMUM RATE APPLICABLE I.E. 30%. SHRI AGGARWAL CONTENDED THAT IF THE COMPANY REGARDED THE APPELLANT AS AN EMPLOYEE, IT WOULD HAVE STATED IN ITS REPLY THAT TAX WAS DEDUCTED UNDER SECTION 192. IT IS ALSO RELEVANT TO POINT OUT THAT PARAGRAPH 3 OF THE AGREEMENT BETWEEN SUZUKI INDIA AND THE APPEL LANT SHOWS THAT THE APPELLANT HAD CONTENDED THAT NO INCOME-TAX IS DEDUC TIBLE FROM THE AMOUNT PAYABLE TO HIM, BUT THE COMPANY DEDUCTED TAX OUT O F ABUNDANT CAUTION TO AVOID ANY FUTURE DISPUTES WITH THE TAX AUTHORITIE S. IT IS, THEREFORE, CLEAR THAT HAVING REGARD TO THE DRASTIC CONSEQUENCES (IN THE F ORM OF INTEREST, PENALTY AND PROSECUTION) IF THE TAX AUTHORITIES TOOK THE VI EW THAT THE AMOUNT DEDUCTED WAS INADEQUATE, THE COMPANY ADOPTED THE SA FER COURSE OF DEDUCTING TAX AT THE MAXIMUM MARGINAL RATE OF 30%. THE I.T.O. HAS IGNORED THE REASONS GIVEN BY SUZUKI INDIA FOR DEDUCTING TAX AT THE RATE OF 30 PER CENT AND 6 HAS ARBITRARILY CONCLUDED THAT THE COMPANY REGARDED THE APPELLANT AS AN EMPLOYEE. 7. IN JULY, 2007 THE APPELLANTS TENURE AS MANAGIN G DIRECTOR WAS EXTENDED FOR A FURTHER PERIOD OF THREE YEARS. THE I .T.O. HAS CITED THE RESOLUTION PASSED BY THE SHAREHOLDERS TO THIS EFFEC T AS AN ARGUMENT TO SUPPORT THE CONTENTION THAT THE APPELLANT WAS AN EMPLOYEE O F THE COMPANY. SHRI AGGARWAL POINTED OUT THAT THE CONCLUSION DRAWN BY T HE I.T.O. IS CLEARLY FALLACIOUS. UNDER SECTION 319 OF THE COMPANIES ACT, 1956, THE TENURE OF A MANAGING DIRECTOR WAS LIMITED TO FIVE YEARS AND WAS REQUIRED TO BE PERIODICALLY EXTENDED BY THE SHAREHOLDERS. THEREFOR E, EVEN THOUGH THE APPELLANT WAS APPOINTED MANAGING DIRECTOR BY VIRTU E OF HIS BEING THE INDIAN JOINT PARTNER, THE TENURE HAD TO BE EXTENDED BY A RESOLUTION OF THE SHAREHOLDERS OF SUZUKI INDIA TO COMPLY WITH THE LAW . SHRI AGGARWAL, THEREFORE, URGED THAT ON AN EXAMINATION OF THE FACT S ON RECORD AND THE SUBMISSIONS MADE BY HIM IT IS MANIFEST THAT THERE I S NOT AN IOTA OF EVIDENCE TO SHOW THAT THE APPELLANT WAS AN EMPLOYEE OF SUZUK I INDIA. 8. SHRI AGGARWAL THEN DEALT WITH THE ISSUE WHETHER THE AMOUNT RECEIVED BY THE APPELLANT FELL WITHIN THE AMBIT OF CLAUSE (V A) WHICH WAS INSERTED IN 7 SECTION 28 OF THE INCOME-TAX ACT BY THE FINANCE ACT , 2002. HE POINTED OUT THAT THE MEMORANDUM EXPLAINING THE PROVISIONS IN TH E FINANCE BILL, 2002, PREPARED BY THE CENTRAL BOARD OF DIRECT TAXES AND L AID ON THE TABLE OF BOTH HOUSES OF PARLIAMENT STATES (AT PAGE 15) THAT THIS PROVISION HAS BEEN INTRODUCED FOR TAXING THE RECEIPTS