THE COMMR OF INCOME TAX V. SRI PRAKASH LADHANI

ITA/237/2007

AI Insights

The case involves four Income Tax Appeals (ITAs) filed by the Commissioner of Income-Tax and the Deputy Commissioner of Income-Tax against Sri.Prakash Ladhani and Sri.Sachnand Ladhani concerning the taxability of non-computation fees received under non-competition agreements for the assessment years 1998-99 and 1999-2000. The core legal issue was whether these receipts should be classified as capital gains and thus taxable under the Income Tax Act, 1961. The appellants argued that the fees should be taxed under 'any other source' as per Section 28 of the Act. However, the respondents contended that these receipts were capital in nature and not taxable until the specific amendment in 2003. The High Court, referencing the Supreme Court's decision in Guffic Chem (P) Ltd. v. CIT and earlier judgments, ruled that the receipts were not taxable as capital gains for the years in question.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 701292 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 08-04-2013
• Assessment Year: misc
• Other Referred Cases: Guffic Chem (P) Ltd., V/s. CIT & another, Commissioner of Income Tax and another V/s. K.Chandrakanth Kini
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: A SHANKAR; M LAVA
• Assessee Lawyers: K V ARAVIND
• Keywords: Capital Gain; Capital receipt; Finance Act, 2002; Income Tax; Negative covenant; Non-computation fee
• Section: 28; 260A

Judgement Text

"IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 8th DAY OF APRIL 2013 PRESENT THE HON’BLE MR. JUSTICE N.KUMAR AND THE HON’BLE MR. JUSTICE B.MANOHAR I.T.A. NO.237/2007 c/w. I.T.A. Nos.238/2007, 247/2007 & 264/2007 In I.T.A. No.237/2007 BETWEEN : 1. The Commissioner of Income-Tax, C.R.Building, Queens Road, Bangalore. 2. The Deputy Commissioner Of Income-Tax, Circle-8(1), C.R.Building, Queens Road, Bangalore. ...APPELLANTS (By Sri.K.V.Aravind, Adv.) AND : Sri.Prakash Ladhani, No.5/1, I Main Road, Jayamahal Extension, Bangalore – 46. …RESPONDENT (By Sri.A.Shankar, Adv. & Sri.M.Lava, Adv.) . . . . - 2 - This I.T.A. is filed under Section 260A of the Income Tax Act, 1961 praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore Bench in I.T.A. No.174/Bang/2005 dated 07.07.2006 and confirm the order passed by the Commissioner of Income Tax-IV, Bangalore, in the interest of justice and equity. In I.T.A. No.238/2007 BETWEEN : 1. The Commissioner of Income-Tax, C.R.Building, Queens Road, Bangalore. 2. The Deputy Commissioner Of Income-Tax, Circle-8(1), C.R.Building, Queens Road, Bangalore. ...APPELLANTS (By Sri.K.V.Aravind, Adv.) AND : Sri.Prakash Ladhani, No.5/1, I Main Road, Jayamahal Extension, Bangalore – 46. …RESPONDENT (By Sri.A.Shankar, Adv. & Sri.M.Lava, Adv.) . . . . This I.T.A. is filed under Section 260A of the Income Tax Act, 1961 praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income - 3 - Tax Appellate Tribunal, Bangalore Bench in I.T.A. No.175/Bang/2005 dated 07.07.2006 and confirm the order passed by the Commissioner of Income Tax-IV, Bangalore, in the interest of justice and equity. In I.T.A. No.247/2007 BETWEEN : 1. The Commissioner of Income-Tax, C.R.Building, Queens Road, Bangalore. 2. The Deputy Commissioner Of Income-Tax, Circle-8(1), C.R.Building, Queens Road, Bangalore. ...APPELLANTS (By Sri.K.V.Aravind, Adv.) AND : Sri.Sachnand Ladhani, No.5/1, Main Road, Jayamahal Extension, Bangalore – 46. …RESPONDENT (By Sri.A.Shankar, Adv. & Sri.M.Lava, Adv.) . . . . This I.T.A. is filed under Section 260A of the Income Tax Act, 1961 praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore in I.T.A. No.178/Bang/2005 dated 07.07.2006 and confirm the order passed by the Commissioner of Income Tax-IV, Bangalore, in the interest of justice and equity. - 4 - In I.T.A. No.264/2007 BETWEEN : 1. The Commissioner of Income-Tax, C.R.Building, Queens Road, Bangalore. 2. The Deputy Commissioner Of Income-Tax, Circle-8(1), C.R.Building, Queens Road, Bangalore. ...APPELLANTS (By Sri.K.V.Aravind, Adv.) AND : Sri.Sachnand Ladhani, No.5/1, Main Road, Jayamahal Extension, Bangalore – 46. …RESPONDENT (By Sri.A.Shankar, Adv. & Sri.M.Lava, Adv.) . . . . This I.T.A. is filed under Section 260A of the Income Tax Act, 1961 praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore in I.T.A. No.179/Bang/2005 dated 07.07.2006 and confirm the order passed by the Commissioner of Income Tax-IV, Bangalore, in the interest of justice and equity. These I.T.As. coming on for hearing, this day, N.Kumar J., delivered the following: - 5 - JUDGMENT In all these four appeals, a common question of law arises for consideration. They are taken up for consideration together and disposed of by this common order. 2. The assessee in ITA Nos. 237/2007 and 238/2007 are one and the same whereas in I.T.A. Nos. 247/2007 and 264/2007, the assessee are one and the same. The relevant assessment years are 1998-99 and 1999-2000. These appeals were admitted to consider the following substantial question of law: Whether the Appellate Tribunal was right in holding that non-computation fee received by the Assessee is not a Capital gain and not liable to pay Income-tax for that amount though such amount could be taxed under `any other source’ under Section 28 of the Act? 3. The Apex Court in the case of Guffic Chem (P) Ltd., V/s. CIT & another reported in (2011) 332 ITR 602(SC) has held that payment received as non- - 6 - competition fee under a negative covenant was always treated as a Capital receipt till the assessment year 2003-04. It is only vide the Finance Act, 2002 with effect from 1st April, 2003 that the said Capital receipt is now made taxable. The Finance Act, 2002 itself indicates that during the relevant assessment year, compensation received by the assessee under non- competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1st April, 2003. It is well-settled that a tax liability cannot be created retrospectively. 4. Following the aforesaid judgment, this Court in the case of Commissioner of Income Tax and another V/s. K.Chandrakanth Kini reported in (2012) 347 ITR 388(Kar.) held that the amendment brought about in 2002 with effect from 1st April, 2003 is not clarificatory but amendatory. Therefore, when the said provision is held to be not clarificatory, but amendatory, it follows earlier to the said provision, the said amount was not taxable. The said provision was not inserted by way of clarification. It was introduced only by way of - 7 - amendatory and to tax such income with effect from 1st April 2003. 5. In the light of the aforesaid law declared by the Apex Court and this Court, the substantial question of law in these appeals are answered in favour of the Assessees and against the Revenue. Hence, there is no merit in these appeals. Appeals are dismissed. Sd/- JUDGE Sd/- JUDGE SPS "