THE COMMISSIONER OF INCOME TAX V. SHRI.V.RAVICHANDRAN

ITA/272/2009

AI Insights

The case revolves around an appeal by the Commissioner of Income Tax and the Income-Tax Officer against the decision of the Income Tax Appellate Tribunal, which had affirmed the Appellate Commissioner's ruling that the Rs.14 lakhs received by the assessee, Sri V. Ravichandran, from M/s. Vave Consultants Pvt. Ltd. was a capital receipt and not taxable as income. The assessee, a chartered accountant and merchant banking consultant, had received this amount under a non-competition agreement, which prohibited him from carrying on his proprietary business for two years. The primary legal question was whether this receipt could be considered a capital receipt exempt from tax under the income tax laws applicable at the time of receipt.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 701139 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 28-10-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-tax, Bangalore v. K.Chandrakanth Kini
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: CHYTHANYA
• Assessee Lawyers: K V ARAVIND
• Keywords: Capital receipt; Income tax appeal; Non-compete fees; Taxable income
• Section: 28(va); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA, BANGALORE DATED THIS THE 28TH DAY OF OCTOBER, 2014 PRESENT: THE HON'BLE Mr.JUSTICE N.KUMAR AND THE HON'BLE Mr.JUSTICE B.MANOHAR INCOME TAX APPEAL NO.272 OF 2009 BETWEEN: 1. THE COMMISSIONER OF INCOME TAX C.R.BUILDING QUEENS ROAD, BANGALORE 2. THE INCOME-TAX OFFICER WARD-5 (2) C.R. BUILDING, QUEENS ROAD, BANGALORE. ... APPELLANTS (BY SRI. K.V.ARAVIND, ADVOCATE) AND: SRI.V.RAVICHANDRAN NO.18,14th MAIN V.SECTOR, HSR LAYOUT BANGALORE - 560 102. ... RESPONDENT (BY SRI.CHYTHANYA K.K., ADVOCATE ) 2 THIS APPEAL IS FILED U/S 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 12.12.2008 PASSED IN ITA NO.685/(BANG)/1999 FOR THE ASSESSMENT YEAR 1995-96, PRAYIANG THAT THIS HON’BLE COURT MAY BE PLEASED TO: i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED TEHREIN, ii) ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT BANGALORE IN ITA.NO.685/BANG/1999 DATED 12.12.2008 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE INCOME TAX OFFICER, WARD-5(2), BANGALORE. THIS APPEAL IS COMING ON FOR HEARING THIS DAY, N.KUMAR, J., DELIVERED THE FOLLOWING: J U D G M E N T The revenue has preferred this appeal challenging the order passed by the Tribunal which has upheld the decision of the Commissioner of Income Tax (Appeals) that the non-compete fees of Rs.14 lakhs received by the assessee is not taxable as the assessee’s income. 2. The assessee is an individual engaged in Merchant banking business as a Consultant. He is a Chartered Accountant by qualification. The assessee received a sum of Rs.14 lakhs from a Company by name M/s.Vave 3 Consultants Private Limited. During the relevant accounting year, the assessee was not carrying on the consultancy business in Merchant banking. 3. The Assessee contends that the said receipt is capital in nature and it is not the income of the assessee and therefore, no tax is paid. The said contention was not accepted by the Assessing Officer and levied tax. However, the First Appellate Authority treated it as capital in nature and set aside the order of the Assessing Officer, which order is affirmed by the Tribunal. It is against the said order, the revenue has preferred this appeal. 4. The substantial question of law which is raised on 09.12.2010 at time of admission of this appeal is as under: 1. Whether the Appellate Authorities were correct in holding that the amount of Rs.14 lakhs received from M/s. Vave Consultants Pvt. Ltd., which had been created by the assessee having 85% shares and balance 15% shares being with his friend where the assessee was the Director and the promoter of the company and person-incharge of the 4 day to day activities would be entitled to claim the same as capital receipt exempt from tax as the assessee was prohibited from carrying on his proprietary business for a period of two years? 5. We have heard the learned counsel appearing for both the parties. 6. The compensation received under the non-competition agreement document became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide section 28(va) which came into effect from April 1, 2003. Therefore, on the day when the assessee received the said compensation, it was not taxable as a revenue receipt. This Court in the case of Commissioner of Income-tax, Bangalore v. K.Chandrakanth Kini reported in (2012) 347 ITR 388 (Kar.) (2011) 12 taxmann.com 325 (Kar.) had an occasion to consider the aforesaid provision and at paragraph No.9 it was held as under: “Therefore, when the said provision is held to be not clarifactory, but amendatory, it follows 5 earlier to the said provision the said amount was not taxable. The said provision was not inserted to by way of a clarification. It was introduced only by way of amendatory. Prior to the insertion, of that provision there was no provision in the Act for providing for charging tax on such income. However, from 1-4-2008 it is treated as an income chargeable to tax under the heading of profits and gains. Though prior to that Act it was treated as a capital asset, it was not taxable under the head. In this background, the contention that because it was not taxable under the head. In this background, the contention that because it was treated as a capital asset, the Appellate Authority was justified in holding that it is capital gains and therefore, it is chargeable to tax as such is not justified.” 7. Therefore, the said provision was held to be prospective in operation and that it is not clarifactory in nature. Therefore, prior to that amendment it was not taxable. Hence, the order passed by the Appellate Authority is in accordance with law and does not call for any interference. The substantial question of law is 6 answered in favour of the Assessee and against the Revenue. No merits. Accordingly, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE VMB "