IN THE NATURE O F NON-COMPETE FEES AND EXCLUSIVITY RIGHTS. SHRI AGGARWAL ALSO POINTED OUT THAT PARAGRAPH 26 OF C.B.D.T. CIRCULAR NO. 8 OF 2002 DATED 27 AUGUST, 20 02 REITERATES THIS POSITION. THE EXPRESSION NON-COMPETE FEES CONNOTES A PAYMENT MADE TO A PERSON FOR NOT COMPETING WITH THE PAYER, BUT THE PAYMENT BY SUZUKI INDIA TO THE APPELLANT WAS NOT MADE FOR NOT COMPETING WITH I T, BUT FOR PROHIBITING HIM FROM PROVIDING THE BENEFIT OF HIS KNOWLEDGE, SKILL AND EXPERTISE TO OTHERS . 9. SHRI AGGARWAL CONTENDED THAT THE EXPRESSIONS B USINESS AND PROFESSION HAVE BEEN USED IN THE ACT IN A MUTUALL Y EXCLUSIVE SENSE. THE ACTIVITY OF PROVIDING THE BENEFIT OF ONES KNOWLEDG E OF REGULATORY MATTERS, NEGOTIATING SKILLS AND STRATEGIC PLANNING EXPERTISE TO ANY OTHER PERSON WOULD BE REGARDED AS AN ACTIVITY IN RELATION TO A PROFESS ION, AND NOT AN ACTIVITY IN RELATION TO A BUSINESS. BESIDES, THE APPELLANT WAS NOT CARRYING ON ANY SUCH PROFESSIONAL ACTIVITY. EVEN ASSUMING THAT HE WAS CA RRYING ON ANY SUCH PROFESSIONAL ACTIVITY (WHICH HE CERTAINLY WAS NOT) THE AMOUNT PAID TO HIM 8 WILL NOT FALL WITHIN THE AMBIT OF THE WORDS FOR NO T CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS USED IN SECTION 28(VA) OF THE ACT. 10. IN SUPPORT OF HIS CONTENTION, SHRI AGGARWAL IN VITED OUR ATTENTION TO PAGE 692 OF VOLUME 1 OF KANGA AND PALKHIVALA'S THE LAW AND PRACTICE OF INCOME-TAX RELATING TO CLAUSE (VA) OF SECTION 28 T HAT THIS CLAUSE TAXES A SUM RECEIVED FOR A RESTRICTIVE COVENANT IN RELATION TO A BUSINESS, BUT NOT A PROFESSION. ON PAGE 679 OF VOLUME- 1 OF THE SAID T REATISE, IT HAS BEEN STATED THAT THOUGH THE WORD BUSINESS IS A WORD OF WIDE IMPORT, IT WOULD NOT TAKE IN ITS AMBIT ACTIVITIES WHICH MAY CONSTITUTE PROFES SION BECAUSE THE TWO EXPRESSIONS BUSINESS AND PROFESSION HAVE BEEN U SED IN THE ACT, IN A MUTUALLY EXCLUSIVE SENSE AND THAT BEING SO, EVEN IF THE WORD BUSINESS, ON A WIDER INTERPRETATION, CAN INCLUDE WITHIN ITS SCOPE PROFESSION, FOR THE PURPOSES OF THE ACT, PROFESSION HAS TO BE UNDERST OOD TO BE DISTINCT AND SEPARATE FROM BUSINESS. 11. ACCORDING TO SHRI AGGARWAL, IT IS A SETTLED PR INCIPLE OF TAX LAW THAT ALL RECEIPTS DO NOT CONSTITUTE INCOME CHARGEABLE TO TAX AND IT IS FOR THE REVENUE TO ESTABLISH THAT THE AMOUNT RECEIVED BY THE APPELL ANT IS CHARGEABLE TO TAX UNDER THE INCOME-TAX ACT, WHICH, HE CONTENDS, THE I .T.O. AND CIT (A) HAVE 9 FAILED TO DO. SHRI AGGARWAL HAS URGED THAT THE AMOU NT RECEIVED BY THE APPELLANT IS IN THE NATURE OF A CAPITAL RECEIPT AND COULD BE TAXED ONLY IF IT WAS COVERED BY SECTION 28 (VA) OF THE INCOME-TAX ACT WH ICH, HE URGED, IT IS NOT. 12. GROUND NOS 3 TO 8 RELATE TO THE FOLLOWING OBSE RVATIONS MADE BY THE LEARNED CIT (A) IN PARAGRAPH 4.1.13 OF HIS ORDER RE GARDING THE OPINION OF SHRI BHARDWAJ:- THIS OPINION CANNOT HAVE A CLOAK OF SUBSTANTIAL VI EW FOR IT MAKES INCOMPLETE REFERENCES TO THE AGREEMENT BETWEEN THE PARTIES AND SUCH DELIBERATE INCOMPLETE REFERENCES HELP IN NO IN SIGNIFICANT MEASURE TO ARRIVE AT SELF-SERVING CONCLUSIONS THAT COULD HA VE BEEN USEFUL TO THE APPELLANT IN AVOIDING DUE AND LAWFUL TAXES. A PLAIN COMPARISON OF THE DOCUMENTS SHOWS THAT THE OPINION MAKES NO REFERENCE TO THE OBLIGATION OF THE APPELLANT IN CLAUSE 1 OF THE AGRE EMENT THAT HE SHALL NOT PROVIDE THE BENEFIT OF HIS KNOWLEDGE OF REGULAT ORY MATTERS, NEGOTIATING SKILLS AND STRATEGIC PLANNING EXPERTISE TO ANY OTHER PERSON IN INDIA IN THE TWO WHEELER SEGMENT FOR A PERIOD OF TWO YEARS, FROM THE DATE OF EXECUTION OF THIS AGREEMENT . THE CLAUSE ( SIC ) 5 AND 6 OF THE OPINION APPEAR TO BE DIVERSIONARY AND WOULD NOT HELP THE APPELLANT IN VIEW OF THE FACTS AS PER THE AGREEMENT BETWEEN T HE PARTIES IN TOTALITY. SHRI AGGARWAL HAS URGED THAT THE OBSERVATION BY THE LEARNED CIT (A) THAT THE OPINION OF SHRI BHARDWAJ MAKES DELIBERATE INCOMPLE TE REFERENCES TO THE 10 AGREEMENT BETWEEN THE PARTIES IS BASED ON THE INCOR RECT ASSUMPTION THAT THE OPINION HAS OMITTED TO REFER TO THE WORDS IN ITALIC S IN THE ABOVE CITED PASSAGE FROM THE CITS ORDER. THE LEARNED CIT (A) H AS IGNORED THE FACT THAT IN PARAGRAPH 2 OF THE OPINION, SHRI BHARDWAJ HAS CL EARLY STATED THAT THE APPELLANT WAS PAID BY THE COMPANY IN CONSIDERATION OF HIS AGREEING NOT TO PROVIDE THE BENEFIT OF HIS KNOWLEDGE OF REGULATORY MATTERS, NEGOTIATING SKILLS AND STRATEGIC PLANNING EXPERTISE TO ANY OTHER PERSO N IN INDIA IN THE TWO WHEELER SEGMENT FOR A PERIOD OF TWO YEARS FROM THE DATE OF EXECUTION OF THE AGREEMENT. MR. AGGARWAL HAS URGED THAT THE UNWARRA NTED OBSERVATIONS MADE BY THE LEARNED CIT (A) ON THE INTEGRITY OF THE ADVOCATE NEED TO BE CONDEMNED. 13. IN HIS REPLY, THE LEARNED DEPARTMENTAL REPRESE NTATIVE URGED THAT THE LEARNED COUNSEL FOR THE APPELLANT HAS NOT BEEN ABLE TO ESTABLISH THAT THE APPELLANT WAS NOT AN EMPLOYEE OF SUZUKI INDIA AND T HE MERE FACT THAT HE DID NOT RECEIVE ANY SALARY OR PERQUISITES FROM SUZUKI I NDIA DOES NOT JUSTIFY THE CONCLUSION HE WAS NOT AN EMPLOYEE OF THE COMPANY. H E ALSO CONTENDED THAT THE RESIGNATION OF THE APPELLANT AND THE AGREEMENT BETWEEN HIM AND SUZUKI, INDIA WERE BOTH MADE ON THE SAME DATE, THAT IS, 31 MARCH, 2010. SUCH AGREEMENTS ARE ENTERED INTO AFTER PROLONGED DISCUSS ION AND CANNOT BE CONCLUDED IN ONE DAY AND THE APPELLANT SHOULD HAVE FILED THE MINUTES OF THE DISCUSSIONS; COPY OF THE RESOLUTION PASSED BY THE B OARD OF DIRECTORS OF 11 SUZUKI INDIA APPROVING THE AGREEMENT; AND OTHER AGR EEMENTS BETWEEN THE APPELLANT AND SUZUKI INDIA. 14. IN HIS REJOINDER, THE LEARNED SENIOR ADVOCATE CONTENDED THAT THE WHEREAS CLAUSES IN THE AGREEMENT DATED 31 MARCH, 20 10 BETWEEN THE APPELLANT AND SUZUKI INDIA ESTABLISH THAT THE APPEL LANT WAS NOT AN EMPLOYEE OF SUZUKI INDIA. THE FACT THAT THERE WAS NO SERVICE AGREEMENT BETWEEN SUZUKI INDIA AND THE APPELLANT AND THAT DURING THE ENTIRE PERIOD BETWEEN MARCH, 2003 TO MARCH, 2010 IN WHICH THE APPELLANT W AS MANAGING DIRECTOR HE DID NOT RECEIVE ANY SALARY OR PERQUISITES FROM I NTEGRA OR SUZUKI INDIA REINFORCES THAT THE APPELLANT WAS NOT AN EMPLOYEE O F SUZUKI INDIA. THE LEARNED SENIOR ADVOCATE ALSO URGED THAT IT IS A WEL L-KNOWN BUSINESS PRACTICE THAT NEGOTIATING PARTIES DO NOT RECORD MINUTES OF T HE DAY TO DAY DISCUSSIONS. THE AGREEMENT BETWEEN SUZUKI INDIA AND THE APPELLAN T UNDER WHICH THE SUM OF RS. 1,32,00,000 WAS PAID TO THE APPELLANT IS THE MAIN DOCUMENT FOR DETERMINING THE ISSUES UNDER CONSIDERATION, WHICH C ONCLUSIVELY ESTABLISHES THAT THE RELATIONSHIP BETWEEN SUZUKI INDIA AND THE APPELLANT IS NOT THAT OF EMPLOYER AND EMPLOYEE. 12 15. WE HAVE CONSIDERED THE ARGUMENTS GIVEN BY THE I.T.O. IN HIS ASSESSMENT ORDER AND BY THE LEARNED CIT (A) IN HIS APPELLATE ORDER; THE OPINION OF SHRI BHARDWAJ; AND THE SUBMISSIONS MADE, AND SYNOPSIS PROVIDED, BY THE LEARNED SENIOR ADVOCATE; THE ARGUM ENTS ADVANCED IN HIS REPLY BY THE DEPARTMENTAL REPRESENTATIVE; AND SHRI AGGARWALS REJOINDER. TWO MAIN ISSUES NEED TO BE CONSIDERED. THE FIRST AN D THE PRINCIPAL ISSUE IS WHETHER THE SUM OF RS. 1,32,00,000 RECEIVED BY THE APPELLANT FROM SUZUKI INDIA IS TAXABLE AS PROFITS IN LIEU OF SALARY UND ER SECTION 17(3) OF THE ACT. THE SECOND ISSUE IS THAT, IF THE ANSWER TO THE FIRS T ISSUE IS IN THE NEGATIVE, WHETHER THE SAID SUM IS TAXABLE UNDER SECTION 28(VA ) OF THE ACT. THE QUESTION WHETHER THE SUM OF RS. 1,32,00,000 IS TAXA BLE AS PROFITS IN LIEU OF SALARY HINGES ON THE STATUS OF THE APPELLANT. WAS THE APPELLANT AN EMPLOYEE OF SUZUKI INDIA OR NOT? WE HOLD THAT THE APPELLANT WAS A JOINT VENTURE PARTNER IN THAT COMPANY, AND NOT AN EMPLOYEE OF THE COMPANY. 16. IN RAM PRASHAD V. COMMISSIONER OF INCOME-TAX, NEW DELHI (1972) 86 ITR 122, THE SUPREME COURT HAS OBSERVED AT PAGE 126 THAT: A SERVANT ACTS UNDER THE DIRECT CONTROL AND SUPERV ISION OF HIS MASTER. AN AGENT, ON THE OTHER HAND, IN THE EXERCISE OF HIS WORK, IS NOT SUBJECT TO THE DIRECT CONTROL OR SUPERVISION OF THE PRINCIP AL , THOUGH HE IS BOUND TO EXERCISE HIS AUTHORITY IN ACCORDANCE WITH ALL LAWFUL ORDERS 13 AND INSTRUCTIONS WHICH MAY BE GIVEN TO HIM FROM TIM E TO TIME BY HIS PRINCIPAL. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER HAD ASKED SUZUKI INDIA AS TO WHAT WERE THE DUTIES ASSIGNED T O MR. SATYA SHEEL KHOSLA AS A MANAGING DIRECTOR AND WHAT TYPE OF WORK HE WAS LOOKING AFTER TO WHICH SUZUKI INDIA REPLIED THAT HE WAS ASSIGNED THE FOLLOWING DUTIES:- A. MANAGING ALL AFFAIRS OF THE COMPANY. B. EVOLVING BUSINESS STRATEGIES AND DEVELOPMENT. C. ADVISING MANAGEMENT ON VARIOUS ISSUES IN RELATIO N TO BUSINESS OF THE COMPANY. D. OVERLOOK THE MANAGEMENT OF THE COMPANY. THE WIDE AMPLITUDE OF THE ROLE ASSIGNED TO THE APPE LLANT CLEARLY SHOW THAT HE WAS NOT SUBJECT TO THE DIRECT CONTROL OR SUPERVISIO N OF SUZUKI INDIA, BUT WAS MANAGING ALL AFFAIRS OF THE COMPANY; EVOLVING BUSIN ESS STRATEGIES; AND ADVISING THE COMPANY. HIS ROLE WAS CLEARLY THAT OF A JOINT VENTURE PARTNER IN SUZUKI INDIA AND NOT THAT OF AN EMPLOYEE OF THE COM PANY. IN VIEW OF THE FOREGOING AND THE SUBMISSIONS MADE BY SHRI AGGARWAL , SUMMARIZED IN PARAGRAPHS 4 TO 7 ABOVE, WE ARE OF OPINION THAT THE APPELLANT WAS NOT AN EMPLOYEE OF SUZUKI INDIA AND, AS SUCH, THE SUM OF R S. 1,32,00,000 RECEIVED BY HIM FROM THE COMPANY CANNOT BE TAXED AS PROFITS IN LIEU OF SALARY UNDER SECTION 17(3) OF THE ACT. 17. WE NEXT DEAL WITH THE QUESTION WHETHER THE AMO UNT RECEIVED BY THE APPELLANT FROM SUZUKI INDIA IS TAXABLE UNDER SECTIO N 28(VA). CLAUSE (VA), INSERTED IN SECTION 28 OF THE INCOME-TAX ACT BY THE FINANCE ACT, 2002, READS AS UNDER: 14 (VA) ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN C ASH OR KIND, UNDER AN AGREEMENT FOR (A) NOT CARRYING OUT ANY ACTIVITY IN RELATION TO AN Y BUSINESS; OR (B) NOT SHARING ANY KNOW-HOW, PATENT, COPYRIGHT, TR ADE-MARK, LICENCE, FRANCHISE OR ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE OR INFORMATION OR TECHNIQUE LIKELY TO 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 CAS H OR KIND, ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE, PR ODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY ON ANY BUSINESS, WHICH IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS; (II) ANY SUM RECEIVED AS COMPENSATION, FROM THE MUL TILATERAL FUND OF THE MONTREAL PROTOCOL ON SUBSTANCES THAT DEPLETE TH E OZONE LAYER UNDER THE UNITED NATIONS ENVIRONMENT PROGRAMME, IN ACCORDANCE WITH THE TERMS OF AGREEMENT ENTERED INTO WITH THE G OVERNMENT OF INDIA. SUB-CLAUSE (B) OF CLAUSE (VA) HAS NO RELEVANCE FOR THE ISSUE UNDER CONSIDERATION. WE HAVE, THEREFORE, TO CONSIDER WHET HER THE AMOUNT RECEIVED BY THE APPELLANT FALLS UNDER SUB-CLAUSE (A) OF CLAU SE (VA) OF SECTION 28 OF THE INCOME-TAX ACT. WE FIND THAT THE FOLLOWING OBSERVAT IONS OF THE SUPREME COURT OF INDIA IN GUFFIC CHEM. P. LTD. VS. COMMISSI ONER OF INCOME-TAX (2011) 332 ITR 602 AT PAGE 607 SUPPORT THE VIEWS EX PRESSED BY SHRI BHARDWAJ AND THE CONTENTION OF SHRI AGGARWAL THAT T HE AMENDMENT MADE BY THE FINANCE ACT, 2002 WAS INTENDED TO BRING NON-COM PETITION FEE WITHIN THE AMBIT OF TAXATION:- PAYMENT RECEIVED AS NON-COMPETITION FEE UNDER A NE GATIVE COVENANT WAS ALWAYS TREATED AS CAPITAL RECEIPT TILL THE ASSE SSMENT YEAR 2003-04. 15 IT IS ONLY VIDE THE FINANCE ACT, 2002 WITH EFFECT F ROM APRIL 1, 2003 THAT THE SAID CAPITAL RECEIPT IS NOW MADE TAXABLE ( SEE SECTION 28(VA)). THE FINANCE ACT, 2002 ITSELF INDICATES THAT DURING THE RELEVANT ASSESSMENT YEAR COMPENSATION RECEIVED BY THE ASSESS EE UNDER NON- COMPETITION AGREEMENT WAS A CAPITAL RECEIPT, NOT TA XABLE UNDER THE 1961 ACT. WE AGREE WITH SHRI AGGARWAL THAT AS THE SUM OF RS. 1,32,00,000 WAS PAID BY SUZUKI INDIA TO THE APPELLANT IN CONSIDERATION OF N OT PROVIDING THE BENEFIT OF HIS KNOWLEDGE OF REGULATORY MATTERS, NEGOTIATING SKILLS AND STRATEGIC PLANNING EXPERTISE TO ANY OTHER PERSON IN INDIA IN THE TWO WHEELER SEGMENT IT CANNOT BE REGARDED AS NON-COMPETITION FEE BECAUS E IT HAS NOT BEEN PAID FOR NOT COMPETING WITH THE PAYER, BUT FOR NOT PROVIDING THE BENEFIT OF HIS KNOWLEDGE, EXPERTISE, SKILLS ETC. TO ANY OTHER PERS ON IN THE TWO WHEELER SEGMENT. THE VIEWS EXPRESSED BY SHRI BHARDWAJ IN HI S OPINION AND THE CONTENTION BY SHRI AGGARWAL THAT SECTION 28(VA) TAX ES A SUM RECEIVED FOR A RESTRICTIVE COVENANT IN RELATION TO A BUSINESS, BUT NOT A PROFESSION IS ALSO SUPPORTED BY THE OBSERVATIONS IN PARAGRAPH 28 ON PA GE 692 OF KANGA AND PALKHIVALA'S LAW AND PRACTICE OF INCOME-TAX THAT CLAUSE (VA) OF SECTION 28 OF THE INCOME-TAX ACT TAXES A SUM RECEIVED FOR A R ESTRICTIVE COVENANT IN RELATION TO A BUSINESS, BUT NOT A PROFESSION; AND, THEREFORE, DOES NOT FALL WITHIN THE AMBIT OF SECTION 28(VA). WE MAY ADD THAT IN THE CASE OF GUFFIC CHEM. P. LTD. VS. COMMISSIONER OF INCOME-TAX ( IBID ) AT PAGE 606 THE HONBLE SUPREME COURT OF INDIA HAS OBSERVED THAT CO MPENSATION ATTRIBUTABLE TO A NEGATIVE/RESTRICTIVE COVENANT IS A CAPITAL REC EIPT. HENCE, AS THE SUM RECEIVED BY THE APPELLANT DOES NOT FALL WITHIN THE AMBIT OF SECTION 28(VA), IT IS NOT CHARGEABLE TO TAX AS IT CONSTITUTES A CAPITA L RECEIPT. 16 18. WE NOW DEAL WITH SHRI AGGARWALS CRITICISM OF THE COMMENTS BY LEARNED CIT(A) IN PARAGRAPH 4.1.13 OF HIS ORDER. WE AGREE WITH SHRI AGGARWAL THAT LEARNED CIT(A) WAS NOT JUSTIFIED IN S AYING THAT THE OPINION OF SHRI BHARDWAJ DELIBERATELY MAKES AN INCOMPLETE REFE RENCE TO THE AGREEMENT TO ARRIVE AT A SELF-SERVING CONCLUSION, WHEN SHRI B HARDWAJ HAS, IN FACT, REPRODUCED THE RELEVANT PART OF THE AGREEMENT IN HI S OPINION AND HAS GIVEN COGENT AND VALID REASONS, BACKED WITH AUTHORITY, IN SUPPORT OF THE CONCLUSION THAT THE AMOUNT RECEIVED BY THE APPELLANT DOES NOT FALL WITHIN THE AMBIT OF SECTION 28(VA) OF THE ACT. IT WOULD HAVE BEEN MORE APPROPRIATE FOR THE LEARNED CIT(APPEALS) TO ANALYZE AND REBUT THE POINT S MADE BY SHRI BHARDWAJ IN PARAGRAPHS 5 TO 9 OF HIS OPINION. WE, T HEREFORE, DEPRECATE THE ABOVE UNCALLED FOR OBSERVATIONS MADE BY THE LEARNED CIT(A) ON THE OPINION OF THE LEARNED ADVOCATE. 19. FOR THE REASONS GIVEN IN PARAGRAPHS 15, 16, 17 AND 18, WE UPHOLD THE CLAIM OF THE APPELLANT THAT (A) THE SUM OF RS. 1,32 ,00,000 RECEIVED BY THE APPELLANT FROM SUZUKI INDIA IS NOT TAXABLE UNDER SE CTION 17(3) OF THE INCOME-TAX ACT; (B) THE SAID SUM DOES NOT FALL WITH IN THE AMBIT OF SECTION 28(VA), AND BEING A CAPITAL RECEIPT IS NOT TAXABLE UNDER THE INCOME-TAX ACT; 17 AND (C) THE OBSERVATIONS MADE BY THE LEARNED CIT(A) IN PARAGRAPH 4.1.13 OF THE APPELLATE ORDER ARE WITHOUT ANY BASIS. THE APPE AL IS, THEREFORE, ALLOWED. 20. IN RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 .11.2015 SD/- SD/- ( O.P. KANT ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 10 /11/2015 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR 18 DATE DRAFT DICTATED ON COMPUTER 10.11.2015 DRAFT PLACED BEFORE AUTHOR 10.11.2015 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 10.11.20 15 APPROVED DRAFT COMES TO THE SR.PS/PS 18.11.2015 KEPT FOR PRONOUNCEMENT ON 10.11.2015 FILE SENT TO THE BENCH CLERK 20.11.2015 DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.